Paper 5 Cost and Management Accounting PDF

CHARTERED ACCOUNTANCY PROFESSIONAL II
(CAP-II)
Compilation of Suggested Answers
Paper 5: Cost and Management Accounting

(June 2001 - June 2019)
Education Department
The Institute of Chartered Accountants of Nepal
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CAP II Paper 5: Cost and Management Accounting
Table of Contents
CHAPTER 1: BASIC CONCEPTS .......................................................................................... 1
CHAPTER 2: MATERIAL CONTROL................................................................................. 18
CHAPTER 3: LABOUR CONTROL ..................................................................................... 78
CHAPTER 4: OVERHEAD CONTROL ............................................................................. 120
CHAPTER 5: JOB AND BATCH COSTING ..................................................................... 194
CHAPTER 6: CONTRACT COSTING ............................................................................... 207
CHAPTER 7: PROCESS COSTING.................................................................................... 249
CHAPTER 8: JOINT AND BY PRODUCTS ...................................................................... 297
CHAPTER 9: OPERATING COSTING .............................................................................. 338
CHAPTER 10: COST SHEET.............................................................................................. 378
CHAPTER 11: INTEGRATED AND NON-INTEGRATED ACCOUNTING SYSTEM .. 412
CHAPTER 12: MARGINAL COSTING ............................................................................. 460
CHAPTER 13: BUDGETARY CONTROL......................................................................... 577
CHAPTER 14: STANDARD COSTING ............................................................................. 627
CHAPTER 15: COST CONTROL AND COST REDUCTION .......................................... 658
CHAPTER 16: UNIFORM COSTING AND INTERFIRM COMPARISON ..................... 665
CHAPTER 17: COST AUDIT.............................................................................................. 675
CAP II Paper 5 Cost and Management Accounting
CHAPTER 1:
BASIC CONCEPTS
© The Institute of Chartered Accountants of Nepal 1

Theoretical Questions
Question No 1
Distinguish Between
(a) Cost Centre and Cost unit [December 2001 – 7(i), 4 Marks] [December
2005 – 6(a), 4 Marks] [December 2009 – 5(c), 5 Marks] [December 2010 – 5(c), 2.5
Marks] [December 2011 – 5(b), 5 Marks] [June 2012 – 5(a), 5 Marks] [June 2013 –
5(a), 2.5 Marks] [June 2016 – 6(c), 2.5 Marks]
Answer
Cost Centre:
It is defined as a location, person or an item of equipment (or group of these) for which
cost may be ascertained and useful for the purpose of cost control.
Cost centres are of two types viz. Personal and Impersonal.
In a manufacturing concern there are two main types of cost centres viz. Production cost
centre and Service cost centre.
Cost Unit:
It is a unit of product, service or time (or combination of these) in relation to which costs
may be ascertained or expressed e.g. cost per tonne of steel, cost per tonne km in
transport service or cost per machine hour. A single order or a contract may be a cost unit.
A batch consisting of identical items may also be considered as a cost unit.
Alternative Answer
CIMA defines Cost Centre as “a production or service, function, activity or item of
equipment whose costs may be attributed to cost units. A cost centre is the smallest
organisational sub-unit for which separate cost allocation is attempted”. A cost centre is
an individual activity or group of similar activities for which costs are accumulated. For
example in production departments, a machine or group of machines within a department
or a work group is considered as cost centre. Any part of an enterprise to which costs can
be charged is called as ‘cost centre’.
A cost centre can be:
(i) Geographical i.e. an area such as production department, stores, sales area.
(ii) An item of equipment e.g. a lathe, forklift, truck or delivery vehicle.
(iii) A person e.g. a sales person.
CIMA defines Cost Unit as “a quantitative unit of product or service in relation to which
costs are ascertained”. A ‘cost unit’ is a unit of product or unit of service to which costs
are ascertained by means of allocation, apportionment and absorption. It is a unit of
quantity of product, service or time or a combination of these in relation to which costs
are expressed or ascertained. For example, specific job, contract, unit of product like
fabrication job, road construction contract, an automobile truck, a table, 1000 bricks etc.
The cost units which pass through the cost centre, the direct and indirect costs of the cost
centre are charged to the units of production by means of an absorption rate. The unit of
output in relation to which cost incurred by a cost centre is expressed is called ‘cost unit’.
Cost units can be developed for all

kinds of organizations, whether manufacturing, commercial or public utility

services.
(b) Product cost and Period cost [December 2001 – 7(iii), 4 Marks] [June 2011 –
5(a), 4 Marks] [December 2018 – 6(b), 2.5 Marks] [June 2009 – 5(e), 4 Marks] [June
2010 – 5(a), 2.5 Marks]
Answer
Product Cost:
Product costs are those costs, which can be assigned to the product and are included in
inventory valuation. It comprises of direct materials, direct labour and manufacturing
overheads in case of manufacturing concerns.
Period Cost:
These are the costs which are not assigned to the products but are charged as expenses
against the revenue of the period in which they are incurred. All non-manufacturing costs
such as general and administrative expenses, selling and distribution expenses are
recognized as period costs.
(c) Relevant cost and Opportunity cost. [December 2003 – 7(a), 4 Marks]
Answer
Relevant costs are those costs which are relevant for decision making like make or buy,
drop or continue, shutdown etc. These costs always affect decision of the management.
Opportunity cost refers to the value of sacrifice made or benefit of opportunity foregone
in accepting an alternative course of action. For example, if promoter use his own money
in business by not investing it in govt. bonds, then interest on bond will be the
opportunity cost of invested fund.
(d) Cost Center and Profit Center. [December 2003 – 7(c), 4 Marks]
Answer
Cost center is defined as a location, person or an item of equipment or group of these, for
which cost may be ascertained and used for the purpose of cost control. Normally, they
are of two types namely personal and impersonal.
Centers which have the responsibility of generating and maximising profits are called
profit centers.
(e) Costing, Cost Accountancy & Cost Accounting. [December 2007 – 6(d), 4 Marks]
Answer
Costing is defined as "the technique and process of ascertaining costs".
Cost Accounting is defined as "the process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated and ends
with the preparation of periodical statements and reports for ascertaining and controlling
costs".

Cost Accountancy has been defined as "the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of information derived there
from for the purpose of managerial decision making".
(f) Controllable costs and uncontrollable costs [December 2008 – 5(a), 5 Marks]
[June 2009 – 5(d), 4 Marks] [December 2012 – 5(c), 2.5 Marks] [December 2014 – 5(a),
2.5 Marks]
Answer
Costs which can be influenced by the action of a specified person in an organisation are
known as controllable costs. Costs which remains unaffected by the action of such a
person are termed as uncontrollable costs. In a business organisation heads of each
responsibility centre are responsible to control costs. Costs which they are able to control
are known as controllable and includes material; labour and direct expenses. Costs which
they fail to control includes fixed costs and all allocated costs.
It may be noted that controllable and uncontrollable cost concepts are related to the
authority of a person in the organisation. An expenditure which may be uncontrollable by
one person may be controllable by another. Moreover, in the long run all costs may be
controllable.
Alternative Answer:
Uncontrollable cost
Controllable cost
i) Controllable cost are the costs which i) Uncontrollable cost are the costs which can
can be influenced by action not be influenced by action
ii) Controllable cost are influenced by ii) Uncontrollable cost are not influenced by
specified member of an undertaking specified member of an undertaking
iii) Can be influenced by the action of iii) Can not be influenced by the action of
executive of each responsibility centers executive of each responsibility but could
avoid with initial decision
iv) Can be minimized for cost control iv) Can not be minimized for cost control
purpose purpose
v) Generally variable cost and semi v) Generally Fixed cost are in the nature of
variable cost are in the nature of uncontrollable cost
controllable cost
(g) Cost driver and cost pool. [December 2008 – 5(b), 5 Marks]
Answer
Cost Driver: A cost driver is a characteristic of an event or activity that results in the
increase of costs. In activity based costing the most significant cost drivers are identified.
Activity cost pool: It is a measure of the frequency and intensity of demand placed on
activities by cost objects. It is used to assign activity cost-to-cost objects.

(h) Profit Centre and investment centre [December 2008 – 5(c), 5 Marks]
Answer
A profit centre is a centre where the manager has the responsibility of generating and
maximising profits. In such centres, the manager is responsible for revenue and cost.
Investment centres are those centres which are concerned with earning an adequate ROI.
In such centres, the manager is responsible for investment, revenue and cost.
(i) Committed fixed costs and discretionary fixed costs [June 2009 – 5(a), 4 Marks]
Answer
Committed fixed costs, are those fixed costs that arise from the possession of: (i) a plant,
building and equipment (e.g. depreciation, rent, taxes, insurance premium etc.) or (ii) a
functioning organisation (i.e. salaries of staff). These costs remain unaffected by any
short-run actions. These costs are affected primarily by long-run sales forecasts that, in
turn indicates the long-run capacity targets. Hence careful long range planning, rather than
day-to-day monitoring, is the key to managing committed costs.
Discretionary fixed costs are sometimes also called managed costs or programmed costs.
These costs have two important features:
• They arise from periodic (usually yearly) decisions regarding the maximum
outlay to be incurred; and
• They are not tied to a clear cause-and-effect relationship between inputs and
outputs. For example: advertising, public relations, executive training,
teaching, research, health care etc. These costs are controllable.
(j) Cost Accounting and Management Accounting

[December 2009 – 6(a), 5 Marks]
Answer
Difference between Cost Accounting and Management Accounting:
Traditionally, cost accounting was synonymously taken as the ways and means to
accumulate and assign historical costs to units of product and departments for the purpose
of inventory valuation and income determination. Cost accounting these days refers to the
gathering and providing of information for decision needs of all types.
Management accounting includes all those accounting services which help the
management in the formulation of policy, fixation of plans and control of their execution
and measurement of performance. It is primarily concerned with the supply of
information which is useful to the management in decision making for the efficient
running of the business and thus contributing toward the maximization of profits.
The principal differences in these two accounting are briefly described below:
i. Cost accounting deals primarily with the techniques of product costing where as
management accounting applies accounting data and helps in management planning
and controlling function.
ii. Management accounting maintains the pool of overall data (both cost and financial)
for providing necessary information to management.
iii. Cost accounting data are used by management accounting in decision making,
budgeting, and controlling purpose.
iv. Cost accounting serves the purpose of internal reporting to managers for use in
planning and controlling routine operations and to make non routine decisions in
formatting major plans and policies. It also provides help in the process of external
reporting to shareholders, government and other outside parties.
Management accounting is more concerned with the management planning and
control and is directly focuses on internal reporting.
On the other hand, cost accounting is concerned with both the internal and external
reporting. Thus, cost accounting serves the purpose of internal reporting as is done by
management accounting and external reporting to the extent that its product costing
functions satisfies the requirement of external reporting.
(k) Sunk costs and Pre-production costs [June 2010 – 5(a), 4 Marks]
Answer
Sunk Costs: These are historical costs which are incurred in the past. These costs were
incurred for a decision made in the past and cannot be changed by any decision that will
be made in future. In other words, these costs play no role in decision making, in the
current period. While considering the replacement of a plant, the depreciated book
value of the old plant is irrelevant, as the amount is a sunk cost which is to be written
off at the time of replacement.
Pre-production Costs: These costs forms the part of development cost, incurred in
making a trial production run, preliminary to formal production. These costs are
incurred when a new factory is in the process of establishment or a new project is
undertaken or a new product line or product is taken up, but there is no established or
formal production to which such costs may be charged. These costs are normally treated
as deferred revenue expenditure (except the portion which has been capitalized) and
charged to the costs of future production.
(l) Cost classification based on variability and controllability. [June 2010 – 5(e),
4Marks]
Answer
Cost classification based on variability:
Fixed cost – these are costs, which do not change in total despite changes of a cost
driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver
and a given time span. Rent, insurance, depreciation of factory building and equipment
are examples of fixed costs where the final product produced is the cost object.
Variable costs- these are costs which change in total in proportion to changes of cost
driver. Direct material, direct labors are examples of variable costs in cases where the
final product produced is the cost object.
Semi-variable costs – These are partly fixed and partly variable in relation to output e.g.
telephone and electricity bill.

Cost classification based on controllability:

Controllable costs – are incurred in a particular responsibility center and relate to a
defined time span. They can be influenced by the action of the executive heading the
responsibility center e.g. direct costs.
Uncontrollable costs – are costs which are not influenced by the action of the
responsibility manager e.g. expenditure incurred by the tool room is controllable by the
foreman in charge of that section, but the share of tool room expenditure which is
apportioned to the machine shop is not controllable by machine shop foreman.
(m)Opportunity cost and Imputed cost [June 2011 – 5(a), 2.5 Marks]
Answer
Opportunity cost refers to the value of sacrifice made or benefit of opportunity forgone in
accepting an alternative course of action. For example, a firm financing its expansion plan
by withdrawing money from its bank deposits. In such a case the loss of interest on the
bank deposit is the opportunity cost for carrying out the expansion plan. It is the cost of
any activity measured in terms of the best alternative forgone. It is the sacrifice related to
the second best choice available to someone who has picked among several mutually
exclusive choices. The notion of opportunity cost plays a crucial part in ensuring that
scarce resources are used efficiently. Thus opportunity costs are not restricted to
monetary or financial costs: the real cost of output forgone, lost time, pleasure or any
other benefit that provides utility should also be considered opportunity costs.
Imputed cost is a cost that is incurred by virtue of using an asset instead of investing it
or undertaking an alternative course of action. An imputed cost is an invisible cost that is
not incurred directly, as opposed to an explicit cost, which is incurred directly. It is also
known as notional cost. Imputed cost is a hypothetical cost and it does not appear in
financial records. But it is relevant for decision making. Interest on capital is a common
type of imputed cost. Financial accountancy accords recognition to interest on capital
only if it is actually paid or constitutes a legal liability. If desirability of a project is being
evaluated, failure to consider interest cost may result in an erroneous decision. For all
practical purpose there is no difference in opportunity costs and imputed costs.
(n) Methods of costing and techniques of costing [December 2011 – 5(d), 2.5 Marks]
Answer
Method of costing refers to the techniques and processes of determining costs of a product
manufactured or a service rendered. Broadly there are two methods of costing, i.e. Job
costing and Process costing. All other methods of costing are only variants of the two.
Techniques of costing refer to the manner of ascertaining costs of a product, job or

activity. It indicates what types of costs are being ascertained such as historical cost,
standard cost, full cost, marginal cost etc. The general techniques of costing are historical
costing, standard costing, full or absorption costing, marginal or variable costing etc
Question No. 2
Write Short Notes on

(a) Define 'Investment Centre' and 'Profit Centre'.

[June 2001 – 4(b), 4 Marks] [June 2009 – 5(c), 4 Marks]
Answer
Investment centre is the segment whose performance is measured by its return on capital
employed. It takes into account profit and funds employed.
Profit centre is a segment of business accountable for costs and revenues. It controls
both, revenues and costs. Each division whose performance is measured by revenue and
cost is called profit centre.
(b) Direct cost [June 2006 – 5(d), 4 Marks]

Answer
Those cost which can be directly identified with particular product, process or service are
direct cost. Direct cost may be variable or fixed. However they can be directly allocated
to particular product or service. Unlike variable cost they may not vary with level of
output.
(c) Discretionary Costs [December 2006 – 6(v), 4 Marks]

Answer
Discretionary costs are costs that are not tied to a clear cause and effect relationship
between inputs and outputs. They usually arise from periodic decision regarding the
maximum outlay to be incurred. Examples include advertising, public relations, executive
training etc. Such cost is imperative and incurred in the normal day to day operations of
the organization with a indirect linkage to different functions. The benefits of
discretionary costs accrue to various functions but directly cost benefit analysis cannot be
carried out due to generalized nature.
(d) Direct Product Profitability (DPP) [June 2007 – 5(a), 4 Marks]

Answer
As traditional absorption costing, which normally uses labour hour as a basis for
absorption is rarely suitable for service and retail organizations other methods had to be
devised. One relatively new way of spreading overheads in retail organizations, which is
used in the grocery trade in particular, is direct product profitability. DPP started in the
USA in 1960s in General Electrics, and was then taken up and used by Proctor & Gamble
in 1980s. In 1985, the Food Marketing Institute in the USA laid down a standard
approach to the system and two years later DPP was taken by the Institute of Grocery
Distribution in the U.K. The system described below was introduced in the late 1980s and
has since undergone transformation as activity based costing.
In recent years DPP has developed considerably in parallel with activity-based costing.
DPP has become much more sophisticated and is now very similar to activity-based
costing. One of the reasons for its development during the 1990s has been the
development of EPOS and EFTPOS (electronic point of sale and electronic fund transfer)
systems that have enabled access to the detailed data needed for direct product cost and
profitability calculations. Even in 1993 Doherty Et al said that:

“DPP in retailing is not and cannot be full-fledged costing system, where every last penny
of expense has to be recovered. The level of cost information available to retailers is
generally not detailed enough to allow for that.”
Since then technology has improved and it is quite possible to cost product lines with
reasonable accuracy.
(e) Multiple costing [December 2011 – 6(c), 2.5 Marks]

Answer
Multiple costing involves the application of two or more methods of costing in respect of
same product. This costing method is used in industries where a number of components
are separately produced and then assembled into a final product. Suppose a firm
manufactures bicycles including its components, the component parts will be costed by
the system of job or batch costing but the cost of assembling the bicycle will be computed
by the single or output costing method. The whole system of costing is known as multiple
or composite costing.
(f) Essential of an effective costing system [June 2012 – 6(b), 5 Marks]

Answer
The essential features that an effective costing system should possess are as follows:
(a) Costing system should be tailor made, practical, simple and capable of meeting the
requirements of a business concern.
(b) The method of costing should be suitable to the industry.
(c) Necessary co-operation and participation of executives from various departments of
the concern is essential for developing good cost accounting system.
(d) The cost of installing and operating the system should justify the results.
(e) The system of costing should not sacrifice the utility by introducing meticulous and
unnecessary details.
(g) Continuous costing [December 2017 – 6(a), 2.5 Marks]

Answer
A category of costing methods applicable to the repetitive production processes with
continuous operations in which the products and services are identical and cannot be
segregated. It enables the management to know what it is costing to do the jobs in hand
and helps it to take corrective action in time to check wastages and losses. Continuous
costing involves very often the use of estimates of expenditure instead of actual.
As will be seen later, actual expenditure on a job regarding materials and labour can
always be known easily but actual information about other expenses may not be available
for some-time. Hence an estimate of such expenses is necessary.
(h) Explicit Cost and Implicit Cost [December 2018 – 6(a), 2.5 Marks]
Explicit costs, which are also known as out of pocket costs, refer to costs involving
immediate payment of cash. Salaries, wages, interest on capital, etc. are some of the
examples of explicit costs. They can be easily measured.

Implicit costs (also known as economic costs) do not involve any immediate cash
payment.
The main points of difference between Explicit and Implicit costs are:
Implicit costs do not involve immediate cash payment whereas Explicit costs involves
immediate cash outflow.
Implicit costs are not recorded in the books of account whereas explicit costs are entered
in the books of account.
(i) Period costs [July 2015 – 6(d), 2.5 Marks]

Answer
The costs which are not associated with production are called period costs. They are
treated as an expense of the period in which they are incurred. They may be fixed or
variable. They are charged against the revenue of the relevant period. Differences between
opinions exist whether certain costs should be considered as product or period costs. There
is an opinion that variable manufacturing costs are product costs whereas fixed
manufacturing and other costs are period costs as they are closely related to the passage of
time than to manufacturing of product.
(j) Importance of Cost Accounting to business concerns. [June 2009 – 6(a), 5 Marks]
Answer
Management of business concerns expects from Cost Accounting detailed cost
information in respect of its operations to equip their executives with relevant information
required for planning, scheduling, controlling and decision making. To be more specific,
management expects from cost accounting – information and reports to help them in the
discharge of the following functions:
1. Control of material cost: Cost of material usually constitute a substantial portion of the
total cost of product. Therefore, it is necessary to control it as far as possible. Such
control may be exercised (i) by ensuring un-interrupted supply of material and
spares for production; (ii) by avoiding excessive locking up of funds/capital in stocks
of materials and stores; (iii) also by the use of techniques like value analysis,
standardization etc. to control material cost.
2. Control of labor cost: It can be controlled if workers complete their work within the
standard time limit. Reduction of labor turnover and idle time to help us to control
labor cost.
3. Control of overheads: Overhead consists of indirect expenses which are incurred in the
factory, office and sales department; they are part of production and sales cost. Such
expenses may be controlled by keeping a strict check over them.
4. Measuring efficiency: For measuring efficiency the cost accounting department should
provide information about standard and actual performance of the concerned activity.
5. Budgeting: Now a day detailed estimates in terms of quantities and amounts are drawn
up before the start of each activity. This is done to ensure that a practicable course of
action can be chalked out and the actual performance corresponding with the estimated
or budgeted performance. The preparation of the budget is the function of costing
department.

6. Price determination: Cost account should provide information which enables the
management to fix remunerative selling prices for various items of products and
services in different circumstances.
7. Curtailment of loss during the off seasons: Cost Accounting can also provide
information which may enable reduction of overhead by utilizing idle capacity during
the off season or by lengthening the season.
8. Expansion: Cost Account may provide estimates of production of various levels on the
basis of which the management may be able to formulate its approach to expansion.
9. Arriving at decisions: Most of the decisions in a business undertaking involve correct
statements of the likely effect on profits. Cost Accounts are vital help in this respect.
In fact, without proper cost accounting, decision would be like taking a jump in dark,
such as when production of a product is stopped.
(k) Sunk cost and Conversion cost [December 2009 – 5(b), 5 Marks]
Answer
Sunk costs are historical costs which are incurrent in the past. These types of costs are
not relevant in connection with the decision making process. For instance, while
considering the replacement of equipment, the book value of the old equipment is
irrelevant as the amount is a sunk cost which is to be written off at the time of
replacement of the equipment. These are different from incremental or differential costs
in the sense that there is no effect on such costs due to increase or decrease in the activity
level.
Conversion cost is the production cost excluding the cost of direct material of producing
partly finished or fully finished products. This type of cost, however, includes the cost
resulting from variations in the direct materials in weight or volume. Thus, conversion
cost of a finished good or work-in-progress covers the cost of direct labour and
manufacturing overhead.
(l) Responsibility Centre [December 2010 – 6(b), 5 Marks]

Answer
Responsibility Centre:
It is defined as an activity centre of business organization entrusted with a special task.
Under modern budgeting and control, financial executives tend to develop responsibility
centers for the purpose of control. Responsibility centers can broadly be classified into
three categories. They are:
(a) Cost Centers;
(b) Profit Centers; and
(c) Investment Centers
Performance of each centers are judged based on predetermined parameters and offsetting
of the performance of one centre with another is not permitted.

(m)Volume-based and non-volume-based cost drivers [June 2011 – 6(d), 2.5 Marks]
Answer
Cost drivers are the factors, forces or events that influence and determine the cost of a
particular activity and help in assigning the cost to production unit. Direct costs are traced
to cost and they themselves are cost drivers. When indirect costs are assigned or allocated
to product or services the factors, such as number of production run, number of machine
set up, number of purchase order etc. are used which are known as cost drivers. Cost
drivers are unique physical aspects of the production process which can be viewed as
causing the cost pools to be incurred.
Volume-based cost drivers assume that a product’s consumption of overhead resources is

directly related or highly correlated to production volume or unit. Some examples of
volume-based cost drivers are units of output, direct labour hours, machine hours, etc.
There are some activities performed which are not directly related to volume of
production such as production run, machine set up, purchase order etc. The cost of these
activities are allocated to the product on the basis of non-volume-based cost drivers, such
as number of production run, number of machine set up, number of purchase order etc.
Both costs derivers are meant for cost control. Volume-based cost drivers facilitate to
control cost directly in proportion to production output. Non volume-based cost drivers
facilitate to control cost through parameters not directly linked to production volume.
Question No. 3
Enumerate the factors which are to be considered before installing a system of Cost
Accounting in a manufacturing organisation.
[2001 December – 1(a), 4 Marks] [June 2009 – 6(c), 4 Marks]
Answer
Factors to be considered before installing a cost accounting system in a manufacturing
organization:
i. The objectives of the system should be defined - whether for control of cost or price
fixation.
ii. The organization of the company should be studied to understand the authorities and
responsibilities of managers.
iii. The technical aspects and flow process should be taken into consideration.
iv. The products to be manufactured should be studied.
v. The marketing set up to be looked into for devicing suitable control reports.
vi. The possibility of inter locking cost accounting with financial accounting system should
be examined.
vii. The procedure for collection and verification of information.
viii. The degree of details of information required at each level of management.
Question No. 4
State the objectives of Cost Accounting. [June 2002 – 1(a), 4 Marks]

Answer
The objectives of cost accounting are
• Ascertainment of cost
• Determination of selling price
• Cost control and cost reduction
• Ascertainment of profit of each activity
• Assisting the management in decision making
Question No. 5
Select a suitable cost unit and also indicate the method of costing used in the following
industries.
(n) Hospital
(ii) Sugar manufacture
(iii)Interior decoration
(iv) Bicycle manufacture [June 2002 – 6(b), 4 Marks]
Answer
Industry Method Cost Unit
Hospital Operating costing Patient/bed
Sugar Single output Bag of Sugar
Interior Decoration Job costing One job
Bicycle Batch costing Batch of Bicycles
Question No. 6
What is Cost Accounting? Write about the types of information provided by Cost Accounting
that facilitates management in discharging management functions.
[June 2003 – 1(a), 4+6=10 Marks]
Answer
Cost ascertainment technique, cost accumulation, analysis, interpretation, communication of
cost for decision making, product cost ascertainment, cost for control.
Types of information: Management needs cost information for discharging management

functions. Such types of information cover:
1. Material cost for control
2. Labour control
3. Overhead cost control
4. Measuring efficiency
5. Budgeting formulation
6. Price fixation
7. Off season adjustment
8. Business expansion
9. Taking decision

Question No. 7
Discuss the types and methods of costing.
[December 2003 – 1(a), 4 Marks] [December 2004 – 1(a) & 1(b), 4+4=8 Marks]
Answer
Types of costing are :
i. Uniform Costing – When a number of firms in an industry agree among themselves to
follow the same system of costing in detail, adopting common terminology for various
items and process they are said to follow a system of uniform costing. In such a case a
comparision of the performance of each of the firms can be made with that of another, or
with the average performance of each of the firms can be made with that of another, or
with the average performance in the industry. 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.
ii. Marginal Costing – It is defined as the ascertainment of marginal cost by differentiating
between fixed and variable costs. It is used to ascertain effect of changes in volume or
type of output on profit.
iii. Standard Costing – It is the name given to the technique wherby standard costs are pre-
determined and subsequently compared with the recorded actual costs. It is thus a
technique of cost ascertainment and cost control. This technique may be used in
conjunction with any method of costing. However, it is specially suitable where the
manufacturing methods involves production of standardized goods of repetitive nature.
iv. Historical Costing – It is the ascertainment of costs after they have been incurred. This
type of costing has limited utility.
v. Direct Costing – It is the practice of charging all direct costs to operations, processes or
products leaving all indirect costs to be written off against profits in which they arise.
vi. Absorption Costing – It is the practice of charging all direct costs both variable and
fixed to operations, processes or products. It differs from marginal costing where fixed
costs are excluded..
Methods of costing are :

Different industries follow different methods of costing because of the difference in the
nature of their work. The various methods of costing are the following:
i. Job Costing – In this case the cost of each job is ascertained separately. It is suitable in
all cases where work is undertaken on receiving a customer’s order like a printing press,
motor workshop, etc.
ii. Batch Costing – It is the extension of job costing. A batch may represent a number of
small orders passed through the factory in batch. Each batch here is treated as a unit of
cost and thus costing is derived separately. Here cost per unit is determined by dividing
the cost of the batch by the number of units produced in the batch.
iii. Contract Costing – Here the cost of each contract is ascertained separately. It is suitable
for firms engaged in the construction of bridges, roads, buildings etc.
iv. Single or Output Costing – Here the cost of a product is ascertained as the product being
the only one produced like bricks, coals etc.

v. Process Costing – Here the cost of completing each stage of work is ascertained, like
cost of making pulp and cost of making paper from pulp.
vi. Operating Costing – It is used in the case of concerns rendering services like transport,
supply of water, retail trade etc.
vii. Multiple Costing – It is a combination of two or more methods of costing outlined
above. Suppose a firm manufacturing bicycle including its components; the costing of the
parts will be done by the system of job or batch costing but the cost of assembling the
bicycle will be computed by the single or output costing method. The whole system of
costing is known as multiple costing.
Question No. 8
Explain the differences between cost accounting, financial accounting and management
accounting. [June 2004 – 1(a), 4 Marks]
Answer
Financial Accounting is concerned with recording, classifying and summarizing financial
transactions and preparing statements relating to the business in accordance with generally
accepted accounting concepts and conventions. It is mainly meant to serve all parties external
to the operating responsibility of the firm such as shareholders and creditors of the firm
besides providing information about the overall operational results of the business.
While management accounting is concerned with accounting information, which is useful for
the management. It is the presentation of accounting information in such a way as to assist
the management in the creation of policy and day-to-day operation of the undertaking. It
includes the methods and concepts necessary for effective planning, for choosing between
alternative business actions and for control through the evaluation and interpretation of
performance.
However, cost accounting is the process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated and ends with
the preparation of periodical statements and reports for ascertaining and controlling costs.
Question No. 9
What are the limitations of the Financial Accounting System? How can Accounting system
overcomes such limitations? [June 2005 – 1(a), 6 Marks]
Answer
The limitations of financial accounting systems are :
i. This system cannot provide information on forecasting and planning;
ii. This system does not provide various information required for decision making viz.buy or
make decision, shut down or continue decision etc ;
iii. This system cannot assess performance of particular section or department in an
organization. For example financial account cannot provide information on which
department has exceeded the cost limit.
The above limitations can be overcome by Cost Accounting System in following ways :
i. The budgetary control system takes care of forecasting and planning;

ii. Marginal costing is the tools given by Cost Accountings System for decision making on
various aspects of organization.
iii. Budgeting and standard costing helps in measuring the performance of particular section
or department.
Question No. 10
What is cost Accounting? Explain its main objectives. [December 2005 – 1(a), 4 Marks]
Answer
Cost Accounting is defined as the process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated and ends with
the preparation of periodical statements and reports for ascertaining and controlling costs.
The main objectives of cost accounting are as follows:
• Ascertainment of cost;
• Determination of selling price;
• Cost control and cost reduction;
• Ascertaining the profit of each activity;
• Assisting management in decision making.
Question No. 11
What do you understand by the term ‘Sunk Cost’ ? [December 2005 – 5(a), 2 Marks]
[December 2015 – 6(b), 2.5 Marks] [June 2019 – 6(d), 2.5 Marks]
Answer
These are the historical cost incurred in the past. These cost were incurred for a made in the
past and cannot be changed by any decision that will be made in future. In other words, these
costs play no role in decision making, in the current period. While considering the
replacement of a plant, the depreciated book value of the old plant is irrelevant, as the amount
is a sunk cost, which is to be written off at the time of replacement.
Question No. 12
Describe what do you understand by engineered costs? [June 2010 – 6(d), 2 Marks]
Answer
Engineered costs are built into the product or output and an organization cannot avoid
incurring them. For example, direct material, direct labor and directly related overhead are
designed into the product and simply must be incurred if output is to be achieved.
Engineered costs should be contrasted with discretionary costs, the level of which is
determined solely by management. For example, the level of R & D, marketing and selling,
and maintenance expenditures are determined by management and are not necessarily related
to the level of productive output.
Question No. 13
What do you mean by cost driver? Explain with example.
[December 2012 – 6(d), 2.5 Marks]
Answer

A cost driver is a variable, such as the level of activity or volume, which causally affects
costs over a given time span. That is, there is a cause-and-effect relationship between a
change in the level of activity or volume and a change in the level of total costs. Cost drivers
signify factors, forces or events that determine the costs of activities. Costs drivers are the
links and they can link a pool of costs in an activity center to the product. For example, if
product design costs change with the number of parts in a product, the number of parts is a
cost driver of product design costs. Similarly, miles driven are often a cost driver of
distribution costs.
The cost driver of a variable cost is the level of activity or volume whose change causes
proportionate changes in the variable cost. For example, the number of vehicles assembled is
the cost driver of the total cost of steering wheels. If setup workers are paid an hourly wage,
the number of setup hours is the cost driver of total (variable) setup costs.
Costs that are fixed in the short run have no cost driver in the short run but may have a cost
driver in the long run. Consider the cost of testing quality of paints in a paint manufacturing
company. These costs consists of testing department equipment and staff costs that are
difficult to change and, hence, are fixed in the short run with respect to changes in the volume
of production. In this case, volume of production is not a cost driver of testing costs in the
short run. In the long run, however, the paint manufacturing company will increase or
decrease the testing department's equipment and staff to the levels needed to support future
production volumes. In the long run, volume of production is a cost driver of quality testing
costs.
Question No. 14
Express your views:
Cost estimation and cost ascertainment are not inter-related. Do you agree?
[July 2015 – 5(a), 5 Marks]
Answer
No. Cost ascertainment and cost estimation are actually inter-related.
Cost estimation is the process of pre-determining the cost of a certain product or job or order.
Such pre-determination may be required for several purposes. Some of the purposes are
Budgeting; Measurement of performance efficiency; Preparation of financial statements
(valuation of stocks etc); Make or buy decisions; Fixation of the sale prices or products
Cost ascertainment is the process of determining costs on the basis of actual data. Hence, the
computation of historical costs is cost ascertainment while the computation of future cost is
cost estimation.
Both cost estimation and cost ascertainment are inter-related and are of the immense use to
the management. In case a concern has a sound costing system, the ascertained costs will
greatly help the management in the process of estimation of rationale accurate costs which
are necessary for a variety of purposes stated above. Moreover, the ascertained cost may be
compared with the pre-determined costs on a continuing basis and proper and timely steps be
taken for controlling costs and maximizing profits.

CHAPTER 2:
MATERIAL CONTROL

Question No 1
Distinguish between
(a) Waste and Scrap. [December 2003 – 7(b), 4 Marks] [June 2011 – 5(c), 2.5
Marks]
Answer
Waste represents the portion of raw materials lost in processing having no realisable
value. It may be visible or not like smoke, evaporation, shrink age etc.
Normal waste is to be borne by good units whereas abnormal waste is to be transferred to
costing P & L /c.
Scrap has been defined as the incidental residue from certain types manufacture, usually
of small amount and low value, recoverable without further processing.
Cost of scrap may be borne by good units if it is negligible or charged to job or process if
it is significant.
(b) Spoilage and Defective [June 2005 – 6(d), 4 Marks] [December 2008 – 5(d), 5
Marks]
Answer
a. Spoilages are the materials, which are badly damaged or have developed some
imperfection during the process of manufacture which cannot economically corrected
and thus goods should be sold as seconds. But Defective are semi finished products
which have developed some imperfection while in the process of manufacturing
however such products can be made into perfect product by incurring some additional
hours and materials.
b. Spoilages unit fail to reach the required standard of quality specifications which
cannot be reconditioned but defective are caused due to substandard materials or bad
workmanships and can be reprocessed to convert into standard product.
c. The normal spoilage cost are either included in the specific product or production
overhead. And any realization from sale of scrap will be credited either to specific
product of production overhead. In case of defective, accounting of defective means
accounting of rectification work. They are charged either good products or to
production overhead.
(c) Treatment in cost accounts for Spoilage and Defectives [December 2006 – 5(iii),5
Marks] [June 2010 – 5(d), 2.5 Marks] [December 2014 – 6(c), 2.5 Marks]
Answer
Spoilage occurs when materials are so damaged in manufacturing operations that they are
taken out of the process and disposed off without further work.
Defectives represent unit of output which fail to comply with a set quality standard. These
can be subsequently rectified, sold as 'seconds' or disposed off as scrap.
Spoilage cannot be repaired or reconditioned, defective can be rectified and transferred,
either back to standard production or to seconds
Normal spoilage are included in cost either by charging the loss due to spoilage to the
production order or charging it to production overheads so that it is spread over all

products. Any value realized from sale of spoilage is credited to production order or
production overhead account, as the case may be. The cost of abnormal spoilage is
charged to Costing Profit and Loss Account. When spoiled work is the result of rigid
specification the cost of spoiled work is absorbed by good production while the cost of
disposal is charge to production overheads.
Defectives
Defectives that are considered inherent in the process and are identified as normal can be
recovered by using the following methods:
Charged to good products: – The loss is absorbed by good units. This method is used
when seconds have a normal value and defectives rectified into seconds or first are
normal.
Charged to general overheads – When the defectives caused in one department are
reflected only on further processing, the rework costs are charged to general overheads.
Charged to department overheads – If the department responsible for defectives can be
identified then the rectification costs should be charged to that department charged to
costing profit and loss account. If defectives are abnormal and are due to causes beyond
the control of organization, the rework cost should be charged to costing profit and loss
account. Where defective are easily identifiable with specific job the costs are debited for
the job.
(d) Inventory Turnover Ratio & Labour Turnover Ratio [December 2007 – 6(e), 4
Marks]
Answer
Inventory Turnover Ratio indicates the efficiency of the firm's inventory management. It
is calculated by dividing the cost of goods sold by the average inventory which are given
below:
Inventory Turnover = Cost of goods sold
Average Inventory
The cost of goods sold figure is computed by subtracting closing inventory from the total
of operating inventory and the manufacturing costs including cost of purchase. The
average inventory figure, used in the denominator, is the average of the opening and
closing inventories. Inventory turnover ratio also includes material turnover ratio. In such
case the formula will be as follows:
Cost of materialconsumed
Material Turnover Ratio =
Average Inventry of Material
The inventory turnover shows how rapidly the inventory is turning into receivable
through sales. Generally, a high inventory turnover is indicative of good inventory
management and a lower inventory turnover suggests an inefficient inventory
management. A low inventory turnover implies excessive tie-up of funds, impairment of
profit and increased costs. Again, a relatively high inventory turnover should be carefully
analyzed. A too high inventory turnover may be the result of a very low level of inventory
which results infrequent stock-outs.

Labour Turnover Ratio in an organization is the rate of changes in the composition of

labour force during a specified period measured against a suitable index. The standard of
usual labor turnover in the industry or locality or the labour turnover rate for a past period
may be taken as the index or norm against which actual turnover rate is compared. There
are three methods of calculating labour turnover which are given below:
(i) Replacement method = Number of employees replaced x 100

Average number of employees on roll
(ii)Separation method = Number of employees separated during the year x

100
Average number of employees on rolls during the
period
(iii)Flux method = Number of employees separated +number of employees

replaced x 100 Average number of employees on rolls during the
period
(e) Bin card and stores ledger [June 2008 – 5(b), 5 Marks] [December 2011 – 5(a), 5
Marks] [June 2012 – 5(b), 2.5 Marks]
Answer
Bin card is quantitative record of stores receipt, issue and balance. Control over stock is
more effective, in as much as comparisons of actual quantity in hand at any time with the
book balance are possible. Bin cards are kept attached to the bins or quite near thereto, so
as to assist in the identification of stock.
Stores ledger is quantitative and value record of stores receipts, issue and balance. It is a
subsidiary ledger to the main cost ledger. It is maintained by cost accounting department.
Alternative Answer:
Bin Card Stores Ledger
1. It is maintained by the storekeeper in It is maintained in costing department.
the store
2. It contains only quantitative details of It contains information both in quantity
materials received, issued & returned & value.
to stores.
3. Entries are made when transaction It is always posted after the transaction.
take place
4. Each transaction is individually Transactions may be summarized and
posted. then posted.
5. Inter department transfer do not Materials transfer from one job to
appear in bin card. another are recorded for costing
purposes.

(f) Normal loss and abnormal loss [June 2009 – 5(b), 4

Marks]
Answer
Normal loss is defined as the loss of material which is inherent in the nature of work.
Such wastage can be estimated in advance on the basis of past experience or technical
specifications. If the wastage is within the specified limit, it is considered as normal.
Suppose a company states that the normal wastage in Process A will be 5% of input. In
such a case wastage upto 5% of input will be considered as normal wastage of the
process.
When the wastage fetches no value, the cost of normal wastage is absorbed by good
production units of the process and the cost per unit of good production is increased
accordingly. If the normal wastage realises some value, the value is credited to the
process account to arrive at normal cost of normal output.
Abnormal loss, on the other hand, is defined as the wastage which is not inherent to
manufacturing operations. This type of wastage may occur due to the carelessness of
workers, a bad plant, design etc. Such a loss cannot be estimated in advance. In other
words any wastage excess of normal wastage is abnormal wastage.
The units representing abnormal wastage are valued like good units produced and debited
to the separate account which is known as abnormal wastage account. If the abnormal
wastage fetches some value, the same is credited to abnormal wastage account. The
balance of abnormal wastage account i.e. difference between value of units representing
abnormal wastage minus realization value is transferred to Costing Profit and Loss
account for the year.
(g) Periodic and Perpetual Inventory System [December 2009 – 5(a), 5

Marks]
Answer
Under periodic inventory system, stock taking for each item of material is done only at
the end of a specified period, generally at the end of an accounting year. Periodically, all
inventory items are physically counted and value is assigned to stock of each item
according to predetermined method of valuation. Whereas under perpetual inventory
system stocks are continuously taken and balance quantity in hand and its value is always
available after each receipt and issue of materials. It is the method of recording stores
balances after each receipt and issue to facilitate regular checking and obviate closing
down for stock-taking. The value of closing stock of each item is arrived at as follows:
Value of closing Cost of Cost of purchase Cost of issue during the

Stock of a = Opening + During the - period on the prescribed
material Stock period basis
However, the value of inventory under perpetual inventory system is derived after each
and every movement of the inventory.
Both the system can be distinguished from the inherent advantages and disadvantages in
the system as depicted below:

Advantages/Disadvantages of Periodic Inventory System

• There is exclusive attention on stock – taking.
• Work-in-progress can be physically checked more accurately only if production
activity is stopped for some time.
• Periodic stock taking is much less costly then the perpetual stock taking.
Advantages of Perpetual Inventory System
• It avoids stoppage of business operations for stock-taking at the end of a period.
• Stock records are always kept up-to-date.
• Profit and loss Account and Balance Sheet can be more frequently prepared as
value of stock is always available.
• There is regular cross checking between physical stock, bin entries and entries in
stores ledger.
Perpetual inventory system seems to be more effective compared to periodic inventory
system as the later ensures real time identification of errors and or omissions in inventory
handling.
(h) Periodic stock taking and continuous stock taking [June 2012 – 5(d), 5 Marks]
Answer
Basis of
S.No. Periodic stock taking Continuous stock taking
differences
1 Definition Stock verification which Stocks are verified at regular
takes place at the end of a intervals during the years.
financial period, say a year Since stocktaking takes place
is called periodic stock regularly, it is called
taking. continuous stocktaking.
2 Coverage of All items of stocks are In each verification, two or
stock items covered in a single stretch three items are covered, say
of verification, say over two over a entire period, all items
or three days. are covered on rotation basis.
3 Interference in Regular stores procedures There is no interference with
regular like materials receipts, regular work flow.
working issues etc. may have to be
stopped to facilitate stock
taking.
4 Time of Discrepancies can be Discrepancies are ascertained
identification known at the end of the immediately in order to take
of period. Responsibility corrective action and avoid
discrepancies cannot be easily fixed. recurrence.
5 Preparation of Inventory records may also Due to surprise element
Inventory be updated periodically, say involved, inventory records
records weekly or monthly, infact at must be maintained up to date
any time before physical at all times. This is called
verification. Perpetual Inventory records.

6 Compilation of This does not facilitate or It provides stock figures on

financial help the quick compilation real-time basis. Hence final
records of interim or final financial accounts can be compiled
results. quickly. Interim results can
also be prepared conveniently.
(i) Bill of material and Material requisition note [December 2014 – 5(d), 2.5
Marks]
Answer
Bill of material Material requisition note
It is a comprehensive list of materials with It is a formal written demand or
exact description and specifications, required request, usually from the production
for a job or other production units. This also department to store for the supply of
provides information about required quantities specified materials, stores etc. It
so that if there is any deviation from the authorises the storekeeper to issue the
standards, it can easily be detected. It is requisitioned materials and record the
prepared by the Engineering or Planning same on bin card.
Department in a standard form.
The purpose of bill of material is to act as a The purpose of material requisition
single authorisation for the issue of all materials note is to draw material from the store
and stores items mentioned in it. It provides an by concerned departments.
advance intimation to store department about
the requirements of materials. It reduces paper
work. It serves as a work order to the
production department and a document for
computing the cost of material for a particular
job or work order to the cost department.
(j) Just in Time manufacturing and Traditional manufacturing

[June 2017 – 6(b), 2.5 Marks]
Answer
Just in Time manufacturing Traditional manufacturing
1. It is a demand pull system. 1. It is a production push system.
2.There is insignificant or zero inventories 2.There is significant inventories
3.There are manufacturing sales (work 3. There is process structure
centers)
4. There is multifunction labor. 4. There is specialized labor.
5. There is total quality management 5.There is acceptable quality labor(AQL)
system. 6. It uses complex cost accounting
6. It uses simple cost accounting system.

Question No 2
Write Short Notes on:
(a) Re-order level [June 2006 – 5(b), 4
Marks]
Answer
It is the level at which purchase requisition is initiated for fresh purchase of goods. In
other words, it is the predetermined quantity of stock which, when reached, will initiate a
reorder in a continuous (perpetual) review system. Reorder level takes into account the
maximum usage and expected delay in receiving fresh supply of goods. This level is
determined at such a level that even with the maximum consumption during the lead time
and with unusual delays, the sock level does not reach to zero.
(b) Treatment of shortages in stock taking [December 2006 – 6(iii), 4 Marks]

Answer
At the time of stock taking generally discrepancies are found between physical stock
shown in the bin card and stores ledger. The discrepancies are in the form of shortages or
losses. The causes for these discrepancies may be classified as unavoidable and
avoidable.
Losses arising form unavoidable causes should be taken care of by setting up a standard
percentage of loss based on study of the past data. The issue prices may be inflated to
cover the standard loss percentage. Alternatively, issues may be made at the purchase
price but the cost of the loss or shortage may be treated as overheads.
Actual loss should be compared with the standard and excess losses should be analysed to
see whether they are due to normal or abnormal reasons. If they are attributable to normal
causes, an additional charge to overheads should be made on the basis of the value of
material consumed. If they arise from abnormal causes, they should be charged to the
Costing Profit and Loss Account.
Avoidable losses are generally treated as abnormal losses. These losses should be debited
to the Costing Profit and Loss Account.
Losses or surpluses arising from errors in documentation, posting etc. should be corrected
through adjustment entries.
(c) ABC Analysis as a technique of Inventory Control [December 2007 – 5(c), 4 Marks]
[June 2009 – 6(a), 4 Marks] [December 2012 – 6(b), 2.5 Marks]
Answer
It is a system of inventory control. It exercises discriminating control over different items
of stores classified on the basis of investment involved. Usually they are divided into
three categories according to their importance, namely, their value and frequency of
replenishment during a period.
‘A’ category of items consists of only a small % i.e. about 10% of total items handled by
the stores but require heavy investment about 70% of inventory value, because of their
high prices or heavy requirement or both.

‘B’ category of items are relatively less important, i.e. 20% of the total items of material
handled by stores and % of investment required is about 20% of total investment in
inventories.
‘C’ category, 70% of total items handled and 10% of value. For ‘A’ category items, stock
levels and EOQ are used and effective monitoring is done. For ‘B’ Category same tools as
in ‘A’ category are applied. For ‘C’ category of items, there is no need of exercising
constant control. Orders for items in this group may be placed either after 6 months or
once in a year, after ascertaining consumption requirements.
(d) Scrap [December 2007 – 5(e), 4 Marks]

Answer
Scrap may be defined as discarded material having some value. The scrap has generally
very low utility or market value and is recoverable without further processing. In the
manufacturing industry, scrap is the residue incidentally obtained from the processes. In
the engineering industries where operation liking drilling, boring, turning, etc. takes
place, scrap is quite common.
Some of the examples of scrap are:
• Metal for stamping operation,
• Off-cuts of sheet metal,
• Saw dust and trimmings in the timber industry,
• Dead heads and bottom ends in foundries,
• Cuttings, pieces, and splits in leather industries.
Treatment of Scrap:
Scrap may be sold or reprocessed. The method of accounting for scrap depends upon the
purpose for which scrap is put to use. Treatment of scrap in the cost accounts is dealt with
under the following heads:
A. When Scrap is Sold:
(a) Treatment by Neglect:
This method is followed when the value of scrap is negligible. In such a case, no
entry will be passed till the scrap is sold. The sale of scrap is treated as other income
in the Profit and Loss Account. When this method is followed, unit cost of
production is inclusive of the cost of scrap.
(b) Credited to Job or Work-in-Progress Account:
When the value of the scrap generated is significant and the quantity varies from one
job to another, the sale proceeds of the scrap is credited to the job account. This method
is feasible only when the scrap is identifiable to each job. Following journal entries is
passed to do the accounting:
(1) Scrap A/c Dr.
To Job A/c or Work-in-Progress A/c
(2) Cash A/c or Debtors A/c Dr.
To Scrap A/c
(c) Credited to Manufacturing Overhead:

When the scrap can not be identified with the individual jobs, the sale proceeds of
scrap is credited to manufacturing overhead account. This will reduce the
overhead recovery rate. Following entries are passed in order to give effect to
this particular method of the treatment of scrap.
(1) Scrap A/c Dr.
To Manufacturing Overhead A/c
(2) Cash A/c or Debtors A/c Dr.
To Scrap A/c
B. When Scrap is Reprocessed:
Instead of selling, scrap arising in one job may be issued for utilization in another
job. In such a case, the most recent purchase price is considered as the price for
passing the entries. The transfer of scrap from one job to another should be
effected through material transfer notes.
In some cases, scrap is first returned to stores and subsequently issued to another
job for utilization. This method is more suitable when further processing is
required on the scrap before it can be utilized for other jobs.
(e) What are the conditions that favour the adoption of last in first out system of
material pricing and indicate its advantages? [December 2009 – 6(d), 4
Marks]
Answer
The LIFO method works well in process cost systems where individual material
requisitions are seldom used and materials move into process in bulk lots. This method is
based on the assumption that the most recent purchase costs are more significant in terms
of matching cost with revenues in the process of determining net income. The advantages
of this system are
• The cost of the materials issued will be either nearer or will reflect the current
market price. Thus, the cost of goods produced will be related to the trend of the
market price of materials. Such a trend in price of materials enables the matching
of cost of production with current sales revenues.
• During the period of rising prices this method does not reflect undue high profit in
the income statement, as it was under the FIFO or average method. In fact, the
profit shown here is relatively lower because the cost of production takes into
account the rising trend of material prices.
• In the case of falling prices, profit tends to rise due to lower material cost, yet the
finished products appear to be more competitive and are at market price.
During the period of inflation, LIFO will tend to show the correct profit and thus,
avoid paying undue taxes to some extent.
(f) Two Bin System [December 2011 – 6(b), 4

Marks]

Answer
Under this system each bin is divided into two parts – one, smaller part, should stock the
quantity equal to the minimum stock or even the re-ordering level, and the other to keep
the remaining quantity. Issues are made out of the larger part; but as soon as it becomes
necessary to use quantity out of the smaller part of the bin, fresh order is placed. “Two
Bin System” is supplemental to the record of respective quantities on the bin card and the
stores ledger card.
(g) Defective Work [December 2011 – 6(c), 4 Marks]

Answer
Defective work signifies those units of production which can be rectified and turned out as
good units by the application of additional material, labor or other service. For example,
duplication of pages or omission of some pages in a book.
Defectives arise due to sub-standard materials, bad-supervision, bad-planning, poor
workmanship, inadequate-equipment and careless inspection. To some extent, defectives
may be unavoidable but usually, with proper care it should be possible to avoid defect in
the goods produced.
When defectives are found, the Inspector will make out the Defective Work Report, giving
particulars of the department, process or job, defective units, normal and abnormal
defectives, cost of rectification etc. On receipt of the defective Work Report, it may be
decided to rectify the defective work; all costs of rectification are collected against the
rectification work order, precaution will be taken to se that number of defectives is within
normal limits. Defectives are generally treated in two ways, either they are brought up to
the standard be incurring further costs on additional material and labor of where possible,
they are sold as inferior production (seconds) at lower prices.
(h) Pareto Inventory Analysis [June 2012 – 6(b)(i), 2.5 Marks]

Answer
Unit cost commonly affects the degree of control that should be maintained over an
inventory item. As unit cost increases, internal controls (such as inventory access) are
typically tightened and perpetual inventory system is more often used. Recognition of cost-
benefit relationships may result in a Pareto Inventory Analysis, which separates inventory
into three groups based on annual cost-to-volume usage.
Items having the highest value are referred to as A items; C items represent the lowest value;
and all other items are categorized as B items. Once this categorization is done, management
can determine the best inventory control method for items in each category.
(i) Treatment of scrap on cost accounting [December 2012 – 6(c), 5

Marks]
Answer
Scrap is the incidental residue from certain types of manufacture, usually of small amount
and low value, recoverable without further processing.
Scrap may be recorded as the following methods in cost accounting,

a. As a other Income: Where the value of scrap is negligible, such value may be
excluded from costs. Hence, the cost of scrap is borne by good units. Income from
scrap realization is treated as other income.
b. As a NRV of scrap: The net realizable value (NRV) of scrap is deducted from
overheads or material cost. This method is followed when scrap cannot be
aggregated job or process-wise.
c. As a Specific identification: When the scrap is identifiable with a particular job or
process and its value is significant, the scrap account is charged with full cost. The
credit is given to the job or process concerned. The profit and loss in the scrap
account, on realization, will be transferred to the Costing Profit and Loss Account.
(j) Advantages of ABC analysis [June 2013 – 5(d), 2.5 Marks]

Answer
Followings are the advantages of ABC analysis system:
a. It ensures that, without there being any danger of interruption of
production for want of materials or stores, minimum investment will be
made in inventories of stocks of materials or stocks to be carried.
b. The cost of placing orders, receiving goods and maintaining stocks is
minimized especially if the system is coupled with the determination of
proper economic order quantities.
c. Management time is saved since attention need be paid only to some of the
items rather than all the items as would be the case if the ABC system was
not in operation.
d. With the introduction of the ABC system much of the work connected
with purchases can be systematized on a routine basis to be handled by
subordinate staff.
(k) Advantages of Bin Cards [December 2013 – 6(b), 2.5 Marks]

Answer
• There would be fewer chances of mistakes being made as entries will be made
at the same time as goods are received or issued by the person actually
handling the materials.
• Control over stock can be more effective, in as much as comparison of the
actual quantity in hand at any time with the book balance is possible.
• Identification of the different items of materials is facilitated by reference to
the Bin Card the bin or storage receptacle.
(l) Replacement price method [July 2015 – 6(a), 2.5

Marks]
Answer
Replacement price method is defined as "the price at which it is possible to purchase an
item, identical to that which is being replaced/revalued'. It is also referred to as market
price method. Under this method, materials issued are valued at the replacement cost of

the items. This method pre-supposes that determination of the replacement cost of
material at the time of each issue, i.e. the cost at which identical materials could be
currently purchased. The product cost under this method is at current price, which is the
main objective of the replacement price method. This method is based on view that cost
should reflect current market conditions. When this method is used, profit is made during
rising prices and loss is incurred during falling prices
(m) Valuation of material receipt [December 2017 – 6(b), 2.5

Marks]
Answer
The invoice of material purchased from the market some time contain such items such as
trade discount, quantity discount, freight, duty, insurance, cost of packing, sale tax, excise
duty, cash discount etc. Under such a situation the general principal is that all the cost
incurred up to the point of procuring and storing materials should constitute the cost of
material purchase .The amount of trade discount. The amount of trade discounts, quantity
discounts and VAT are deducted from the invoice of materials purchased. The transport
charges, sale tax, insurance, cost of packing, customs and excise duty should be included
in the invoice cost of materials. The cash discount is considered as financial gain, so it is
kept outside the domain of material cost. In case the containers are returnable, their resale
value should also be taken in the invoice price of material to correctly ascertain the cost
of material purchased. The cost of material purchased so determined may be used for the
entry of material in the Store Ledger.
Question No 3
Discuss the advantages and disadvantages of 'first-in-first-out' (FIFO) method of
pricing of material issues. [December 2001 – 2(a), 6 Marks]
Answer
FIFO method of pricing of material issues:
Advantages:
i. It is simple to understand and easy to operate.
ii. Material cost charged to production represent actual cost with which the cost of
production should have been charged.
iii. In the cost of falling prices, the use of this method gives better.
iv. Closing stock of material will be represented very closely at current market price.
Disadvantages:
i. If the prices fluctuate frequently, this method may lead to clerical error.
ii. Since each issue of material to production is related to a specific purchase price, the costs
charged to the same job are likely to show a variation from period to period.
iii. In case of rising prices, the real profits of the concern being low, they may be inadequate
to meet the concern's demand to purchase raw material at the ruling price.

Question No. 4
Explain perpetual inventory records and continuous stock taking. [June 2002 – 2(a), 3
Marks] [June 2010 – 5(b), 4Marks] [December 2010 – 5(a), 5 Marks]
Answer
Perpetual inventory records consist of the following:
(i) Bin cards
(ii) Stock control cards
(iii) Store ledger
Bin cards and stock control cards are essentially quantitative records of stores Bin card is
posted after every receipt or issue and the balance is struck Actual quantity can be verified
with bin balance. Control is maintained in a compact manners. Store ledger contains
quantitative and value record. The balances is the bin card and stores ledger are agreed after
every issue. Continuous stock taking is necessary to ensure that stores balances as depicted
on bin cards are in agreement with the actual quantity. Then the accounts reflect the correct
position. A team of stock checking staff is deployed to check all items at least three to four
times in a year.
Perpetual Inventory System:
It is a system of stock control followed by the stores department. Under this system, a
continuous record of receipt and issue of material is maintained by the stores department. In
other words, in this system, stock control cards or bin cards and the stores ledger show
clearly the receipts, issues and balance of all items in stock at all times. This system
facilitates planning of production and ensures that production is not interrupted for want of
materials and stores.
Continuous Stock taking: It means physical verification of stores items on a continuous
basis to reveal the position of actual balances. Such verification is conducted round the
year, thus covering each item of store twice or thrice. Any discrepancies, irregularities or
shortages brought to the notice, as a result of continuous stock verification are reported to
the appropriate authorities for initiating necessary rectification measures. This system
works as a moral check as stores staff and acts as a deterrent to dishonesty.
A perpetual inventory system is usually supported by a programme of continuous stock
taking. That is continuous stock taking is complementary to the perpetual inventory system.
Sometimes the two terms are considered synonymous but it is not so. The success of the
perpetual inventory system depends upon the maintenance and upto date writing up of (i) the
stores ledger and (ii) bin-cards/stock control cards, Continuous stock taking, ensures the
veracity of figures shown by the above records
Question No. 5
What is continuous stock taking? What are its advantages?
[June 2003 – 1(c), 3+3=6 Marks]
Answer
Physical verification, checking the quantities of items of stock, locate inventory size and
tallying with store records, helps to check unwarranted use of stock.
Advantages:
1. No disruption in normal functioning.

2. Full time specialized staff can be engaged.

3. Moral pressure
4. Notice of stock discrepancies
5. Chances of obsolescence decreases
6. Convenient to prepare accounts quickly
Question No. 6
What is Inventory Control? Explain the techniques of Inventory Control.
Answer
Inventory control is the control mechanism to be followed to achieve maximum efficiency in
production and sales with the minimum investment in inventory following are the techniques
of inventory control.
i. Setting of various stock levels
ii. ABC Analysis
iii. Two Bin system
iv. Budgetary system
v. Perpetual Inventory Records & Continuous Stock Verification
vi. Economic Order Quantity
vii. Review of slow & non-moving items
viii. Use of Control Ratios
Question No. 7
What is defective unit? How rectifying expenses of defective units are brought into
account? [June 2004 – 4(b), 6
Marks]
Answer
Sub-standard products, spoilage or faulty product units. Needs defective work report giving
details including cost of rectification showing material, labour and expenses. Precaution
needs to be taken to keep cost within normal limit
Question No. 8
What is maximum and minimum stock level? Explain how these are calculated.
[December 2010 – 2(b), 6 Marks]
Answer
Maximum level of stock indicates the maximum quantity of an item of material which should
be held in stock at any time. The stock in hand is regulated in such a way that normally, it
does not exceed this level.
While fixing the maximum level, following factors needs to be considered:
i) Maximum requirement of the material for production purpose,
ii) Rate of consumption and time lag between the date of order and receipt of
material (lead time),
iii) Nature and properties of the material, e.g. this level is kept low for materials
which are liable to quick deterioration.

iv) Cost of storage and insurance,

v) Economy in prices: Maximum levels for items which are available at discount in
bulk purchase are generally high.
vi) Financial considerations: Available of funds and price of the items.
Minimum level of stock indicates the lowest quantity of an item of material which must be
maintained in hand at all times so that there is no stoppage of production due to the
unavailability of material.
While fixing the minimum level, following factors are considered:
i) Nature of the item: No minimum level is necessary for special materials purchased
against the specific orders of a customer.
ii) Rate of consumption of the material.
iii) Lead time.
Calculation of Maximum and Minimum Stock Level:
Maximum and minimum level is calculated in the following manner:
Maximum Level = Reorder level + Reordering Quantity – Minimum consumption during
the period required to obtain delivery
Minimum Level = Reorder level – (Normal usage per period x Average Delivery Time)
Question No. 9
Explain Economic Ordering Quantity. [December 2012 – 1(b), 4
Marks]
Answer
Economic Order Quantity (EOQ): Purchase department in manufacturing concerns is usually
faced with the problem of deciding the ‘quantity of various items’ which they should
purchase. If purchases of material are made in bulk then inventory carrying cost will be high.
On the other hand if order size is small each time, then the ordering cost will be high. In order
to minimise ordering and carrying costs it is necessary to determine the order quantity which
minimises these two costs. The size of the order for which both ordering and carrying cost are
minimum is known as economic order quantity.
Calculation of EOQ made as follows:
EOQ = √2AO/C
Where;
A= Annual requirement
O= Ordering cost per order
C= Carrying cost per unit per annum
At EOQ level total cost of material including ordering and holding cost will be minimal.
Question No. 10
What do you mean by perpetual inventory system? State its advantages.
[June 2014 – 6(a), 2.5 Marks]
Answer
Perpetual Inventory System means continuous stock taking. CIMA defines Perpetual
Inventory System as ‘the recording as they occur of receipts, issues and resulting balances of
individual items of stock in either quantity or quantity and value’.

Under this system, a continuous record of receipt and issue of materials is maintained by the
stores department & the information about the stock of materials is always available. Entries
in the bin card and stores ledger are made after every receipt and issue and the balance is
reconciled on regular basis with the physical stock.
The main advantages are:
i) Physical stock can be counted and book balances adjusted as and when desired
without waiting for the entire stock taking to be done.
ii) Quick compilation of profit and loss account (for interim period) due to prompt
availability of stock figures.
iii) Discrepancies are easily located and thus corrective action can be promptly taken
to avoid the recurrence.
iv) A systematic review of perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow-moving materials, so that remedial measures may be
taken in time.
Fixation of various stock level and checking of actual balances in hand with these levels
assist the storekeeper in maintaining stocks within limits and in initiating purchase
requisitions for correct quantity at proper time.
Question No. 11
Explain Economic Ordering Quantity. What are the implications of Economic Order
Quantity in proper inventory management? [June 2014 – 4(b), 5
Marks]
Answer
Economic Order Quantity (EOQ): Purchase department in manufacturing concerns is
usually faced with the problem of deciding the ‘quantity of various items’ which they
should purchase. If purchases of material are made in bulk then inventory carrying cost will
be high. On the other hand, if order size is small each time, then the ordering cost will be
high. In order to minimize ordering and carrying costs it is necessary to determine the order
quantity, which minimizes these two costs. The size of the order for which both ordering
and carrying costs are minimum is known as economic order quantity.
The prime objective of inventory management is to find out and maintain optimum level of
investment in inventory to minimize the total costs associated with it. Economic Order
Quantity is the size of the order for which both ordering and carrying costs are minimum.
Economic Order Quantity forms the very basis of inventory management. It refers to the
size of each purchase order quantity for each item, which gives the maximum economy in
purchase of that raw material or finished goods or stores materials.
While placing any order for purchase of any item, it must be ensured that the order quantity
is neither too large nor too small. A large order, no doubt, shall also mean the lower
ordering cost but it shall mean a higher and sometimes prohibitive carrying costs. On the
other hand, a small order may reduce the inventory carrying cost but the ordering costs
would increase as the company may have to place a new order every now and then, besides,
it may result in occasional production halts also.

Therefore, a proper balance has to be struck between these two factors and the Economic
Order Quantity shall be fixed at a point, where the aggregate cost of the two is minimum
i.e., the total cost associated with the inventory management is minimum.
Question No. 12
What is Just in time (JIT) purchases? What are the advantages of such purchases?
[July 2015 – 4(c), 2 Marks]
Answer
Just in time (JIT) purchases means the purchase of goods or materials such that delivery
immediately precedes their use.
Advantages of JIT purchases:
Main advantages of JIT purchases are as follows;
i) The suppliers of goods or materials cooperate with the company and supply
requisite quantity of goods or materials for which order is placed before the start
of production.
ii) JIT purchases result in cost savings for example, the cost of stock out, inventory
carrying, materials handling are reduced.
iii) Due to frequent purchases of raw materials, its issue price is likely to be very
close to the replacement price. Consequently the method of pricing to be followed
for valuing material issues becomes less important for companies using JIT
purchasing.
JIT purchasing are now attempting to extend daily deliveries to as many areas as possible so
that the goods spend less time in warehouses or on store shelves before they are exhausted.
Question No. 13
Continuous stock taking is complementary to the perpetual inventory system
[December 2015 – 6(a), Marks]
Answer
Under Perpetual Inventory system, a continuous record of receipt and issue of material is
maintained by the stores department. In other words, in this system, stock control cards or bin
cards and the stores ledger show clearly the receipts, issues and balance of all items in stock
at all times. This system facilitates planning of production and ensures that production is not
interrupted for want of materials and stores.
Continuous Stock taking means physical verification of stores items on a continuous basis to
reveal the position of actual balances. Such a verification is conducted round the year, thus
covering each item of store twice or thrice. Any discrepancies, irregularities or shortages
brought to the notice, as a result of continuous stock verification are reported to the
appropriate authorities for initiating necessary rectification measures. This system works as a
moral check as stores staff and acts as a deterrent to dishonesty.
A perpetual inventory system is usually supported by a programme of continuous stock
taking. That is continuous stock taking is complementary to the perpetual inventory system.
Sometimes the two terms are considered synonymous but it is not so. The success of the
perpetual inventory system depends upon the maintenance and upto date writing up of (i) the

stores ledger and (ii) bincards/stock control cards, Continuous stock taking, ensures the
veracity of figures shown by the above records.
Question No. 14
What are the ways for the treatment of defective work?
[June 2016 – 3(c), 4 Marks] [December 2016 – 5(b), 4 Marks]
Answer
The possible ways for the treatment of defective work are as below:
i) Defectives that are considered inherent in the process and are identified as normal
can be recovered by using the following methods:
a. Charged to good products-The loss is absorbed by good units .This method is
used when seconds or first are normal:
b. Charged to general overheads-When the defectives caused in one department
are reflected only on further processing,the rework costs are charged to
general overheads;
c.Charged to Department overheads-If the department responsible for defectives
can be identified then the rectification costs should be charged to that
department.
d.Charged to Costing Profit and loss Account-If defectives are abnormal and are
due to causes beyond the control of organization, the rework cost should be
charged to Costing Profit and Loss Accounts.
ii) Where defectives are easily identifiable with specific jobs, the work costs are
debited to the job.
Question No. 15
Discuss how you would treat the shortage in stock taking. [June 2016 – 6(d), 2.5
Marks]
Answer
At the time of stock taking generally discrepancies are found between physical stock shown
in the bin card and store ledger. These discrepancies are in the form of shortages or losses.
The causes for these discrepancies may be classified as unavoidable or avoidable.
Losses arising from unavoidable causes should be taken care of by setting up a standard
percentage of loss based on the study of the past data. The issue price may be inflated to
cover the standard loss percentage. Alternatively, issues may be made at the purchase price
but the cost of the loss or shortage may be treated as overheads.
Actual losses should be compared with the standard and excess losses should be analyzed to
see whether they are due to normal or abnormal reasons. If they are attributable to normal
causes, an additional charge to overheads should be made on the basis of the value of
material consumed. If they arise from abnormal causes, they should be charged to the costing
profit and loss account.
Avoidable losses are generally treated as abnormal losses. These losses should be debited to
the costing profit and loss account. Losses and surpluses arising from errors in
documentation, posting etc. should be corrected through adjustment entries.

Question No. 16
What are the aims of Material Requirement Planning (MRP)?
Answer
The aims of material requirement planning to make use of computer in order to :
a. Determine for final products namely,what should be produced and at what
time.
b. Ascertaining the required units of production of sub-assemblies.
c. Determining the requirement for materials based on an up-to -date bill of
materials file.
d. Computing inventories, work-in -progress ,batch sizes and manufacturing and
packaging lead times.
e. Controlling inventory by ordering bought -in components and raw materials in
relation to the orders received or forecast rather than the more usual practice of
ordering from stock-level indicators.
Question No. 17
Explain briefly advantages of perpetual inventory system. [December 2018 – 5(c), 4
Marks]
Answer
Advantages of Perpetual inventory system
a. The system serves as a moral check on the stores staff. They keep the
stores record up-to-date and are differed from committing dishonest acts.
b. Interim financial accounts can be prepared with regular convenience
because the long and costly work of actual stock taking is avoided.
c. Over -investment in stock can be avoided because quantity and value of
materials in stock is always known.
d. In case of destruction of stock by fire, the system helps in settling the
insurance claim as correct stock figures can be readily obtained.
e. loss of stock due to pilferage or obsolence etc, is detected at an early
stage and suitable steps can be taken to prevent its recurrence.
f. Timely replenishment of stock is facilitated as the management may be
informed daily of the number of units and the value of each kind of
material on hand. This tends to eliminate delays and shut down in
production activities.

Numerical Questions
Question No. 18
From the following information show the entries for Material X to be made in stores Ledger
using:
(i) the Weighted Average Method
(ii) the Last-in-First-out Method
Jan. Units Value in Rs.
1 Balance in hand 500 1,000

4 Purchased 200 500
8 Issued 300
9 Purchased 100 220
15 Issued 200
18 Purchased 100 200
26 Issued 300
[June 2001 – 2(a), 8 Marks]
Answer
(i) Weighted Average Method
Store Ledger
Receipt Issue Balance
Date Particulars Qty Rate Value Qty Rate Value Qty Rate Value
Jan units Rs. Rs. units Rs. Rs. units Rs. Rs.
1 Opening 500 2.00 1,000
Bal.
4 Purchase 200 2.50 500 700 2.14 1,500
8 Issue 300 2.14 642 400 2.14 858
9 Purchase 100 2.20 220 500 2.16 1,078
15 Issue 200 2.16 432 300 2.15 646
18 Purchase 100 2.00 200 400 2.12 846
26 Issue 300 2.12 636 100 2.10 210
(ii) L.I.F.O Method
Receipt Issue Balance

Date Particulars Qty units Rate Value Qty Rate Value Qty Rate Value
Jan Rs. Rs. unit Rs. Rs. units Rs. Rs.
s
1 Opening 500 2.00 1,000
Bal.
4 Purchase 200 2.50 500 500 2.00 1000
200 2.50 500
8 Issue 200 2.50 500
100 2.00 200 400 2.00 800

9 Purchase 100 2.20 220 400 2.00 800

100 2.20 220
15 Issue 100 2.20 220
100 2.20 200 300 2.00 600
18 Purchase 100 2.00 200 300 2.00 600
100 2.00 200
26 Issue 300 2.00 600 100 2.00 200
Question No. 19
A firm produces a product, which has a monthly demand of 2,500 units. The product requires
a special component, which is purchased at Rs. 2. For every finished product, one unit of
special component is required. The ordering cost is Rs. 15 per order and the holding cost is
20% p.a.
The firm at present orders its inventory requirement in quantities equivalent to 3 months'
consumption. The firm has been advised to change the present ordering system to the system
based on Economic Order Quantity. Required to calculate:
i) Economic Order Quantity
ii) The Savings arising from switching over to the system based on Economic Order
Quantity. [December 2001 – 2(b), 5+5=10 Marks]
Answer
i. Economic Order Quantity.
Annual demand = 2500 x 12 = 30000 units
Ordering cost = Rs. 15
Carrying cost = 20% of Rs. 2 = Rs. 0.40 / unit
2 x 30000 x 15
EOQ = 0.40 = 1500 units
ii. The Savings arising from switching over to the system based on
Economic Order Quantity.
Order quantity equivalent to 3 months consumption = 2500 x 3 = 7500 units

Average cost = 7500/2 = 3750 units
Carrying cost = 20% of 3750 x 2 = Rs. 1500
Ordering cost - No. of orders i.e. 4 x 15 = Rs. 60
-----------
Total cost Rs. 1560
-----------
EOQ system:
Ordering quantity = 1500 units

Carrying cost = 20% of 1500/2 x 2 = Rs. 300
Ordering cost = No. of order = 20 x 15 = Rs. 300

----------
Total Cost Rs. 600
---------
Savings in cost = 1560 - 600 = Rs. 960
Question No. 20
A company uses a purchased component in an assembly. It follows a policy of economic
order quantity for procurement of the component. The purchase price of the component is Rs.
800 each and the cost of carrying one unit is 15% per annum. The cost of placing an order is
Rs. 150. The company has estimated the total cost of carrying and order placement at Rs.
36,000. The supplier has offered a discount of 3% on the purchase price if the entire
requirement of the component is covered in two purchase order in a year.
Required:
i. Find the economic order quantity.
ii. Calculate the total cost of the component procurement and storage if the discount offer
is accepted. Compare this cost with the total cost of EOQ.
iii. What further discount, if any should be negotiated for minimising the cost.
[June 2002 – 5(a), 8 Marks]
Answer
Rs.
Carrying cost/unit 800 x 15% = 120
Total cost = 36000
Ordering cost = Rs. 150 x 120 orders 18000
Carrying cost = Rs. 120 18000
18000
Average Qty. 120 = 150
∴ EOQ = 150 x 2 = 300 units
EOQ can also be worked out as under
2AO 2 x 36000 x 150
EOQ = = = 300 units
C 12
∴ Annual consumption 300 x 200 = 36000 units
Evaluation of offer of Discount

No. of orders = 2
Rs.
Ordering cost 2 x 150 = 300
18000
Carrying cost = 900 x 120 = 1080000
2
Purchase Cost 36000 x 776 = 27936000
Total 29016300
EOQ
No. of orders 120

Ordering cost 120 x 150 = 18000

Carrying cost = 18000
Purchase cost 36000 x 800 = 28800000
Total 28836000
The discount of 3% is not acceptable
Further discount required
Rs. 29016300 - 28836000 = 180300
180300
= 36000 = 5/-
5
800 x 100 = 0.625% more
Question No. 21
The extracts from the store ledger are given below:
Stock on 1.1.2059 was 200 units costing Rs. 460
Procurements:
5.11.2059 — 400 units costing Rs. 800
16.11.2059 — 300 units costing Rs. 720
24.11.2059 — 500 units costing Rs. 1,190
Issues:
10-11-2059 — 300 units
20-11-2059 — 500 units
30-11-2059 — 400 units
50 units were returned on 23.11.2059 from the work order out of the earliest purchase lot
included in the issue made on 20.11.2059.
Required: Store ledger by using
1. LIFO method and

2. Weighted average Price method. [June 2003 – 2(b), 5+5=10
Marks]
Answer
1. LIFO Method
1.11.2059 200 2.30 460
5.11.2059 400 2 800 200 2.30 460
400 2 800
10.11.2059 300 2 600 200 2.30 460
100 2 200
16.11.2059 300 2.4 720 200 2.30 460

100 2 200
300 2.4 720
20.11.2059 300 2.4 720
100 2 200
100 2.3 230 100 2.30 230
23.11.2059 50 2.3 115 150 2.30 345
24.11.2059 500 2.38 1190 150 2.30 345
500 2.38 1190
30.11.2059 400 2.38 952 150 2.30 345
100 2.38 238
2. Weighted average price method
1.11.2059 200 2.3 460

5.11.2059 400 2 800 600 2.1 1260
10.11.2059 300 2.1 630 300 2.1 630
16.11.2059 300 2.4 720 600 2.25 1350
20.11.2059 500 2.25 1125 100 2.25 225
23.11.2059 50 2.25 112.5 150 2.25 337.50
24.11.2059 500 2.38 1190 650 2.35 1527.50
30.11.2059 400 2.35 940 250 2.35 587.50
Question No. 22
After inviting tenders Bhardwaz Company Pvt. Ltd. received two quotations as follows:
Supplier A – Rs. 2.2 per Unit
Supplier B – Rs. 2.10 per Unit plus Rs. 2,000 fixed charges irrespective of units ordered.
i. Caluclate the order quantity for which the purchase price per unit will be the same.
ii. Considering all factors regarding production requirements and availability of finance, the
purchase officer wants to place an order for 15,000 units. Which supplier should he
select?
Answer
(i)
Supplier A= Rs. 2.20 per unit
Supplier B= Rs. 2.10 per unit + Rs 2,000/- fixed charges
Difference Rs. 0.10 per unit
In order to cover the fixed charges of Supplier of B, the order quantity should be
20,000 units (i.e. 2,000/0.10)

At the quantity of 20,000 units the purchase price per unit will be the same in both the
cases as detailed below:
A = Rs. 2.20*20,000 = Rs. 44,000 @ Rs. 2.20 per unit)
B = Rs. 2.10*20,000 = Rs. 42,000 + 2,000 = Rs. 44,000) (i.e. @2.10 per unit)
ii. As seen from the above, at the quantity of 20,000 units, purchase cost will be the same in
both cases. If it is for less than 20,000 units Supplier A should be selected.
For an order of 15,000 units:
A = 15,000 *2.20 = Rs. 33,000
B = (15,000*2.10) +Rs. 2,000 = Rs. 33,500
Hence, A should be selected in order to place an order for 15,000 units.
Note: If the order is for more than 20,000 units, Supplier B should be selected, as the
fixed charges of Rs. 2,000 are irrespective of the units ordered.
Question No. 23
From the following details of stores receipts and issues of material "EXE" in a manufacturing
unit prepare the stock Ledger using Weighted Average method of valuing the issues:
Poush 1. Opening Stock 2,000 units @ Rs. 5.00 each

Poush 3. Issued 1,500 units to production
Poush 4. Received 4,500 units @ Rs. 6.00 each
Poush 8. Issued 1,600 units to production
Poush 9. Returned to store 100 units by Production Department
(from the issues of Poush 3) .
Poush 16. Received 2,400 units @Rs. 6.50 each
Poush 19. Returned to supplier 200 units out of the quantity
received on Poush 4
Poush 24. Issued to Production 2,100 units
Poush 29. Issued to production 2,800 units
(use rates upto two decimal places) [December 2004 – 2(b), 10 Marks]
Answer
Stock Ledger
Receipt Issues Balance of Stock
Date GR Unit Rat Amount Unit Rat Amount Unit Rat Amoun
Pous N s e s s e s s e t
h No. Rs. Rs. Rs.
1 Opening stock 2,000 5.00 10,000
3 - 1,500 5.00 7,500 500 2,500
4 - 4,500 6.00 27,000 5,000 5.90 29,500
8 - 1,600 5.90 9,440 3,400 20,060
9 - 100 5.00 500 3,500 20,560

16 - 2,400 6.50 15,600 5,900 36,160

19 - 200 6.00 1,200 5,700 34,960
20 - 1,000 7.00 7,000 6,700 6.26 41,960
24 - 2,100 6.26 13,146 4,600 28.814
27 - 1,200 7.50 9,000 5,800 6.52 37,814
29 - 2,800 6.52 18,256 3,000 19,558
Question No. 24
A Company uses three raw materials A, B and C for a particular product for which the
following date apply:
Raw Usage Re- Delivery Period (in weeks) Reorde Minimu
Materia Per Order r m
l unit Quantit Level Level
Produc y (kgs) (kgs)
t (kg.) Minimu Averag Maximu
(kgs.) m e m
A 10 10,000 0.1 1 2 3 8,000
0
B 4 5,000 3.3 3 4 5 4,750
0
C 6 10,000 0.1 2 3 4 2,000
5
Weekly production varies from 175 to 225 units, averaging 200 units of the said product.
What would be the following quantities?

i. Maximum Stock of A?
ii. Maximum Stock of B?
iii. Re-order level C?
iv. Average Stock level of A? [December 2004 – 3(b), 8
Marks]
Answer
(i) Minimum Stock of A :
= ROL - (Normal usage * Average ROP)
= 8,000- (200*10 = 2,000 kg * 2 weeks)
= 8,000 -4,000 = 4,000 kg.
(ii) Maximum Stock of B :
=ROL- (Minimum usage * Minimum ROP) + ROQ
=4,750- (175 * 4 = 700 kg * 3 weeks) + 5,000
=4,750 – 2,100 + 5,000 =7,650 kgs.
(iii) Re- order level C:
= Maximum ROP * Maximum usage
= 4 weeks X (6*225 = 1,350 kg)

=5,400 kg.
or,
Minimum Stock of C + (Average usage*Normal ROP)
=2,000 + (6*200) = 1,200 kg * 3 weeks)
=2,000 + 3,600 =5,600 kgs.
(iv) Average Stock level of A :

Maximum Stock of A:
= ROL - (Minimum usage X Minimum ROP) + ROQ
=8,000 - (175*10 = 1750 kg * 1 weeks) + 10,000
=8,000 – 1750 +10,000 = 16,250 kg
Average Stock level of A = (Minimum Stock + Maximum Stock)/2

= (4000 + 16,250)/2 = 10,125 kg.
or,
Minimum Stock + 1/2 ROQ = 4,000 + (1/2 * 10,000) = 9000 kg.
Note:
ROL = Reorder Level
ROQ = Reorder Quantity
ROP = Reorder Period
Question No. 25
Zenith Ltd. manufactures iron rods. The purchase manager of the company declared to place
orders for minimum quantity of 225 units of a particular item to get discount of 10% on the
purchase price. From the records it was found that in the last year, 5 orders each of size 160
units has been placed. The finance manager argues that this is the most economical purchase
that can be made. The following additional information has been provided:
Ordering cost: NPR 250 per order

Inventory carrying cost: 20% of inventory value per annum
Cost per unit: NPR 200
As per cost Accountant, analyze the decision of purchase Manager making assumption that
total material requirement will be as in the last year. What will be financial impact of this
decision? What is your suggestion? Explain.
Answer
Given,
Annual requirement (A) = 160 * 5 = 800units
Ordering Cost (P) = 250 per order
Carrying Cost (C) = 200 * 0.2 = Rs.40
Now, EOQ = √2AP = √2 * 800 * 250 = 100 units
C 40

Total no, of orders = 80/100 = 8 orders
I. Total cost of inventory under EOQ

Order cost = 250 * 8 = Rs.2, 000
Carrying Cost of inventory = ½ * 100 * 40 = Rs.2, 000
Purchase cost = 200 * 800 = Rs.1, 60,000
Total Rs. 1, 64,000
ii. Total cost of inventory of last year

Order cost = 250 * 5 = Rs.1, 250
Carrying cost of inventory = ½ * 160 * 40 = Rs.3, 200
Purchase cost = 200 * 800 = Rs.1, 60,000
Total Rs.1, 64,450
iii. Total inventory cost as per Purchase Manager’s decision

Order cost = 250* 4 = Rs.1, 000
Carrying cost of inventory = ½*225*40 = Rs.4, 500
Purchase cost = 180 * 800 = Rs1, 44,000
Total Rs.1, 49,500
The purchase Manger’s decision has reduced the total cost by 1, 64,000 – 1, 49,500 =
Rs14, 500
Question No. 26
The information relating to Pokhara Stores for the first two weeks of September 2006 is as
under:
Date Particulars Qty. (in kgs.) Price per kg (in Rs.)
01.09.2006 Opening Stock 100 5

05.09.2006 Purchase 200 6
06.09.2006 Issue 250
08.09.2006 Purchase 500 7
10.09.2006 Issue 400
12.09.2006 Purchase 600 8
14.09.2006 Issue 500
Required:
i. Calculate using FIFO (First in first out) and Moving Weighted Average Method of
inventory accounting:
a) The value of material consumed during the period
b) The value of closing stock as on 14.09.06

ii. Explain why the closing stock as on 14.09.06 is different under the two methods of
pricing of materials.
[December 2006 – 1, 16+4=20 Marks]
Answer
(i)
FIFO Method
Date Particulars Quantity (in kgs.) Price per kg. (in Rs.) Value
01.09.06 Opening Stock 100 5 500

05.09.06 Purchase 200 6 1,200
06.09.06 Issue 100 5 500
150 6 900
08.09.06 Purchase 500 7 3,500
10.09.06 Issue 50 6 300
350 7 2,450
12.09.06 Purchase 600 8 4,800
14.09.06 Issue 350 7 1,050
350 8 2,800
14.09.06 Closing Stock 250 8 2,000
a) Total value of material issued – Rs. 8,000 (Rs. 500 + Rs. 900 + Rs. 300 + Rs. 2,450 +
Rs. 1,050 + Rs. 2,800)
b) Total value of closing stock as on 14.09.06 is Rs. 2,000.
Moving weighted Average Method

Date Particulars Quantity Price per Value
(in kgs.) kg. (in Rs.)
01.09.06 Opening Stock 100 5 500.00

05.09.06 Purchase 200 6 1,200.00
05.09.06 Closing Stock 300 5.67 1,700.00
06.09.06 Issue 250 5.67 1,417.50
08.09.06 Purchase 500 7 3,500.00
08.09.06 Closing Stock 550 6.88 3,782.50
10.09.06 Issue 400 6.88 2,752.00
12.09.06 Purchase 600 8 4,800.00
12.09.06 Closing Stock 750 7.77 5,830.50
14.09.06 Issue 500 7.77 3,885.00
14.09.06 Closing Stock 250 7.78 1,945.50
a) Total value of material issued – Rs. 8,054.50 (Rs. 1,417.50 + Rs. 2,752 + Rs. 3,885)

b) Total value of closing stock is Rs. 1,945.50
(ii.)As per the above calculation, the closing stock as per FIFO is calculated on the basis
of price of last purchased stock. The last purchase was on 12.09.06 wherein 600 kgs
were purchase out of which 350 were issued on 14.09.06 and remaining 250 kgs were
lying in stock.
As per above calculation, the closing stock as per Moving Weighted Average Method
is calculated on the last calculated weighted average cost i.e. Rs. 7.78 on 14.09.06.
Under this method material issues for a period are valued at a price, which is the
average of the periodic weighted average prices of a given number of periods. Thus,
the closing stock of 250 kgs. @ Rs. 7.78 per kg values Rs. 1,943.94.
Question 27
i. The purchase department of Nepal Limited has received an offer of quality discount
on its orders of materials as under:
Price Per Tonnes Tonnes

Rs. 1200 Less than 500
Rs. 1180 500 and less than 1,000
Rs. 1160 1,000 and less than 2,000
Rs. 1140 2,000 and less than 3,000
Rs. 1120 3,000 and above
The annual requirement of the material is 5,000 tonnes. The delivery cost per order is
Rs. 1,200 and the stock holding cost is estimated at 20% of the material cost per
annum.
You are required to advise the purchase department the most economic purchase
level.
ii. From the following data for the year ended 31st Ashadh 2063, calculate the inventory
turnover ratio of the two items and put forward your comments on them,
Material A Material B
Opening stock 01/04/2062 Rs. 10,000 Rs. 9,000
Purchase during the year Rs. 52,000 Rs. 27,000
Closing stock 31/03/2063 Rs. 6,000 Rs. 11,000
[June 2007 – 2, 8Marks]
Answer
i. Statement showing the most economic purchase level:
1 Order size ( in ton) 400 500 1,000 2,000 3,000
2 No. of orders (annual 12.5 10 5 2.5 1.67

requirement X order
size)
3 Value of order [order 480 590 1,160 2,280 3,360
size/ price per ton (Rs.
‘000)]
4 Average inventory 240 295 580 1,140 1,680
[value per order/2 (Rs.
‘000)]
5 Ordering cost [no. of 15,000 12,000 6,000 3,000 2,000
order/ per order (Rs.
1,200] 48,000 59,000 1,16,000 2,28,000 3,36,000
Carrying cost (20% of
item 4)
6 Total of 5 63,000 71,000 1,22,000 2,31,000 3,38,000
7 Add: annual cost of 60,00,000 59,00,000 58,00,000 57,00,000 56,00,000
material (annual
demand X price per
ton)
Total Annual cost 60,63,000 59,71,000 59,22,000 59,31,000 59,38,000
Rs. 59,22,000 is the total minimum cost at 1,000 order size.

Therefore, the most economical purchase level is 1,000 tons.
ii. Calculation of cost of material consumed:
Cost of materials consumed Material A Material B

Opening stock Rs. 10,000 Rs. 9,000
Add: Purchases 52,000 27,000
62,000 36,000
Less: Closing Stock 6,000 11,000
Materials consumed 56,000 25,000
Average inventory: (Op. Stock + Cl. Stock)/ 2 8,000 10,000
Inventory Turnover Ratio: 7 times 2.5 times
(Consumption/ Avg. inventory)
Inventory Turnover (No. of days): (No. of days in a 52 days 146 days
year/ I.T Ratio)
Comments: Material A is faster moving than Material B.
Question No. 28
The fertilizer dealer Co. is deciding on the economic order quantity for two brands of lawn
fertilizers, Oxy A and Hydro B. The following information is collected:

Fertilizer
Oxy A Hydro B
Annual Demand 5,000 Bags 3,200 Bags
Relevant ordering cost per purchase order Rs. 956.25 Rs. 1237.50
Annual relevant carrying cost per bag Rs. 425 Rs. 550
Required:
i. Compute EOQ for Oxy A and Hydro B.
ii. For the EOQ, what is the sum of the total annual relevant ordering costs and total
annual relevant carrying costs for Oxy A & Hydro B?
iii. For the EOQ, compute the number of deliveries per year for Oxy A & Hydro B.
[June 2007 – 3(a), 7 Marks]
Answer
2 SC O
i. EOQ =
ic1
Here,
S = Annual demand of fertilizer bags.
C1 = Cost per bag.
Co = Relevant ordering cost per purchase order.
ic1 = Annual relevant carrying cost per bag.
2 × 5,000 bags × 956.25

EOQ for Oxy A = = 150 bags
Rs.425
2 × 3,200 bags × 1,237.50

EOQ for Hydro B = = 120 bags
Rs.550
ii. Total annual relevant costs = Total annual relevant ordering cost + Total annual
relevant carrying cost.
S 1
= × C O + EOQ × ic1
EOQ 2
5,000 bags 1
For Oxy A = × 956.25 + × 150 × 425
150 2
= 31,875 + 31,875 = 63750
3,200 bags 1
For Hydro B = × 1,237.50 + × 120 × 550
120 2
= 33,000 + 33,000 = 66,000
iii. Number of deliveries per year.

S
=
EOQ
5,000
Oxy A = = 33.33 = Say 34 orders
150
3,200
Hydro B = = 26.66 = Say 27 orders
120
Question No. 29
In order to make posting in the stores ledger, what values (rate per kg.) would you adopt in
respect of materials M1 and M2 included in the following purchase invoice?
Rs. Rs.
350 Kgs. of M1 at Rs. 3 per kg. (one case) … … 1,050
600 Kgs. of M2 at Rs. 5 per kg. (three cases) … … 3,000
Less: Trade Discount @ 15% … … __450
_ 2,550
3,600
Cash Discount @ 2.50% for payment within 30 days: 90
3,510
Carriage: 190
Cost of 4 cases (non-refundable) @ Rs. 12.50 each: 50
3,750
Answer
M1 M2
Quantity (Kgs.) 350.00 600.00
Rs. Rs.
Invoice Value 1,050.00 2,550.00
Less: Cash Discount @ 2.5% 26.25 63.75
1,023.75 2,486.25
Carriage (350 : 600) 70.00 120.00
Cost of Cases (1 : 3) 12.50 37.50
Total: Rs. 1,106.25 Rs. 2,643.75
Rate per Kg.: (Total/Quantity) Rs. 3.16 Rs. 4.41
Note:
The above calculation is based on the assumption that credit should be given for cash
discount. If the policy of the management is different, cash discount will have to be excluded
from the computation
Question No. 30

A wholesaler supplies 30 CDs every day to various retailers. CDs are purchased in lots of 120
each of Rs 1,200 per lot. Every order incurs a handling charge of Rs 60 plus a freight charge
of Rs 250 per lot. Multiple and fractional lots can also be ordered and all orders are filled the
next day. The incremental cost is Rs 0.60 per year to store a CDs in inventory. The
wholesaler finances inventory investment by paying its holding company a quarterly interest
rate of 6% for borrowed funds. Compute:
i) How many CDs shall be ordered to minimize the annual inventory cost? Assume
that there are 250 days in a year.
ii) How frequently should order be made? [June 2008 – 2(b), 8 Marks]
Answer
Working Notes:
i. Annual required units = Number of CDs sold everyday X Number of days per
annum = 30 X 250 = 7500 CDs
ii. Cost per CDS = Cost per lot

Number of CDs per lot
= 1200/120 = 10
iii. Annual carrying cost per CD = Cost of Investment in inventory + Incremental

carrying cost
= Rs 10 x ( 6 x 4)% per annum + Rs 0.60
= Rs 3
iv. Ordering cost per order = Handling charges + Freight charges

= Rs 60 + Rs 250 = Rs 310
Now EOQ = Square root of (2 x Annual required units x Ordering Cost per order)
Annual carrying cost per unit
= Square root of (2 x 7500 x 310)
3
= 1,245 CDs
Computation of order p.a
= Annual required units = 7500/1245 = 6.02 orders

Unit per order
Frequency of order = 12 months = 12/6 = 2 months

Number of orders p.a
Question No. 31
Nepal Copper Wires Limited has received an offer of quantity discount on its
order of copper wire as under:

Price per ton Tons number

NRs.96,000 Less than 50
NRs.93,600 50 and less than 100
NRs.91,200 100 and less then 200
NRs.88,800 200 and less than 300
NRs.86,400 300 and above
The annual requirement for the copper wire is 500 tons per annum. The ordering
cost per order is NRs.125,000 and the stock holding cost is estimated at 25% of
the material cost per annum.
Based on above stated information, you are required to compute the most
economical purchase level. Also, compute Economic Order Quantity (EOQ) if
there are no quantity discounts and the price per ton is NRs.105,000.
[June 2009 – 1(b), 6 Marks]
Answer
The most economic purchase level when there is an availability of Price Discounts
is 300 units. The same is calculated as per below:
Statement of Economic Purchase Level

Order Size No. of Cost of Ordering cost Carrying cost Total cost
(Units) orders purchase A x A/Q x Q/2xCx25% (NRs.)
(Units) per unit cost NRs.125,000
(Q) A/Q (3+4+5)
(1) ( 2) (3) (4) (5) (6)
40 12.5 48,000,000 1,562,500 480,000 50,042,500
(500x96,000) (40/2 x 96,000 x 0.25)
50 10 46,800,000 1,250,000 585,000 48,635,000
(500x93,600) (50/2 x 93,600 x 0.25)
100 5 45,600,000 625,000 1,140,000 47,365,000
(500x91,200) (100/2 x 91,200 x 0.25)
200 2.5 44,400,000 312,500 2,220,000 46,932,500
( 500X88,800) (200/2 x 88,800 x 0.25)
300 1.67 43,200,000 208,750 3,240,000 46,648,750
(500x86,400) (1.67x125000) (40/2 x 86,400 x 0.25)
From the above table it is clear that the total cost of 500 units including ordering
and carrying cost is at a minimum (NRs.46,648,750) when the order size is 300
units. Hence the most economical purchase level is 300 units.
Further when there is no quantity discounts and the price per ton is NRs.105,000
the economic order quantity (EOQ) is computed as per below:

2AO
EOQ = CxI
Where;
A: Annual Requirement
O: Ordering Cost
C: Price
I: Rate of carrying cost
Hence,
2 x 500 x
125,000
EOQ = 105,000 x 0.25
= 69 Ton.
Question No. 32
At the beginning of October 2007, Quality Brush Company had in stock 10,000
brushes value at NRs. 10 each. Further purchases were made during the month as
follows:
7th October 4,000 Brushes @ NRs.12.50
th
14 October 6,000 Brushes @ NRs.15.00
th
24 October 8,000 Brushes @ NRs.16.50
Issue to shop floor were as follows:
16th October 16,000 Brushes
th
28 October 10,000 Brushes
You are required:
i) to prepare a store ledger card for the month of October on the assumption that
materials were issued on the First-in- First-out principle; and
ii) to state the value of closing stock at the end of October if issue are priced by the
weighted average method. [June 2009 – 2(a), 8 Marks]
Answer:
i. Quality Brush Company
Stores Ledger Account (FIFO Method)
Receipts Issues Balance
Date Qty Rate Value Qty Rate Value Qty Rate Value
Oct. Units NRs. NRs. Units NRs. NRs. Units NRs. NRs.
1 10,000 10.00 100,000
7 4,000 12.50 50,000 - - - 10,000 10.00 100,000
4,000 12.50 50,000
14 6,000 15.00 90,000 - - - 10,000 10.00 100,000

4,000 12.50 50,000

6,000 15.00 90,000
16 10,000 10.00 100,000 4,000 15.00 60,000
4,000 12.50 50,000
2,000 15.00 30,000
24 8,000 16.50 132,000 - - - 4,000 15.00 60,000
8,000 16.50 132,000
28 4,000 15.00 60,000 2,000 16.50 33,000
6,000 16.50 99,000
31 2,000 16.50 33,000
ii) The value of closing stock at the end of October if issues are priced by the weighted
average method is NRs.30,000. The same is calculated as per below:
Rate on the 14th October = (10,000x10)+(4,000x12.50)+(6,000x15)
10,000+4000+6000
= NRs.12.
Issue on 16th = 16,000x NRs.12
= NRs.192,000
Balance on 16th = 4,000x NRs12

= NRs. 48,000
Rate on 24th Oct. = (4,000x12)+(8,000x16.50)

4,000+8,000
= NRs.15
Hence, the value of stock = 2,000x NRs.15

= NRs. 30,000.
Question No. 33
From the following data for the year ended 31st December , 2008, calculate the inventory
turnover ratio of the two items and put forward your comments on them,
Material A Material B
Opening stock 1/1/2008 Rs. 10,000 Rs. 9,000
Purchase during the year Rs. 52,000 Rs. 27,000
Closing stock 31/12/2008 Rs. 6,000 Rs. 11,000
Answer
First of all it is necessary to find out the cost of material consumed
Cost of materials consumed Material A Material B
Opening stock Rs. 10,000 Rs.9,000
Add: purchases 52,000 27,000
62,000 36,000

Less: closing stock 6,000 11,000

Materials consumed 56,000 25,000
Average inventory :(op. stock +cl. Stock)/2 8,000 10,000
Inventory turnover ratio: (consumption/ avg. inventory) 7 times 2.5 times
Inventory turnover (no. of days):(no. of days in a year/I.T. ratio) 52 days 146 days
Comments: Material A is more fast moving than material B
Question No. 34
Raw materials 'X' costing Rs. 100 per kilogram and 'Y' costing Rs.60 per kilogram are
mixed in equal proportion for making product 'A'. The loss of materials in processing works
out to 25% of the output. The production expenses are allocated at 50% of direct material
cost.
1
The end product is priced with a margin of 33 3 % over the total cost. Material Y is not
easily available and substitute raw material 'Z' has been found for 'Y' costing Rs. 50 per
kilogram. It is required to keep the proportion of this substitute material in the mixture as
low as possible and at the same time maintain the selling price of the end product at the
existing level and ensure the same quantum of profit as at present.
You are required to compute what should be the ratio of mix of the raw materials X and Z.
Answer
i. Output of Product A (assumed) 1.00

Process loss 25% of output 0.25
Input of raw material X and Y 1.25
X and Y are mixed in equal proportion for making product A, therefore 0.625 kg of X and
0.625 kg. of Y will be mixed to produce on kg of product A.
ii. Statement of Cost and Profit for producing one kg. of A:
Rs.
Raw material X (0.625 x Rs.100) 62.50
Raw material Y (0.625 x Rs.60) 37.50
Material cost 100.00
Add Production Exp. At 50% of material cost 50.00
Total cost 150.00
Add Profit at 33.33% over total cost 50.00
Selling price 200.00
iii. Ratio of mix of raw material X and Z:
Minimum quantity of Z is to be mixed and maintain the same selling price and same
amount of profit. For this purpose, total material cost in one kg of product A should be
the same i.e. Rs. 100 only. Cost of Z is Rs.50 per kg. Suppose quantity of Z raw material
is Z.
Z x Rs. 50 + (1.25 – Z)kg x Rs. 100 = Rs. 100

50Z + 125 – 100Z = 100

50Z – 100Z =100 – 125
-50Z = -25
Z = 0.5
X will be 1.25 -0.5 kg i.e. 0.75 kg
Ratio will be 3:2 between X and Z (i.e. 0.75 kg and 5 kg). It can be proved as below:
Statement of Cost
Rs.
Raw material X 0.75 kg at Rs. 100 75
Raw material Z 0.50 kg at Rs. 50 25
Total material cost 100
Production expenses 50% 50
Total cost 150
Profit 33.33% of total cost 50
Selling price 200
Question No. 35
National Limited is engaged in the manufacture of two product A and B. Product A uses one
unit of component P and two units of component Q. Product B uses two units of component P
and one unit of Q and two units of component R. Component R which is assembled in the
factory uses one unit of component Q. Components P and Q are purchased from the market.
The firm has prepared the following forecast of sales and inventory for the next year.
Products
A B
Sales Units 8,000 15,000
Inventories:
At the end of the year Units 1,000 2,000
At the beginning of the year Units 3,000 5,000
The production of both the products and the assembling of the component R will be spread
out uniformly throughout the year.
The firm at present orders its inventory of components P and Q in quantities equivalent to 3
months consumption. The firm has been advised that savings in the provisioning of
components can arise by changing over to the ordering system based on economic ordering
quantities. The firm has compiled the following data relating to two components.
P Q
Component usage per annum 30,000 48,000
Price per unit Rs. 2.00 0.80
Order placing costs per order Rs. 15.00 5.00
Carrying costs per annum (%) 20 20
You are required to :

(i) Prepare a budget of production and requirements of components for the next
year.
(ii) Find the economic order quantity.
(iii) Based on the economic order quantity calculated in (ii) above, calculate the
savings arising from switching over to the new ordering system both in terms of
cost and reduction in working capital.
[December 2009 – 5(a), 4+2+4=10 Marks]
Answer
i. Statement showing production budget of products A and B.
In units
Product A Product B
Closing inventory 1,000 2,000
Add: Sales 8,000 15,000
9,000 17,000
Less: Opening inventory 3,000 5,000
Production 6,000 12,000
Budget requirement of components P, Q and R

P Q R
For A 1 unit of P X 6,000 6,000
2 units of Q X 6,000 12,000
For B 2 units of P X 12,000 24,000
1 unit of Q X 12,000 12,000
2 units of R X 12,000 24,000
For R 1 unit of Q X 24,000 24,000
30,000 48,000 24,000
______________________________________________________
ii. EOQ = √2 X Annual Consumption X Buying Cost Per Order/(Cost per unit X Storage
and carrying cost rate)
________________________
Component P = √2 X 30,000 X 15 / (2 X 20%) = 1,500 units
Component Q = √2 X 48,000 X 15 / (0.80 X 20%) = 3,000 units
iii. Existing system

Component P Component Q
a. Present order quantity (equivalent to 3 30,000 X 1 / 4 48,000 X 1 / 4
months consumption = 7,500 units = 12,000 units
b. Average stock (a / 2) 3,750 units 6,000 units
c. Investment in inventory (b X Rs. 2 for P Rs. 7,500 Rs. 4,800
& Re 0.80 for Q

d. Total investment Rs. 12,300

e. Carry cost (20% of 12,300) Rs. 2,460
f’. Number of order = 30,000 / 7,500 =48,000/12,000
=4 =4
g. Ordering cost = No. of order X ordering = 4 X 15 = 60 = 4 X 15 = 60
cost per order
h. Total cost (e + g) Rs. 2,580
After Switching Over to the New Ordering System
Component P Component Q
a. EOQ 1,500 units 3,000 units
b. Average stock (a / 2) 750 units 1,500 units
c’. Investment in inventory (b X Rs. 2 for P Rs. 1,500 Rs. 1,200
& Re 0.80 for Q
d’. Total investment Rs. 2,700
e’. Carrying cost 20% of Rs. 2,700 Rs. 540
f’. Number of order = 30,000/ 1,500 =48,000 /
=20 3,000 = 16
g. Ordering cost = No. of order X ordering Rs. 300 Rs. 240
cost per order
h. Total cost (e + g) 1,080
Saving in cost = 2,580 – 1,080 = Rs. 1,500

Reduction in working capital = 12,300 – 2,700 = Rs. 9,600
Question No. 36
The Purchase Department of your organization has received an offer of quantity discount
on its order of material as under:
Price per tonne Tonnes
Rs. 1,200 Less than 500
1,180 500 and Less than 1,000
1,160 1,000 and Less than 2,000
1,140 2,000 and Less than 3,000
1,120 3,000 and above
The annual requirement for the material is 5,000 tonnes. The delivery cost per order is Rs.
1,200 and the stock holding cost is estimated at 20% of material cost per annum.
You are required to advice the Purchase Department the most economical purchase level.
[June 2010 – 1(a), 6 Marks]

Answer
Statement showing the most economic purchase level
1 Order size (tone) 400 500 1,000 2,000 3,000
2 No. of orders (annual 12.5 10 5 2.5 1.67
requirement /order size)
3 Value or order(order size x 480 590 1,160 2,280 3,360
price per tonne)(Rs.’000)
4 Average inventory(value per 240 295 580 1,140 1,680
order/2)(Rs.’000)
5 Ordering cost (no. of order x 15,000 12,000 6,000 3,000 2,000
ordering cost per order,
i.e.(Rs.1,200)
Carrying cost (20% of item 4) 48,000 59,000 116,000 228,000 336,000
Total of 5 63,000 71,000 122,000 231,000 338,000
Add: annual cost of material
(annual demand x price per 6,000,000 5,900,000 5,800,000 5,700,000 5,600,000
tonne)
Total annual cost 6,063,000 5,971,000 5,922,000 5,931,000 5,938,000
Rs.5,922,000 is the total minimum cost at 1,000 order size.
Therefore, the most economical purchase level is 1,000 tonnes.
Question No. 37
From the following data for the year ended 31st December, 2009 calculate the inventory
turnover ratio of the two items and put forward your comment on them,
Material P Material Q
Rs. Rs.
Opening Stock 1/1/2009 20,000 9,000
Purchase during the year 104,000 54,000
Closing stock 31/12/2009 12,000 22,000
[June 2010 – 1(b), 4 Marks]
Answer
First of all it is necessary to find out the cost of material consumed.
Cost of material consumed Materials P Materials Q

Add: Purchases 104,000
54,000
124,000
63,000
Less: Closing stock 12,000
22,000

Material consumed 112,000

41,000
Average inventory(Op. Stock + Cl. Stock) ÷2 16,000
15,500
Inventory Turnover Ratio 7 times 2.65
times
(Consumption ÷ Avg. inventory)
Inventory Turnover (No. of days ): 52 days 138 days
(No of days in a year ÷ I.T.Ratio)
Comments: Material P is more fast moving than Material Q.
Question No. 38
The annual demand for an item of raw material is 4,000 units and the purchase price is
expected to be Rs. 90 per unit. The incremental cost of processing an order is Rs. 135 and the
cost of storage is estimated to be Rs. 12 per unit.
i) What is the optimal order quantity and total relevant cost of this order quantity?
ii) Suppose that Rs. 135 as estimated to be the incremental cost of processing an
order is incorrect and should have been Rs. 80. All other estimates are correct.
What is the difference in cost on account of this error?
iii) Assume at the commencement of the period that a supplier offers 4,000 units at a
price of Rs. 86. The materials will be delivered immediately and placed in the
stores .Assume that the incremental cost of placing the order is zero and original
estimate of Rs. 135 for placing an order for the economic batch is correct. Should
the order be accepted?
[June 2011 – 1(a), 2+3+3=8 Marks]
Answer
Optimal Order Quantity = √2 UP/S
Where: U=Total annual requirement of raw materials in units
P =Ordering cost per order
S =Raw materials carrying cost per unit per annum
=√2×4,000units×Rs 135/Rs. 12 =300 units
Total Relevant Cost when the order quantity is 300 units
=Order Cost+Carrying Cost
=No of orders × Ordering cost per order +1/2 order size× Carrying cost per unit per
annum
=4,000/300×135+ ½ (300×12)
=Rs. 1,800 + Rs. 1,800=Rs 3,600
b) Revised Optimal Order Quantity =√2×4,000×Rs 80/Rs. 12

=231 unit
Total Revised Relevant Cost when Order Quantity is 231 units
=Rs. 80 × (4,000/231)+12×(231×1/2)
=Rs 1,385.28+Rs. 1,386=Rs. 2,771.28(or say Rs 2,771)--------------------(1)

It may be noted that the estimated of ordering cost was detected as wrong at the end of the
year and all other estimate were found to be correct, hence, the relevant cost under such a
situation would be as follows:-
=Rs. 80×(4,000/300)+Rs 12×(300/2)
=Rs 1,066.67+Rs 1,800=Rs. 2,866.67(or say Rs. 2,867)--------------------(2)
Difference in the relevant cost (2)-(1) on account of wrong estimation of ordering cost.
=Rs 2,867-Rs 2,771=Rs.96
(c) Evaluation of special offer for supply of materials

Total Pric Order Total Cost of Orderin Carrying Total Cost
units e size Purchase g Cost Cost
Purchased (in units)
Rs. Rs. Rs. Rs. Rs.
4,000 86 4,000 3,44,000 Nil 24,000 3,68,000
(4,000×Rs 86)
4,000 90 300 3,60,000 1,800 1,800 3,63,600
(4,000×Rs. 90)
Difference in 4,400
Cost
Comments:. The above table shows that the special offer of Rs. 86 per unit on the initial
purchase of 4,000 units impose an additional cost of Rs 4,400 hence such a purchase is not
recommended
Question No. 39
X Ltd. is reviewing its stock policy, and has the following alternatives available for the
evaluation of stock:
i) Purchase stock twice in a month, 400 units.
ii) Purchase monthly, 800 units
iii) Purchase every three months, 2,400 units
iv) Purchase every six month, 4,800 units
v) Purchase annually, 9,600 units
It is ascertained that the purchase price per unit is Rs. 40 for deliveries up to 2,000 units. A
5% discount is offered by the supplier on the whole order where deliveries are 2,001 to 4,000
units and 10% reduction on the total order for deliveries in excess of 4,000 units. Each
purchase order incurs administration costs of Rs. 250. Interest on capital and other storage
costs are Rs. 12.50 per unit of average stock quantity held.
Calculate the optimum order size. [June 2011 – 4(c), 4 Marks]
Answer
The purchase cost is not constant per unit. It is therefore, not possible to use the EOQ
formula. For optimum order size statement of cost is prepared as follows:

Order No. of Annual Purchase Cost Storage Admin Total

size Order Rs. Rate/unit Cost (Rs) Cost (Rs) Cost (Rs)
9,600 1 345,600 36 60,000 250 405,850
4,800 2 345,600 36 30,000 500 376,100
2,400 4 364,800 38 15,000 1,000 380,800
800 12 384,000 40 5,000 3,000 392,000
400 24 384,000 40 2,500 6,000 392,500
The optimum order size is 4,800 units which cost Rs. 376,100 in total.
Working Notes:
(i) Order size up to 2,000 units, Purchase price is Rs. 40
Order size 2,001 – 4,000 units, Purchase price is Rs. 40 – 5% Discount = Rs. 38.
Order size greater than 4,000 units, Purchase price is Rs. 40 – 10% Discount
= Rs. 36.
(ii) Storage cost: Rs. 12.50 per unit of average stock
For order size 400 units, Average stock 200 units × Rs. 12.50 = Rs. 2,500 and so on.
Question No. 40
During Poush 2067, a company purchased 1,200 kg. of raw materials. The following
particulars relate to the purchase:
i) Lot prices quoted by supplier and accepted by the company for
placing the purchase order:
Lot up to 1000 kg. @ Rs.22/ kg.
Between 1000 – 1500 kg. @ Rs.20/ kg.
Between 1500 – 2000 kg. @ Rs.18/ kg.
ii)Trade discount 20%.

iii)
VAT at 13% extra; credit is to be taken.
iv)Freight paid Rs. 240.
v) Insurance paid at 2.5% on Invoice Value.
vi)Stores overhead applied at 5% on total purchase cost of
material.
The entire quantity was received and issued to production.
Required:
Prepare a statement showing total cost of material purchased and unit cost of material issued
to production. [December 2011 – 3(c), 5Marks]
Answer

Statement of total and per unit cost of materials

Particulars Total Amount Per unit Amount
(Rs.) (Rs.)
Raw material 1200 kg @ Rs.20/ kg 24,000.00 20.00
Less: Trade discount @ 20% 4,800.00 4.00
19,200.00 16.00
Add: VAT @13% 2,496.00 2.08
Invoice Value 21,696.00 18.08
Freight paid 240.00 0.20
Insurance @2.5% on Rs.21,696.00 542.40 0.45
22,478.40 18.73
Add: Stores overhead @5% 1,123.92 0.94
Less: VAT credit 2,496.00 2.08
` 21,106.32 17.59
Question No. 41
Calculate the material turnover ratio for the year 2067-2068 from the following details.
Stock as on 1-4-2067 : 25,000

Stock as on 31-3-2068 : 15,000
Purchases : 1,90,000
[June 2012 – 1(a), 2 Marks]
Answer:
a) Computation of the material turnover ratio
Particulars Amounts ( inRs.)

Opening Stock as on 1-4-2067 25,000
Add: Purchases 1,90,000
Less: Closing stock as on 31-3-2068 15,000
i) Material Consumed 2,00,000

ii) Average inventory (Opening+Closing/2) 20,000
Therefore, Material turnover ratio (i/ii) 10 Times
Question No. 42
PQR Ltd. manufactures a special product using raw material “SED”. The following
particulars were collected for the year 2067-2068.
i) Monthly demand of SED : 7500 Units
ii) Cost of placing an order : Rs. 500
iii) Re-order period : 5 to 8 weeks
iv) Cost per unit : Rs. 60
v) Carrying cost % p.a. : 10%
vi) Normal usage : 500 per week
vii) Minimum usage : 250 per week

viii) Maximum usage : 750 per week

Required:
i) Re-order quantity
ii) Re-order level
iii) Minimum stock level
iv) Maximum stock level
v) Average stock level [June 2012 – 1(b), 6 Marks]
Answer
Here,
Monthly demand of the SED= 7500 units
Therefore, annual demand of the SED(A)= 7500×12 units =90,000 units
Cost of one order (O) = Rs.500
Cost per unit (C)= Rs.60
Re-order period= 5-8 days
Carrying cost per unit per annum (I) = 10%
Normal usage=500 per week
Minimum Usage=250 per week
Maximum Usage=750 per week
i) Re-order quantity :
We know that,
2𝐴𝑂
�
𝐶. 𝐼
2×90000×500
�
60 𝑥 10%
=3,873 Units
ii) Re-order level:
We know that,
Re-order-level =Maximum lead time × maximum usage
=8×750
=6,000 units
iii) Minimum stock level:
We know that,
Minimum stock level=Re-order-level – normal lead time × normal
usage
=6,000-6.5×500 (where normal lead time=5+8/2)
=2,750 units
iv) Maximum Stock level:
We know that,

Maximum stock level=R.O.Q. +Re-order-level -minimum stock level

=3,873+6,000-2,750
=7,123 units
v) Average Stock level:
We know that,
Average stock level= {(minimum stock level + maximum stock
level)/2 = (2,750+7,123)/2
=4,936.50 ≈ 4937 units
(Alternatively, average stock level= minimum stock level+R.O.Q/2)
Question No. 43
A company prepared the following budgeted income statement for next financial year:
Particulars Amount Amount

(Rs.) (Rs.)
Sales (52,000 units @ Rs.850 each) 44,200,000
Cost of goods sold:
Opening stock (2,000 units @ Rs.650 each) 1,300,000
Purchases (52,000 units @ Rs.700 each) 36,400,000
Closing stock (2,000 units @ Rs.700 each) (1,400,000) 36,300,000
Gross profit 7,900,000
Expenditures:
Purchasing cost- variable (@Rs.30,000 per order) 240,000
Purchasing cost- fixed 840,000
Transportation cost (@Rs.55,000 per order) 440,000
(charged by the supplier of goods)
Stock insurance cost (5,500 units @ Rs.40 each) 220,000
(based on average stockholding)
Fixed warehouse costs 2,300,000 4,040,000
Net profit before tax 3,860,000
At present, sales occur evenly throughout the year and a buffer stock of 2,000 units is
maintained. Recently, the company has contracted with supplier to buy 52,000 units of goods,
the payment of which shall be made in equal monthly installment throughout the year
irrespective of the order size. As per the contract, transportation costs are to be paid at the
beginning of the year.
The supplier has offered Rs.10,000 discount in transportation cost per order if the company
increase the order size from 6,500 units to a minimum of 10,000 units per order.
The cost of capital of the company is 20% per annum.
Required:
i) Assuming that the buffer stock level of 2,000 units is maintained; calculate the
optimal order size for the company.
ii) Show the improvement in net profit before tax with the implementation of the
optimal order size.

[June 2012 – 4(a), 5+7=12 Marks]

Answer:
i) Calculation of Optimal Order Size
To calculate optimal order size, we have to find out EOQ
EOQ =√(2 x A x O/ C)
Where,
EOQ= Economic Order Quantity
A = Annual Usage
O = Ordering Cost
C = Carrying Cost
Now,
EOQ = √ (2 x 52,000 x 85,000 / 40) = 14,866 units
At this EOQ level, the company will be eligible to get concession of Rs.10,000 on
transportation cost from supplier. Therefore, the ordering cost should be taken as
Rs. 75,000 for calculating EOQ. Hence, new EOQ is
EOQ = √ (2 x 52,000 x 75,000 / 40) = 13,964 units
The buffer stock level of 2,000 units are covered in above 13,964 units of order size,
therefore, the optimal order size for the company is 13,964 units per order.

ii)
Statement showing improvement in net profit before tax

with implementation of optimal order size
Particulars Amount (Rs.) Amount (Rs.)
Sales (52,000 units @ Rs.850 each) 44,200,000
Less Cost of goods sold:
Opening stock (2,000 units @ Rs.650 each) 1,300,000
Purchases (52,000 units @ Rs.700 each) 36,400,000
Closing stock (2,000 units @ Rs.700 each) (1,400,000) 36,300,000
Gross profit 7,900,000
Less Expenditures:
Purchasing cost- variable (WN 1) 120,000
Purchasing cost- fixed 840,000
Transportation cost (WN 2) 180,000
Stock insurance cost (WN 3) 359,280
Fixed warehouse costs 2,300,000 3,799,280
Revised net profit before tax 4,100,720
Original net profit before tax 3,860,000
Improvement in net profit before tax 240,720
WN 1) Calculation of variable purchasing cost

Annual requirement (units) 52,000
Order size (units) 13,964
No. of orders (Annual requirement/ order size) 4
Variable purchasing cost per order (Rs.) 30,000
Total variable purchasing cost (Rs.) 120,000
WN 2) Calculation of transportation cost

No. of orders 4
Transportation cost per order (Rs.) 45,000
Total transportation cost (Rs.) 180,000
WN 3) Calculation of stock insurance cost

Buffer stock level (units) 2,000
Average stock (13964/2) (units) 6,982
Total average stockholding 8,982
Insurance cost per unit (Rs.) 40
Total stock insurance cost (Rs.) 359,280
Question No. 44
Sambriddhi Coffee Ltd. is the supplier of high quality coffee with gift packaging for export.
Company is newly establishes and very conscious about the cost control. To be competitive
in the market; company maintain definite level of stock as well. The following are the details
of their operating during 2012:

Average monthly market demand for coffee 2,500 Packet

Ordering cost Rs. 100 per order
Inventory carrying cost 20% per annum
Cost of high quality material Rs. 500 per Kg.
Normal usage of material 100 Kg. per week
Minimum usage 50 Kg. per week
Maximum usage 300 Kg. per week
Lead time 4-6 weeks
Using the above data and information compute:
i) Economic Order Quantity
ii) Reorder Level
iii) Maximum Level of Stock
iv) Minimum Level of Stock
v) If the supplier is willing to supply quarterly 1,500 Kg. in one lot at a discount of
5%, is it worth accepting?
[December 2013 – 4(c), 1+1+1+1+2=6 Marks]
Answer
i. Computing EOQ
Let A= annual usage = Normal usage per week ×52 Weeks
= 100×52
=5,200 Kg
O = ordering cost per order =Rs. 100
Cost per unit =Rs. 500/Kg
C= stock holding rate p.a. = 20% p.a.
Q=Re-order quantity
# CS= Carrying cost per unit p.a. = 500×20% = Rs 100
EOQ=√2AO/C
=√2×5,200×100/100
=102 units
ii. Reorder Level = Max. Usage × Maximum Lead Time

=300 Kg/week × 6 weeks
= 1,800 Kg
iii. Maximum Level = Reorder Level + Reorder Qty - (Minimum Usage × Minimum
Lead Time)
= 1,800 +102 ( W.N.1) - (50 Kg per week × 4 weeks)
=1,702 Kg
iv. Minimum level = Reorder Level – (Avg or Normal Usage × Average Lead
Time)
=1,800 – ((100 × (4+6/2))
= 1,300 Kg

v. Evaluation of price discount offer:

The price discount offer can be decided upon only after comparing the total annual
inventory cost at EOQ & total annual inventory cost at 1500 units of order size.
Total annual inventory cost = Total Purchase Cost + Total Ordering Cost + Total
Carrying cost of Average Inventory.
= (A×C) + (A\Q×O) + 1\2×Q×CS
At Q= 102 units (i.e. EOQ) = (5,200 ×500) + (5200\102×100) + (1\2×102×100)
= 26, 00,000 + 5098+5100
= Rs 26,10,198 (approx.)
At Q= 1500 units = (5,200 × (500-5%)) + (5,200\1500×100) + (1\2×1500 × (500-

5%×20%))
=24,70,000 + 347 + 71250
= Rs 25,41,597 (approx.)
If the re-order quantity is fixed at 1500 Kg, the total annual inventory cost will be lower. So
the discount offer should be accepted.
Assumption:
Since, there is no specification about re order quantity, it has been assumed to be equal to
EOQ units i.e. 102 Kg/order.
Question No. 45
MTC Limited uses chemical X in one of its finished products. The chemical-X is purchased
from a vendor outside Nepal. MTC Limited purchases 36,000 Ltr. of chemical X per year at
the rate of Rs. 900 per Ltr plus import duty @10% on such purchases.
The chemical X is used evenly throughout the year in the production process on a 360 day
per year basis. The Company incurs Rs. 1,75,000 on one year agreement for material supply
with the vendor and it estimates that Rs. 35,000 will be incurred to place a single purchase
order. The chemical X is needed to be kept in a very carefully controlled temperature and
humidity conditions. MTC Ltd. Incurs 1.5% and 0.2676% of the value of inventory as storage
cost and as insurance cost respectively.
Delivery from the vendor generally takes 12 days, but it can take as much as 16 days. The
days of delivery time and percentage of their occurrence are shown in the following
tabulation:
Delivery time (days) : 12 13 14 15 16

Percentage of occurrence : 70 10 10 5 5
Required:
i) Compute the economic order quantity (EOQ).

ii) Assume the company is willing to assume a 10% risk of being out of stock. What would
be the safety stock? The re-order point?
iii) Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
[December 2014 – 2(b), 3+3+4=10 Marks]
Answer
(i) Economic Order Quantity (E.O.Q)
= √2AO = √2x36,000 Ltrs. xRs 35000 = 12,000 litres
C Rs 17.50
(ii) Safety Stock at 10% risk of being out of stock
Safety Stock required for two days i.e. for 13th and 14th day
Safety stock = 36,000ltr x 2days = 200 litres

360 days
Re-order Point = Minimum Stock level + Average lead time x Average
consumption
= 200+12 x 100
= 1400 litres
(iii) At 5% risk of being out stock, safety stock will be safety stock for three days
100 ltr x 3 days =300 ltr.
Total Ordering Cost =36,000ltr x Rs 35,000 = Rs 1,05,000

12,000ltr
Total Carrying cost of inventory = (Safety Stock + Average inventory) Carrying

Cost per litre per annum
= (300 + 1/2 x 12,000 ltr.) Rs 17.50
= Rs 1,10,250
Total cost of ordering & carrying inventory = 1,05,000 + 1,10,250 = Rs 2,15,250
Working Notes
1. Risk of being out of stock
Delivery Percentage of Cumulative percentage Risk of non
Time Occurrence (%) of Occurrence (%) Occurrence (%)
12 days 70 70 30
13 days 10 80 20
14 days 10 90 10
15 days 5 95 5

16 days 5 100 0
16 days 5 100 0
2 (a) Ordering Cost per order (O)- Rs 35,000

(b) Cost per litre of chemical-X
Rate per litre Rs 900
Add: Import duty @10% Rs 90
Rs 990
Carrying cost per litre per annum of chemical-X (C)
1.7676% (1.5%+0.2676%) of Rs 990= Rs17.50
(Note: Amount of Rs. 175,000 incurred on making agreement for material supply will
be apportioned over the entire quantity of 36,000 ltr and included with cost of
chemical X. However for the purpose of calculating carrying cost i.e storage cost and
insurance cost only invoice cost of material is taken. Invoice cost consist of cost per
litre of chemical X plus import duty.)
Question No. 46
From the following data for the year ended 31st December, 2014 calculate the inventory
turnover ratio of the two items and put forward your comment on them,
Material P Material Q
Opening Stock 1/1/2014 Rs. 20,000 Rs. 9,000
Purchase during the year 104,000 54,000
Closing Stock 31/12/2014 12,000 22,000
[July 2015 – 2(b), 4 Marks]
Answer
First of all it is necessary to find out the cost of material consumed.
Cost of material consumed Materials P Materials
Q
Add:Purchases 1,04,000 54,000
1,24,000 63,000
Less: Closing stock 12,000 22,000
Material consumed 1,12,000 41,000
Average inventory(Op. Stock+Cl. Stock) ÷2 16,000 15,500
Inventory Turnover ratio( Consumption÷Avg. inventory) 7 times 2.64

times
Inventory Turnover (No. of days ): (No of days in a year 52 days 146 days
÷ I.T.Ratio)
Comments: Material P is more fast moving than Material Q.

Question No. 47
cost of storage is estimated to be Rs. 12 per unit.
i) What is the optimal order quantity and total relevant cost of this order quantity?
ii) At the commencement of the year a supplier offers 4,000 units at a price of Rs.
86.The materials will be delivered immediately and placed in the stores and the
incremental cost of placing the order is zero. Should the order be accepted?
iii) At the time of annual cost audit it was revealed that Rs. 135 as estimated to be the
incremental cost of processing an order is incorrect and should have been Rs. 80.
All other estimates are correct. What is the difference in cost on account of this
error?
[June 2016 – 2(a), 2+4+4=10 Marks]
Answer
i) Optimum order quantity (EOQ) = 2AO
√ C
Where
A = Total Annual requirements of raw materials in units
O = Ordering cost per order
C = Raw materials carrying cost per unit per annum
= 2× 4,000 units× Rs.135

√ Rs. 12
= 300 units
Total relevant cost when order quantity is 300 units
= Ordering cost + Carrying cost
= No. of orders × ordering cost per order + ½ Order size × carrying cost per unit per
annum
= 4,000 units ×Rs. 135 + ½ × 300 units × Rs. 12
300 units
= Rs. 1,800 + Rs. 1,800
= Rs. 3,600
ii) Comparision of cost at Special offer and EOQ

Order Total Price Total cost Ordering Carrying Total
Size units per unit of purchase Cost Cost Cost (Rs.)
(units) purchased (Rs.) (Rs.) (Rs.) (Rs.)
Special 4,000 4,000 86 3,44,000 Nil 24,000 3,68,000
Offer
EOQ 300 4,000 90 3,60,000 1,800 1,800 3,63,600
Difference in cost 4,400

Since the special offer of Rs. 86 per unit on the initial purchase of 4,000 units
imposes an additional cost of Rs.4,400, the offer should not be accepted.
iii)
Revised optimal order quantity = 2× 4,000 units × Rs.80
√ Rs. 12
= 231 units
Revised relevant cost when order quantity is 231 units

= 4,000 units ×Rs. 80 + ½ × 231 units × Rs. 12
231 units
= Rs. 1,385.28 + Rs. 1,386
= Rs. 2,771.28
Difference in the relevant cost on account of wrong estimation of ordering cost

= Rs. 3600 – Rs. 2,771.28
= Rs. 828.72
Question No. 48
A company manufactures a product from a raw material, which is purchased at Rs. 54 per kg.
The company incurs a handling cost of Rs. 350 plus freight of Rs. 400 per order. The
incremental carrying cost of inventory of raw material is Re. 0.50 per kg per month. In
addition, the cost of working capital finance on the investment in inventory of raw material is
Rs. 8 per kg per annum. The annual production of the product is 94,500 units and 2 units are
obtained from one kg of raw material.
Required:
i) Calculate the economic order quantity of raw materials.
ii) Advise, how frequently orders should be placed for procurement.
iii) If the company proposes to rationalize placement of orders on quarterly basis,
what percentage of discount in the price of raw materials should be negotiated?
[December 2016 – 2(a), 4+1+5=10 Marks]
Answer
(i) EOQ = 2AO

√ C
A = Annual consumption = 94,500units x 1kg. = 47,250 kgs.
2 units
O = Cost of placing order = Handling cost + Freight = Rs. 350 +Rs. 400 = Rs. 750
C = Carrying cost per unit per annum

Carrying cost (Re. 0.50 × 12) =Rs. 6

Finance charges on investment in inventory = Rs.8

Rs.14
EOQ = 2 x 47,250 x 750 = 2,250 kgs.

√ 14
(ii) Number of orders = 47,250 kgs./ 2,250 kgs. = 21 orders

Frequency in placing orders = 365 days / 21 orders = 17 days
(iii) If company places orders on quarterly basis, percentage of discount in price of raw
material to be negotiated :
Cost under EOQ :

Ordering cost 21 orders × Rs. 750 Rs.15,750
Carrying cost 2,250 kgs. × ½ × Rs. 14 Rs.15,750
Total cost Rs.31,500
Cost under Ordering on Quarterly Basis :

Ordering cost 4 orders × Rs. 750 Rs. 3,000.00
Carrying cost (47,250 kgs./4 orders )× ½ × Rs. 14 Rs. 82,687.50
Total cost Rs. 85,687.50
Incremental cost if orders are placed on quarterly basis = Rs.85,687.50 –

Rs.31,500.00
= Rs. 54,187.50
Reduction in purchase price to be negotiated = Rs. 54,187.50/47,250 kgs.

= Rs. 1.15 per kg.
Percentage of discount to be negotiated = Rs. 1.15 × 100

Rs.54
= 2.13%
Question No. 49
Nepa Engineering produces one of the component “Metal Shaft” from a single raw material
in economic lots of 2,000 units. The raw material cost is Rs. 2 per Metal Shaft. Average
annual demand is 20,000 units. The annual holding cost of material is Re. 0.25 per unit and
the minimum stock level is set at 400 units. Direct labour costs for the component are Rs. 6
per unit, fixed manufacturing overhead is charged at a rate of Rs. 3 per unit based on normal
activity of 20,000 units. The company also hires a machine on which the components are
produced at a rate of Rs 200 per month.
Required:
i) What will be the total annual manufacturing cost of 20,000 units of Metal Shaft?

ii) Nepa Engineering is considering the possibility of purchasing from a supplier the
components now it makes. The supplier will provide necessary components at a
unit price of Rs. 9. Transportation and storage cost would be negligible. Should the
company purchase the component instead of manufacturing?
[June 2018 – 3(a), 5+3=8 Marks]
Answer
Working Note:
1. The cost of placing an order when the raw material is purchased is not given.
Let the cost of placing an order be X
_______________________________________
Economic Batch Quantity (EBQ) = 2 x Annual Consumption x Cost of placing an order
√ Cost of carrying one unit of inventory for one year
Substituting the available Information

______________
2,000 = 2 x 20,000 x X
√ 0.25
X = 40,00,000/160,000
Or X = Rs. 25
Cost of placing an order = Rs. 25
2. Average stock level = Minimum stock level + ½ EOQ

= 400 + ½ (2000)
= 1,400 units
i) Calculation of total annual manufacturing cost

Rs.
Material Cost (20,000 x Rs.2) 40,000
Storage cost (1,400 x Re. 0.25) 350
Ordering Cost (20,000/2,000) x Rs. 25 250
Labour cost (20,000 x Rs. 6) 1,20,000
Rental Charges (Rs.200 x 12) 2,400
Fixed Manufacturing Overhead (20,000 x 3) 60,000
Total annual manufacturing cost 223,000
ii) Total annual manufacturing cost (calculated as above) 223,000

Less: Fixed Manufacturing Overhead (Sunk cost) 60,000
Manufacturing Cost 163,000
Purchase cost (20,000 x 9) 180,000
Fixed cost being sunk cost is not relevant for decision making. The company
should not purchase the component. Bying the components will be beneficial
only if there is alternative use of existing capacity and the opportunity cost
exceeds Rs. 17,000 i.e. Rs. 1,80,000 – Rs. 1,63,000.

Question No. 50
annual cost of storage is estimated to be Rs. 12 per unit. Compute the optimal order quantity
and total relevant cost of this order quantity.
Suppose that Rs. 135, as estimated to be the incremental cost of processing an order, is
incorrect, and should have been Rs. 80. All other estimates are correct. Estimate the
difference in cost on account of this error.
Assume at the commencement of the period that a supplier offers 4,000 units at a price of Rs.
86. The materials will be delivered immediately and placed in the stores. Assume that the
incremental cost of placing the order is zero and original estimate of Rs. 135 for placing an
order for the economic batch is correct. Analyze, should the order be accepted?
[June 2019 – 3(a), 8 Marks]
Answer
a)
i) Optimal order quantity i.e. E.O.Q.
2𝑥4,000x135
=√ 12
=√90,000
= 300 units
Relevant Cost of this order quantity Rs.
Ordering Cost = 4,000/300 13.33 say 14 order at Rs.135 1,890
Carrying Cost = ½ x 300 x 12 1,800
Relevant Cost 3,690
2𝑥4,000x80
ii) Revised EOQ =√ 12
= 231 units
Ordering Cost = 4,000/231 = 17.32 say 18 orders at Rs.80 1,440
Carrying Cost = ½ x 231 x 12 1,386
2,826
Different in cost on account of this error = 3,690 – 2,826 =Rs.864
iii) In case of discount in purchase price, the total cost of purchase
cost, ordering cost and carrying cost should be compared.
Original offer at Rs.90 per unit Supplier offered at Rs.86 per unit
Rs. Rs.
Purchase cost 3,60,000 Purchase cost 4,000 x 86 3,44,000
Ordering cost 1,890 Ordering cost Nil
Carrying cost 1,800 Carrying cost ½ x 4,000x12 24,000
Total cost 3,63,690 3,68,000
This special offer at Rs.86 per unit should not be accepted as its total cost is
higher by Rs.4,310 (3,68,000 – 3,63,690) as compared to original offer.

CHAPTER 3:
LABOUR CONTROL

Question No. 1
Distinguish between:
(a) Job Evaluation and Merit Rating [December 2001 – 7(iv), 4 Marks] [June 2004 – 7(e), 4 Marks]
Answer
Job Evaluation:
It is the process of analysis and assessment of jobs to ascertain reliably their relative
worth and to provide management with a reasonably sound basis of determining the basic
internal wage and salary structure for the various job positions.
Merit Rating:
It is systematic evaluation of the personality and performance of each employee by his
supervisor or some other qualified person. It is assessment of the relative worth of the
man on the jobs and ensures fair rate of pay for different class of workers.
Alternative Answer
Job evaluation. It can be defined as the process of analysis and assessment of jobs to
ascertain reliably their relative worth and to provide management with a reasonably
sound basis for determining the basic internal wage and salary structure for the
various job positions. In other words, job evaluation provides a rationale for
differential wages and salaries for different groups of employees and ensures that
these differentials are consistent and equitable.
Merit Rating. It is a systematic evaluation of the personality and performance of each
employee by his supervisor or some other qualified persons.
Thus the main points of distinction between job evaluation and merit rating are as
follows:
Job evaluation is the assessment of the relative worth of jobs within a company and
merit rating is the assessment of the relative worth of the man behind a job. In other
words job evaluation rate the jobs while merit rating rate employees on their jobs.
Job evaluation and its accomplishment are means to set up a rational wage and salary
structure whereas merit rating provides scientific basis for determining fair wages for
each worker based on his ability and performance.
Job evaluation simplifies wage administration by bringing a uniformity in wage rates.
On the other hand merit rating is used to determine fair rate of pay for different
workers on the basis of their performance.
(b) Shift Premium and Overtime Premium [June 2010 – 5(c), 2.5 Marks]
Answer
Shift premium/differential refers to the payment of higher hourly rates for working in less
desirable shifts of job, such as evening or night shift. It is charged to factory overhead
control rather than work-in-process, and spread over all units produced because they are
not caused by specific units. For example, if day time rate per hour is Rs.50 and night time

rate is Rs.60 per hour, the shift premium per hour is Rs. 10 only, which is charged to
factory overhead.
Overtime work is caused due to random scheduling of jobs, requirement of a specific job
and poor workmanship or negligence. It may be paid at the regular rate or higher rate as
required. If higher rate is paid for the overtime hours, the differential is termed as
overtime premium. If it is caused by random scheduling of jobs, it is treated as shift
premium; if it is caused by requirement of specific job, it is charged to that specific job;
and if it is caused by poor workmanship or negligence, it is charged to profit and loss
account.
Question No 2
(a) Fringe Benefits [December 2004 – 7(d), 4
Marks]
Answer
These are additional payments of facilities provided to the workers apart from their salary
and direct cost allowances like house rent, dearness and city compensatory allowances.
These benefits are given in the form of overtime, extra shift allowances, holiday pay,
pension facilities etc.
These indirect benefits stand to improve, loyalty and stability of employees towards the
organization. If the amount of fringe benefit is considerably large, it may be recovered as
direct charge by means of a supplementary wage of labour rate; otherwise these may be
collected as part of production overheads.
(b) Cost associated with labour turnover. [December 2006 – 6(i), 4

Marks]
Answer
Preventive Costs – These are costs, which are incurred in order to keep the workers
satisfied and thus to act as a discouragement against leaving employment.
These costs include the following:
a. Personnel administration costs – such costs, which relate to the efforts of the
personnel manager in maintaining harmonious relationship between the
management and staff.
b. Cost of material services.
c. Cost of welfare services such as sport facilities, canteen services etc.
d. Cost of pension or gratuity scheme etc.
Replacement costs – These include are incurred after the staff has actually left the
organization.
a. Loss of output due to delay in obtaining the new labor.
b. Increase in expenses of the Personnel Department.
c. Cost of training and induction of new workers.

d. Increased spoilage.
e. Cost of tool and machine breakages due to handling by inexperienced new
workers.
f. Lower productivity on account of inefficiency of new workers.
(c) Gantt task and bonus system of wage payment and incentive.
[December 2008 – 6(d), 5 Marks]
Answer
This system is a combination of time and piecework system. According to this system a high
standard or task is set and payment is made at time rate to a worker for production below the set
standard.
Wages payable to workers under the plan are calculated as under:
Output Payment
(i) Output below standard Guaranteed time rate
(ii) Output at standard Time rate plus bonus of 20% (usually) of time rate
(iii) Output above standard High piece rate on worker’s output. (It is so fixed
,so as to include a bonus of 20% of time rate)
(d) Treatment of overtime premium in cost accounting [December 2009 – 6(a), 4

Marks] [June 2010 – 6(c), 4Marks] [June 2014 – 6(b), 2.5 Marks]
Answer
Treatment of overtime premium in cost accounting
a. If overtime is resorted to at the desire of the consumer, then overtime premium
may be charged to the job directly.
b. If overtime is required to cope with general production programme or for
meeting urgent orders, the overtime premium should be treated as overheads cost
of the particular department or cost center, which works overtime.
c. If overtime is worked in a department due to the fault of another department, the
overtime premium should be charged to the latter department.
d. Overtime worked on account of abnormal conditions such as floods, earthquake
should not be charged to cost rather to the costing P&L account.
(e) High wage plan [June 2011 – 6(c), 4 Marks]

Answer
Under this plan a worker is paid substantially a higher rate of wage as compared to that in
the industry or the area. It is expected that workers put their efforts to increase the
productivity due to high moral and motivation. Ultimate result of such high wage is
expected to rise the performance of the workers giving higher production and better
quality. Ultimately, such rates are not as high as they appear at the beginning as per unit
cost is reduced due to increased level of performance. Such wage plan is introduced where
high quality of work as well as increased productivity is required. It is simple and

inexpensive to operate and required less supervision and helps in attracting highly skilled
employees.
(f) Advantages of time rate remuneration plans.

[December 2014 – 4(c), 2 Marks]
Answer
The advantages of time rate remuneration plans are as follows:
a. It is commonly recognized by all trade unions as well as worker .
b. It is a guaranteed income assured to the worker.
c. It is very easy to understand and simple to calculate the earnings of
worker.
d. It involves less clerical work and detailed records are not necessary.
e. Since the production is not the criteria for calculation of wages, tools
and materials are handled carefully. Wastage is also minimized.
(g) Efficiency Rating [June 2018 – 6(d), 2.5 Marks]

Answer
Efficiency is usually related with performance and may be computed by computing the
time taken with the standard time allotted to perform the given job/task. If the time taken
by the worker on a job is equal or less than the standard time, then he is rated efficient. In
case he takes more time than the standard time he is rated as inefficient. It may be
computed as follows;
Efficiency in Percent=Time allowed as per std*100/ Time taken
(h) Halsey and Hasley Weir Systems [June 2019 – 6(a), 2.5 Marks]
Answer
Under this scheme, for performing a job, operation or task, a standard time is specified.
The hourly rate is fixed & the workers are guaranteed so that even if, within the standard
time specified, the job is not completed by them, guaranteed time rate may be received
by them. The worker becomes entitled to bonus, if he is in a position to complete the job
in less than the specified time; bonus being equal to his time wage for 50% of the time
saved in addition to the time wage which he is entitled for the actual time worked.
Formula for calculating wags under Halsey and Hasley Weir Systems:
= Time taken * time rate + 50% of time saved * Time rate
Question No. 3
Discuss the accounting treatment of idle time wages and overtime wages in cost
accounting. [December 2001 – 3(a), 4 Marks] [June 2008 – 6(d), 5 Marks] [June 2009
– 6(d), 4 Marks]
Answer
Treatment of idle time in cost accounting:

a. Normal idle time is treated as a part of the cost of production. Thus in the
case of direct workers an allowance is built into the labour cost rates.
b. In case of indirect workers, normal idle time is spread over all the products
or jobs through absorption of factory over heads.
c. Abnormal idle time cost is taken to costing profit & loss account.
Treatment of overtime:
a. If overtime is resorted to at the desire of the customer, then it may be
charged to the job directly.
b. If overtime is required to cope with general production programmes or to
meet urgent orders, it should be treated as overhead cost of that department.
c. If overtime is done in a department due to the fault of another dept, it
should be charged to latter dept.
d. Overtime done due to abnormal conditions like flood etc. should be charged
to costing profit and loss account.
Question No. 4
Discuss the effect of labour turnover on cost of production. [June 2002 – 1(b), 4 Marks]
Answer
Effect of labour turnover on cost of production
• even flow of production is disturbed
• efficiency of new workers is low - hence low production
• increased cost of training and induction
new workers cause increased damage and breakage of tools, increased waste and spoilage.
Question No. 5
Define labor turnover. Write about the causes of labour turnover.
[June 2003 – 7(b), 2+4=6 Marks]
Answer
Change in the ratio of labour force, ratio of outgoing and incoming labour, reflecting stability
of labour force.
Causes: Personal, avoidable and unavoidable job for betterment, premature retirement due to
ill health, old age, domestic problem, discontent about jobs/working environment.
Seasonal nature, raw material shortage, plant layout rearrangement disability, disciplinary
cause, marriage, strained relationship lack of training facilities, dissatisfaction with job,
remuneration facilities like medical, recreations etc.
Question No. 6
What are the major factors to be considered for introducing an incentive system?
Answer
The following factors need to be considered prior to introducing an incentive system:

a. Incentive system shall be introduced only if high product quality as per

requirement can be ensured
b. Where quantity of work done cannot be measured precisely, incentive schemes
cannot be offered;
c. When the work is repetitive, workers should be offered good incentives to
achieve high efficiency but in case management is constantly required to plan
the work, the management should share the benefits of extra efficiency
achieved. This factor determines the choice of a particular incentive scheme;
d. Sometime output is not dependent upon the effort made by the workers; in such
cases incentive scheme may not be suitable.
e. Fixation of standard is necessary for introduction of incentive scheme. When
this requires heavy expenditure, incentive scheme may be rather costly.
f. The effect of an incentive scheme for one set of workers on other workers shall
be analyzed to avoid dissatisfaction among other set of workers.
g. The system of wage payment prevailing in other areas and industries or similar
occupations. If possible there should be uniformity.
h. The attitude of labour and trade unions towards incentive scheme should be
understood.
Question No. 7
You are manager of a factory which has a labour problem for demand of incentive
scheme and you have two alternatives for providing incentives to the workers viz.
Halsey and Rowan premium plan. Which method you will prefer and why ?
[June 2006 – 6(e), 4 Marks]
Answer
Incentives schemes are essential for motivation and retaining of labour force. The Halsey
system ensures fifty percentage bonus to staff for their time saving in work. A worker has
limitation for their earning since it cannot exceed the fifty percentage of their saving.
However in case of Rowan system the worker is rewarded more if he is more efficient in time
consuming. Hence it becomes more equitable than Halsey system. So if I have to install the
bonus schemes I will prefer rowan plan.
Question No. 8
Bonus paid under the Halsey Plan with bonus at 50% for the time saved equals the
bonus paid under the Rowan System. When will this statement hold good? Your answer
should contain the proof.
[June 2014 – 6(c), 2.5 Marks]
Answer
Bonus under Halsey Plan:
× Time saved ............... (i )

50
S tan dard rate ×
100

Bonus under Rowan Plan:
× Time saved ................ (ii )

Time taken
S tan dard rate ×
Time allowed
Now,
50
S tan dard rate × × Time saved =
100
Time taken
S tan dard rate × × Time saved
Time allowed
50 Time taken
Or , =
100 Time allowed
Or, Time taken = 50% of time allowed.
Therefore, when the time taken to perform a job is 50% of the time
allowed, the bonus under Halsey and Rowan Plan is equal.
Question No.9
Enumerate the remedial steps to be taken to minimize the labour
turnover.
[December 2014 – 6(d), 2.5 Marks]
Answer
The following steps are useful for minimizing labour turnover:
a. Exit interview: An interview be arranged with each outgoing employee to ascertain
the
reasons of his leaving the organization.
b. Job analysis and evaluation: to ascertain the requirement of each job.
c. Organisation should make use of a scientific system of recruitment, placement and
promotion for employees.
d. Organisation should create healthy atmosphere, providing education, medical and
housing facilities for workers.
e. Committee for settling workers grievances.
Question No. 10
Outline the Important Factors for the control of labour cost.
[June 2017 – 5(b), 4 Marks]
Answer
To exercise an effective control over the labour cost, the essential requisite is efficient
utilization of labour and allied factors. The main points which need consideration for
controlling labour cost are the following.
1. Assessment of manpower requirement
2. Control over time keeping and time booking
3. Time and motion study
4. Control over ideal time and overtime

5. Control over labour turnover

6. Wage system and Incentive system
7. Job Evaluation and Merit ratings
8. Labour Productivity
Question No.11
It should be management’s endeavor to increase inventory turnover but to reduce
labour turnover. Expand and illustrate the idea contained in this statement.
[June 2018 – 5(b), 4 Marks]
Answer
Inventory turnover: It is a ratio of the value of materials consumed during a period to the
average value of inventory held during the period. A high inventory turnover indicates fast
movement of stock.
Labour turnover: It is defined as an index denoting change in the labour force for an
organization during a specified period. Labour turnover in excess of normal rate is termed as
high and below it as low turnover.
Effects of high inventory turnover and low labour turnover: High inventory turnover
reduces the investment of funds in inventory and thus accounts for the effective use of the
concern’s financial resources. It also accounts for the increase of profitability of a business
concern. As against high labour turnover the low labour turnover is preferred because high
labour turnover causes-decrease in production targets; increase in the chances of break-down
of machines at the shop floor level; increase in the number of accidents; loss of customers
and their brand loyalty due to either non-supply of the finished goods or due to sub-standard
production of finished goods; increase in the cost of selection, recruitment and training;
increase in the material wastage and tools breakage.
All the above listed effects of high labour turnover account for the increase in the cost of
production/ process/ service. This increase in the cost finally accounts for the reduction of
concern’s profitability. Thus, it is necessary to keep the labour turnover at a low level.
As such, it is correct that management should endeavour to increase inventory turnover and
reduce labour turnover for optimum and best utilization of available resources and reduce the
cost of production and thus increase the profitability of the organization.
Numerical Questions
Question No. 12
Calculate the earnings of two workers A and B for every 200 units of output from the
following information:
Standard conversion cost of product : Rs. 60 per unit
Over head 150% of wages cost (wage rate) : Wroker A : Rs. 10 per hour
Worker B : Rs. 12 per hour
Time taken to complete 200 units by worker A is 400 hours and by worker B is 380 hours.
There is an incentive system based on the reduction of labour and overhead cost in the
following Scale:
Reduction upto Earns a Bonus

15% 10% of wages
20% 20% of wages
25% 25% of wages
[June 2001 – 2(b), 8 Marks]
Answer
Statement of total earning of works:
Worker A B
Output in units 200 200

Time taken (hours) 400 380
Wage Rate per hour (Rs.) 10 12
Wages (Before Bonus) (Rs.) 4,000 4,560
Overhead cost @ 15% of wages (Rs.) 6,000 6,840
Conversion Cost (Rs.) 10,000 11,400
Standard Conversion Cost (Rs.) 12,000 12,000
Reduction in Cost (Rs.) 2,000 600
Reduction percentage 16.66% 5%
Bonus Earned as % of wages 20% 10%
Bonus Amount (Rs.) 800 456
Total Earning (Rs.) 4,800 5,016
Question No. 13
A company is in the process of introduction of wage incentive system. It has taken up the study of the outpu
the piece rate is based on a standard output of 4 units per hour.
The company is considering the wage calculations under (i) Time rate system (ii) Piece rate
system, (iii) Halsey system and (iv) Rowan system.
Calculate under each of the aforesaid four systems for each worker:
(i) The total earnings per shift of 8 hours.

(ii) The effective earnings per hour worked.
(iii) The wage cost per unit of output. [June 2002 – 5(b), 8 Marks]
Answer
4 units per hour
60
∴ Std. Tune = 4 = 15 mts.
(i) Time Rate A B C

Time taken Hr. 8 8 8

Rate 5 5 5
Earnings Rs. 40 40 40
Effective Earning/ Hr. 5 5 5
Output 44 36 24
Cost per unit 0.91 1.11 1.67
5
(ii) Piece Rate 4 = 1.25 unit
Output 44 36 24
Earnings 55 45 30
Effective Earnings/Hr. 6.875 5.625 3.75
Cost per unit 1.25 1.25 1.25
(iii) Holsey System
Output 44 36 24
Time allowed 11 9 6
Time Taken 8 8 8
Time Saved 3 1 -
Wages 40 40 40
Bonus 7.50 2.50 -
Total Earnings 47.50 42.50 40.00
Effective Earnings/Hr. 5.9375 5.3125 5.00
Cost/unit 1.08 1.18 1.67
(iv) Rowan System
Wages 40 40 40
Bonus 10.91 4.44 ---
Total Earnings 50.91 44.44 40.00
Effective Earnings/ Hr. 6.36 5.56 5.00
Cost/Unit 1.16 1.23 1.67
Question No. 14
The details of the staff force of a firm are stated below:
i. Staff force in the beginning of the last year was 125
ii. Staff force at the end of the last year was 175.
15 workers discharged on disciplinary cause.
20 workers left their job because of dispute with the management of the firm.

The annual expenses associated with the staff force during the period were:
i. Human resource development — Rs. 90,000
ii. Loss of output because of delay in hiring new staff — Rs. 60,000
iii. Training expenses for the whole staff force — Rs. 30,000
iv. Cost of recruitments — Rs. 45,000
Required: 1. Labour turnover on account of unavoidable cause
2. Labour turnover cost
3. Preventive labour turnover cost [June 2003 – 3(b), 1+2+2=5 Marks]
Answer
1. Labour turnover on account of unavoidable cause
Separation under unavoidable cause 15
= × 100 =
Average number of work force (125+175)÷ 2 × 100 = 10%
Rs 90000 + Rs 60000 + Rs 30000 + Rs 45000
2. Labour turnover cost = = Rs. 1500
15
Preventive Cost Rs 90000 + Rs 30000
3. Prevnetive labour turnover cost = Average No. of Workforce = 150
= Rs. 800
Question No. 15
A worker of a workshop realized 2,500 units by working 100 hours. The negotiated wage rate
per hour was Rs. 40. The standard time fixed was 0.25 hours for 6 units. The top executive of
the workshop has endorsed the recommendation made by the Technical Team for Quality
Control for the addition of 20% on the pre-fixed standard time to improve quality of the
products before issuing work order for that production lot.
Required: Ascertain earning of the worker by using
1. Straight piece rate system
2. Rowan Premium Plan [June 2003 – 3(c), 2+3=5 Marks]
Answer
Standard time after revision = 0.25 + 20% of 0.25 = 0.30 Hours
6 units
Hourly output = = 20 units
0.30 Hours
Rs. 40
Piece Rate = 20 units = Rs. 2
1. Earning under straight piece rate system = 2500 units × Rs. 2 = Rs. 5000
ST -AT
2. Rowan Premium Plan = AT × R + ST × AT × R
125Hrs-100Hrs
= 100 Hrs × Rs. 40 + × 100Hrs × Rs. 40
125Hrs
= Rs. 4,000 + Rs. 800 = Rs. 4,800
Question No. 16
The scenarios of the labour force of an industry are as follows:

Labour force of beginning - 195

Labour force of ending - 205
5 workers were discharged on disciplinary ground. The registrations submitted by
10 workers were accepted.
Annual expenditure associated with human resource are:
i. Medical expenses - Rs. 40,000
ii. Recruitment expenses - Rs. 20,000
iii. Loss of output on account of replacement - Rs. 30,000
iv. Training cost for the entire manpower - Rs. 50,000
Required: a. Labour
b. Labour turnover ratio on account of unavoidable circumstances
c. Cost per labour turnover
d. Preventive cost per labour turnover
e. Replacement cost per labour turnover
[December 2003 – 4(b), 2x5=10 Marks]
Answer
195 + 205
Average no. of labour force = = 200
2
5 + 10
a. Labour turnover ratio = × 100 = 7.5%
200
b. Labor turnover ratio on account of unavoidable circumstances
5
= × 100 = 2.5%
200
c. Cost per labour turnover
Rs (40,000 + 20,000 + 30,000 + 50,000 Rs1,40,000
= = = Rs 700
200 200
d. Preventive cost per labour turnover
Rs90,000
= Rs( 40,000 + 50,000) = = Rs 450
200
e. Replacement cost per labour turnover
Rs (20,000 + 30,000) Rs50,000
= = = Rs 250
200 200
Question No.17
A factory has recently replaced an old machine by a modern machine.
The technical board of the factory endorsed the recommendation made by the technical
committee for the curtailment of the previously set up time of 0.50 hour by 20% for realizing
4 units of output.
The current wage rate per hour is Rs. 40. A worker of the factory produced 360 units working
for 6 hours a day for 5 days after the regulation of the revised hours.
Required: Earning of the worker based on:

(1) Straight piece rate system

(2) Differential piece rate system ranging lowest of 83% and highest of 125%.
(3) Halsey Premium Plan
(4) Rowan Premium Plan [June 2004 – 2(a), 8 Marks]
Answer
Revised hour = 0.50 hour less 20% = 0.40 hour per 4 units
1
Hour output = 0.40 × 4 units = 10 units
Rs. 40
Piece rate = 10 units = Rs. 4
Working hour = 6 hours × 5 days = 30 hours

1. Earnings based on straight piece rate system = 360 units × Rs. 4 =
Rs. 1,440
2. Standard output = 30 hours × 10 units = 300 units, Actual output = 360 units
Differential piece rate system = 360 units × 125% of Rs. 4 = Rs. 1,800
360 units
3. Standard time for the actual output = = 36 hours
10 units
Earning under Halsey = (30 hrs × Rs. 40) + 50% (36 hrs - 30 hrs) Rs 40
= Rs. 1,200 + Rs. 120 = Rs. 1,320
36 - 30
4. Earning under Rowan = (30 hrs × Rs. 40) + (30 hrs × Rs. 40)
36
= Rs. 1,200 + Rs. 200 = Rs. 1,400
Question No.18
In an engineering concern, the employees are paid incentive bonus in addition to their normal
wages at hourly rates. Incentive bonus is calculated in proportion of time taken to time
allowed, of the time saved.
The following details are made available in respect of employees X, Y and Z for a particular
week:
X Y Z
Normal Wages ( Rs per hour ) 4.00 5.00 6.00
Completed Units of production 6000 3000 4800
Time allowed ( per 100 units ) 0.8 hr 1.5 hrs 1 hrs
Actual time taken ( hours ) 42 40 48
You are required to work out for each employee:

i. the amount of bonus earned
ii. the total amount of wages received
iii. the total wages cost per 100 units of output. [December 2004 – 5(a), 9 Marks]
Answer

Particulars Employees
X Y Z
Production – Unit 6,000 3,000 4,800
Time allowed per 100 units Hours Hours Hours
Time allowed (T.A) for production 0.8 1.5 1.0
Time Taken (T.T.) 0.8 * 6000/100 1.5 * 3000/100 1.0 * 4800 /100
=48 =45 =48
42 40 48
Time saved (T.S.) 6 5 Nil

Normal Wages ( per hour ) Rs. 4.00 Rs. 5.00 Rs. 6.00
(i) Amount of Bonus earned 21 22.22 Nil

(Note-1)
Normal Wages earned 42*4= 168 40*5 = 200 48*6 = 228
(ii) Total amount of wages 189 222.22 288
received
(iii) Total wages cost per 100 189/6000*100 222.22/3000*100 288/4800*100
units of output = Rs.3.15 = Rs.7.41 = Rs.6.00
Note: 1 Amount of Bonus earned = TT/TA * TS* rate per hour

X = 42/48*6*4 = Rs.21
Y = 40/45*5*5 = Rs.22.22
Z = Time Saved is Nil. Hence Bonus earned is Nil.
Question No.19
A company employs two workman, Harish and Gopal who produces same product. Both
Harish and Gopal have same normal wage. Harish is paid bonus according to Rowan
System, while Gopal is paid bonus according to the Halsey system. The time allowed to
make the product is 200 hours. Harish takes 120 hours while Gopal takes 160 hours to
complete the products.
The factory overhead rate is Rs.10 per hour. The cost of material for both Harish and Gopal
is same. The factory cost of the product for Harish is Rs.14, 560 and Gopal is Rs.15, 200.
i. To find the normal rate of wages.
ii. To find the cost of materials
iii. To prepare a statement comparing the factory cost of the products as made by
the two workmen. [June 2005 – 3(a), 8 Marks]
Answer
Let X be the cost of the material and Y be the normal wage rate.
Material X
Wages 120 Y

Bonus (120 Y*80/200) 48Y

Overheads 1200
Total factory cost X+120Y+48Y+Rs.1, 200 = 14, 560
Or
X+168Y = 13,360
Factory cost of workman Gopal
Material X
Wages 160Y
Bonus (40 Y*50/100) 20Y
Overheads 1600
Total factory cost X+160Y+20Y+Rs.1, 600 = 15, 200
Or
X+180Y = 13, 600
The two equations are:
X + 168 Y = 13, 360
X + 180 Y = 13, 600
Solving above two equation, we get :
X = 10, 000
Y = 20
Hence, cost of material is Rs. 10, 000 and normal wage is Rs.400
Statement of factory cost of product made by two workmen:
Harish Gopal
Material Cost 10, 000 10, 000

Direct Wages 2, 400 3, 200
Bonus 960 400
Factory Overhead 1, 200 1, 600
Factory Cost 14, 560 15, 200
Question No. 20
A worker takes 6 hours to complete a job under a scheme of payment by results. The standard
time allowed for the job is 9 hours. His wages rate is Rs. 1.50 per hour. Material cost of the
job is Rs.16 and the overheads are recovered at 150% of the total direct wages. Calculate the
factory cost of job under;
i. Rowan; and
ii. Halsey systems of incentive payments. [December 2005 – 5(b), 6 Marks]
Answer
Statement of wages earned under Rowan System of Incentive Payment
Basic wages for time worked (1.50 * 6) 9.00
Incentive bonus :

Time saved x time taken x hourly rate

Time allowed
= (9 – 6 ) x 6 x 1.50
9 3.00
Total earnings 12.00

Statement of wages earned under Halsey System of Incentive Payment
Basic wages for time worked (1.50 * 6) 9.00
Incentive bonus :
50% of time saved * Hourly rate
= ½ * (9 – 6) * 1.50 = 2.25
Total earnings 11.25

Statement showing factory cost of the job
Rowan system Halsey system

Materials 16 16
Direct wages 12 11.25
Overhead (150% of direct wages ) 18 16.88
Factory cost 46 44.13
Question No 21
In a manufacturing concern 20 workmen work in a group. The concern follows a group
incentive bonus system whereby each workman belonging to a group is paid a bonus on the
excess output over the hourly production standard of 250 pieces, in addition to his normal
wage at hourly rate. The excess of production over the standard is expressed as a percentage
and two-thirds of this percentage is considered to be the share of the workman and is applied
on the notional hourly rate of Rs. 6.00 (considered only for the purpose of computation of
bonus). The output data for a week are stated below:
Days Man hours worked Output (In pieces

Monday 160 48,000
Tuesday 172 53,000
Wednesday 164 40,000
Thursday 168 52,000
Friday 160 46,000
Saturday 160 42,000
Total 984 2,81,000

You are required to:

i) Work out the amount of bonus for the week and the average rate at which each
workman is to be paid the same.
ii) Compute the total wages including bonus payable to Hari Yadav who worked for
48 hours at an hourly rate of Rs. 2.50 and to Asim Karki who worked for 52 hours
at an hourly rate of Rs. 3.00. [December 2007 – 3, 15 Marks]
Answer
i) Actual production per week 28,1000 pieces
Standard production (250 piece x 984) 2,46,000 pieces
Excess production over standard 35,000 pieces
Excess production as a percentage over standard production
=(35,000 /2,46,000)x 100 = 14.228%
Each workman’s share 2/3x 14.28 = 9.485%
Total Bonus Payble= Rs. 6x9.485%x984 = Rs.560
Hourly Bonus per workman= Rs. 6 X 9.485 = Rs.0.569
ii) Consumption of Wages
Hari Yadav:
Basic Wages: 48 hrs.x Rs. 2.50 Rs. 120.00
Bonus : 48 hrsx Re. 0.569 27.31
Total 147.31
Asim Karki
Basic Wages: 52x Rs 3 156.00
Bonus : 52x Re. 0.569 29.59
Total 185.59
Question No.22
Annapurna Ltd. has been encountering a problem due to high labour turnover in its factory.
The management is concerned about the reason for labour turnover and its remedial course of
action. However, the management wants to know the profit foregone by the company due to
labour turnover last year. You are provided with following information and required to work
out the profit foregone due to labour turnover last year.
The sales of the last year amount to Rs. 8,303,300 and P/V ratio during the period is 20
percent. The total number of actual worked by the direct labour force was 4.45 lacs hours. As
a result of the delays by the company in filling vacancies due to labour turnover, 100,000
potentially productive hours were lost. The actual direct labour hours included 30,000 hours
attributable to train new recruits, out of which half of the hours were unproductive.
The other costs incurred in consequent to labour turnover is as follows:
Settlement cost for leaving by labour Rs 43,820
Selection cost Rs 12,750
Recruitment cost Rs 26,740
Training cost Rs 30,490

Calculate the profit foregone due to turnover assuming that the potential production lost due
to labour turnover would have sold at prevailing price.
[June 2008 – 2(a), 9 Marks]
Answer
Determination of Contribution Foregone
Actual hours worked 445,000

Less: Unproductive training hours (30,000 X 50%) 15,000
Actual Productive hours 430,000
Total hours lost 100,000

Sales lost Rs. 8,303,300 x 100,000/430,000 Rs. 1,931,000
Contribution lost: 1,931,000 x 20% Rs. 386,000
Statement showing profit foregone

Rs.
Contribution lost 386,200
Settlement cost due to leaving 43,820
Recruitment costs 26,740
Selection costs 12,750
Training costs 30,490
Profit foregone 500,000
Question No.23
The cost accountant of Y Ltd. has computed labour turnover rates for the quarter ended 31st
March, 2008 as 10%, 5% and 3% respectively under ‘Flux method’. ‘Replacement method’
and ‘Separation method’.
If the number of workers replaced during that quarter is 30, find out the number of
iii) workers recruited and joined, and
iv) workers left and discharged. [December 2008 – 1(b), 4 Marks]
Answer
Average number of workers on payroll:
Labour turnover rate (Replacement method) = Number of workers replaced*100
Average number on pay roll
or,
5/100 = 30/ Average number on pay roll
or, Average number of workers on payroll = (30*100/5) = 600.

Number of workers left and discharged:

Labour turnover rate (Separation method) = Number of Separations * 100
Average number on Payroll
or,
3/100 = Number separated
600
or,
Number of workers separated (i.e., left and discharged) = ( 600*3/100) = 18.
Number of workers recruited and joined:
Labour turnover rate (Flux method) =
Number of separtions + Number of workers recruited and joined * 100
Average no on Payroll
or,
10/100 = 18 + Number recruited and joined
600
or, Number of workers recruited and joined = ( 600*10/100 – 18) = 42.
Question No. 24
During first week of April 2009 the workman Mr. Kalyan manufactured 300 articles. He
receives wage for a guaranteed 48 hours week at the rate of NRs. 4 per hour. The estimated
time to produce one article is 10 minutes and under incentive scheme the time allowed is
increased by 20%. Calculate his gross wages and rate per hour according to:
i) Piece work with a guaranteed weekly wage,
ii) Rowan premium bonus, and
iii) Halsey premium bonus: 50 % to workman. [June 2009 – 2(b), 7 Marks]
Answer
The Gross wages due to Mr. Kalyan under various schemes is as per below:
(i) Piece-work with a guaranteed weekly wage NRs.

NRs
Wages for 60 hours, i.e. standard time @ NRs. 4 per hour
(Being more than the guaranteed wage of NRs. 192 for 48 hours)
240.00
Rate per hour worked: NRs. 240÷48 5.00
(ii) Rowan Premium Bonus Plan

Wages for 48 hours @ NRs.4 per hour 192.00
Bonus = Wages for time worked X (Time saved ÷ Standard time)
= 192 x (12÷60) = 38.40
230.40

Rate per hour worked: NRs.230.40 ÷ 48 = 4.80

(iii) Halsey Premium Bonus Plan
Wages for 48 hours 192.00
Bonus: 50% of the wages for time saved 24.00
216.00
Rate per hour worked NRs. 216÷ 48 = 4.50
Working notes:
Estimated time for one article 10 minutes
Add: 20% increase under incentives scheme 2 minutes
Total for one articles 12 minutes
Total for 300 articles = (300*12 min) 3,600 minutes = 60 hours
Time taken = 48 hours
Time saved = 12 hours
Question No.25
A company has pressure to increase its production by 25% to meet the increased demand. To
increase the productivity of its 10 workers, the company has given assurance to them of
average 20% increase in their pay through introduction of some incentive scheme; either
Halsey Scheme with 50% bonus or Rowan Scheme.
The company observes the following figures for this month after the assurance:
Guaranteed Hourly Wage Rate Rs. 25
Time Allowed for producing a unit 2 Hours
(Calculated on the basis of previous performance)
Number of working hours per day 8 Hours
Number of working days in this month 25 Days
Actual production during this month 1,250 Units
You are required to calculate:
i) Effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
ii) Savings to the company in terms of direct labour cost per unit under each scheme.
[December 2009 – 3(b), 8
Marks]
Answer
i. Calculation of Effective Hourly Rate of Earning
Under Halsey Scheme
= (Total Time Wages of 10 workers+Total Bonus)/ Total Actual hours
worked
= (50000+6250)/2000 Rs. 28.125
Under Rowan Scheme

= (Total Time Wages of 10 workers+Total Bonus)/ Total Actual hours

worked
=(50000+10000)/2000 = Rs. 30
ii. Calculation of Saving in terms of direct labour cost per unit

Direct Labour Cost per unit
Under Time Wage= 2 hours * Rs.25 = Rs. 50
Under Halsey=(50000+6250)/1250 = Rs. 45
Under Rowan=(50000+10000)/1250 = Rs. 48
Saving Under Halsey Scheme=50-45 = Rs. 5

Saving Under Rowan Scheme=50-48 = Rs. 2
Working Notes:
A. Total time wages of 10 workers per month
=Working days in month*Working hours per day*Hourly wage rate*No. of workers
=25*8*25*10 = Rs. 50000
Time saved per month

B) Time allowed per piece per worker 2 hrs
Actual Unit produced by 10 workers in the month 1250 Units
Total Time Allowed to produce 1250 units (1250*2) 2500 hrs
Actual Time Taken (25 days*8 hrs*10 workers) 2000 hrs
Time saved per month (2500-2000) 500 hrs
C. Total Bonus under Halsey Scheme

= (50% of time saved)*Hourly wage rate
=500*0.50*25 = Rs. 6250
Bonus Percentage= 12.50%
D. Total Bonus under Rowan Scheme

= (Time Saved/ Time Allowed)* Time Wages
= (500/2500)*50000 = Rs. 10000
Bonus Percentage= 20.00%
Question No.26
Calculate the earnings of workers A and B from the following particulars for a month and
allocate the labour cost to each job X, Y and Z:
A B
Basic Wages (Rs.) 100 160

Dearness Allowance 50% 50%

Contribution to Provident Fund (on basic wages) 8% 8%
Contribution to Employees’ Life Insurance (on basic wages) 2% 2%
Overtime Hours 10 -
The Normal working hours for the month are 200. Overtime is paid at double the total of
normal wages and dearness allowance. Employer’s contribution to life Insurance and
Provident Fund are made at the rates equal to employees’ contributions. The two workers
were employed on jobs X, Y and Z in the following proportions:
Jobs
X Y Z
Workers A 40% 30% 30%
Worker B 50% 20% 30%
Overtime was done on job Y.
[June 2010 – 4(b), 10 Marks]
Answer
Statement Showing Earnings of Workers A and B
Workers: A B
Rs. Rs.
Basic Wages 100 160
Dearness Allowance (50% of Basic Wages) 50 80
Overtime Wages (Refer to Working Note 1) 15 -
Gross Wages earned 165 240
Less: - Provident Fund – 8% of Basic wages and ELI – 10 16
2% of Basic wages
Net Wages paid 155 224
Statement of Labour Cost: Rs. Rs.
Gross Wages (excluding overtime) 150 240
Employer’s Contribution to P.F. and E.L.I. 10 16
Ordinary wages 160 256
Labour Rate per hour 0.80 1.28
(Rs. 160/200) (Rs. 256/200)
Statement showing allocation of Wages to Jobs

Jobs
Total Wages: X Y Z
Rs. Rs. Rs. Rs.
Worker A:
Ordinary Wages: (4 : 3 :3) 160 64 48 48
Overtime 15 - 15 -

Workers B:
Ordinary Wages: (5: 2 : 3) 256 128 51.20 76.8
431 192 114.2 124.8
Working Notes:
Normal Wages are considered as basic wages
Overtime = 2 x (Basic wage + D.A.)
200
= 2 × (Rs. 150/200) × 10 hours = Rs. 15/-.
Question No.27
Two workmen BED and DEB, produce the same product using the same material. Their
normal wage rate is also the same. BED is paid bonus according to the Rowan system, while
DEB is paid bonus according to the Halsey System. The time allowed to make the product is
100 hours. BED takes 60 hours while DEB takes 80 hours to complete the product. The
factory overhead rate is Rs.10 per man-hour actually worked. The factory cost for the product
for BED is Rs. 7,280 and for DEB it is Rs. 7,600.
You are required to find the normal rate of wages of BED and DEB.
Answer
Let x be the cost of material and y be the normal rate of wage per hour.
Factory cost of workman BED:
Material cost Rs. x
Wages 60 y
Bonus under Rowan System: Time saved x Hours Worked x Rate per Hour
Time allowed
Overhead (60 x 10) = Rs. 600
Factory cost = x + 60 y + 24 y + Rs. 600 = Rs. 7,280, Or x + 84 y = Rs. 6,680 … (i)
Factory cost of workman DEB:
Material Rs. x
Wages 80 y
Bonus under Halsey Premium Plan = (Hours Saved x 50)/ 100 x Rate per Hour
= 20 x ½ y = 10 y
Overhead (80 x 10) = Rs. 800
Factory cost = x + 80y + 10 y + Rs. 800 = 7,600, Or x + 90 y = Rs. 6,800 … … (ii)
Deducting equations (i) from (ii), 6 y = 120, Or, y = 120/6 = 20
The normal rate of wages is therefore Rs. 20 per Hour.
Question No.28
Ramesh is considering the introduction of some wage incentive system to his employees.

There is increased demand of his product in recent days. Production has to be increased at
least by 25% to cope with the increased demand. He is currently considering either Halsey or
Rowan system of incentive payment. Employee representatives are of the belief that they
should get at least 15% more than the current earnings. Implementation of the scheme
ensures required minimum production to meet the increased demand in both the cases.
Production and wage details after the introduction of the scheme are as
follows:
Hourly guaranteed wage rate Rs. 30
Average time of producing one unit (before the scheme) 5 hours
Number of working days in a month 25
Daily working hours 8
Number of employees 10
Number of actual production units 500
You are required to find:
a) Effective rate of earnings per hour under Halsey and rowan scheme.
b) Saving to Ramesh in terms of direct labor cost per unit.
c) Appropriate scheme for both employer and employee.
[June 2011 – 4, 4+3+3=10 Marks]
Answer
Effective rate of earnings per hour under Halsey and rowan scheme.
a) Halsey Scheme
Bonus=50% of time saved X hourly rate of wage
=50/100X(500X5-25X8X10)X30=Rs.7,500
So, total Wage= Basic wage +incentive=2000X30+7500=67,500
Effective rate of earning per hour=67,500/2000= Rs.33.75
b) Rowan Scheme
Bonus=(Time saved/time allowed )X time wages
=500/2500X 60000= Rs.12,000
Total wage=60000+12000= Rs.72,000
Effective rate of earning per hour=72,000/2000=Rs.36
Saving to Ramesh in terms of direct labor cost per unit
Under Halsey Scheme
Labour cost per unit (existing)=Rs.30X5=Rs.150
Labour cost per unit according to the scheme=67,500/500=Rs.135
Saving= Rs.150-135=Rs.15
Under Rowan Scheme
Labour cost per unit(existing)=Rs.30X5=Rs.150
Labour cost per unit according to the scheme=72000/500=Rs.144
Saving=Rs.150-144= Rs 6
Appropriate scheme for both employer and employee
Increase in earnings of employees
Under Halsey Scheme=(67,500-60,000)/60,000X100%=12.5%

Under Rowan scheme=(72000-60,000)/60,000X100=20%
There should be at least 15% increase in earnings of employees as per the
commitment. So, only rowan scheme is acceptable in this case as it ensures more
than 15% increment.
Question No.29
The existing incentive system of Beta Ltd. is as under:
Normal working week : 5 days of 8 hours each plus 3 late
shifts of 3 hours each.
Rate of payment : Day work: Rs. 160 per hour
: Late shift: Rs. 225 per hour
Average output per operator for 49 hours
week i.e. including 3 late shifts : 120 articles.
In order to increase output and eliminate overtime, it was decided to switch on to a system of
payment by results. The following information is obtained:
Time-rate (as usual) : Rs. 160 per hour
Basic time allowed for 15 articles : 5 hours
Piece-work rate : Add 20% to
basic piece-rate
Premium Bonus : Add 50% to time.
Required:
Prepare a statement showing hours worked, weekly earnings, number of articles produced
and labour cost per article for one operator under the following systems:
vi) Existing time-rate
vii) Straight piece-work
viii) Rowan system
ix) Halsey premium system
Assume that 135 articles are produced in a 40 hour week under straight piece
work, Rowan premium system, and Halsey premium system above and worker
earns half the time saved under Halsey premium system. [June 2011
– 4(b), 8 Marks]
Answer
Table showing Labour cost per article:
Method of payment Hours Weekly Number of

Labour cost
Worked earnings articles
per article

Rs.
produced Rs.
Existing time rate 49 8,425.00 120 70.21
Straight piece rate system 40 8,640.00 135 64.00
Rowan Premium system 40 9,007.41 135 66.72
Halsey Premium system 40 8,600.00 135 63.70
Working notes:
Existing time rate Rs.
Weekly wages 40 hours @ Rs. 160 per hour 6,400
9 hours @ Rs. 225 per hour __2,025
8,425
Piece Rate system:
Basic time: 5 hours for 15 articles (120/40hour=3hr/Article)
Cost of 15 articles at hourly rate of Rs. 160/hr. 800
Add 20% __160
960
∴Rate per article = Rs. 960/15 = Rs. 64
Earning for the week = 135 articles ×Rs. 64 = Rs. 8,640
Rowan Premium system:
Basic Time : 5 hours for 15 articles
Add : 50% to time
7.5 hours for 15 articles
Or 30 minutes per article
∴Time allowed for 135 articles = 67.5 hours
Actual time taken for 135 articles = 40 hours
 TA − HW 
Earnings = (HW ×RH) +  × HW × RH 
 TA 
 67.5 − 40 
= (40 hrs. ×Rs. 160) +  × 40 × Rs.160 
 67.5 
= Rs. 9,007.41
Halsey Premium System:
50
Earnings = HW ×RH + (TA –HW) ×RH
100
= 40× Rs. 160+ ½ (67.5 -40) ×Rs. 160
= Rs. 8,600
Question No.30
Rolland Limited operates a group incentive scheme in one of its department. A minimum
hourly rate is guaranteed to each of the six employees in the group if actual output for the
week is less than the standard output. If actual output is greater than the standard output, the

hourly rate of each employee is increased by 4% for each additional 600 units of output
produced. The standard output for the group is 12,000 units for a 40 hour week.
During the week ended 31st December, 2010, each employee in the group worked 40 hours;
actual output and minimum hourly rates were as follows:
Employee Actual output (units) Minimum hourly rate (Rs.)
Lal 2,500 60
Hari 2,700 100
Mohan 2,400 60
Shyam 2,500 80
Hanuman 2,460 60
Krishna 2,440 40

i) Calculate the earnings of each employee;
ii) Appraise the effectiveness to the company of this group incentive scheme.
[December 2011 – 3(b), 5+2=7 Marks]
Answer
Statement showing the earning of each employee in the group during the
week ended 31st December 2010.
Employee Minimum Hourly premium Total rate (Rs.) Total wages for
hourly rate (Rs.) rate (Rs.)(20%of the week 40
minimum Wages Hours (Rs.)
W.N (a)
Lal 60 12 72 2,880
Hari 100 20 120 4,800
Mohan 60 12 72 2,880
Shyam 80 16 96 3,840
Hanuman 60 12 72 2,880
Krishna 40 8 48 1,920
Total 19,200
Working notes:
a) Calculation of the percentage increase in the hourly rate due to higher efficiency:
(Output for 40 hour week)
Standard 12,000 units
Actual 15000 units
Additional production 3,000 units
Increase in wage rate is 4% for each additional 600 units. Hence total increase;
= (3000/600) * 4% = 20%
ii) Hourly rate for all employee (60+100+60+80+60+40) =Rs.400.

Std production per hour 12000/40×6= 50units.

Hence Std. wages cost of actual production =Rs. 400×50units =Rs. 20000.
Actual wages paid Rs. 19,200.
Therefore, there is a saving of Rs. 800. The gain on account of
efficiency of the worker has thus been shared by the employer and the
employee.
Question No.31
Wage negotiations are going on with the recognized Labour Union and the management
wants you as the cost accountant of the company to formulate an incentive scheme with a
view to increase productivity.
The case of three typical workers Ram, Shyam and Hari who produce respectively 180, 120
and 100 units of the company’s product in a normal day of 8 hours is taken up for study.
Assuming that day wages would be guaranteed at 75 paisa per hour and the piece rate would
be based on a standard hourly output of 10 units, calculate the earnings of each of the three
workers and the labour cost per 100 pieces under:
i) Day wages
ii) Piece rate
iii) Halsey scheme and,
iv) The rowan scheme
[June 2012 – 1(c), 12 Marks]
Answer
Computation of earnings of each worker and the labour cost per 100 pieces
under different wages scheme
i) Day wages
Name of the workers Day wages(Rs.) Actual output(units) Labour cost per 100
pieces (rs.)
Ram 6.00 180 3.33
Shyam 6.00 120 5.00
Hari 6.00 100 6.00
Total 18.00 400 4.50
Average labour cost per 100 pieces=( total wages/total output)×100
=Rs. (18/400)×100
=Rs. 4.50
ii) Piece rate
Name of the Actual Piece rate (Rs) Wages earned Labour cost per
workers output(units) (Rs) 100 pieces (rs.)
Ram 180 0.075 13.50 7.50
Shyam 120 0.075 9.00 7.50
Hari 100 0.075 7.50 7.50
Total 400 30.00 7.50


=Rs. (30/400)×100
=Rs. 7.50
iii) Halsey Scheme
Name Actual Standard Actual Time Bonus Total wages Labour
of the output(units) time for time for saved(hrs) hrs.(50% earned(actual cost
workers actual actual of hrs+bonus per
output(hrs) output(hrs) saving hr)×rate per 100
hrs) hour pieces
Ram 180 18 8 10 5 9.75 5.42
Shyam 120 12 8 4 2 7.50 6.25
Hari 100 10 8 2 1 6.75 6.75
Total 400 24.00 6.00
=Rs. (24/400)×100
=Rs. 6.00
(Total wages earned, Ram:(8+5)×0.75=9.75, Shyam:(8+2)×0.75=7.50,Hari:(8+1)×0.75=6.75
iv) Rowan Scheme
Name Actual Standard Actual Time Bonus Total wages Labour
of the output(units) time for time for saved(hrs) hrs.* earned(actual cost
workers actual actual hrs+bonushr)×rate per
output(hrs) output(hrs) per hour 100
pieces
Ram 180 18 8 10 4.44 9.33 5.18
Shyam 120 12 8 4 2.67 8.00 6.67
Hari 100 10 8 2 1.60 7.20 7.20
Total 400 24.53 6.13
=Rs. (24.53/400)×100
=Rs. 6.13
(Total wages earned, Ram:(8+4.44)×0.75=9.33,
Shyam:(8+2.67)×0.75=8.00,Hari:(8+1.60)×0.75=7.20
*bonus hours= time taken × time saved/ standard time
Ram=8×10/18=4.44, Shyam=8×4/12=2.67, Hari=8×2/10=1.60
Question No.32
A company uses an old method of machining a part manufactured for sale. The estimate of
operating details for the year 2011 – 12 are as under:
Number of parts to be manufactured and sold 30,000
Raw materials required per part 10 kg @ Rs. 2 per kg
Average wage rate per worker Rs. 40 per day of 8 hours

Average labour efficiency 60%

Standard time required for manufacturing one part 2 hours
Overhead rate Rs. 10 per clock hour
Material handling expenses 2% of the value of raw materials
The company has a suggestion box scheme and an award equivalent to three months saving
in labour cost is passed on to the employee whose suggestion is accepted. In response to this
scheme suggestion has been received from an employee to use a special Jig in the
manufacture of aforesaid part. The cost of Jig which has life of one year is Rs. 31,500 and
the use of the Jig will reduce the standard time by 20 minutes and labour efficiency will
increase by 20%.
Required:
i) Compute the amount of award payable to the employee who has given the
suggestion.
ii) Prepare a statement showing the annual cost of production before and after the
implementation of the suggestion to use the Jig and indicate the annual savings.
[June 2012 – 3(a), 5+5=10 Marks]
Answer
(i) Computation of amount of award payable to employee:
Total labour cost under existing condition:
Standard time required for one part 2 hours or 120 minutes
Average efficiency 60%
Direct labour hours required for one part 120 × 100 / 60 = 200 minutes
Time required for 30,000 components 30,000 × 200 / 60 = 100,000 hours
Labour cost @ Rs. 5 per hour [A] Rs. 500,000
Total labour cost under suggested condition:
Standard time required for one part (120 – 20) = 100 minutes
Average efficiency of labour 80%
Direct labour hours required for one part 100 × 100 / 80 = 125 minutes
Time required for 30,000 components 30,000 × 125 / 60 = 62,500 hours
Labour cost @ Rs. 5 per hour [B] Rs. 312,500
Labour cost saved in a year [A] – [B] Rs. 187,500
Award equivalent to 3 months cost saving Rs. 187,500×(3/12) = 46,875
(ii) Annual cost of production to the company under both the condition and savings made:
Before After
Particulars
Rs. Rs.
Raw materials [30,000 × 10 × Rs. 2] 600,000 600,000
Direct wages @ Rs. 5 per hour
For 100,000 hours 500,000 -
For 62,500 hours - 312,500

Overhead absorbed @ Rs. 10 per hour 1,000,000 625,000

Material handling charges @ 2% 12,000 12,000
Cost of Jigs - 31,500
Total costs 2,112,000 1,581,000
Saving in costs [Rs. 2,112,000 – Rs. 1,581,000] 531,000
Less: Award to employee 46,875
Net cost saving 484,125
Question No.33
In a manufacturing concern 20 workmen work in a group. The concern follows a group
incentive bonus system whereby each workman belonging to the group is paid a bonus on the
excess output over the hourly production standard of 250 pieces, in addition to his normal
wages at hourly rate. The excess of production over the standard is expressed as a percentage
and two-thirds of this percentage is considered to be the share of the workman and is applied
on the notional hourly rate of Rs. 60 (considered only for the purpose of computation of
bonus). The output data for a week are stated below:
Days Man hours worked Output in pieces
Monday 160 48,000
Tuesday 172 53,000
Wednesday 164 40,000
Thursday 168 52,000
Friday 160 46,000
Saturday 160 42,000
Total 984 281,000
Required: (5+3=8)
i) Workout the amount of bonus for the week and the average rate at which each workman
is to be paid.
ii) Compute the total wages including bonus payable to Ram who worked for 48 hours at an
hourly rate of Rs. 25 and to Shyam who worked for 52 hours at an hourly rate of Rs. 30.
Answer
(i) Computation of group incentive bonus
% of 2/3% of
Man Standard Actual Excess Bonus
excess excess
Days hours output (pcs) output output (Rs.)
output output for
worked (W.N.1) (pcs) (pcs) (W.N. 3)
(W.N.2) bonus
Monday 160 40,000 48,000 8,000 20.00 13.33 1,279.68
Tuesday 172 43,000 53,000 10,000 23.26 15.51 1,600.63
Wednesday 164 41,000 40,000 - - - -

Thursday 168 42,000 52,000 10,000 23.81 15.87 1,599.70

Friday 160 40,000 46,000 6,000 15.00 10.00 960.00
Saturday 160 40,000 42,000 2,000 5.00 3.33 319.68
984 5,759.69
Share of each individual workman: Rs. 5,759.69 / 984 = Rs. 5.85 per hour worked.
(ii)
Computation of wages to individual workmen
Ram Shyam
a) Hours worked 48 52
b) Hourly rate of payment Rs. 25 30
c) Total wages at hourly rate (a) × (b) Rs. 1,200.00 1,560.00
d) Incentive bonus (a) × Rs. 5.85 Rs. 280.80 304.20
e) Total wages payable (c) + (d) Rs. 1,480.80 1,864.20
Working notes:
(1) Standard output for Monday (160 × 250) = 40,000 pieces and so on for other days.
(2) % of excess output for Monday (8,000 / 40,000 × 100) = 20% and so on for other
days.
(3) Bonus for Monday (160 × 60 × 13.33%) = Rs. 1,279.68 and so on for other days.
Question No.34
Both direct and indirect labor of a department in a factory is entitled to production bonus in
accordance with a Group Incentive Scheme, the outlines of which are as follows:
i) For any production in excess of the standard rate fixed at 10,000 tons per month
(of 25 days) a general incentive of Rs. 10 per ton is paid in aggregate. The total
amount payable to each separate group is determined on the basis of an assumed
percentage of such excess production being contributed by it, namely @ 70% by
direct labor, @ 10% by inspection staff, @ 12% by maintenance staff and @ 8%
by supervisory staff.
ii) If the excess production is more than 20% above the standard, direct labor also
gets a special bonus @ Rs. 5 per ton for all production in excess of 120% of
standard.
iii) Inspection staff is penalized @ Rs. 20 per ton for rejection by customer in excess
of 10% of production
iv) Maintenance staff is penalized @ Rs. 20 per hour of breakdown.
From the following particulars for a month work out the production bonus earned by
each group:
(i) Actual working days : 20
(ii) Production : 11,000 tons
(iii) Rejection by customers : 200 tons
(iv) Machine breakdown : 40 hours
[June 2013 – 4(b), 8 Marks]

Answer
(i) No. of working days during month : 20
(ii) Standard production for 20 days @ 10,000 tons per month of 25 days
= 10,000 x 20/25 = 8,000 tons
(iii)Actual production during the month = 11,000 tons
(iv) Excess production during the month = 11,000 – 8,000 = 3,000 ton
(v) Excess production above 20% of standard : 3,000 – 20% of 8,000
= 3,000 – 1,600 = 1,400 tons
Statement showing Bonus earned by each category of staff:
Category General Incentive @ Rs. Special Incentive Penalty Bonus
10 per ton @ Rs. 5 per ton earned
% Tons Amount Tons Amount Rs Rs
(a) Direct labor 70 2,100 21,000 1,400 7,000 - 28,000
(b) Inspection Staff 10 300 3,000 - - -* 3,000
(c) Maintenance staff 12 360 3,600 - - 800** 2,800
(d) Supervisory staff 8 240 2,400 - - - 2,400
Total 100 3,000 30,000 1,400 7,000 800 36,200
* Penalty for rejection: Not applicable (Actual rejection is less than allowed level)
** Penalty for machine breakdown for 40 hours @ Rs. 20 per hour.
Question No.35
Raman Garment Company employs 70 direct workers. Each worker is paid wages Rs. 400
per week of 40 hours. When necessary, overtime worked up to a maximum of 16 hours per
week per worker is paid at time rate plus one –half as premium. The current output on an
average is 6 units per person-hour, which may be regarded as standard output. If bonus
scheme is introduced, it is expected that the output will increase to 8 units per person-hour.
The worker will, if necessary, continue to work overtime up to the specified limit although no
premium no incentives will be paid.
The company is considering introduction of either Halsey scheme or Rowan scheme of wage
incentive system. The budgeted weekly output is 20,000 units. The selling price is Rs. 15 per
unit and the direct material cost is Rs. 10 per unit. The variable overhead amount to Rs. 0.5
per direct labor hour and the fixed overhead is Rs. 10,000 per week.
Prepare a statement to show the effect on the company’s weekly profit of the proposal to
introduced (i) Halsey scheme, and (ii) Rowan scheme. [December 2013 – 2(b), 8 Marks]
Answer
Statement of company’s weekly profit
Present Scheme Halsey Scheme Rowan Scheme
Output (units) 20,000 20,000 20,000
Selling price Rs. Per unit 15.00 15.00 15.00

Direct Material Cost Rs. 10.00 10.00 10.00

Per unit
Direct Labour Rs. Per unit 36,000/20,000 = 1.80 29,167/20,000 = 1.46 31,250/20,000 = 1.56
Variable Overhead Rs. Per (3,333*0.5)/20,000 = 0.08 (2,500×0.5)/20000= (2,500×0.5)/20000=
unit (0.5 per direct labour 0.06 0.06
hour)
Total Variable costs Rs. 11.88 11.52 11.62
Per unit
Contribution Rs. Per unit 3.12 3.48 3.38
Total Contribution Rs. 62,400 69,600 67,600
Less: Fixed Overhead Rs. 10,000 10,000 10,000
Net Profit Rs. 52,400 59,600 57,600
Working Notes:
Wage rate per hour per workers = Rs400\Rs40 = Rs 10 per hour
Overtime rate per hours per workers = normal rate per hour + 50%
= Rs 15 per hour
Overtime premium = Rs. 15- Rs. 10 = Rs. 5
Average current output/hour = 6 units
Hours to be worked for budgeted weekly output of 20,000 units
=20,000\6 units =3333.33 hours
Total normal hours available per week = No. of workers ×hour per week
= 70 workers × 40 hours
= 2,800 hours
Maximum overtime hours per week for all workers = 70 x 16
= 1120
Overtime hour required
= Total hour to be worked - total normal hrs available
= 3333.33 hrs. – 2800 hrs.
= 533.33 hrs.
Hence, all overtime hours worked are eligible for bonus.
Total wages under the proposed scheme:
Normal wages for total hrs worked (3333.33 hrs ×10) 33,333
Add: overtime premium (5 × 533.33) 2,667
36,000
Time saved
Time allowed = 1 hour for 6 units
For 20,000 units = 20,000\6 units = 3,333.33 hrs
Time taken: = 1 hour for 8 units
20,000 units need = 20,000/8 = 2,500 hours

Time saved = Time allowed – Time taken

= 3,333.33 hrs – 2,500 hrs
= 833.33 hrs
Under Halsey Scheme:
Total wages = (Time taken × Standard wage rate) + (50% × Time saved × Standard wage
rate)
= (2,500×10) + (50%×833.33×10)
= 25,000+4,167
=29,167
Under Rowan Scheme:
Total wages = Normal wages + Bonus
= (Time taken × Standard wage rate) + [Time saved × Time taken\ Time
allowed × Standard wage rate]
= (2,500 x10) + (833.33 x 2,500/3,333.33 x 10)
= 25,000+6,250
= 31,250
Question No.36
Two fitters, a labourer and a boy undertake a job on piece rate for Rs. 1,290. The time spent
by each of them is 220 ordinary working hours. The rates of pay on time-rate basis are Rs.
1.50 per hour for each of the two fitters, Re. 1 per hour for the labourer and Re. 0.50 per hour
for the boy.
Required:
i) The amount of piece-work premium and the share of each worker, when the piece-
work premium is divided proportionately to the time wages paid.
ii) The selling price of the above job on the basis of the following additional data:
Cost of direct material Rs. 2,010
Works Overhead at 20% of Prime Cost
Selling Overhead at 10% of Work Cost and
Profit at 25% on Cost of Sales. [December 2014 – 4(b), 6+2=8 Marks]
Answer:
(i) Calculation of wages:
2 Fitters @ Rs. 1.50 per hour for 220 hours each Rs. 660
1 Labourers @ Re. 1 per hour for 220 hours Rs. 220
1 Boy @ Re. 0.50 per hour for 220 hours Rs. 110
Total Rs. 990
Piece Work Premium
Total Wages agreed on piece-rate basis Rs. 1,290
Less: Wages calculated on time basis Rs. 990
Piece Work Premium Rs. 300

Amount of premium will be paid to workers in the ratio of 660:220:110 (or 6:2:1) as
follows:
2 Fitters Rs.200.00
1 Labourer Rs. 66.67
1 Boy Rs. 33.33
Total Rs. 300.00
(ii) Computation of Selling Price: Rs.
Direct Material 2,010
Direct Wages 1,290
Prime Cost 3,300
Work Overheads at 20% in Prime Cost 660
Work Cost 3,960
Selling Expenses at 10% in Work Cost 396
Cost of Sales 4,356
Add: Profit at 25% on Cost of Sales 1,089
Selling Price 5,445
Question No.37
In a factory bonus system, bonus hours are credited to the employees in the proportion of
time taken, which time saved bears to time allowed. Jobs are carried forward from one week
to another. No overtime is worked and payment is made in full for all units worked on,
including those subsequently rejected. From the following information you are required to
calculate for each employee:
i) The bonus hours and amount of bonus earned;
ii) The total wage costs; and
iii) The wages cost of each good unit produced.
Particulars Worker A Worker B Worker C
Basic rate per hour Rs. 10 Rs. 16 Rs. 12
Units produced 2,600 2,200 3,600
Time allowed for 100 units 2 hours 30 minutes 3 hours 1 hour 30 minutes
Time taken 52 hours 75 hours 48 hours
Rejects 100 units 40 units 400 units
Answer
The computation is shown in the following table:
Statement showing Bonus and Wage cost per unit

Units produced 2,600 2,200 3,600

Rejects 100 units 40 units 400 units

Good units 2,500 units 2,160 units 3,200 units
Time allowed for 100 units 2 hrs 30 3 hrs 1 hrs 30
minutes minutes
Total time allowed 65 hours 66 hours 54 hours
Time taken 52 hours 75 hours 48 hours
Time saved [Time allowed- 13 hours - 6 hours
Time taken]
Basic rate per hour Rs. 10 Rs. 16 Rs. 12
Statement showing Bonus and Cost per unit
Basic wages Rs. 520 Rs. 1,200 Rs. 576
Bonus* Rs. 104 - Rs. 64
Total wage cost Rs. 624 Rs.1,200 Rs. 640
Wages cost per unit of good Rs. 0.25 Rs. 0.56 Rs. 0.20
units produced#
#Wages cost per unit of good unit is computed by dividing the total wages cost by the
good units.
*Bonus is computed as follows:
The Bonus is to be paid in the proportion of time taken which the time saved bears to the time
allowed. For A, the time saved is 13 hours while the time allowed is 65 hours. This means
that the proportion of time saved to time allowed is 13/65=1/5 hours and hence the bonus is
1/5th of the basic wages i.e. `104.
For B, there is no time saved and hence he is not entitled for any bonus.
For C, time saved is 6 hours while the time allowed is 54 hours which means that the time
saved is 1/9th.
Question No.38
In a manufacturing concern bonus to workers is paid on a slab rate based on cost savings
towards labour and overheads. The following are the slab rates:
Up to 10% saving - 5% of the earning
Above 40% saving - 32% of the earning
The wage rate per hour of workers - P, Q, R and S are respectively Rs. 10, Rs. 11, Rs.
12 and Rs. 14. Overheads are recovered on direct wages at the rate of 200%. Standard
cost under wages and overhead per unit of production is fixed at Rs. 300. The workers
have completed one unit each in 8, 7, 5½ and 5 hours respectively.

Calculate in respect of each worker:

i) Amount of bonus earned
ii) Total earnings
iii) Total earnings per hour
[December 2017 – 5(a), 3+2+2=7 Marks]
Answer
Statement showing computation of amount of bonus, total earnings and earnings per hour
Rs.
Particulars P Q R S
1. Standard cost of wages and overheads 300 300 300 300
2. Time taken in hours 8 7 5.5 5
3. Rate per hour 10 11 12 14
4. Actual wages (2 x 3) 80 77 66 70
5. Overheads (200% of wages) 160 154 132 140
6. Actual cost of Labour & Overhead (4 + 5) 240 231 198 210
7. Savings (1 – 6) 60 69 102 90
8. % of savings (7/1 x 100) 20% 23% 34% 30%
9. % of bonus applicable 13% 21% 28% 21%
10. a) Amount of bonus earned (4 x 9) 10.40 16.17 18.48 14.70
11. b) Total earnings (4 + 10) 90.40 93.17 84.48 84.70
12. c) Total earnings per hour (11/2) 11.30 13.31 15.36 16.94
Question No.39
A job can be executed either through workman M or N. M takes 32 hours to complete the job
while N finishes it in 30 hours The standard time to finish the job is 40 hours. The hourly
wage rate is same for both the workers. In addition workman M is entitled to receive bonus
according to Halsey plan (50%) sharing while N is paid bonus as per Rowan plan. The works
overheads are absorbed on the job at Rs. 7.50 per labour hour worked. The factory cost of the
job comes to Rs. 2,600 irrespective of the workman engaged.
Find out the hourly wage rate and cost of raw materials input. Also show cost against each
element of cost included in factory cost. [June 2018 – 3(b), 8
Marks]
Answer
Working notes:
1. Time saved and wages:
Workmen M N
Standard time (hrs) 40 40
Actual time taken (hrs) 32 30
Time saved (hrs) 08 10
Wages paid @ Rs. x per hr. (Rs.) 32x 30x
2. Bonus Plan:

Halsey Rowan
Time saved (hrs) 8 10
Bonus (Rs.) 4x 7.5x
(8 hrs × Rs x) (10 hrs/40 hrs × 30 hrs × Rs x)
2
3. Total wages:
Workman M: 32x + 4x = Rs 36x
Workman N: 30x + 7.5x = Rs 37.5x
Let Material Cost be y
Statement of factory cost of the job
Workmen M N
Rs. Rs.
Material cost y y
Wages (Refer to working note 3) 36x 37.5x
Works overhead 240 225
Factory cost 2,600 2,600
The above relations can be written as follows:
36x + y + 240 = 2,600 …. (i)
37.5x+ y+ 225 = 2,600 …..(ii)
Subtracting (i) from (ii) we get
1.5x – 15 = 0
or 1.5 x = 15
or x = Rs. 10 per hour
On substituting the value of x in (i) we get y = Rs. 2,000
Hence the wage rate per hour is Rs. 10 and the cost of raw material input is Rs. 2,000 on
the job.
Statement of showing factory cost
Particulars M N
Material 2000 2000
Wages 360 375
Factory OH 240 225
Total 2600 2600
Question No.40
M/s. Shyam Sunder Bros. wants to ascertain the profit lost during the year 2017/18 due to
increased labour turnover. They have given you the following information:
i) Traning period of the new recruits is 60,000 hours. During this period their
productivity is 75% of the experienced workers. Time required by an experienced
worker is 10 hours per unit.

ii) 20% of the output during training period was defective. Cost of rectification of a
defective unit was Rs. 40.
iii) Potential productive hours lost due to delay in recruitment were 120,000 hours.
iv) Selling price per unit is Rs. 400 and P/V ratio is 20%.
v) Settlement cost of the workers leaving the organisation was Rs. 400,000.
vi) Training cost was Rs. 200,000.
vii) Recruitment cost was Rs. 160,000.
You are required to calculate the profit lost by the company due to increased labour turnover
during the year 2017/18. [December 2018 – 4(c), 5 Marks]
Answer
i) Output by experienced workers in 60,000 hours = (60,000/10) , = 6,000
units
Output by new recruits = 75% of 6,000 = 4,500
units
Loss of output = 6,000 – 4,500 = 1,500
units
ii) Total loss of output = Due to delay recruitment + due to inexperience

= (1,20,000/10) + 1500 = 12,000 + 1,500 = 13,500
units
iii) Contribution per unit = 20% of Rs. 400 = Rs. 80

Total contribution lost = Rs. 80 × 13,500 units = Rs.
10,80,000
iv) Cost of repairing defective units = 4,500 units × 0.2 × Rs. 40 = Rs.
36,000
Profit forgone due to labour turnover
Particulars Amount (Rs.)

Loss of Contribution 10,80,000
Cost of repairing defective units 36,000
Recruitment cost 1,60,000
Training cost 2,00,000
Settlement cost of workers leaving 4,00,000
Profit forgone in 2017-18 18,76,000
Question No.41
A manufacturer introduces new machinery into his factory, as a result of which, production
per worker has increased. The workers are paid by results, and it is agreed that for every 2%
increase in average individual output, an increase of 1% on the rate of wages will be paid.
Just after installation of machinery the selling price of the products falls by 8 1/3 %.

Before New Machinery After New Machinery

(Actual) (Planned)
Number of workers 175 125
Number of articles produced 8,400 7,000
Wages paid Rs. 16,800
Total Sales Rs. 37,800
Show the net saving in production costs which would be required to offset the losses
expected from reduced turnover and bonus to be paid to workers.
[June 2019 – 4(b), 5 Marks]
Answer
Relevant cost/sales Rs.
Fall in sales value 2,625.00
Increase in wages cost 1,000.00
Total expected Loss 3,625.00
Therefore, net saving in production costs that would be required to offset the
expected loss is Rs. 3,625.
Working Notes:
If machinery
was not After Installation
Description installed of Machinery
Sales of 8400 Units
Sales of 7000 Units before fall in sales value
(37800/8400)*7000 31,500.00
Fall in sales value 2,625.00
(31500*0.25/3)
125 workers would produce

(8400/175)*125 6000 7000
Excess production 1000
Increase in labour efficiency
(1000/6000 * 100) 16.67%
Increase in wages rate 8.33%
('16.67%/2)
Wages cost for 125 workers before increasing wages rate
(16800/175)*125 12000
Wages cost for 125 workers after increasing wage rate 13,000.00
(12000*108.33%)
Increase in wages cost 1,000.00

CHAPTER 4:
OVERHEAD CONTROL

Question No 1
Distinguish between
(a) Allocation and apportionment of overheads. [June 2002 – 2(b), 3 Marks] [June 2010
– 6(e), 4Marks] [June 2011 – 5(c), 3 Marks] [December 2011 – 5(b), 2.5 Marks] [June
2012 – 5(c), 5 Marks] [December 2013 – 5(c), 2.5 Marks]
Answer
The overheads which can be directly identified under a department, cost centre, job,
process or product is charged direct to such department, cost centre, job, process or
product as the case may be. This process is known as allocation. Common items of
overheads will have to be distributed over department, cost centre, jobs, processes or
products in an equitable manner. e.g. rent on floor area basis. This is known as
apportionment
The general principles of apportionment are:
• Service rendered or use basis
• Survey basis
• Ability to pay basis
For apportionment of overheads, basis have to be developed e.g. electricity on kwh basis.
Alternative Answer
Cost allocation is the process of charging the full amount of an individual item of cost
directly to a cost centre for which this item of cost was incurred. For example, where
separate electric meters are installed in each of the department, the electricity charges on
the basis of electricity bill can be allocated to the respective departments. Similarly,
salary and wages paid to indirect workers of each department can be allocated to the
respective departments.
Cost apportionment on the other hand, is the process of charging the proportion of
common items of cost to two or more cost centres on some reasonable and equitable
basis. For example, where only one electric meter is installed in a factory, the common
electricity charges should be apportioned to all the departments on the basis of number of
light points or floor area. Similarly, if factory rent is incurred for the factory as a whole
and benefits all the departments in the factory, it should be apportioned to all the
departments on the basis of floor area occupied by each department.
(b) Overhead Apportionment and Absorption [June 2007 – 6(a), 4 Marks]

Answer
Overhead Apportionment:
It is defined as the process of distributing an item of cost over several cost centers or
costs units. In the case of apportionment, one item of cost is charged to two or more cost
centers or cost units. Generally, indirect costs overheads are charged to cost centers or
cost units by way of apportionment in proportion to the anticipated benefits.

Overhead Absorption:
It is defined, as the process of absorbing all overhead costs allocated to or apportioned
over particular cost center or production department by the units produced. For example,
using a rate per lathe hour may absorb the overhead costs of a lathe center. Cost
absorption can take place only after cost allocation. In other words, the overhead costs are
either allocated or apportioned over different cost centers and afterwards they are
absorbed on equitable basis by the output of the same cost centers.
(c) Rated Capacity & Practical Capacity [June 2007 – 6(c), 4 Marks]
Answer
Rated Capacity:
It refers to the capacity of a machine or a plant as indicated by its manufacturer. In fact
this capacity is the maximum possible productive capacity of a plant. It is also known as
installed capacity of a plant. Due to the loss of operating time of a plant it is difficult to
achieve this rated capacity. In other words, it is only a theoretical capacity and is
therefore, seldom achieved.
Practical Capacity:
It is defined as actually utilized capacity of a plant. It is also known as operating capacity.
This capacity takes into account loss of time due to repairs, maintenance, minor
breakdown, idle time, set up time, normal delays. Sundays and holidays, stock taking etc.
Generally, practical capacity is taken between 80 to 90% of the rated capacity. It is also
used as a based for determining overhead rates. Practical capacity is also called net
capacity or available capacity.
(d) Cost Allocation and Cost Absorption [December 2009 – 5(d), 5 Marks]
Answer
Cost allocation is defined as the allotment of items of cost to related cost centres.There
may be various bases for such allocation. For example, if a computer operator works
exclusively for Board of Studies, then the salary paid to him/her should be charged to
Board of Studies account. However, if she/he works for 3 different departments the same
should be allocated to all the 3 departments applying some suitable basis of such
allocation. This technique of charging the entire overhead expenses to a cost centre is
known as cost allocation.
Cost absorption is defined as the process of absorbing all overhead costs allocated to or
apportioned over particular cost centre or production department by the units produced.
For example, the overhead costs of a lathe centre may be absorbed by a rate per lathe
hour.
Cost absorption can take place only after cost allocation. In other words, the overhead
costs are either allocated or apportioned over different costs centers and afterwards they
are absorbed on equitable basis by the output of the same cost centers.

(e) Single and Multiple Overhead Rates [December 2010 – 5(d), 5 Marks]
Answer
Single overhead rate:
It is one single overhead absorption rate for the whole factory. It may be computed as
follows:
The base can be total output, total labour hours, total machine hours etc
The single overhead rate may be applied in factories which produces only one major
product on a continuous basis. It may also be used in factories where the work performed
in each department is fairly uniform and standardized.
Multiple overhead rate:
It involves computation of separate rates for each production department, service
department, cost center and each product for both fixed and variable overheads. It may be
computed as follows:
Under multiple overhead rates, jobs or products are charged with varying amount of
factory overheads depending on the type and number of departments through which they
pass. However, the number of overhead rates which a firm may compute would depend
upon two opposing factors viz. the degree of accuracy desired and the clerical cost
involved.
Question No. 2
Write Short notes on
(a) Packing Expenses
Answer
Cost of primary packing necessary for protecting the product or for convenient handling,
should become a part of the prime cost. The cost of packing to facilitate the transportation
of the product from the factory to the customer should become a part of the distribution
cost. If the cost of special packing is at the request the request of the customer, the same
should be charged to the specific work order or the job. The cost of fancy packing
necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a
selling overhead.
(b) Depreciation
Answer
Depreciation is "the diminution in the intrinsic value of an asset due to use and/or the
lapse of time" Depreciation is, thus, the result of two factors viz. the use, and the lapse of
time.
We known that each fixed asset loses its intrinsic value due to their continuous use and as

such the greater the use the higher is the amount of depreciation. The loss in the intrinsic
value may also arise even if the asset in question is not in service.
In cost accounting, the depreciation is charged to the cost of production.
The various reasons for including the depreciation charge in Cost accounting are as
follows:
a. To show a true and fair picture of Business Sheet.

b. To ascertain the true cost of production.
c. To keep the asset intact by distributing losses in its value over a number of years.
d. To keep the capital intact and to make a provision of the resources for the
replacement of asset in future.
e. To provide for depreciation before distribution of profit as required under the
Companies Act.
(c) Research and Development Expenses

Answer
The terminology defines research expenses as "the expense of searching for new or
improved products, new application of materials, or new or improved methods."
Similarly, development expenses are defined as "the expenses of the process which
begins with the implementation of the decision to produce a new or improved product."
If research is conducted in the method of production, the research should be charged to
the production overhead ; while the expenditure become a part of the administration
overhead if research relates to administration. Similarly, market research expenses are
charged to the selling and distribution overhead. Development costs incurred in
connection with a particular product should be charged directly to that product. Such
expenses are usually treated as "deferred revenue expenses", and recovered as a cost per
unit of the product when production is fully established.
General research expenses of a routine nature incurred on new or improved methods of
manufacture or the improvement of the existing products should be charged to the general
overhead. Even in this case, if the amount involved is substantial it may be treated as
deferred revenue expenditure, and spread over the period during which the benefit would
accrue.
Expenses on fundamental research, not relating to any specific product, are treated as the
part of the administration overhead.
Where research proves a failure, the cost associated with it should be excluded from costs
and charged to the costing Profit and Loss Account.
(d) Blanket Overhead Recovery Rate [June 2006 – 5(a), 4 Marks]

Answer
When overheads are absorbed on the basis of output irrespective of their nature and cost
structure it is known as blanket overhead recovery rate. Even if the factory produces more
than one product and their nature as well as cost incurrence is different the overheads are
based on total output. This method is welcomed only if the company has single product of

same standard. If the company has two or more than two products this method of
absorption can not be used.
(e) Re-apportionment of Overheads [December 2011 – 6(a), 4 Marks]

Answer
After apportioning joint overhead costs to production & service departments, the next
stage is to re-apportion the overhead costs of service departments over production
departments. Service departments are those departments which do not directly take part in
the production of goods. Such departments provide ancillary services. Examples of such
departments are boiler house, canteen, stores, time office, dispensary etc. The overheads
of these departments are to be re-apportioned over the production departments since
service departments operate primarily for the purpose of providing services to production
departments. At this stage, all the factory overheads are collected under production
departments.
(f) Reciprocal method of cost allocation [December 2011 – 6(b), 2.5 Marks]
Answer
The reciprocal method allocates support department costs to operating departments by
fully recognizing the mutual services provided among all support departments. For
example, the Plant Maintenance department maintains all the computer equipments in
Information System department. Similarly, Information System department provides
database support for Plant Maintenance. The reciprocal method fully incorporates
interdepartmental relationships into the support department cost allocations.
(g) Idle capacity and its treatment in cost accounts[June 2012 – 6(c), 5 Marks] [July 2015 – 6(b), 2.5 Mar
Answer
It is that part of the practical capacity which cannot be utilised due to lack of demand, non
availability of materials, skilled labour, shortage of power, fuel or supplies, seasonal
nature of product and lower sales expectancy. Idle capacity in fact is the difference
between the practical capacity and the capacity based on sales expectancy. In brief, idle
capacity is unused capacity of a plant, equipment or department which cannot be used
gainfully. It usually arises due to factors which the management of a business concern
considers beyond its control.
Idle capacity is associated with costs which are represented mostly by fixed charges such
as depreciation, repairs and maintenance, insurance premium, rent, rates, management
supervisory costs, which cannot be absorbed or recovered due to under utilisation of plant
capacity.
Treatment of Idle Capacity in cost accounts:
Idle capacity costs may be normal or abnormal. These costs may be treated in the
following ways in cost accounts.
(a) Normal Idle capacity cost due to unavoidable reasons may be included in works
overheads and be absorbed into the cost of production either by inflating the overhead
rate or by means of a supplementary overhead rate.

(b) Abnormal Idle Capacity cost due to avoidable reasons such as lack of proper
planning and control should be charged to costing profit and loss account.
(c) Idle Capacity cost due to trade depression is abnormal in nature and thus it should be
charged to costing profit and loss account
(h) Classification of overhead by nature [December 2017 – 6(c), 2.5 Marks]

Answer
a. Fixed or constant: These are expenses that are not affected by any variation in the
volume of activity, e.g., managerial remuneration, rent, that part of depreciation
which is dependent purely on efflux of time, etc. Fixed or constant expenses remain
the same from from one period to another except when they are deliberately changed,
e.g., on increments being granted to staff or additional staff being engaged.
b. Variable: Expensed that change in proportion to the change in the volume of activity;
when output goes up by 10% the variable expenses also go up by 10%.
Correspondingly, on a decline of the output, these expenses also decline
proportionately e.g., power consumed; consumable stores; repairs and maintenance
and depreciation (on account of wear and tear) are dependent on the use of assets.
Variable expenses are generally constant per unit of output or activity. Suppose
variable expenses amount to Rs. 10,000 for a production of 2,000 units i.e; Rs. 5 per
unit. When output goes up to 2,200 units, with an increase of 10%, the variable
expenses amount to Rs. 11,000 i.e., 10,000 plus 10%, however, the cost per unit will
be the same as before.
c. Semi variable: The expenses that either (a) do not change when there is a small
change in the level of activity but change whenever there is a slightly big change and
the change are in small steps; or (b) change in the same direction as change in the
level of activity but not in the same proportion. An expenses for example, may not
change if output goes up or come down by 5 % but may change by 3% when there is
an increase in production between 5% and 10%. Similarly, another item of expenses
may change by 1% for every 2% change in activity. Examples of such expenses are:
delivery van expenses, telephone charges, depreciation as a whole.
(i) Over and Under Absorption Overhead [June 2019 – 6(b), 2.5 Marks]
When a company uses standards costing, it derives a standard amount of overhead cost
that should be incurred in an accounting period, and applies this standard amount of
overhead to cost objects. If the actual amount of overhead turns out to be different from
the standard amount of overhead, then the overhead is said to be either under absorbed or
over absorbed.
If overhead is under absorbed, this means that more actual overhead costs were incurred
than expected, with the differences being charged to expenses as incurred. This usually
means that the recognition of expenses is accelerated into the current period, so that the
amount of profit recognized declines. If overhead is under absorbed, this means that
fewer actual overhead costs were incurred than expected, so that more cost is applied to

cost objects than were actually incurred. This means that the recognition of expenses is
reduced in the current period, which increases profit.
Question No. 3
Briefly explain the methods of separating semi-variable costs into their fixed and
variable elements. [December 2001 – 3(b), 4 Marks]
Answer
Methods of segregating semivariable costs into fixed and variable:
a. By comparing the highest and lowest level activity and determining the
differential expenditure.
b. By comparing the total expenditure and the output of one period say a quarter
with the other period.
c. Scattegraph method by drawing the line of best fit.
d. By technical opinion.
e. Method of least squares.
f. Method of averages to avoid distortion due to abnormal costs in any particulars
year.
Question No. 4
What are the advantages of departmentalisation of overheads? [June 2001 – 1(a), 6
Marks]
Answer
The collection of overheads department wise yields the following advantages:
a. Expenses, which relate to various departments, can be estimated accurately and as a
result of which the overall estimate of total overhead is likely to be more accurate.
b. This will enable the Management to ensure better control over the expenses as
monitoring of actual departmental expenses against predetermined estimates would be
easier.
c. Since each departmental costs will be known, it would ensure more accurate
ascertainment of product cost as indirect expenses can be more correctly allocated.
d. A suitable method of costing can be followed differently for each department, e.g.
batch costing when a part is manufactured, but single or output costing when the
product is assembled.
Question No.5
What do you understand by the term 'predetermined rate of recovery' of overheads?
What are the bases that are usually advocated for such predetermination? How do
over-absorption and under-absorption of overheads arise and how are they disposed of
in cost accounts? [June 2004 – 2(b),
8 Marks]

Answer
The term 'pre-determined rate of recovery of o/hs' refers to a rate of o/h absorption. It is
calculated by dividing the budgeted o/h expenses for the accounting period by the budgeted
base for the period. This rate of o/h absorption is determined prior to the start of the activity;
that is why it is called 'pre-determined rate'. The use of the pre-determined rate of recovery of
o/hs enables prompt preparation of cost estimates and quotations and fixation of sales prices.
For prompt billing on a provisional basis before completion of work, as for example in the
case of cost plus contracts, pre-determined o/hs rates are particularly useful.
Bases Available: The bases available for computing 'pre-determined rate of recovery of o/hs'
are given below:
a. Rate per unit of output
b. Direct labour cost method
c. Direct labour hours method
d. Machine hour rate method
e. Direct material cost method
f. Prime cost method.
The choice of a suitable method for calculating 'pre-determined rate of recovery of o/h'
depends upon several factors. Some important ones are type of industry, nature of product
and processes of manufacture, nature of o/h expenses, organisational set-up, policy of
management, etc.
Reasons for over/under absorption of o/hs: Over-absorption and under absorption of o/hs
arises due to one or more of the following reasons:
a. Improper estimation of o/h
b. Error in estimating the level of production.
c. Unanticipated changes in the methods or techniques of production.
d. Under utilisation of the available capacity.
e. Seasonal fluctuations in the overhead expenses from period to period.
Methods for absorbing under/over absorbed overheads: The over-absorption and under-
absorption of o/hs can be disposed off in cost accounting by using any one of the following
methods:
a. Use of supplementary rates
b. Writing off to Costing Profit & Loss A/c
c. Carrying over to the next year's a/c
a Use of supplementary rates: This method is used to adjust the difference

between o/hs absorbed and o/hs actually incurred by computing
supplementary o/h rates. Such rates may be either positive or negative. A
positive rate is intended to add the unabsorbed o/hs to the cost of production.
The negative rate, however corrects the cost of production by deducting the

amount of over-absorbed o/hs. The effect of applying such a rate is to make

the actual o/h get completely absorbed.
b. Writing off to Costing & Loss Account: When over or under absorbed
amount is quite negligible and it is not felt worth while to absorb it by using
supplementary rates, then the said amount be transferred to costing Profit &
Loss Account. In case under absorption of over heads arises due to factors
like idle capacity, defective planning etc., it may also be transferred to
costing Profit & Loss A/C.
c. Carrying over to the next year's account: Under this method the amount of
over/under absorbed o/h is carried over to the next period. This method is
not considered desirable as it allows costs of one period to affect costs of
another period. Further, comparison between one period and another is
rendered difficult. Therefore, this method is not proper and has only a limited
application. However, this method may be used when the normal business
cycle extends over more than one year, or in the case of a new project, the
output is low in the initial years.
Question No.6
How depreciation, packing expenses and expenses on removal and re-erection of
machine cost are treated in cost accounting ? [June 2006 – 2(a), 6 Marks[
Answer
i. Depreciation : Depreciation "is the diminution in the intrinsic value of an asset due to
use and/ or the lapse of time." Depreciation is thus the result of two factors viz, the use,
and the lapse of time. We know that each fixed asset loses its intrinsic value due to
continuous use and as such the greater the use the higher is the amount of depreciation.
The loss in the intrinsic value may also arise even if the asset in question is not in service.
In Cost Accounting depreciation is charged to the cost of production.
The various reasons for including the depreciation charge in Cost Accounting are as per
below:
a. To show a true and fair picture of Balance Sheet.
b. To ascertain the true cost of production.
c. To Keep the asset intact by distributing losses in its value over a number of
years.
d. To keep the capital intact and to make a provision of the resources for the
replacement of asset in future.
e. To provide for depreciation before distribution of profit as required under the
Companies Act.
ii. Packing expenses : Cost of primary packing necessary for protecting the product or
for convenient handling, should become a part of the prime cost. The cost of packing
to facilitate the transportation of the product from the factory to the customer should
become a part of the distribution cost. If cost of special packing is at the request of the
customer, the same should be charged to the specific work order or the job. The cost

of fancy packing necessary to attract customers is an advertising expenditure. Hence,

it is to be treated as a selling overhead.
iii. Expenses on removal and re-erection of machines : Expenses are sometime
incurred on removal and re-erection of machinery in factories. Such expenses may be
incurred due to factors like changes in the method of production; an addition or
alternation in the factory building, change in the flow of production, etc. All such
expenses are treated as production overheads. When amount of such expenses is large,
it may be spread over a period of time. If such expenses are incurred due to faulty
planning or some other abnormal factor, then they may be charged to costing Profit
and Loss Account.
Question No.7
Discuss the step method and reciprocal service method of secondary distribution of
overheads.
[June 2008 – 6(b), 5 Marks] [June 2009 – 6(b), 4 Marks] [June 2010 – 5(d), 4Marks]
Answer
Step method: This method gives cognizance to the service rendered by service department to
another service department, thus sequence of apportionments has to be selected. The
sequence here begins with the department that renders service to the maximum number of
other service department. After this, the cost of service dep’t serving the next largest number
of department is apportioned.
Reciprocal service method : This method recognizes the fact that where there are two or
more service department, they may render service to each other and, therefore, these inter
department services are to be given due weight while re-distributing the expense of service
dep’t. The methods available for dealing with reciprocal servicing are:
a. Simultaneous equation method
b. Repeated distribution method
c. Trial and error method
Question No. 8
Explain briefly the conditions when supplementary rates are used.
[December 2010 – 6(c), 2.5 Marks]
Answer
The conditions when supplementary rates are used
When the amount of under absorbed and over absorbed overhead is significant or large,
because of differences due to wrong estimation, then the cost of product needs to be adjusted
by using supplementary rates (under and over absorption/actual overhead) to avoid
misleading impression.
Question No.9
Discuss the treatment of research and development expenditures in cost accounting.
[December 2014 – 6(a), 2.5 Marks]

Answer
If research is conducted in the methods of production, the expenses should be charged to
production overhead. If the research relates to administration, the expenses are charged to
administration overheads. If it is related to market research, the expenses are charged to S &
D overheads. Development costs incurred in connection with a particular product should be
charged directly to that product. Such expenses are usually treated as deferred revenue
expenditure and recovered as cost per unit of the product when production is fully
established. Routine nature research expenses are charged to general overheads.
Question No.10
There is no difference between idle capacity and excess capacity. Do you agree? How
idle capacity costs are treated in cost accounting?
Answer
Idle capacity is different from excess capacity. Idle capacity is a part of the capacity of a
plant, machine or equipment which cannot be effectively utilized in production. It is the
difference between the practical or normal capacity and capacity utilization based on sales.
Idle Capacity refers to temporary idleness of available resources due to irregular
interruptions. Excess capacity results either from managerial decision to retain larger
production capacity or from unbalanced equipment or machinery within departments. Excess
capacity refers to that portion of practical capacity which is available but no attempt is made
for its utilization for strategic or other reasons.
Idle capacity costs can be treated in product costing in following ways:
a. if idle capacity is due to avoidable reasons, it should be charged to Profit and
Loss Account.
b. if idle capacity is due to unavoidable reasons, as supplementary overhead rate
may be used to recover the costs and charges to the production capacity
utilized.
c. if idle capacity is due to seasonal factor, it should be charged to the cost of production
by inflating overhead rates.
Question No. 11
Describe briefly on method of Accounting of administrative overhead.
[June 2017 – 3(c), 2 Marks] [June 2019 – 5(b), 4 Marks]
Answer
Method of Accounting of administrative overhead
There are three distinct methods of accounting of administrative overheads.
(a)Appropriation of Administrative Overheads between Production and sales
Department
(b) Charging to Profit and loss Account
This method is used when the overhead not directly related to production and selling
& distribution, where difficult to determine suitable base.

(c) Treatment of administrative overheads as a separate additional to cost of

Production
This method considers administration as a separate function like production and sale.
Numerical Questions
Question No.12
A Company has three production departments X, Y and Z and two service departments A and
B. The expenses incurred by the service departments during the month are:
Department A Rs. 46,800
Department B Rs. 60,000
The expenses of service departments are apportioned to the production departments as per the
following basis:
X Y Z A B
Expenses of Department A 20% 40% 30% — 10%

Expenses of Department B 30% 20% 30% 20% —
The expenses of production departments for the particular month are:

Rs.
Department X 1,60,000
Department Y 1,00,000
Department Z 1,20,000
Show how the expenses of service departments A and B would be apportioned to departments
X, Y and Z.
[June 2001 – 1(b), 12 Marks]
Answer
Statement showing reciprocal cost ascertainment cost centres:
A (Rs.) B (Rs.) X (Rs.) Y (Rs.) Z (Rs.)
46,800 60,000 1,60,000 1,00,000 1,20,000
Apportionment of 'A' (46,800) 4,680 9,360 18,720 14,040
" 'B' 12,936 (64,680) 19,404 12,936 19,404

" 'A' (12,936) 1,294 2,587 5,174 3,881
" 'B' 259 (1,294) 388 259 388
" 'A' (259) 25 52 104 78
" 'B' 4 (25) 8 5 8
" 'A' (4) — 1 2 1
Total (Rs.) 1,91,800 1,37,200 1,57,800

Question No.13
The budgeted working conditions for a Cost Centre are as follows:
Normal working hours per week: 42 hours, Number of machines 24
Normal weekly loss of hours on maintenance: 5 hours per machine
Number of weeks worked per annum: 50
Estimated annual overheads Rs. 1,50,000.
Estimated direct wage rate: Rs. 5 per hour
Actual results in respect of 8 week period are:

Wages incurred Rs. 20,000
Overheads incurred Rs. 22,000
Machine hours produced 2,000
Calculate:
i) Overhead rate per machine hour
ii) Amount of under or over absorption of wages and overheads.
[June 2001 – 7(b), 4+4=8 Marks]
Answer
Total Working Hours per annum = 42 × 24 × 50 = 50,400
Less: Normal Hours Lost (5 × 24 × 50) = 6,000
------------
Effective Hours 44,400
Overheads Rs. 1,50,000
Overhead absorption rate per hour Rs. 3.38
Overheads absorbed = 2,000 × 3.38 = Rs. 6,760
Overheads actual incurred = Rs. 22,000
Under absorbed Overheads = Rs. 15,240
Labour Rate Rs. 5 per hour

Wages absorbed = 8,064 hours × Rs. 5 = Rs. 40,320
(24 × 8 × 42)
Wages Incurred = Rs. 20,000
Over absorbed wages = Rs. 20,320
Question No. 14
PH Ltd. is a manufacturing company having three production departments A, B and C and
two service departments X and Y. Budgeted overheads allocated/ apportioned by the cost
accountant for the next year are given below:
Total A B C X Y
O/H allocated/ Rs 3,21,000 62,000 1,45,000 74,000 16,000 24,000

apportioned

Budgeted capacity – 4,500 10,000 7,400 – –

machine hours
A technical assessment of the apportionment of expenses of service departments is as

under:
A B C X Y
% % % % %
Service dept. X 20 40 20 – 20
Service dept. Y 10 60 20 10 –
Calculate the overhead rates of each production department after completing the distribution
of service department costs to production departments.
Answer
Using "Simultaneous equations method" of distribution of service dept. cost:

Let total overheads of service dept. X be x
And total overheads of service dept. Y be y
x = 16000 + 0.1 y ..................... (i)
y = 24000 + 0.2x ...................... (ii)
Multiply eq. (ii) by 0.1 and then add to eq. (i)

We get - x - 0.1y = 16000
0.2x + 0.1 = 2400
------------------------
Adding 98 x = 18400
x = 18775
And y = 27755
Distribution of service dept. o/h to production dept.
Production dept. A B C Total
Rs. Rs. Rs. Rs.
Direct allocation 62000 145000 74000 281000

Dept. X (80% of 18775) 3755 7510 3755 15020
Dept. Y (90% of 27755) 2776 16653 5551 24980
---------- ---------- ---------- ----------
Total 68531 169163 83306 321000
Budgeted capacity 4500 10000 7400
(machine hours)

---------- ---------- ----------

Overhead rate/ machine hour Rs. 15.229 16.916 11.257
---------- ---------- ----------
Note: Alternate method may also be used for distribution of service dept. expenses.
Question No. 15
From the records of a manufacturing company, the following budgeted details are available:
Rs. Rs.
Direct materials 1,99,000
Direct Wages
Machine Shop 12,000 hours 63,000
Assembly Shop 10,000 hours 48,000 1,11,000
Works overheads
Machine Shop 88,200
Assembly Shop 51,800 1,40,000
Administrative overheads 90,000
Selling overheads 81,000
Distribution overheads 62,100
The company follows absorption costing method.
Required:
(i) Prepare a schedule of overhead rates from the figures available stating the basis of
overhead recovery rates used under the given circumstances.
(ii) Work out a cost estimate for the following job based on overhead rates so computed:
Direct materials : 25 kgs @ Rs. 16.80 per kg
15 kgs @ Rs. 20.00 per kg
Direct labour : Machine shop 30 hours
Assembly shop 42 hours
[June 2002 – 3(c), 9 Marks]
Answer
Labour Hour Rate:
Machine shop Rs. 63000 ÷ 1200 = Rs. 5.25 per hrs.
Assembly shop Rs. 48000 ÷ 10000 = Rs. 4.80 per hr.
Works Overhead Rate:

Machine shop Rs. 88200 ÷ 12000 = Rs. 7.35 per hour
Assembly shop Rs. 51800 ÷ 10000 = Rs. 5.18 per hour
Rs.
Direct Materials 199000
Direct Wages 111000
Prime Cost 310000

Works overheads 140000

Works cost 450000
90000
Admn. overhead 450000 x 100 = 20% of work cost 90000
Production cost 540000
Selling Distribution overheads 143100

Total cost 683100
143100
Selling & Distribution overhead = 450000 x 100 = 31.8% of works cost
Job Cost
Direct Materials Rs. Rs.
25kgs @ 16.80 420
15kgs @ 20.00 300 720.00
Direct Wages
Machine shop 30 x 5.25 157.50
Assembly shop 42 x 4.80 201.60 359.10
Works Overheads
Machine shop 30 x 7.35 220.50
Assembly shop 42 x 5.18 217.56 438.06
Works Cost 1517.16

Administrative Overhead 1517.16 x 20% 303.43
Production Cost 1820.59
Selling & Distribution Overhead 1517.16 x 31.8% 482.46
Total Cost 2303.05
Question No. 16
A manufacturing concern has been producing products through two Production Departments
and two Service Departments. The overheads for the month ended Falgun 30, 2059 are given
below:
Rs.
Maintenance materials 50,000
Indirect labour 40,000
General overhead 40,000
Depreciation 90,000
Rent 50,000

The data reflecting the operational aspects of the month for the departments of the
manufacturing concern are compiled below:
Production departments Service Departments
Assembly Making Store Power House
Direct wages (in Rs.) 1,00,000 50,000 25,000 25,000
Book value of assets (in 4,00,000 1,00,000 1,00,000 4,00,000
Rs.) 8,000 7,000 5,000 5,000
Space used (in sq.mt.) 24 15 6 5
No. of requisition made 40,000 20,000 10,000 10,000
DLH
The patterns of the percentage sharing of the cost of Service Departments are stated below:
Production departments Service Departments
Assembly Making Store Power House
Store Department in % 50 30 – 20
Power House Department 40 50 10 –
%
Required: 1. Overhead distribution summary

2. Re-apportionment by applying Simultaneous Equation Method
3. Total cost for a unit of output requiring direct material cost of Rs. 40 and
dirct wage of Rs. 30 with processing of 2 DLH in Assembly Dept and 3
DLH in Making Dept. [June 2003 – 4(a), 4+4=8 Marks]
Answer
1. Overhead distribution summary:
Direct Wages Given 50,000 – – 25,000 25,000

Maintenance No. of req. 50,000 24,000 15,000 6,000 5,000
materials 24:15:6:5 = 50
Indirect Direct wages 40,000 20,000 10,000 5,000 5,000
labour 4:2:1:1 = 8
General DLH 40,000 20,000 10,000 5,000 5,000
overhead 4:2:1:1 = 8
Depreciation B.V. 90,000 36,000 9,000 9,000 36,000
4:1:1:4 = 10
Rent Space 50,000 16,000 14,000 10,000 10,000
8:7:5:5 = 25
Total 3,20,000 1,16,000 58,000 60,000 86,000

2. S = 60,000 + 0.1 × P
P = 86,000 + 0.2 × S
or, S = 60,000 + 0.1 (86,000 + 0.2 × S)
or, S = 60,000 + 8,600 + 0.02 S
or, 0.98 S = 68,600
∴ S = 70,000
Assigning S value
P = 86,000 + 0.2 × 70,000 = Rs. 1,00,000
Allocated Cost 1,74,000 1,16,000 58,000
Re-apportionment of store (50% & 30% 56,000 35,000 21,000
of Rs. 70,000)
Re-apportionment of Power (40% & 90,000 40,000 50,000
50% of Rs. 1,00,000)
3,20,000 1,91,000 1,29,000
DLH 40,000 20,000
Overhead rate 4.775 6.45
3. Total cost for a unit of output
1. Material Cost Rs. 40.00

2. Labour Cost 30.00
Prime Cost 70.00
Overhead production Assembly: 2DLH × 4.775 = 9.55
Making : 3DLH × 6.45 = 19.35
Total Cost 98.90
Question No. 17
The positions of production and service departments of a manufacturing concern are given
below:
Production Departments Service
A B Department
Capital value of assets
(Rs. in lakhs) 8 4 3
Space used (sq. meters) 5,000 4,000 1,000
Direct labour hours 4,000 2,000 2,000
Horse power of machine 200 150 50
Number of staff 25 20 5
The particulars of the expenses incurred are:

Rent, rates and taxes – Rs. 20,000

Canteen – Rs. 10,000
Power – Rs. 24,000
Depreciation – Rs. 30,000
General Overhead – Rs. 16,000
Production departments A and B consumed service of service department in the ratio of 5:3.
Required : a. Primary distribution
b. Re-apportionment of service department's cost
c. Overhead per Direct labour hour of production departments.
[December 2003 – 5(a), 4+2+4=10 Marks]
Answer
PRIMARY DISTRIBUTION
Departments
Items of overhead Bases Total A B Services
Rent, Rates and Taxes Spaces 20,000 10,000 8,000 2,000
5000:4000:1000
Canteen No of Staffs 10,000 5,000 4,000 1,000

25:20:5
Power HP of machine 24,000 12,000 9,000 3,000

200:150:50
Depreciation Capital Value 30,000 16,000 8,000 6,000

8:4:3
General overhead DLH 16,000 8,000 4,000 4,000

4000:2000:2000
Total 1,00,000 51,000 33,000 16,000
Re-appointment of 5:3 - 10,000 6,000 (16000)

service department cost
Total after 1,00,000 61,000 39,000 NIL
reappointment
Direct Labour hours 4,000 2,000 -
Overhead per DLH 15.25 19.50

Question No. 18
Sky Manufacturing Ltd. has three production departments and two service departments. From
the following figures extracted from the records of the company, calculate the overhead rate
per labour hour.
Production Dept. Service Dept
Items Total X Y Z D E
Direct material 60, 000 20, 000 10, 000 19, 000 6, 000 5, 000
Direct Wages 40, 000 15, 000 15, 000 4, 000 2, 000 4, 000
Machine value (Rs) 250, 000 60, 000 100, 000 40, 000 25,000 25, 000
Floor area (sq.ft) 50, 000 15, 000 10, 000 10, 000 5, 000 10, 000
Horse power of machines 150 50 60 30 5 5
No. of light points 50 15 10 10 5 10
Labour hours 15, 000 5, 000 5, 000 2, 000 1, 000 2, 000
The other expenditure incurred are :

Rs.
Indirect Material 15, 000
Indirect wages 10, 000
Depreciation on machines 25, 000
Depreciation on building 5, 000
Rent, rates and taxes , 000
Electric power for the machines 15, 000
General Expenses 500
The expenses service department D and E are apportioned as follows :
X Y Z D E
D 40 20 30 10
E 30 30 40
[June 2005 – 2(b), 11 Marks]
Answer
COMPUTATION OF DEPARTMENTAL OVERHEAD RATES
Basic of Production dept Service dept Total

Charge X Y Z D E
Direct Material Allocation - - - 6 000 5,000 11, 000

Direct Wages Allocation - - - 2,000 4,000 6, 000
Indirect Direct 5,000 2,500 4,750 1,500 1,250 15, 000
Materials Materials

Indirect wages Direct 3,750 3,750 1,000 500 1,000 10,000

Wages
Depreciation on Value of
Machinery Machinery 6,000 10,000 4,000 2,500 2,500 25,000
Building Floor area 1,500 1,000 1,000 500 1,000 5,000
Rent, Rates & Floor area 3,000 2,000 2,000 1,000 2,000 10,000
Taxes
Electricity H.P 5,000 6,000 3,000 500 500 15,000
Machinery
Lightning Light points 150 100 100 50 100 500
General Exp. Labour hrs 5,000 5,000 2,000 1,000 2,000 15,000
29,400 30,350 17,850 15,550 19,350 112,500
Cost of Service Depts.E 6,220 3,110 4,665 (15,550) 1,555 -

Apportioned
35,620 33,460 22,515 - 20,905 112,500
Cost of Service Dept E 6,272 6,272 8,362 - (20,905) -

Apportioned
Total Overheads 41,892 39,731 30,877 - - 112,500
Labour hrs 5,000 5,000 2,000 - - -
Overhead rate per direct 838 7.95 15.44 - - -

Labour hour
Question No. 19
ABC Co. three manufacturing departments X, Y, Z and one service department S. the
following figures are available for one month having working days of 8 hours each day. All
these department work for all the days and with full attendance.
Expenditure Departments
Total S X Y Z
Power and lighting 1100 240 200 300 360
Supervisor’s salary 2000
Rent 500

Welfare 600
Others 1200 200 200 300 400
Total 5400
Supervisor’s salary 20% 30% 30% 20%
Number of workers 10 30 40 20
Floor area(sq. ft) 500 600 800 600
Service department 50% 30% 20%

allocation
Calculate labour hour rate for each departments X, Y and Z. [December 2005 – 4(b), 9
Marks]
Answer
Departmental Distribution Summary
Basis Total S X Y Z
Power and Lighting Given 1100 240 200 300 360
Supervisor’s salary Given 2000 400 600 600 400
Rent Floor area 500 100 120 160 120
Welfare No. of workers 600 60 180 240 120
Others Given 1200 200 200 400 400
Total 5400 1000 1300 1700 1400
Allocation of servicing departmental expenses to other 500 300 200

manufacturing department.
Grand total 1800 2000 1600
Number of hours in a month = 25 * 8 = 30 paisa
Total labour hours in each department:

X: 200 * 30 = 6,000 hours
Y: 200 * 40 = 8,000 hours
Z: 200 * 20 = 4,000 hours

Labour hour rate:

Department X = 1800/ 6000 = 30 paisa
Department Y = 2000/8000 = 25 paisa
Department Z = 1600/4000 = 40 paisa
Question No 20
Janta Nepal Limited is a leading cable manufacturing company. The company has three
production departments A, B and C and two service department P and Q. You are required
to work out the production hour rate of recovery of overheads in department A, B and C,
using simultaneous equation method for apportionment of service department cost to
production departments.
Particulars Total A (Rs) B (Rs.) C (Rs) P (Rs.) Q (Rs.)

Rent 12,000 2,400 4,800 2,000 2,000 800
Electricity 4,000 800 2,000 500 400 300
Indirect labour 6,000 1,200 2,000 1,000 800 1,000
Depreciation 5,000 2,500 1,600 200 500 200
Sundries 4,500 910 2,143 847 300 300
Total 31,500 7,810 12,543 4,547 4,000 2,600
Estimated working hours 1,000 2,500 1,400
Expenses of service departments P and Q are apportioned as under :

A B C P Q
P 30% 40% 20% - 10%
Q 10% 20% 50% 20% -

[June 2006 – 3(b), 9 Marks]
Answer
a.. i. Profit volume ratio :
In second year
Additional net profit means :
Additional contribution 26000-18000 = 8,000
Additional sales 280000-240000 = 40,000
P/V ratio =
8000*100/40000
= 20%
ii. Break even point :
Fixed cost = Contribution – Net profit
= 20% of 240000-18000

= 30000
Break even point = 100*30000/20
= 150000
iii. Margin of safety : = Sales-BEP Sales

Year I = 240000-150000 = 90,000
Year II = 280000-150000 = 130,000
iv. Profit when sales are Rs. 2,00,000

Profit = Contribution-Fixed cost
= 20% of 200000-30000
= 10,000
v. Sales required to earn net profit of Rs. 40,000

Contribution margin for net profit of Rs. 40,000 = 40000+30000
= 70000
Therefore sales required will be = 70000*100/20
= 350000
b. i. Calculation of total overhead of service departments cost P and Q :
Let the total overhead of Dep. P & Q be X and Y respectively
Then,
X = Rs. 4000+20Y/100 ………………… eqn 1
Y = Rs. 2600+10X/100 …………………. eqn 2
solving eqn 1 and 2 we get
Y = 3061.2
X = 4612.2
ii. Statement showing the overheads absorption rates per hour :
Particulars A B C P Q
Allocation and Apportion 7,810.0 12,543.0 4,547.0 4,000.0 2,600.0
Apportion of P at ratio of
3:4:2:1 1,383.7 1,844.9 922.4 (4,612.2) 461.2
Apportion of Q at ratio of
1:2:5:2 306.1 612.2 1,530.7 612.2 (3,061.2
Total overheads 9,499.8 15,000.1 7,000.1 - -
Estimated production hours 1,000.0 2,500.0 1,400.0
Estimated production hour rate 9.5 6.0 5.0
of recovery
Question No 21

In Himalayan Engineering Company, the factory overheads are recovered on a fixed

percentage basis on direct wages and the administrative overheads are absorbed on 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 A Job B
Direct Material 60,000 40,000
Direct Wages 40,000 30,000
Factory overhead 24,000 18,000
Selling price 1,63,680 1,21,440
Profit % on total cost 10% 15%
Required:
i. Computation of percentage of recovery rate of administrative overheads and the
amount of administrative overhead and profit for each job.
ii. Using the above recovery rates, fix the selling price of job Z. The additional data
being:
Direct Materials = Rs. 1,20,000

Direct Wages = Rs. 90,000
Profit % on selling price = 20%
[June 2007 – 3(a), 5+5=10 Marks]

Answer
i. Statement of Jobs
Job A (Rs.) Job B (Rs.)

Direct Materials 60,000 40,000
Prime Cost 1,00,000 70,000
Factory Overhead (60% of Direct Wages) 24,000 18,000
Factory Cost 1,24,000 88,000
Administrative Overhead (20% of Factory Cost) 24,800 17,600
Total Cost 1,48,800 1,05,600
Profit 14,880 15,840
Selling Price 1,63,680 1,21,440
Working Note
Job A Total Cost = 1,63,680 × 100/110 = 1,48,800
Job B Total Cost = 1,21,440 × 100/115 = 1,05,600
ii. Selling Price of Job Z
Rs.

Direct Materials 1,20,000

Direct Wages 90,000
Prime Cost 2,10,000
Factory overhead (60% of Direct Wages) 54,000
Factory Cost 2,64,000
Administrative overhead (20% of Factory Cost) 52,800
Total Cost 3,16,800
Profit Margin 79,200
Selling Price 3,96,000
Working Note:
Profit = 20% on Selling Price
3,16,800
Selling Price = = Rs. 3,96,000
0.80
Question No. 22
A factory has three production departments. The policy of the factory is to recover the
production overheads of the entire factory by adopting a single blanket rate based on the
percentage of total factory overheads to total factory wages. The relevant data for a month are
given below:
Department Direct Direct Factory Direct Labour Machine
Materials (Rs.) Wages (Rs.) Overheads (Hrs.) (Hrs.)
(Rs.)
Budget
Machinery 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 5,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 -
Actual
Machinery 7,80,000 96,000 3,90,000 24,000 96,000
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 -
The details of one of the representative jobs produced during the month are as under:
Job No. CW 555
Department Direct Direct Direct Machine
Materials Wages Labour (Hrs.) (Hrs.)
Machinery 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 -

The factory adds 30% on the factory cost to cover administration and selling overheads and
profit.
Required:
a) Calculate the overhead absorption rates as per the current policy of the company
and determine the selling price of the Job no. CW 555.
b) Suggest any suitable alternative method (s) of absorption of the factory overheads
and calculate the overhead recovery rates based on the method (s) so
recommended by you.
Determine the selling price of Job CW 555 based on the overhead application rates calculated
in (b) above. [December 2007 – 3, 15 Marks]
Answer
a) Computation of Overhead absorption rate
(As per the current policy of the company)
Department Budgeted Factory Overhead Budgeted direct wages

Rs. Rs.
---------------------------------------------------------------------------------------------------
Machining 3,60,000 80,000

Assembly 1,40,000 5,50,000
Packing 1,25,000 70,000
Total 6,25,000 7,00,000

____________________________________________________________________
Budgeted Factory overheads

Overhead absorption Rate = --------------------------------- x 100
Budgeted Direct wages
6,25,000
= ----------- x 100
7,00,000
= 89.28% of Direct wages
Selling Price of Job No. 55.5

Rs.
Direct Materials (Rs. 1200+ 600+300) 21,00.00
Direct Wages. ( Rs. 240 + 360+60) 660.00
Overheads(89.28% of Rs 660) 589.25
Total Factory Cost 3349.25

Add: Mark Up(30% of Rs 3349. 1004.77

Selling Price 4354.02
b) Methods available for absorbing factory overheads and their overhead recovery rates in
different departments
1. Machining department
As machine hour rate is the predominant factor of production in this dept. Machine hour
rate should be used to recover overheads in this dept.
Budgeted factory Overheads
Machine hour rate = ---------------------------------
Budgeted Machine Hours
3,60,000
= ----------------
80,000 hours
=Rs. 4.50/hour
2. Assembly department
Direct labour hour is the main factor, so labour hour rate method should be used to
recover overheads in this dept.
Budgeted factory overhead
Direct labour hour rate = --------------------------------
Budgeted direct labour hours
1,40,000
= ------------ = Rs. 1.40 /hour.
1,00,000
3. Packing department
Labour is most important factor so direct labour hour rate method should be used:
Budgeted factory overhead
Direct Labour Hour rate = --------------------------------
Direct Labour hours
1,25,000
= ----------- = Rs. 2.50 per hour.
50,000

c) Selling Price of Job 555

(Based on the overhead application rates calculated in (b) above)
Rs.
Direct Materials 2100.00
Direct Wages 660.00
Overhead 1078.00
(Working Note)
Factory cost 3838.00

Add Mark Up 1151.40
(30% of 3838)
Selling Price 4,989.40
Working Note
Overhead Summary
Department Basis Overheads
Machining Machine Hr. 180x4.50 = 810
Assembly Direct Labour Hr. 120x1.40= 168
Packing Direct Labour Hr. 40x 2.50 = 100
1078
Question No. 23
From the details furnished below you are required to compute a comprehensive machine-hour
rate:
Original purchase price of the machine Rs. 324,000

(subject to depreciation at 10% per annum
on original cost)
Normal working hours for the month 200 hours
(The machine works to only 75% of capacity)
Wages of Machine man Rs. 125 per day (of 8 hours)
Wages for Helper (machine attendant) Rs. 75 per day (of 8 hours)
Power cost for the month for the time worked Rs. 15,000
Supervision charges apportioned for the Rs. 3,000
machine centre for the month
Electricity & Lighting for the month Rs. 7,500
Repairs & maintenance (machine) including Rs. 17,500
Consumable stores per month
Insurance of Plant & Building (apportioned) Rs. 16,250
for the year
Other general expense per annum Rs. 27,500

The workers are paid a fixed dearness allowance of Rs. 1,575 per month. Production bonus
payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
allowance. Add 10% of the basic wage and dearness allowance against leave wages and
holidays with pay to arrive at a comprehensive labour-wage for debit to production.
[June 2008 – 4, 15 Marks]

Answer
Computation of comprehensive Machine hour rate
Per Month (Rs.) Per Hour (Rs.)
Fixed Cost
Supervision Charges 3,000
Electricity & Lighting 7,500
Insurance of Plant & Building 1,354
(16250/12)
Other General Expenses 2,292
(27500*1/12)
Depreciation (32400*1/12) 2,700
16,846 112.31
Variable cost
Repairs & Maintenance 17500 116.67
Power 15000 100.00
Wages of machine man 44.91
Wages of helper 32.97
Machine Hour Rate (Comprehensive) 406.85
Effective machine hours per month

200 Hrs. * 75% = 150 hours.
Wages per machine hour

Machine man Helper
Wages for 200 hrs.
(Rs. 125*25) 3,125.00
(Rs. 75*25) 1,875.00
D.A. 1,575.00 1,575.00
4,700.00 3,450.00

Production Bonus (1/3 of above) 1,566.67 1,150.00

6,266.67 4,600.00
Leave wages (10%) 470.00 345.00
6,736.67 4,945.00
Effective wage rate per machine hour (150 hrs. in all) 44.91 32.97
Question No. 24
A company has two production departments and two service departments. The data relating
to a period are as under:
Production Departments Service
Departments
PD1 PD2 SD1
SD2
Direct materials (Rs.) 80,000 40,000 10,000 20,000
Direct wages (Rs.) 95,000 50,000 20,000 10,000
Overheads (Rs.) 80,000 50,000 30,000
20,000
Power requirement at
normal capacity
operations (Kwh.) 20,000 35,000 12,500 17,500
Actual power consumption

during the period (Kwh.) 13,000 23,000 10,250 10,000
The power requirements of these departments are met by a power generation plant. The
said plant incurred an expenditure, which is not included above, of Rs. 1,21,875 out of
which a sum of Rs. 84,375 was variable and the rest fixed,. After apportionment of power
generation plant costs to the four departments, the service department overheads are to be
redistributed on the following basis:
PD1 PD2 SD1

SD2
SD1 50% 40% -
10%
SD2 60% 20% 20% -

(i) Apportion the power generation plant costs to the four departments.
(ii) Re-apportion service department costs to production departments.

(iii)Calculate the overhead rates per direct labour hour of production departments,
given that the direct wage rates of PD1 and PD2 are Rs. 5 and Rs. 4 per hour
respectively.
[December 2008 – 2, 5+8+2=15 Marks]
Answer
(i) Apportionment of Power Generation Plant Costs
Items of Basis of Total Production Service

Expense Apportionment Department Department
Rs. P1 P2 S1 S2
Fixed Power 37500 8824 15441 5515 7720
Expense Requiremnts(Kwt)
at normal capacity
(8:14:5:7)
Variable Actual power 84,375 19,500 34,500 15,375 15,000
Expense consumption
(kwh.)
(13 : 23 : 10.25 :
10)
1,21,875 28,324 49,941 20,890 22,720
(ii) Overhead Distribution Summary and Re-apportionment

of Service Department Costs
Total Production Service

Department Department
Rs. P1 P2 S1 S2
Power 1,21,875 28,324 49,941 20,890 22,720

Generation Cost
Direct Materials 30,000 10,000 20,000
Direct Wages 30,000 20,000 10,000
Other Overheads 1,80,000 80,000 50,000 30,000 20,000
3,61,875 1,08,324 99,941 80,890 72,720
Reapportionment:
SD1 (5 : 4 : 1 ) 40,445 32,356 ()80,890 8,089
SD2 (6 : 2 : 2 ) 48,485 16,162 16,162 ()80,809
SD1 (5 : 4 : 1 ) 8,081 6,465 ()16,162 1,616
SD2 (6 : 2 : 2 ) 970 323 323 ()1,616
SD1 ( 5: 4 : 1 ) 162 129 ()323 32

SD2 ( 6 : 2 ) 24 8  ()32
Total 3,61,875 2,06,491 1,55,384
(iii) Calculation of Overhead Rates
P1 P2
Direct Wages (Rs.) 95,000 50,000
Wages Rate per (Rs.) 5 4
Hour
Direct Labour (Hours) 19,000 12,500
Hours (Direct
wages Wage rate)
Overheads (Rs.) 2,06,491 1,55,384
Overhead Rate per (Rs.) 10.87 12.43
Hour (Overheads
 Labour hours
Question No. 25
From the details furnished below you are required to compute a comprehensive machine-hour
rate:
Original purchase price of the machine (subject to depreciation at NRs.3,240,000
10% per annum on original cost)
Wages of Machine man NRs.250 per day (of 8 hours)
Wages for Helper (machine attendant) NRs.150 per day (of 8 hours)
Power cost for the month for the time worked NRs.150,000
Supervision charges apportioned for the machine centre for the month NRs.30,000
Electricity & Lighting for the month NRs.75,000
Repairs & maint (machine) including consumable stores per month NRs.175,000
Insurance of Plant & Building (apportioned) for the year NRs.162,500
Other general expense per annum NRs.275,000
The workers are paid a fixed dearness allowance of NRs.3,150 per month. Production bonus
payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
allowance. Add 10% of the basic wage and dearness allowance against leave wages and
holidays with pay to arrive at a comprehensive labor-wage for debit to production.
[June 2009 – 3, 15 Marks]

Answer
We have,
Effective machine working hour’s per month = 200 hrs. × 75% = 150 hrs.
Computation of Comprehensive Machine Hour Rate

Particulars Per month (NRs.) Per hour (NRs.)
Fixed cost
Supervision charges 30,000.00
Electricity and lighting 75,000.00
Insurance of Plant and building 13,541.67
(162,500×1/12)
Other General Expenses (275,000×1/12) 22,916.67
Depreciation (324,000×1/12) 27,000.00
168,458.33 1,123.06
Variable Cost
Repairs and maintenance 175,000 1,166.67
Power 150,000 1,000.00
Wages of machine man (W.N. 1) 89.82
Wages of Helper (W.N. 1) 65.93
Machine Hour rate (Comprehensive) NRs.3,445.48
Working Note
W.N. 1: Wages per machine hour

Machine man Helper
Particulars NRs. NRs.
Wages for 200 hours
(NRs.250x 25) 6,250.00
(NRs.150× 25) 3,750.00
D.A. 3,150.00 3,150.00
9,400.00 6,900.00
Production bonus (1/3 of above) 3,133.33 2,300.00
12,533.33 9,200.00
Leave wages (10%) 940.00 690.00
13,473.33 9,890.00
Effective wage rate per machine hour (150 hrs in all) 89.82 65.93

Question No. 26
RST Ltd. has two production departments: Machining and Finishing. There are three service
departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these
service departments are as follows:
HR Maintenance Design
NRs. NRs. NRs.
Variable 100,000 160,000 100,000
Fixed 400,000 300,000 600,000
500,000 460,000 700,000
The usage of these Service Departments’ output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Providers of Service
Users of Service HR Maintenance Design
HR - - -
Maintenance 500 - -
Design 500 500 -
Machining 4,000 3,500 4,500
Finishing 5,000 4,000 1,500
Total 10,000 8,000 6,000
Required:
i) Use the direct method to re-apportion RST Ltd.’s service department cost to its
ii) State the proper sequence to be used in re-apportioning the firm’s service department
cost by step-down method.
iii) Use the step-down method to reapportion the firm’s service department cost.
[June 2009 – 3(a), 10 Marks]
Answer
(i) Apportionment of Service Department Overheads amongst production departments using
Direct Method:
Production Dept. Service Dept
Particulars Machining Finishing HR Maint Design
NRs. NRs. NRs. NRs. NRs.
Budgeted Overheads 500,000 460,000 700,000
Apport of design at ratio(4,500 : 1,500) 525,000 175,000 (700,000)
Apport of Maint at ratio (3,500 : 4,000) 214,667 245,333 (460,000)
Apport of ratio HR (4,000 : 5,000) 222,222 277,778 (500,000)
Total 961,889 698,111 Nil Nil Nil

(ii)The proper sequence for apportionment of service department overheads is First HR,
Second Maintenance, and Third Design. The sequence has been laid down based on
service provided.
(iii) Statement of Apportionment of Service Department Overheads

(Using Step-Down Method)
Production Depts. Service Depts.
Particulars Machining Finishing HR Maint Design
NRs. NRs. NRs. NRs. NRs.
Budgeted Overhead 500,000 460,000 700,000
Apport of HR at ratio (4 : 5 :0.5 : 0.5) 200,000 250,000 (500,000) 25,000 25,000
Apport of Maint at ratio (7 : 8 :1) 212,188 242,500 - (485,000) 30,312
Apport of Design at ratio (3 : 1) 566,484 188,828 - - (7,55,312)
Total 978,672 681,328 Nil Nil Nil
Question No. 27
One of your clients, ABC Ltd., has hitherto based his quotations on cost of materials and
labour plus a percentage to cover overheads and profit. He has now accepted your device
to relate costs to departments (viz;X,Y and Z) through which the work passes and in
pursuance of this policy to charge overheads of jobs on the basis of departmental direct
labour hours. He has compiled the following cost data from records for the year ending
31st March, 2008.
Expenses Rs. Suggested base for

apportionment to departments
Consumable stores 500 direct labour hours
Rents, rates and insurance 3,000 floor area
Depreciation 2,500 plant value
Indirect labour 4,000 direct labour hours
Repairs and renewals 1,000 technical estimate, i.e.,3:3:4
respectively
Labour amenities 1,500 no. of employees
E.S. insurance 400 no. of employees
Works manager’s salary 3,600 equally
General administration 6,000 ratio of quotations in previous
years, i.e. 5:4:3
Sundry expenses 400 12:7:1
Department X Y Z
wage rate per 0.60 0.50 0.40

hour(Re.)
No. of employees 20 20 10
Floor area(in sq. ft.) 3,000 2,000 1,000
Value of plant(Rs.) 15,000 9,000 6,000

a) Calculate the hourly overhead rates to be charged for work in each department.
b) Prepare a quotation for a job to which the following data relates:
Material Rs. 300
Direct labour:
X 20 hours
Y 15 hours
Z 10 hours
Profit =20% of selling price.
[December 2009 – 2, 7+8=15 Marks]
Answer
a)
Statement showing overheads distribution and hourly overhead rates
Expenses Ratio Total Dept.X Dept.Y Dept.Z
Rs. Rs Rs. Rs.
Consumable stores 5:3:2 500 250 150 100
Rent, rates and insurance 3:2:1 3,000 1,500 1,000 500
Depreciation 5:3:2 2,500 1,250 750 500
Indirect labour 5:3:2 4,000 2,000 1,200 800
Repairs and renewals 3:3:4 1,000 300 300 400
Labour amenities 2:2:1 1,500 600 600 300
E.S.I 2:2:1 400 160 160 80
Works manager salary Equally 3,600 1,200 1,200 1,200
General admn. 5:4:3 6,000 2,500 2,000 1,500
Sundry expenses 12:7:1 400 240 140 20
Total 22,900 10,000 7,500 5,400
Labour hours 5,000 3,000 2,000
Overhead rate per hour Rs.2.00 Rs. 2.50 Rs.
2.70
b)
Statement showing quotation for the job
Materials Rs. 300.00
labour : dept.X 20 hrs. X Re. 0.60 Rs.12.00
Y 15 hrs. X Re.0.50 7.50

Z 10 hrs. X Re.0.40 4.00 23.50
Overheads: dept.X 20 hrs. XRs.2.00 40.00

Y 15 hrs. X Rs. 2.50 37.50
Z 10 hrs. X Rs. 2.70 27.00 104.50
Total cost 428.00
Profit 20% of s.p. or 25% of cost 107.00
Question No. 28
In a factory, a machine is considered to work for 208 hours in a month. It includes
maintenance time of 8 hours and set up time of 20 hours.
The expenses data relating to the machine are as under:
• Cost of machine is Rs. 500,000. Life 10 years. Estimated scrap value at the end of
life is Rs. 20,000.
• Repairs and maintenance per annum 60,480
• Consumable stores per annum 47,520
• Rent of building per annum
(The machine under reference occupies 1/6 of the area) 72,000
• Supervisor's salary per month (Common to three machines) 6,000
• Wages of operator per month per machine 2,500
• General lighting charges per month allocated to the machine 1,000
• Power 25 units per hour at Rs. 2 per unit
Power is required for productive purposes only. Set up time, though productive, does
not require power. The Supervisor and Operator are permanent. Repairs and
maintenance and consumable stores vary with the running of the machine.
You are required to calculate a two-tier machine hour rate for (i) set up time, and (ii) running
time. [December 2009 – 2(b), 10 Marks]
Answer
Working Notes:
(i) Effective hours for standing charges (208 hours – 8 hours) 200
(ii) Effective hours for variable costs (208 hours – 28 hours) 180
1. Standing charges per hour

Per Month Rs. Per Hour Rs.
Supervisor's salary (Rs.6,000/3 machines) 2,000
General Lighting 1,000
Rent (72,000/6) / 12 1,000
Total standing charges 4,000
Standing charges per hour (4,000/2,00) 20.00

2. Machine expenses per hour

Depreciation (Rs.500,000 – Rs. 20,000/
(10 years x 12 months) 4,000 (Rs. 4,000/200 hrs) 20.00
Repair and maintenance (Rs. 60,480/12 months) 5,040 (Rs. 5,040/180 hrs) 28.00
Consumable stores (Rs.47,520/12 months) 3,960 (Rs.3,960/180 hrs) 22.00
Power ( 25 units x Rs.2 x 180 hrs) 9,000 (Rs. 9,000/180 hrs) 50.00
Wages 2,500 (Rs.2,500/200 hrs) 12.50
Total machine expenses 24,500 132.50
Computation of two-tier Machine Hour Rate:
Setup time rate Running time rate
Per machine hour per machine hour
Rs. Rs.
Standing charges (Refer to working note 1) 20.00 20.00
Machine expenses (Refer to working Note 2)
Depreciation 20.00 20.00
Repair and maintenance - 28.00
Consumable stores - 22.00
Power - 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50
Question No. 29
One of your clients, a Jobbing Engineer, has until now based his quotations on cost of
materials and labour plus a percentage to cover overheads and profit. He has now accepted
your advice to relate costs to departments (viz., X,Y and Z) through which the work passes.
In pursuance of this policy to charge overheads to jobs on the basis of departmental direct
labour hours, he has compiled the following cost data from records for the year ending 31
Ashad, 2066.
Expenses Rs. Suggested base for apportionment to

departments
Consumable stores 500 Direct labour hours
Rent, rates and insurance 3,000 Floor area
Depreciation 2,500 Plant value
Indirect labour 4,000 Direct labour hours
Repairs and renewals 1,000 Technical estimate, i.e., 3:3:4
respectively
Labour amenities 1,500 No. of employees
Employee Insurance 400 No. of employees

Works Manager's Salary 3,600 Equally

General Administration 6,000 Ratio of quotations in
previous years, i.e., 5:4:3
Sundry expenses 400 12:7:1
Departments X Y Z
Wages rate per hour (Re.) 0.60 0.50 0.40
No. of employees 20 20 10
Floor area (in sq. ft.) 3,000 2,000 1,000
Value of plant (Rs.) 15,000 9,000 6,000

i) Calculate the hourly overhead rates to be charged for work in each
department;
ii) Prepare a quotation for a job to which the following data relates:
Material Rs. 300

Direct labour:
X 20 hours
Y 15 hours
Z 10 hours
Profit is 20% of selling price. [December 2009 – 5, 6+4=10 Marks]
Answer
(a) Statement showing Overhead Distribution and Hourly Overhead Rate
Expenses Ratio Total Dep. X Dep. Y Dep. Z

Consumable stores 5:3:2 Rs. 500 Rs. 250 Rs. 150 Rs. 100
Rent, rates and insurance 3:2:1 3000 1500 1000 500
Depreciation 5:3:2 2500 1250 750 500
Indirect labour 5:3:2 4000 2000 1200 800
Repairs and renewals 3:3:4 1000 300 300 400
Labour amenities 2:2:1 1500 600 600 300
Employee Insurance 2:2:1 400 160 160 80
Works Manager Salary Equally 3600 1200 1200 1200
General Admn. 5:4:3 6000 2500 2000 1500
Sundry Expenses 12:7:1 400 240 140 20
Total 22900 10000 7500 5400
Labour Hours 5000 3000 2000
Labour Rate per hour Rs.2.00 Rs.2.50 Rs.2.70

(b) Statement showing quotation for the Job
Material Rs. 300.00

Labour: Dep. X 20 hrs X Re. 0.60 Rs. 12.00
Y 15 hrs X Re. 0.50 7.50
Z 10 hrs. X Re. 0.40 4.00 23.50
Overhead: Dep. X 20 hrs X Re. 2.00 40.00 .
Y 15 hrs X Re. 2.50 37.50
Z 10 hrs. X Re. 2.70 27.00 104.50
Total Cost 428.00
Profit 20% of S.P. or 25% of Cost 107.00
Question No. 30
Pasupati Manufactures Ltd. have three production departments P1, P2, P3 and two service
departments S1 and S2 details pertaining to which are as under:
P1 P2 P3 S1 S2
Direct Wages (Rs.) 3,000 2,000 3,000 1,500 3,000
Working hours 300 400 200 - -
Value of machines (Rs.) 70,000 80,000 100,000 50,000 50,000
H.P. of machines 60 30 50 10 -
Light points 5 6 2 4 3
Floor space (sq. mtr.) 200 250 300 200 50
The following figures extracted from the cost accounting records are
required to be considered:
Rs.
Rent and Rates 15,000
General Lighting 2,000
Indirect Wages 2,500
Power 1,500
Depreciation on machines 100,000
The expenses of the Service Departments are allocated to production department as
under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -

Find out the total cost of product Q which is processed for manufacture in Departments
P1, P2 and P3 for 10, 5 and 4 hours respectively, given that its Direct Material Cost is Rs.
600 and Direct Labour Cost is Rs. 100. [December 2010 – 2, 15 Marks]
Answer
Statement Showing Distribution of
Overheads of Pasupati Manufactures Ltd.
Production Depts Service Depts
Particulars Basis Total P1 P2 P3 S1 S2
Rs. Rs. Rs. Rs. Rs. Rs.
Rent & Rates Area 1,5000 3,000 3,750 4,500 3,000 750
General lighting Light points 2,000 500 600 200 400 300
Indirect wages Direct 2,500 600 400 600 300 600
wages
Power H.P. 1,500 600 300 500 100 -
Depreciation of Value of 100,000 20,000 22,857 28,571 14,286 14,286
machines machines
Direct Wages Direct 4,500 - - - 1,500 3,000
125,500 24,700 27,907 34,371 19,586 18,936
Redistribution of Service Department’s Expenses Over

Production Departments
Production Depts Service Depts
Total P1 P2 S1 S2
Rs. P3 Rs. Rs
Rs. Rs.
Rs.
Total Overheads 125,500 24,700 27,907 34,371 19,586 18,936
Dept. S1 Overhead 19,586 3,917.2 5,875.8 7,834.40 -19,586 1,958.60
apportioned in the 0 0
ratio (20:30:40::10)
Dept. S2 Overhead 20,894.60 8,357.8 4,78.92 6,268.38 2,089.4 -20,894.60
apportioned in the 4 6
ratio (40:20:30:10:-)
Dept. S1 Overhead 2,089.46 417.89 626.84 835.78 - 208.95
apportioned in the 2,089.4
ratio (20:30:40:-:10) 6
Dept. S2 Overhead 208.95 83.58 41.79 62.69 20.89 -208.95
apportioned in the
ratio (40:20:30:10:-)
Dept. S1 Overhead 20.89 4.18 6.27 8.36 -20.89 2.08
apportioned in the

ratio (20:30:40:-:10)
Dept. S2 Overhead 2.08 0.83 0.41 0.62 0.20 -2.08
apportioned in the
ratio (40:20:30:10:-)
Dept. S1 Overhead 0.20 0.04 0.06 0.08 -0.20 0.02
apportioned in the
ratio (20:30:40:-:10)
Total 37,481.5 38,637.0 49,381.35
6 9
Working hours 300 400 200
Rate per hour 124.94 96.59 246.91
Cost of product ‘X’

Rs.
Direct material cost 600.00
Direct labour cost 100.00
Overhead cost 2719.99
Total 3419.99
Working Note:
Overhead cost to be charged to Product Q
Production Departments Hours Used Rate per hour Total
P1 10 124.94 1249.40
P2 5 96.59 482.95
P3 4 246.91 987.64
2719.99
Note
Direct cost of service departments are also charged to production department assuming that
there are no other activities in the service departments which can absorb such costs.
Question No. 31
A factory has three production departments P1, P2 and P3 and two service departments S1 and
S2. Budgeted overheads for the next fiscal year have been allocated/apportioned by the cost
department among the five departments. The secondary distribution of service department
overheads is pending and the following details are given to you:
Department Overheads apportioned/allocated Estimated level of activity
P1 Rs. 48,000 5,000 machine hours
Apportionment of service departments costs

S1 Rs. 16,000 P1 (20%), P2 (40%) P3 (20%), S2 (20%)

S2 Rs. 24,000 P1 (10%), P2 (60%), P3 (20%), S1 (10%)
You are required to calculate the overhead rate per machine hour of each production
department after completing the distribution of service department costs.
Answer
It is given in the question that the secondary distribution of service department overhead is
pending. The same is thus attempted by the use of simultaneous equation method.
Let the total overheads of department S1 = x and
Let total overheads of department S2 = y
Based on the given information and applying simultaneous equation, we get:
x = 16,000 + 0.1 y (i)
y = 24,000 + 0.2 x (ii)
Multiplying equation (ii) by 5, we get:
5 y = 120,000 + x, Or x = 5y – 120,000
By deducting equation (i) from equation (iii), we get:
y = 27,755
x = 18,775
With these figures, the secondary distribution of service departments' overhead would be as
given in the following table.
Production Departments P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct Allocation: 48,000 112,000 52,000 212,000
Department S1 (80% of Rs. 18,775) 3,755 7,510 3,755 15,020
Department S2 (90% of Rs. 27,755) 2,776 16,653 5,551 24,980
Total: 54,531 136,163 61,306 252,000
Budgeted capacity (machine hours) 5,000 12,000 6,000
Overhead rate per machine hour Rs. 10.91 Rs. 11.35 Rs. 10.22
Question No. 32
For a factory which has three production departments (two machine shops and one assembly
shop) and three service departments, one of which-engineering services department, serving
the machine shops only, you are required to :
a) Prepare an overhead analysis sheet, showing the basis of any apportionment of
overhead to departments;
b) Calculate suitable overhead absorption rates for the production departments, ignoring
the apportionment of service department costs amongst service departments;
c) Calculate the overheads to be absorbed by two products, X and Y whose cost sheet
shows the following times spent in different departments:
X Y
Machine shop:A 5 machine hrs. 3 machine hrs.
Machine shop:B 2 machine hrs. 7 machine hrs.

Assembly shop 7 direct labour hrs. 9 direct labour hrs.
The annual budgeted overhead costs for the year are:

Indirect Wages(Rs.) Consumable Supplies(Rs.)
Machine shop A 23,260 6,300
Machine shop B 20,670 9,100
Assembly shop 8,110 2,100
Stores 4,100 1,400
Engg. Services 2,670 2,100
General services 3,760 1,600
Depreciation of 22,000
machinery
Insurance of 4,000
machinery
Insurance of building 1,800 (see note 1)
Power 3,600
Light and heat 3,000
Rent 7,050 (see note 2)
Notes:
1. Because of special fire risks, machine shop A is responsible for a special loading of
insurance on the building. This results in a total building insurance cost for machine
shop A as one–third of the annual premium.
2. The general services departments are located in a building owned by the company. It
is valued at Rs. 6,000 and is charged into costs at a notional value of 8% per annum.
This cost is additional to the rent and rates shown above.
3. The value of issues of materials to the production departments are in the same
proportion as shown above for consumable supplies.
The following data are also available:
Department Book Area Effective Production Capacity
value of (sq. ft.) H.P.hour Direct Machine
Machinery % Labour hours hours
Machine shop:A Rs.60,000 5,000 50 200,000 40,000

Machine shop:B 45,000 6,000 1 150,000 50,000
333
Assembly shop 15,000 8,000 1 300,000
46
Stores 6,000 2,000 - - -
Engg. Service 18,000 2,500 1 - -
122
General Service 6,000 1,500 - - -
[December 2011 – 2, 15 Marks]

Answer
(i)Department Distribution Summary
Production Deptt.
Service Deptt.
Items of Basis of Total M/c M/c Assemb Stores Engg General
Expenditure Apportion Amount shop Shop ly Servic Service
ment A B Shop e
Indirect wages Allocation Rs Rs Rs
given 62,570 23,260 20,670 8,110 4,100 2,670 3,760
Cons supplies ‘’ 22,600 6,300 9,100 2,100 1,400 2,100 1,600
Depreciation Capital 22,000 8,800 6,600 2,200 880 2,640 880
on machine value of
machine
Insurance on ‘’ 4,000 1,600 1,200 400 160 480 160
machine
Insurance on 1/3rd to
building machine
shop and
balance on
area basis 1,800 600 360 480 120 150 90
Power H.P.Hrs.% 3,600 1,800 1,200 150 - 450 -
Light and Heat Area 3,000 600 720 960 240 300 180
Rent and rates Area 7,050 1,500 1,800 2,400 600 750 -
Service G/service
Deptt@8
% 480 - - - - - 480
On
Rs.6,000
Total 1,27,100 44,460 41,650 16,800 7,500 9,540 7,150
(ii)
Production Deptt. Service Deptt.
Items of Basis of Total M/c M/c Assembl Stores Engg General

Expenditure Apportion Amount shop Shop y Service Service
ment (Rs) A B Shop (Rs)
(Rs) (Rs) (Rs) (Rs)
(Rs)
Stores Ratio of
con. 2,700 3,900 900 (7,500)

Supplies
value(63:9
1:21)
Engineering Machine 5,300 - (9,540)
Service hours of
Shopes A
&B only 4,240
(4:5)
General Labour 2,200 1,650 3300 (7,150)
Service hours
(20:15:30)
9,140 10,850 4,200
Total allocated 44,460 41,650 16,800
overhead as
per (a)(i) above
Total allocated 1,27,100 53,600 52,500 21,000
and
apportioned
overhead of
Production
Deptt
(b)
Overhead Absorption Rates
Production Deptt
Machine shop A Machine shop B Assembly Shop
Total overhead 53,600 52,500 21,000
allocated is Rs(as
per a(ii) above)
Machine hours 40,000 50,000
Labour hours 3,00,000
Rate per machine Rs.1.34 Rs1.05
hour
Rate per direct Rs 0.07
labour hour
(c ) Statement showing Amount of Overheads Absorbed by two products X and Y

Shop Absorption rate per hour Product X Product Y
Machine Rs Hrs Rs Hrs Rs
Shop
A 1.34 5 6.70 3 4.02
B 1.05 2 2.10 7 7.35

Assembly 0.07 7 0.49 9 0.63

shop
Total 9.29 12.00
overhead
absorbed by
product
Note: Machine Shops A and B have got the production capacity of both
direct labour hours and machine hours. It appeals to reason that overhead
absorption of machine shop A and B should be based on machine hours
and absorption overhead rate of Assembly shop should be based on
labour hours.
Question No. 33
In a factory, the expenses of factory are charged on a fixed percentage basis on wages and
office overhead expenses are calculated on the basis of percentage of works cost.
Following information is supplied to you:
Order I (Rs.) Order II (Rs.)
Materials 12,500 18,000
Wages 10,000 14,000
Selling Price 44,850 61,880
Percentage of profit on cost 15% 12%
Find out percentage for factory overhead and office overhead. Justify with verification.
Answer
Order I
Selling price = Rs. 44,850 including 15% profit on cost.
Cost of production is therefore, 44,850* (100/115) = Rs. 39,000
Order II
Selling price = Rs. 61,880 including 12% profit on cost.
Cost of production is therefore, 61,880 *(100/112) = Rs. 55,250

Cost of production = Direct material (DM) + Direct Wages (DW) + Factory Overhead
(FO) + Office Overhead (OH)
According to the problem factory expenses is charged at a fixed percentage on wages while
OH is charged at a percentage of Works cost (WC). Both these figures are unknown. Hence
we have to solve it algebraically.
Let FO be x% of wages and OH be y% of works cost.
Then in the Order I the equation will be:
39,000 = 12,500 + 10,000 + (x% * 10,000) + y% (22500 + 100x)

39,000 = 22,500 +100x + 225y + y% (22500 + 100x)

16,500 = 100x + 225y + xy ……………………………………..
……………………………….(i)
And in the Order II the equation will be :
55,250 = 18,000+14,000 +(x% *14,000) + y% (32,000+140x)
Or, 23,250 = 140x + 320y +1.4xy
…………………………………………………………………(ii)
On multiplying equation (i) by 1.4 and equation (ii) by 1.0 we get

23.100 = 140x + 315y +1.4xy
…………………………………………………………………...(iii)
23,250 = 140x +320y + 1.4xy
…………………………………………………………………… (iv)
Bu subtracting (iii) from (iv) we get

150 = 5y or y = 30
On putting the value of y in (i) we get
16,500 = 100x + 6750 + 30x
Or, 9750 = 130x
Or, x = 75
Factory overhead is therefore 75% of wages and office overhead is 30% on works
cost.
Verification
Order I Order II
(Rs.) (Rs.)
Material 12,500 18,000
Wages 10,000 14,000
Factory Overhead (75% on wages) 7,500 10,500
Works cost 30,000 42,500
Office overhead (30% on works cost) 9,000 12,750
Cost of production 39,000 55,250
Add: Profit 15% and 12% respectively for I & 2 order 5,850 6,630
Selling price 44,850 61,880
Question No. 34
A Machine Shop has 8 identical drilling machines manned by 6 operators. The machines
cannot be worked without an operator wholly engaged on it. The original cost of all these 8
machines works out to Rs. 8 lakhs. These particulars are furnished for a six month period:

Normal available hours per month 208

Absenteeism (without pay) - hours 18
Leave (with pay) - hours 20
Normal idle time unavoidable - hours 10
Average rate of wages per day of 8 hours Rs. 20
Production bonus estimated 15% on wages
Value of power consumed Rs. 8,050
Supervision and indirect labour Rs. 3,300
Lighting and electricity Rs. 1,200
These particulars are for a year:

Repairs and maintenance including consumables 3% on value of machines.
Insurance Rs. 40,000.
Depreciation 10% on original cost.
Other sundry works expenses Rs. 12,000.
General management expenses allocated Rs. 54,530.
You are required to work out a comprehensive machine hour rate for the Machine Shop.
Answer:
a) Before computing the comprehensive machine hour rate, it is necessary to find out the
total machine hours utilized and total wages paid to the operators.
Computation of total machine hours utilized:
Normal available hours per month per operator 208 hours
Less: Unutilized hours due to:
Absenteeism 18
Leave 20
Idle time 10 48
Total hours utilized per month per operator 160
Total hours utilized for 6 months for 6 operators 160 × 6 × 6 5,760 hrs.
It is given in the question that the machines cannot work without an operator wholly engaged
on it. Therefore, hours utilized for 6 operators i.e. 5,760 hours represents the total machine
hours.
Total wages to 6 operators for 6 months:
Average rate of wages per hour = Rs. 20 ÷ 8 hrs = Rs. 2.50
Normal hours for which wages are to be paid = 208 hrs –18 hrs = 190 hrs.
Wages for 6 months for 6 operators @ 2.50 / hr = 190× 6 × 6 × Rs. 2.50 = Rs. 17,100.

Computation of comprehensive Machine hour rate for the Machine Shop:

Rs.
Operators wages (as above) 17,100
Production Bonus (15% of wages) 2,565
Power consumed 8,050
Supervision and indirect labour 3,300
Lighting and electricity 1,200
Repairs and maintenance(3% of Rs. 8 lakhs) / 2 12,000
Insurance (given for 12 months: reduced to 50%for 6 months) 20,000
Depreciation for 6 months 40,000
Other sundry works expenses for 6 months 6,000
General management expenses for 6 months 27,265
Total overheads for 6 months 137,480
Comprehensive machine hour rate = Rs. 137,480 / 5,760 hrs = Rs. 23.87 per hrs.
Question No. 35
ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-
determined rate of Rs. 10 per machine hour.
At the end of the financial year 2011-12, it has been found that actual production overheads
incurred were Rs. 600,000. It included Rs. 45,000 on account of written off obsolete stores
and Rs. 30,000 being the wages paid for the strike period.
The production and sales data for the year 2011-12 is as under:
Production:
Finished goods 20,000 units
Work-in-progress (50% complete in all respect) 8,000 units
Sales:
Finished goods 18,000 units.
The actual machine hours worked during the period were 48,000 hours. It has been found that
one-third of the under-absorption of production overheads was due to lack of production
planning and the rest was attributable to normal increase in costs.
Required:
iii) Calculate the amount of under-absorption of production overheads during the year 2011-
12 and;
iv) Show the accounting treatment of under-absorption of production overheads
v) Calculate the apportionment of under-absorption overheads over WIP, finished goods and
cost of sales.
[December 2012 – 3(a), 3+4+3=10 Marks]
Answer
(i) Amount of under-absorption of production overheads during the year 2011-12:

Particulars Rs. Rs.

Total production overheads actually incurred 600,000
Less: Obsolete stores written off 45,000
Wages paid for strike period 30,000 75,000
Net production overheads actually incurred 525,000
Production overheads actually absorbed by 48,000 machine
480,000
hours @ Rs. 10
Amount of under-absorption of production overheads 45,000
(ii) Accounting treatment of under absorption of production overheads:

It is given in the question that one third of the under absorbed overheads were due to lack of
production planning and the rest were attributable to normal increase in costs. So accounting
treatment of under absorbed overheads will be as follows:
1. Under absorbed overheads due to lack of production planning being abnormal should
be debited to the Profit & Loss Account. Therefore, the amount to be debited to Profit & Loss
Account is Rs. 45,000 × 1 / 3 = Rs. 15,000.
2. Under absorbed overheads attributable to normal increase in costs should be
distributed over work-in-progress, finished goods and cost of sales by using supplementary
rate. The amount to be so distributed is Rs. 45,000 × 2 / 3 = Rs. 30,000.
(iii) Similarly as per question 20,000 units were completely finished and 8,000 units were
50% complete, apportionment of unabsorbed overheads over work-in-progress, finished
goods and cost of sales will be as follows:
Equivalent completed Supplementary
Particulars Rs.
units rate
Work-in-progress 4,000 1.25 5,000
Finished goods 2,000 (20,000-8000) 1.25 2,500
Cost of sales 18,000 1.25 22,500
24,000 30,000
Working notes:
Rs. 30,000
Supplementary rate per unit = = Rs. 1.25
24,000
Question No.36
A company has three production departments (M1, M2 and A1) and three service departments,
one of which “Engineering service department” is servicing the M1 and M2 only. The relevant
information are as follows:
Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct Labour hours 18 Direct Labour hours

The Annual budgeted overhead costs for the year are:

Indirect Wages Consumable supplies
Rs. Rs.
M1 46,520 12,600
M2 41,340 18,200
A1 16,220 4,200
Stores 8,200 2,800
Engineering Services 5,340 4,200
General Service 7,520 3,200
Depreciation on Machinery 39,600

Insurance on Machinery 7,200
Insurance on Building 3,240
(Total building insurance cost for M1 is one third of annual premium)
Power 6,480
Light 5,400
Rent 12,675
(The general service dept. is located in a building owned by the company. It is valued
at Rs. 6,000 and is charged into cost at notional value of 8% per annum. This cost is
additional to the rent shown above.)
The value of materials issued to the production departments are in the same
proportion as shown above for the consumable supplies.
The following data are also available:
Department Book value Area Effective Production
Capacity Machinery (sq. ft.) H.P.
Direct Labour Machine
Rs. Hours % Hours Hours
M1 120,000 5,000 50 200,000 40,000

M2 90,000 6,000 35 150,000 50,000
A1 30,000 8,000 05 300,000
Stores 12,000 2,000 -
Engg. Service 36,000 2,500 10
General Service 12,000 1,500 -
Required:
i) Prepare an overhead analysis sheet, showing the bases of
apportionment of overhead to departments.

ii) Allocate service department overheads to production department ignoring the

apportionment of service department costs among service departments.
iii) Calculate suitable overhead absorption rate for the production departments.
iv) Calculate the overheads to be absorbed by two products, X and Y.
[December 2013 – 2(a), 5+3+2+2=12 Marks]
Answer
(i) Summary of Apportionment of Overheads
Items Basis of Total Production Deptt. Service

deptt.
Apportionment amount M1 M2 A1 Store Engineering General
Service Service
Service
Indirect Given 1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
Wages
Consumable
Stores Given 45,200 12,600 18,200 4,200 2,800 4,200 3,200
Depreciation Machine value 39,600 15,840 11,880 3,960 1,584 4,752 1,584
(20:15:5:2:6:2)
Insurance of Machine value 7,200 2,880 2,160 720 288 864 288
Machine (20:15:5:2:6:2)
Insurance on 1/3 to M1 & 3,240 1,080 648 864 216 270 162
On building balance area
basis 12:16:4:5:3)
Power HP Hr. % 6,480 3,240 2,268 324 -- 648 --
(50:35:5:0:10:0)
Light Area 5,400 1,080 1,296 1,728 432 540 324
(10:12:16:4:5:3)
Rent Area 12,675 2,535 3,042 4,056 1,014 1,268 760
(10:12:16:4:5:3)
Rent of Direct 480 -- -- -- -- -- 480
General (8% of 6,000)
Service _______ _______ ______ _______ ________ _________ _________
Total 2,45,415 85,775 80,834 32,072 14,534 17,882 14,318
(ii) Allocation of service department overheads

Service Basis of Production dept Service dept.
Dept. Apportionment M1 M2 A1 Store Engineering
General

Store Consumable value

(126:182:42) 5,232 7,558 1,744 (14,534) -- --
Engineering Machine Hrs
(4:5) 7,948 9,934 -- -- (17,882) --
General LHR basis

(20:15:30) 4,406 3,304 6,608 -- -- (14,318)
Production Department Allocated in (i)

85,775 80,834 32,072
Total 2,45,415 1,03,361 1,01,630 40,424
(iii) Overhead Absorption rate

M1 M2
A1
Total overhead allocated 1,03,361 1,01,630 40,424
Machine hours 40,000 50,000 --
Labour hours -- -- 3,00,000
Rate per MHR 2.584 2.033 --
Rate per Direct labour -- -- 0.135
(iv) Statement showing overhead absorption for Product X and Y

Machine Absorption Product X Product
Y
Deptt.Rate Hours Rs. Hours
Rs.
M1 2.584 10 25.84 6 15.50
M2 2.033 4 8.13 14 28.46
A1 0.135 14 __1.89 18 __2.43
35.87 46.39
Question No. 37
From the details furnished below you are required to compute a comprehensive machine
hours rate:
Original purchase price of the machine Rs. 324,000
(Subject to depreciation at 10% p.a. on original cost)

Wages of machine man Rs. 125 per day (of 8 hours)

Wages for a helper (machine attendant) Rs. 75 per day (of 8 hours)
Power cost for the month for the time worked Rs. 15,000
Supervision charges apportioned for the machine centre
for the month Rs. 3,000
Electricity & lighting for the month Rs. 7,500
Repairs & maintenance (machine) including consumable
stores per month Rs. 17,500
Insurance of plant & building (apportioned) for the year Rs. 16,250
Other general expenses per annum Rs. 27,500
The workers are paid a fixed dearness allowance of Rs. 1,575 per month. Production
bonus payable to workers in terms of an award is equal to 33.33% of basic wages and
dearness allowance. Add 10% of the basic wages and dearness allowance against
leave wages and holiday with pay to arrive at a comprehensive labour wage for debit
to production.
[June 2014 – 3(b), 10 Marks]
Answer
Computation of comprehensive machine hour rate
Per month Per hour
Rs. Rs.
Fixed cost:
Supervision charges 3,000.00
Electricity and lighting 7,500.00
Insurance of plant & building (Rs. 16,250 × 1 / 12) 1,354.17
Other general expenses (Rs. 27,500 × 1 / 12) 2,291.67
Depreciation (Rs. 32,400 × 1 / 12) 2,700.00
16,845.84 112.31
Variable cost:
Repairs & maintenance 17,500.00 116.67
Power 15,000.00 100.00
Wages of machine man 6,737.00 44.91
Wages of helper 4,945.00 32.97
Machine hour rate (comprehensive) 406.86
Effective machine working hours per month = 200 hours × 75% = 150 hrs.
Working note:
Wages for machine man and helper
Machine man Helper
Rs. Rs.
Wages for 200 hours (Rs. 125 × 25) 3,125 -
(Rs. 75 × 25) - 1,875

Dearness allowances 1,575 1,575

Total of wages & dearness allowances 4,700 3,450
Production bonus (1/3 of above) 1,567 1,150
6,267 4,600
Leave wages – 10% of wages & dearness allowances 470 345
Total wages 6,737 4,945
Wages rate per machine hour (total 150 hrs) 44.91 32.97
Question No. 38
Aryan Ltd. has three production department M, N and O and the two service department P
and Q.
The following particulars are available for the month of September 2013:
(Rs.)
Lease rental 35,000
Power and Fuel 4,20,000
Wages to factory supervisor 6,400
Electricity 5,600
Depreciation on machinery 16,100
Depreciation on building 18,000
Payroll expenses 21,000
Canteen expenses 28,000
Provident fund contribution 58,000
Following are the further details available:

Particulars M N O P Q
Floor space (Sq. M) 1,200 1,000 1,600 400 800
Light Points(Nos) 42 52 32 18 16
Cost Of machine 12,00,000 10,00,000 14,00,000 4,00,000 6,00,000
(Rs.)
No of Employees 48 52 45 15 25
(Nos)
Direct wages (Rs.) 1,72,800 1,66,400 1,53,000 36,000 53,000
HP of Machines 150 180 120 - - :
Working Hours 1,240 1,600 1,200 1,440 1,440 The
(hours) Expe
nses of service department are to be allocated in the following manner
M N O P Q
P 30% 35% 25% - 10%
Q 40% 25% 20% 15% -

You are required to calculate the overhead absorption rate per hour in respect of the three
Answer
Item of Basis of apportion Total Production Department Service
cost ment (Rs) Department
M N O P Q
(Rs) (Rs) (Rs) (Rs) (Rs)
Lease Floor space 35,000 8,400 7,000 11,200 2,800 5,600
Rental (6:5:8:2:4)
Power & HP of machines x 4,20,00 1,26,40 1,95,72 97,864 - -
Fuel Working hours 0 8 8
(93:144:72)
Supervisor’ Working hours 6,400 1,964 2,535 1,901 - -
s wages* (31:40:30)
Electricity Light points 5,600 1,470 1,820 1,120 630 560
(21:26:16:9:8)
Depreciatio Value of machinery 16,100 4,200 3,500 4,900 1,400 2,100
n On (6:5:7:2:3)
Machinery
Depreciatio Floor space 18,000 4,320 3,600 5,760 1,440 2,880
n on (6:5:8:2:4)
building
Payroll No Of Employes 21,000 5,448 5,903 5,108 1,703 2,838
Expenses (48:52:45:15:25)
Canteen No Of Employes 28,000 7,625 7,870 6,811 2,270 3,784
expenses (48:52:45:15:25)
PF Direct wages 58,000 17,244 16,606 15,268 3,593 5,289
contributio (864:832:765:180:26
n 5)
Total 608,10 176,719 244,56 149,93 13,83 23,05
0 2 2 6 1
*wages to supervisor is to be distributed to production departments only.
Since the service department has incurred direct wages, it has also to be allocated to the
production department. Therefore , the process of allocation is as under.
P Q
Apportioned Overhead 13,836 23,051
Add: Allocated direct wages 36,000 53,000
49,836 76,051

P = 49,836+ 0.15 Q …………..(I)

Q = 76,051+ 0.10 P……………(II)
Substituting the value of Q in (I) we get
P = 49,836 + 0.15 (76,051+ 0.10 P)
P = 49,836 + 1140Q +0.015 P
P = 61244/0985
P = Rs 62177
And Q = 76,051+0.10 x 62,177
=Rs 82,269
Secondary Distribution summary
Particulars Total M N O
Allocated and apportioned 5,71,213 1,76,719 2,44,562 1,49,932
overheads as per primary
distribution
Add: 90% of P(30%,35% & 55,959 18,653 21,762 15,544
25%)
Add: 85% of Q(40%,25% & 69,928 32,907 20,567 16,454
20%)
2,28,279 2,86,891 1,81,930
Overhead rate per hour
M N O
Total Overhead cost (Rs.) 2,28,279 2,86,891 1,81,930
Workings hours 1,240 1,600 1,200
Rate per hour (Rs.) 184.09 179.31 151.61
Question No. 39
The machine shop of Siddhababa Metal Industries Ltd. has 8 identical Drilling Machines
manned by 6 skilled operators. The machines cannot be worked without an operator wholly
engaged on it. The original cost of all these 8 machines works out to Rs. 9.5 lakhs. Following
particulars are gathered as on Chaitra end 2071 (First nine months of the financial year
2071/72).
Normal available hours per month 208
Absenteeism (without pay) – hours per month 18
Leave (with pay) – hours per month 20
Normal idle time unavoidable – hours per month 10
Average rate of wages per day of 8 hours Rs. 200
Production bonus estimated 15% on wages
Value of power consumed Rs. 12,075
Supervision and indirect labour Rs. 4,950
Lighting and electricity Rs. 1,800

In addition to the above, following annual costs are associated with the machine shop:
Repairs and maintenance including consumables 3% on value of machines. Insurance Rs .40,
000. Depreciation 10% on original cost. Other sundry works expenses Rs. 12,000 General
Management expenses allocated Rs. 54,500.
Required:
To work out a comprehensive machine hour rate for the Machine Shop.
[July 2015 – 4(b), 8 Marks]
Answer
Working note
1) Total Machine hours utilized
Normal available hours p.m. per operator 208 hours
Less: Unutilised hours due to:
Absenteeism 18 hours
Leave 20 hours
Idle time 10 hours 48 hours
Total hours utilized p.m. per operator 160 hours
It is given in the question that the machines cannot work without
an operator wholly engaged on it.
Therefore, hours utilized for 6 operators (160 hours × 6 × 9 mths) 8,640 hours
2) Total wages paid to the operators

Average rate of wages per hour = Rs. 200/8 hrs = Rs.25
Normal hours for which wages are to be paid = 208 hrs – 18 hrs = 190 hrs.
Wages for 9 months for 6 operators @ Rs. 25/hr. = 190 × 9 × 6 × 25 =Rs.
2,56,500
Computation of Comprehensive Machine hour rate for the Machine Shop
Particulars Rs.
Operators wages (as above) 2,56,500
Production Bonus (15% of wages) 38,475
Power consumed 12,075
Supervision and indirect labour 4,950
Lighting and electricity 1,800
Repairs and maintenance (3% of Rs.9.5 lakhs) ×3/4 21,375
30,000
Insurance (given for 12 months; reduced to 3/4th for 9 months)
71,250
Depreciation for 9 months (9.5 lakhs × 10% × 3/4)
9,000
Other sundry works expenses for 9 months
40,875
General management expenses for 9 months
Total overheads for 9 months 4,86,300
Comprehensive Machine Hour Rate = (Rs.4,86,300 / 8,640 hrs.) Rs. 56.28 per hr.

Question No. 40
The production department of factory furnishes the following information for the month of
March 2015:
Amount in (Rs.)
Materials used 54,000
Direct wages 45,000
Overheads 36,000
Labour hours worked 36,000
Hours of machine operation 30,000
For an order executed by the department during a particular period, the

relevant information was as under:
Materials used 6,00,000
Direct wages 3,20,000
Labour hours worked 3,200
Machine hours worked 2,400
Calculate the overhead charges chargeable to the job by the following methods:
i) Direct materials cost percentage rate
ii) Labour hour rate; and
iii) Machine hour rate
[December 2015 – 2(b), Marks]
Answer
(i) Direct material cost percentage rate= (overheads/ direct material) x 100
=(Rs. 36,000/54,000) x100 =66.67%
Materials used on the order Rs. 6,00,000, so overhead will be @ 66.67% =
R4,00,000.
(ii) Labour hour rate=Overhead/Direct labour hours
=36,000/36,000 = Rs.1
Overheads will be @ Rs. 1= 3,200 hrs x 1= Rs.3,200
(iii)Machine hour rate=Overhead/Machine hours
= Rs. 36,000/30,000 = Rs.1.2
Overheads will be Rs.1.2 per hour x 2,400 hours = Rs. 2,880
Question No. 41
In an engineering company, the factory overheads are recovered on a fixed percentage basis
on direct wages and the administration overheads are absorbed on 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 101 (Rs.) Job 102 (Rs.)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Selling price 1,66,650 1,28,250
Profit percentage on total cost 10% 20%
Required:
i) Computation of percentage recovery rates of factory overheads and administrative
overheads.
ii) Calculation of the amount of factory overheads, administrative overheads and profit for
each of the two jobs. [June 2016 – 5(a),
7 Marks]
Answer
i. Let 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:
Job 101 = Rs. 96,000 + Rs. 42,000F
Job 102 = Rs. 67,500 + Rs. 30,000F
Total Cost of Production of Jobs:

Job 101 = (Rs. 96,000 + Rs. 42,000F) + (Rs. 96,000 + Rs. 42,000F)A
= Rs. 1,51,500…..(i)
Job 102 = (Rs. 67,500 + Rs. 30,000F) + (Rs. 67,500 + Rs. 30,000 F) A
= Rs. 1,06,875…..(ii)
(refer to Working Note)
42,000 F + 96,000 A + 42,000 FA = 55,500…………………….. (iii) x 5
30,000 F + 67,500 A + 30,000 FA = 39375………………………(iv) x 7
On solving above relations

2,10,000 F + 4,80,000 A + 2,10,000 FA = 2,77,500
2,10,000 F + 4,72,500 A + 2,10,000 FA = 2,75,625
7,500 A = 1,875
A = 0.25
Putting the value of ‘A’ in equation no. (iv) above to get the value of ‘F’
30,000 F + 67,500 * 0.25 + 30,000 * 0.25 F = 39,375
37,500 F = 39,375 – 16,875
Or, F = 0.60
Hence percentage recovery rates of factory overheads and administrative
overheads are 60% and 25% respectively.

Working Note:
Job 101 Job 102
Total cost of production Rs. 1,51,500 1,06,875
Selling price ( Rs. ( Rs.
(100% + Percentage of 1,66,650/110%) 1,28,250/120%)
profit
ii. Statements of jobs, showing amount of factory overheads, administrative

overheads and profit
Job 101 (Rs.) Job 102 (Rs.)
Direct Materials 54,000 37,500
Prime Cost 96,000 67,500
Factory Overheads (60% of Direct Wages*) 25,200 18,000
Factory Cost 1,21,200 85,500
Administrative Overheads (25% of Factory 30,300 21,375
Cost*)
Total Cost 1,51,500 1,06,857
Profit (difference figure) 15,150 21,375
Selling Price 1,66,650 1,28,250
*As calculated in requirement (i) above.
Question No. 42
A textile company purchases cotton from the farmers and produces shirtings as final product.
Cotton is processed into two departments namely weaving department and Dying
Department. The following are the cost Details for the two departments for the month of
January, 2016.
Weaving Dying
Department. Department
Capacity 7200 Hours 3000 Hours
(Rs.) (Rs.)
Direct Labour 1,72,800 72,000
Material Consumed 1,80,000 64,000
Depreciation 30,000 10,000
Overhead apportioned 15,000 3,200
Power Consumption per hour @ Rs. 96 32
3.20 per unit
During the month both departments worked at 80% of their capacity and out of these 400
hours were expected to be lost due to unavoidable reasons. The normal processing time to

process 100meter of raw product is 3.5 hours and 2 hours in weaving department and dying
department respectively.
At the end of the month 1,00,000 meter of completed shirting were produced and 50,000
meter of the shirting were in incomplete condition on which processing in dying department
is needed. There was no stock at the beginning of the month. No power is consumed during
idle time.
Required:
i) Machine hour rate for the two departments.
ii) Cost of 1,00,000 meter of completed shirtings.
iii) Cost of abnormal idle time to be charged to costing profit and loss account.
Answer
1. Computation of machine hour rate
Weaving Department Dying Department
Overhead Apportioned 15,000 3,200
45,000 13,200
A
Normal Production Hrs (7,200*80%)-400=5360 Hrs (3000*80%)-400=2000hrs
B
Rate per Hour (A/B) 8.39 6.60
C
Power consumption cost per 96.00 32.00
hour
Machine Hour Rate 104.39 38.60
2. Cost of 1,00,000 meter of completed shirtings

Materials - Weaving Dept. = 180,000/150,000 * 100,000 = 120,000
Dying Dept. = 64,000
Labour -Weaving Dept. = 172,800/150,000 * 100,000 = 115,200
Dying Dept. = 72,000
Overhead - Weaving Dept.=100,000/100*3.5*104.39 = 365,365
Dying Dept. 100,000/100*2*38.60 = 77,200
Total Cost 813,765
3. Cost of abnormal idle time to be charged to the costing profit and loss account
Weaving Department Dying
Department
Total working Hrs at 80% capacity 5760 2400
Less: Normal Idle Time 400 400
Normal Production Hour A 5360 2000

Hours for production:

Weaving Department ( 150,000/100) mtr
* 3.5 hrs B 5250
Dying Department ( 1000mtr*2hrs) 2000

Abnormal Idle Time C 110 Nil
Abnormal Idle Time Cost 110 hrs * Rs 8.39 = Rs
922.90
Question No. 43
A manufacturing unit has purchased and installed a new machine of Rs. 12,70,000 to its fleet
of 7 existing machines. The new machine has an estimated life of 12 years and is expected to
realize Rs. 70,000 as scrap at the end of its working life. Other relevant data are as follows:
1) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This
includes 300 hours for plant maintenance and 92 hours for setting up of plant.
2) Estimated cost of maintenance of the machine is Rs. 25,000 (p. a,).
3) The machine requires a special chemical solution, which is replaced at the end of
each week (6 days in a week) at a cost of Rs. 400 each time.
4) Four operators control operation of 8 machines and the average wages per person
amounts to Rs. 420 per week plus 15% fringe benefits.
5) Electricity used by the machine during the production is 16 units per hour at a cost
of Rs. 3 per unit. No current is taken during maintenance and setting up.
6) Departmental and genera1 works overhead allocated to the operation during last
year was Rs. 50,000. During the current year it is estimated to increase 10% of
this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time
is productive.
[June 2017 – 4(b), 5 Marks]
Answer
Computation of Machine hour Rate
Per year Per hour Per hour
(unproductive) (productive)
Standing charges
Operators wages
4x 420 x 54 90,720
Add: Fringe Benefits 15% 13,608
1,04,328
Departmental and general
overhead
(50,000+ 5,000) 55,000
Total Standing Charges for 8 1,59,328

machines
Cost per Machine (1,59,328/8) 19,916
Cost per Machine hour
9.05
(19,916/2,200)
(19,916/2,292) 8.69
Machine hours:
Setting time unproductive
(2,592-300-92)= 2200
Setting time productive (2,592-
300)= 2,292
Machine expenses
Depreciation (12,70,000 - 45.45
70,000)/(12*2,200)
(12,70,000-70,000)/(12*2,292) 43.63
Electricity (l6*3) 48.00

(16*3*2,200)/2,292 46.07
Special chemical solution 9.82 9.42
(400x54)/2,200
(400x54)/2,292
Maitenance (25,000/2,200) 11.36 10.91
(25,000/2,292)
Machine Hour Rate 123.68 118.72
Note: Alternatively depreciation can be placed under standing charge.
Question No. 44
Compute the machine hour rate from the following data:
(Rs.)
Cost of machine 1,00,000
Installation Charge 10,000
Estimated scrap value after the expiry of its life (15 yrs.) 5,000
Rent and rates for the shop per month 200
General lighting for the shop per month 300
Insurance premium for the machine per annum 960
Repair and maintenance expenses per annum 1,000
Power consumption - 10 units per hour
Rates of power per 100 units 20

Estimated working hours per annum - 2,200. This includes setting-up

time of 200 hours
Shop supervisor's salary per month 600
The machine occupies ¼ of the total area of the shop. The supervisor is expected to
devote 1/5 of his time for supervising the machine. [December 2017 – 3(b), 8
Marks]
Answer
Computation of Machine Hour Rate
Particulars: Rs. Rs.
Standing charges:
Rent and rates (200 *12) * ¼ 600
General lighting (300*12)*1/4 900
Insurance Premium 960
Shop supervisor's salary (600*12) *1/5 1440
n
Dep (1,10,000 - 5,000)/15 7000
10,900
Hourly rate for standing charges ( Rs.10900/ 2,000hrs) 5.45
Machine Expenses:
Repairs and Maintenance (1,000/2,000) 0.50
Power -10 units per hour @ Rs.0.20 per unit 2.00
Machine - hour rate 7.95
Note: Setting- up time has been presumed as non- productive time and hence
productive time is only 2,000 Hours.
Question No. 45
Pappu Manufacturing Ltd. manufactures two products A and B. The manufacturing division
consists of two production department P1 and P2 and two service departments S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory overhead
to the products. The rate of department P1 is based on direct machine hours, while the rate of
department P2 is based on direct labour hours. In applying overheads, the predetermined
rates are multiplied by actual hours. For allocating the service department costs to production
departments, the basis adopted is as follows:
(i) Cost of department S1 to department P1 and P2 equal and
(ii) Cost of department S2 to department P1 and P2 in the ratio of 2:1 respectively
Annual profit plan data:

Factory Overheads budgeted for the year:
Departments P1 P2 S1 S2
Amount (Rs.) 27,85,000 22,55,000 7,50,000 5,10,000

Budgeted output of product A and B are 50,000 units and 30,000 units respectively.
Budgeted raw material cost per unit for product A and B are Rs.120 and Rs.150
respectively. Budgeted time required for production per unit are as follows:
Product A Product B
Department P1 1.5 machine hours 1.0 machine hours
Department P2 2 direct labour hours 2.5 direct labour hours
Average wage rates budgeted in Department P2 are: Product A – Rs. 72

per hour and Product B – Rs. 75 per hour.
All materials are used in Department P1 only.
Actual data (for the month of July 2017)

Units actually produced:
Product A 4,000 units
Product B 3,000 units.
Actual direct machine hours worked in Department P1:

On Product A - 6,100 hours, Product B - 4,150 hours.
Actual direct labour hours worked in Department P2:
On Product A - 8,200 hours, Product B - 7,400 hours.
Costs actually incurred:

Product A Product B
Raw Materials 5,10,000 4,80,000
Wages 5,80,000 5,50,000
Factory Overheads:
Departments P1 P2 S1 S2
Amount 2,81,000 2,25,000 72,000 51,000
Required:
i) Compute the predetermined overhead rate for each production department.
ii) Prepare a Statement showing Budgeted and Actual costs for the month of July, 2017.
[June 2018 – 1, 20 Marks]
Answer:
i) Computation of predetermined overhead rate for each production department for budgeted
data
Particulars Production Departments Service Departments

P1 (Rs.) P2 (Rs.) S1 (Rs.) S2 (Rs.)
Budgeted overhead for the year 27,85,000 22,55,000 7,50,000 5,10,000

Allocation of Service department 3,75,000 3,75,000 (7,50,000) -

S1's cost to Production Dept. P1
and P2 equally
Allocation of Service department 3,40,000 1,70,000 - (5,10,000)
S2’s cost to Production Dept.
P1and P2 in the ratio of 2:1
Total 35,00,000 28,00,000 Nil Nil
Budgeted Machine hours in 1,05,000
department P1(working note 1)
Budgeted Direct labour hours in 1,75,000
department P2 (working note 1)
Budgeted Machine/ Direct labour Rs. 33.33 Rs. 16
hour rate
ii) Statement showing Budgeted and Actual Costs for the month of July 2017.
Particulars Budgeted (Rs.) Actual (Rs.)

Raw Materials used in Department P1
A (4,000 units x Rs.120) 4,80,000 5,10,000
B (3,000 units x Rs.150) 4,50,000 4,80,000
Direct Labour Cost on the basis of labour hours worked
in
department P2 5,76,000 5,80,000
A (4,000 x 2 hrs x Rs. 72) 5,62,500 5,50,000
B (3,000 x 2.5 hrs x Rs. 75)
Factory Overheads:
On machine hour basis in Department P1
A (4,000 x1.5 hrs x Rs. 33.33) 1,99,980 2,08,888
B (3,000 x 1hr x Rs. 33.33) (working note 3) 99,990 1,42,112
On Direct labour hour basis in Department P2
A (4,000 x 2 hrs x Rs. 16) 1,28,000 1,46,128
B (3,000 x 2.5 hrs x Rs. 16) (working note 3) 1,20,000 1,31,872
Total 26,16,470 27,49,000
Working Notes:
Product A Product B Total
1. Budgeted output (in units) 50,000 30,000
Budgeted Machine hours in 75,000 hrs 30,000 hrs 1,05,000
Department P1 (50,000 x 1.5 (30,000 x 1 hrs
hrs) hr

Budgeted Direct labour hour in 1,00,000 hrs 75,000 hrs 1,75,000

Department P2 (50,000 x 2 (30,000 x 2.5 hrs
hrs) hrs)
2. Actual output (units) 4,000 3,000
Actual Machine hours utilized in 6,100 4,150 10,250
Department P1
Actual Direct labour hours utilized in 8,200 7,400 15,600
Department P2
Working Notes: 3
Computation of actual overhead rates for each production department from actual data.
Particulars Production Departments Service Departments
P1 (Rs.) P2 (Rs.) S1 (Rs.) S2 (Rs.)
Actual factory overhead for July 2,81,000 2,25,000 72,000 51,000
2017
Allocation of Service department 36,000 36,000 (72,000) -
S1's
cost to Production Dept. P1 and P2
equally
Allocation of Service department 34,000 17,000 - (51,000)
S2's
cost to Production Dept. P1 and P2
in
the ratio of 2:1
Total 3,51,000 2,78,000 Nil Nil
Actual Machine hours in 10,250
department P1 (Working note 2)
Actual Direct labour hours in 15,600
department P2 (Working note 2)
Machine hour rate Rs. 34.2439
(Rs. 3,51,000 /10,250)
Direct Labour hour rate Rs. 17.8205
(Rs. 2,78,000 / 15,600)
Overhead Absorbed
Product A 2,08,888 1,46,128
(Rs.34.2439 (Rs.17.8205
x 6,100) x 8,200)
Product B 1,42,112 1,31,872

(Rs.34.2439 (Rs.17.8205

x 4,150) x 7,400)
Total 3,51,000 2,78,000
Question No.46
Moti manufacturers – a small scale enterprise, produces a single product and has adopted a
policy to recover the production overheads of the factory by adopting a single blanket rate
based on machine hours. The annual budgeted production overheads for the year 2016-17 are
Rs. 44,00,000 and budgeted annual machine hours are 2,20,000.
For a period of first six months of the financial year 2016-2017,
following information were extracted from the books:
Actual production overheads Rs. 24,88,200

Amount included in the production overheads:
Paid as per court’s order Rs. 1,28,000
Expenses of previous year booked in current year Rs. 1,200
Paid to workers for strike period under an award Rs. 44,000
Obsolete stores written off Rs. 6,700
Production and sales data of the concern for the first six months are as under:
Production:
Works-in-progress
(50% complete in every respect) 18,000 units
Sale:
The actual machine hours worked during the period were 1,16,000 hours. It is revealed from
the analysis of information that ¼ of the under/ over absorption was due to defective
production policies and the balance was attributable to increase/decrease in costs.
Determine the amount of under/over absorption of production overheads for the six months
period of 2016-17 and point out accounting treatment of under/over absorption of production
overheads. [June 2018 – 4(c), 5
Marks]
Answer
Amount of under/ over absorption of production overheads during the period of first six
months of the year 2016-2017:
Amount Amount
(Rs) (Rs)
Total production overheads actually
24,88,200
incurred during the period
Less: Amount paid to worker as per 1,28,000

court order
Expenses of previous year booked in
1,200
the current year
Wages paid for the strike period under

44,000
an award
Obsolete stores written off 6,700 (1,79,900)

23,08,300
Less: Production overheads absorbed
as per machine hour rate (1,16,000 23,20,000
hours × Rs. 20*)
Amount of over absorbed production 11,700
overheads
*Budgeted Machine hour rate (Blanket rate) = 44,00,000/2,20,000 hours

= Rs. 20 per hour
Accounting treatment of over absorbed production overheads:
The over/under absorption of overhead can be treated as

i) Charged to costing P/L A/C
ii) Carry forward to next Accounting Period
iii) Use of supplementary rate
Here the over/under absorbed overhead due to abnormal reason is charged to costing P/L
A/C and the balance under/over absorbed overhead due to normal reason is charged to
i) Cost of sales for units sold
ii) Closing stock for units unsold by calculating supplementary rate.
Question No. 47
A factory which was allocating 'overhead expenses' to jobs on the basis of 'prime cost' found
the resulting cost ludicrous. The management, therefore, decided that overheads should be
allocated either on the basis of direct labor hours or direct labor cost. Scrutiny of a normal
month’s accounts showed the following:
Factory cost incurred Rs. 5,000
Direct labor hours worked 5,000 man hours
Direct labor costs Rs. 2,500
The Direct costs incurred on two typical jobs were as under:

Job Order 847-A Job Order 848-B
Direct materials Rs. 35 Rs. 35
Direct labor cost 4 4.5

Direct labor hours 8 6
You are required to compute the cost of each of these two jobs on the basis of ‘Direct labor
cost rate’ and ‘Direct labor hour rate’ and give your views as to which of these two rates are
more equitable for adoption. [June 2019 – 5(a), 7 Marks]
Answer
Direct Labor Cost Rate: Factory expenses/ Direct labor costs * 100
= Rs. (5,000/2,500) *100 = 200 %
Direct Labor Hours Rate: Factory expenses/ Direct labor hours * 100
= Rs. (5,000/5,000) *100 = Rs. 1 per hour
Statement of Cost Of The Jobs

Job Order 847-A Job Order 848-B
A B
Direct labor Direct Direct Direct

cost rate labor hour labor cost labor hour
(Rs.) rate (Rs.) rate (Rs.) rate (Rs.)
Direct Materials 35 35 35 35
Direct labor cost 4 4 4.5 4.5
Overhead Expenses 8 8 9 6
Total Cost 47 47 48.5 45.5
*200% of direct labor cost **Re 1 per labor hour

The higher rate of wages (75 paise per hour) for Job Order No. 848-B indicates that
the jobs seems to have been done by workers of higher skill than those who were
engaged on the other job ( wage rate 50 paise per hour). From this point of view, the
amount of overhead charged to Job Order No. 848- B should be lower than that
charged to the other job even if the time spent were to be the same. But in case
overheads are recovered as a percentage of direct wages, more overheads are
recovered from Job Order 848-B.
The direct labor hour rate method of charging overheads will give more equitable
results in such a case since overheads are mostly connected with time.

CHAPTER 5:
JOB AND BATCH COSTING

Question No.1
Distinguish between
(a) Job costing and batch costing
[June 2008 – 5(c), 5 Marks] [June 2013 – 5(b), 2.5 Marks]
Answer
According to Job costing, costs are collected and accumulated according to jobs. Each
job or unit of production is treated as a separate entity for the purpose of costing. Job
costing may be employed when jobs are executed for different customers according to
their specifications.
Batch costing is a form of job costing, a lot of similar units which comprises the batch
may be used as a cost unit for ascertaining cost. Such a method of costing is used in case
of pharmaceutical industry, readymade garments, industries manufacturing parts of TV,
radio sets etc.
(b) Job costing and Process costing [June 2011 – 5(d), 2.5 Marks] [December 2013 – 5(d),
2.5 Marks] [June 2017 – 6(a), 2.5 Marks]
Answer
Job costing relates to a costing system where each unit or batch of output of products or
services is unique. This creates the need for the cost of each unit or batch to be calculated
separately. Direct costs and factory overheads are allocated to individual units of
production and the finished goods stock consists of stock of unlike units. In contrast, a
process costing system relates to the situation where masses of identical units or batches
are produced thus making is unnecessary to assign costs to individual units or batches of
output. Instead, the average cost per unit or batch of output is calculated by dividing the
total costs assigned to a product or services of the period by the number of units or
batches of output for that period. Direct costs and factory overhead costs are allocated to
processes. When units are completed, they are transferred to finished goods stock at
average unit cost. Therefore, the finished goods stock consists of stock of like units
valued at average unit cost of production.
The main difference between the two is the cost object used for cost accumulation. Job
costing is when for example a tradesman comes to give you a quote for how much he is
willing to do the job/repair that you want to be done, whereas process costing are what a
business has to spend in order to keep functioning, overheads etc.
Alternative Answer
Job Costing Process Costing
1) Production is carried on by specific 1) Production is a continuous flow and the
order. products are homogeneous.
2) Costs are determined by jobs or batches2)Costs are compiled on time basis i.e for
of products. production for a given accounting period
for each process
3) Various jobs are separate and 3) Processes are related to each other
independent products also lose their individual entity.
4) The unit cost of a process which is
4) Unit cost of a job is calculated by computed by dividing the total cost for the
dividing the total cost by units produced period into the output of the process during
in the lot or batch. that period is an average cost(after

adjusting opening and closing WIP)for the

period.
5) Costs are calculated when a job is 5) Costs are calculated at the end of the
completed. period under each process.
6) There may not be opening or closing 6) Production in process costing is
WIP in an accounting period. continuous and therefore there is normally
WIP at beginning and closing.
7) There is normally no transfer from one 7) Transfer from one process to another is a
job to another .It will be only when there usual feature.
is surplus or excess production.
8) Each product unit is different and 8) Production is standardized and stable the
therefore more managerial attention is control is, therefore easier.
needed for proper control.
(c) Job Costing and Contract Costing [June 2014 – 5(c), 2.5 Marks]
Answer
In job costing, job work is carried in the premises. An order, a unit, lot or batch of
product may be taken as cost unit. Cost is first allocated to cost centers and then charged
to individual jobs. It is a system of costing in which the elements of cost are accumulated
separately for each job or work undertaken by an organization. The prices of the jobs are
fixed based on the nature of costs and policy of the firm.
In contract costing, contract work is carried on at site. Each contract is cost unit. Most of
the expenses are of direct nature and are directly charged to respective contract accounts.
Only general overheads and head office expenses are apportioned to individual contracts.
The pricing is generally through bidding and external forces have major influence in
fixing the offer price.
Question No.2
Write short notes on
(a) Optimum Batch Quantity [December 2007 – 5(b), 4 Marks]
Answer
In batch costing the most important point is the determination of Optimum/Economic
Batch Quantity. The determination of optimum batch quantity, involve two types of costs,
Set up cost, preparation cost and carrying cost. With the increase in the batch size, there is
an increase in the carrying cost but the set up cost per unit of the product is reduced; this
situation is reversed when the batch size is reduced. Thus, there is one particular batch
size for which both the set up and carrying costs are minimum. This size is known as
economic or optimum batch quantity.
Question No. 3
What is 'Job Costing'? In which type of industries this system would be suitable? Give a
specimen of cost sheet. [June 2004 – 3(a), 6 Marks]
Answer
Job costing refers to the cost procedure or system of cost accumulation that ascertains the
costs of an individual job or work order separately. A job represents or constitutes the units of
costing. Many organisations manufacture products, when they receive an order from a
customer. No two orders are necessarily alike. Different orders do not pass through the same

manufacturing processes. For this reason, cost information is accumulated for each order or
job separately. Thus, job costing is used when products are dissimilar and non-repetitive in
nature.
Job costing is suitable for those industries that produce or manufacture products as per the
customers' specifications such as (i) Construction, (ii) Ship building, (iii) Foundries, (iv)
Machine tools, (v) Printing, (vi) Toy-making, (vii) Heavy power generating equipment, (viii)
Hardware, (ix) Interior decoration and (x) Advertising.
Job Cost Card
duct ____________ Job Order No. _______

dered by __________ Buyer's Purchase Order No. _________
Date Started __________
Date Completed __________
Department A
Direct Materials Direct Labour Overheads
Date Reference Amount Date Reference Amount Date Amount
ores req. No.) rker's sed on
Ticket predetermin
No. ed overhead
rate)
Department B
Direct Materials Direct Labour Overheads
Date Reference Amount Date Reference Amount Date Amount
Summary:
Selling Price XXX

Dept. A Dept. B Total
Costs: Direct Material XX XX XXX
Direct Labour XX XX XXX
Factory Overheads XX XX XXX
Total Costs XX XX XXX XXX
Gross Profit ...........
Numerical Questions
Question No.4
Following data refer to the month of December 2009:
Job 410 Job 411 Total
a) Opening balance of job on 2009:

1st December Rs. Rs. Rs.

Direct material 80 420 500
Direct labour 150 450 600
Factory overheads 200 400 600
430 1,270 1,700
b) Direct material requisition during the month of December, 2009:

Job No. Rs.
410 120
411 280
412 225
413 300
925
c) Direct Labour Distribution
Job No Hours Rs.

410 400 600
411 200 450
412 300 675
413 100 225
1,000 1,950
d) Factory overheads are applied to jobs on production according to direct labour hour
rate which is Rs. 2.
e) Factory overhead incurred in December, 2009 Rs. 2,100.
f) Job Nos. 411 and 412 were completed during the month. They were billed to
customer at a price which included 15% of the price of the job for selling and
distribution expenses and another 10% of price for the profit.
Prepare:
i) Job Cost Sheet for Job Nos. 411 and 412
ii) Determine the price for the job;
iii) Calculate the value of work in progress; and
iv) Prepare an income statement showing gross profit for the month of December,
2009. [June 2010 – 3, 15 Marks] [July 2015 – 2(a), 12
Marks]
Answer
i) Job Cost Sheet
Job No. 411 Job No 412
Opening balance on 1.12.2009 Rs 1,270 Nil
Direct material during month 280 225
Direct labour 450 675
Factory Overhead @ Rs. 2 per hour 400 600
Factory cost 2400 1,500
Selling and distribution expenses(Note 1) 480 300

Cost of sales 2,880 1,800

Profit (Note1) 320 200
ii) Billing Price of job 3,200 2,000
iii) Work in progress

Opening balance Rs 1,700
Cost incurred during the month
Material 925
Labour 1,950
Overhead(1000×Rs 2) 2,000
6,575
Less: Jobs completed
Job No. 411 Rs 2,400
Job No. 412 1,500 3,900
Balance of W.I.P 2,675
iv) Income statement
Selling Price (Rs. 3,200+Rs. 2,000) Rs.5,200
Less: Factory cost (2,400+Rs. 1,500) 3,900
Gross Profit 1,300
Note.1
Suppose Price Rs. 100
Less Selling exp. 15
Profit 10 25
Factory Cost 75
For job No 411:

1) If factory cost is 75,selling expenses = 15
If factory cost is 2,400 selling expenses=(15÷75)×2,400=480
2) If factory cost is 75, profit=Rs.10
If factory cost is 2,400 profit=(10÷75)×2400=Rs. 320
For job No 412:

1) If factory cost is 75, selling expenses=15
If factory cost is 1,500 selling expenses=(15÷75)×1500=Rs. 300
2) If factory cost is 75, profit=Rs. 10
If factory cost is 1,500 profit=(10÷75)×1500=Rs. 200
Question No.5
Component CT is made entirely in a machine shop. Material cost is Rs. 15 per component.
Each component requires 4 minutes to produce and the machine operator is paid Rs. 90 per
hour. Machine hour rate is Rs. 360 per hour.
It takes 2 hours for the operator to set up the machine before the production of components
can take place.
You are required to prepare cost sheet showing the setting up costs and production costs, both
in total for the batch and per component, assuming a batch size of 500 components.

[June 2010 – 2(b), 5 Marks]

Answer
A. Setting up cost: Total Batch Cost per
Cost Component
Wages (2 hours @ Rs. 90) Rs. 180
Machine Expenses (2 hours @ Rs. 360 per hour) 720
Total Setting up cost: 900 1.80
B. Production cost
Material (500 X Rs. 15) 7,500
Wages (500 X 4 minutes X Rs. 90/60) 3,000
Machine Expenses (500 X 4 minutes X 360/60) 12000
Total Production Cost 22,500 45.00
Total Setting up and Production Cost 23,400 46.80
Question No.6
Moon Paints Ltd. has an annual demand from a single customer for 50,000 liters of a paint
product. The total demand can be made up of a range of colour will be produced in a
continuous production run after which a set-up of the machinery will be required to
accommodate the colour change. The total output of each colour will be stored and then
delivered to the customer as a single load immediately before production of the next colour
commences.
The set-up costs are Rs. 100 per set-up. This service is supplied by an outside company as
required.
The holding costs are incurred on rented storage space which costs Rs. 50 per sq. meter per
annum. Each square meter can hold 250 liters suitably stacked.
i) Calculate the total cost per year where batches may range from 4,000 to 10,000
liters in multiples of 2,000 liters and choose the production batch size which will
minimize total cost.
ii) Use the economic batch size formula to calculate the batch size which will
minimize total cost. [December 2010 – 4(b),
5.5+1.5=7 Marks]
Answer
Production batch size which minimizes the total cost
___________________________________________________________________________
________________________________________________________________________
Production Set-up costs Holding costs Total Costs
Batch size (lit.) per annum (Rs.) per annum (Rs.) per annum (Rs.)
___________________________________________________________________________
________________________________________________________________________
4,000 1,250 400 1,650
6,000 833 600 1,433
8,000 625 800 1,425
10,000 500 1,000 1,500
___________________________________________________________________________
_________________________________________________________________________

Working Notes:
For a production batch size of 6,000 liters:
1. Number of set-up per year = 50,000/6,000 = 8.33
Hence annual set-up cost per year = 8.33 x Rs. 100 = Rs. 833
2. Average quantity in stock = 6,000/2 = 3,000 liters
This assumes a constant rate of production. At the start of a batch, stock is zero. At the end,
the stock equals the batch size. Hence, on an average, 50% of the batch is on stock at any
point of time.
Holding cost = 3,000 liters x Rs. 50/250 = Rs. 600.
The above table clearly reveals that the total cost is minimum at Rs. 1,425 when the
production batch size is 8,000 liters.
(i) Batch Size which minimizes total cost as per Economic Batch Size Formula
𝟐𝑪 𝑸 𝟐 𝑿 𝟏𝟎𝟎 𝟓𝟎,𝟎𝟎𝟎
Economic production batch size = � 𝑪 𝟐𝑻 = � 𝟎.𝟐 𝑿 𝟏
= 7,071.
𝟏
Question No.7
The Acme shelving Co. Ltd. manufactures shelving brackets in batches of 300. During May,
Batch No. 23 was machined at a rate of 15 per hour. Sixty of the brackets failed to pass
inspection, but of these, 40 were thought to be rectifiable. The remaining 20 were scrapped,
and the scrap value was credited to the batch cost account. Rectification work took nine
hours. The following details are available for Batch No. 23:
Rs.
Raw materials per bracket 160
Scrap value per bracket 86
Machinists' hourly rate 420
Machine hour overhead rate (running time only) 360
Setting up of machine:
Normal machining 2,100
Rectification 1,800
Required:
vi) Calculate the cost of Batch No. 23 in total and per unit, if all units pass inspection.
vii) Calculate the actual cost of Batch No. 23 in total and per unit, after crediting the
recovery value of the scrapped components, and including the rectification costs.
viii) Calculate the loss incurred because of defective work.
[December 2012 – 2(a), 4+6+2=12 Marks]
Answer:
i. Calculation of the cost of Batch No. 23 in total and per unit, if all units pass
inspection:
Batch No. 23
Particulars Rs.
Raw materials (300 X Rs.160) 48,000
Direct Labour:
Machinists' Cost (300/ 15 X Rs.420) 8,400
Overhead (300/ 15 X Rs.360) 7,200

Total Cost 65,700

Per unit cost = Rs. 65,700/ 300 = Rs.219
ii. Calculation of the actual cost of Batch No. 23 in total and per unit, after crediting the
recovery value of the scrapped components, and including the rectification costs
Batch No. 23
Particulars Rs. Rs.
Raw materials (300 X Rs.160) 48,000
Less: Recovery value of scrap (20 X Rs.86) 1,720
46,280
Direct Labour:
Normal- Machinists' Cost (300/ 15 X Rs.420) 8,400
Rectification (9 hours X Rs.420) 3,780
12,180
Rectification 1,800
3,900
Overhead:
Normal (300/ 15 X Rs.360) 7,200
Rectification (9 hours X Rs.360) 3,240
10,440
Total Cost 72,800
Per unit cost = Rs. 72,800/ 280 = Rs.260
iii. Calculation of the loss incurred because of defective work

Batch No. 23
Particulars Rs.
Loss because of additional costs (Rs.72,800- Rs.65,700) 7,100
Loss because of faulty products (Rs.219 X 20 units) 4,380
Total loss incurred because of defective work 11,480
Question No. 8
A shop floor supervisor of a small factory presented the following cost for Job no. 421 to
determine selling price.
Per unit (Rs.)
Material 70
Direct Wages 18 hrs. @ Rs. 2.50 (Dept. X 8 hours; Dept. Y6
hours; Dept. Z 4 hours) 45
Chargeable Expenses (Special stores items) 5
120
Add: 33 1/3% for Overheads 40
Total Cost 160
Analysis of the Profit/Loss Account for 2014 shows the following:

(Amount in Rs.)
Material used 150,000 Sales less
Direct Wages: Returns 250,000
Dept. X 10,000
Dept. Y 12,000
Dept. Z 8,000 30,000
Special stores items 4,000
Overheads:
Dept. X 5,000
Dept. Y 9,000
Dept. Z 2,000 16,000
Total Cost 200,000
Gross Profit c/d 50,000
250,000 250,000
Selling Expenses 20,000
Net Profit 30,000 Gross Profit b/c 50,000
50,000 50,000
It is also noted that average hourly rates for the three departments X, Y, Z are similar.
Required:
i) Draw up a job cost sheet.
ii) Calculate the entire revised cost using 2014 actual figures as basis.
iii) Add 20% to total cost to determine selling price. [December 2015 – 2(c),
Marks]
Answer
In order to prepare the job cost sheet, the overhead rates of different departments will
have to be first determined on the basis of previous year's figures. The rates are as
follows:
FACTORY OVERHEAD RATES
Deptts
. X Y Z
(i) Overheads Rs. 5,000 Rs. 9,000 Rs. 2,000
(ii) Direct Labour Hours = Total Wages/Hourly Rates 4,000 4,800 3,200
(iii) Rate per hour (i) ÷ (ii) 1.25 1.875 .625
COST SHEET OF JOB NO421

Particulars Rate Hrs. Amount
Material `70.00
Direct Wages: Deptt. X ` 2.50 8hrs. 20.00
Deptt. Y 2.50 6 hrs. 15.00
Deptt. Z 2.50 4 hrs 10.00
Chargeable Expenses 5.00
Prime Cost 120.00

Overheads Deptt. X 1.250 8 hrs. 10.00

Deptt. Y 1.875 6 hrs 11.25
Deptt. Z .625 4 hrs 2.50
Total Cost .
Add: Profit 20% of Total Cost 143.75
Selling Price 28.75
172.50
Question No. 9
Auto Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto
Manufacturers Association, there will be a demand of 80 million pistons in the coming year.
Auto Ltd. is expected to have a market share of 1.15% of the total market demand of the
pistons in the coming year. It is estimated that it costs Rs.1.50 as inventory holding cost per
piston per month and that the set-up cost per run of piston manufacture is Rs. 3,500.
i) What would be the optimum run size for piston manufacturing?
ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run,
how much extra costs the company would be incurring as compared to the
optimum run suggested in (i) above? [June 2017 – 4(a),
5 Marks]
Answer
i) Optimum Run Size:
Optimum run size or Economic Batch Quantity (EBQ) =
Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units

S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
= Rs.1.5 × 12 months = Rs. 18
EBQ =
= 18,915 units
(ii) Calculation of Total Cost of set-up and inventory holding
Batch No. of set-ups Set-up Cost (Rs.) Inventory holding Total Cost
size cost (Rs.) (Rs.)
A 40,000 23 80,500 3,60,000 4,40,500
units (9,20,000/40,000) (23 × Rs. 3,500) (40,000*Rs.18/2)
B 18,915 48.64 1,70,235 1,70,235 3,40,470

units (9,20,000/18,915) (48.64 × Rs.3,500) (18,915*Rs.18/2)
Extra Cost (A – B) 100,030

Question No. 10
A firm makes special assemblies to customers’ orders and uses job costing. The data for a
particular period are:
Particulars Job Number Job Number Job number
AA10 (Rs.) BB15 (Rs.) CC20 (Rs.)
Opening work in 26,800 42,790 0
progress
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were Rs. 126,000.

Required:
i) What is the most logical basis for absorbing the overhead job costs?
ii) Calculate the overhead to be added to job number CC20 for the period?
iii) Job number BB15 was completed and delivered during the period and the firm
wishes to earn 33% profit on sales. What is the selling price of job number BB15?
iv) What was the approximate value of closing work-in-progress at the end of the
period?
Answer
i) The most logical basis for absorbing the overhead job costs is to use a percentage of
direct labour cost. If materials cost is used as the basis for overhead absorption, it would
give erroneous result as this would not be equitable because job number BB15 incurred
no material cost and would therefore absorb no overhead. If Prime cost (material plus
labour) is used as the basis for overhead absorption the same disadvantage would arise.
Thus it is best to use direct labour hour as the basis for overhead absorption.
ii) Overhead to be added to job number CC20 (absorbed on the basis of direct labour hours)
= 24,600/(14,500 + 3,500 + 24,600) × 126,000 = 72,761
iii) Calculation of Selling Price to be quoted for Job BB15
Particulars Rs.
Opening WIP 42,790
Labour for the period 3,500
Overheads (35,00/42,600) × 126,000 10,352
Total Cost 56,,642
Profit @ 33% 27,898
Selling Price 84,540
iv) Calculation of Closing WIP (Considering point ii which states that Job BB 15 has been
delivered).

Job Workings WIP (Rs.)

Number
AA 10 (26,800 + 17,275 + 14,500) + (14,500/42,600) × 101,462
126,000
CC 20 (18500 + 24600 + 72761 [as calculated in ii]) 115,861
Total closing WIP 217,323

CHAPTER 6:
CONTRACT COSTING

Question No. 1
(a) Contract Costing and Operating Costing method [June 2010 – 5(c),
4Marks]
Answer
Contract Costing: If a job is very big and takes a long time for its completion, then
method used for costing is known as Contract Costing. Here the cost of each contract is
ascertained separately. It is suitable for firms engaged in the construction of bridges,
roads, buildings etc.
Operating Costing: The method of Costing used in service rendering undertakings is
known as operating costing. This method of costing is used in undertakings like
transport, supply of water, telephone services, hospitals, nursing homes etc.
Question No. 2
(a) Escalation clause [June 2004 – 7(a), 4 Marks] [December 2012 – 6(a), 5 Marks]
Answer
This clause stipulates that in case the prices of material and labour specified in the
contract increases beyond the specified limit during the execution of contract, then such
an increase over and above that limit will be borne by the contractor and contractee in
the agreed ratio.
Such an increase is calculated on the basis of the prices prevailing at the time of signing
the contract and the increase should have taken place during the execution of the
contract.
(b) Cost-Plus Contracts [June 2007 – 5(d), 4

Marks]
Answer
In certain contracts, the contractee agrees to pay to the contractor the cost price usually
prime cost, of the work done on the contract plus an agreed percentage thereof by way
of overhead expenses and profit. Such contracts are known as cost-plus contracts. The
system of cost plus contract costing is employed in cases where it is very difficult for
the contractor to quote the contract price because there has been no precedent, which he
may take as a basis. It is also employed where the work to be done is not fixed at the
time of placing order for the contract. The method is generally used where government
happens to be the contractee.
The method suffers from the following disadvantages:
a) There is no incentive to the contractor to eliminate waste and economize the cost
of completing the contract. On the other hand he is tempted to increase the cost
because greater the cost, the greater will be his share of profit.
b) In case of this system the amount of overheads recovered and profit made depends
upon the value of materials used, which is subject to considerable price
fluctuations. The agreed fixed percentage may, therefore, prove to be either too
excessive or too low for covering overheads and profit.
(c) Principles to be followed while taking credit for profits on incomplete contracts.
[December 2008 – 6(b), 5 Marks] [June 2013 – 4(c), 4 Marks]
Answer
The following are the principles to be followed in taking credit for profit on incomplete
contracts:
a. If the contract is less than one-fourth complete, no profit to be taken to Profit and
Loss Account of the year. The notional profit, if any, arising in the contract will
be
treated as Reserve.
b. If the contract is more than one-fourth complete but not more than half
complete,
the profit to be carried to the Profit and Loss Account of the year is computed as
under:
1/3 × Notional profit × Cash Received/ Work Certified.
The balance to be carried to Reserve.
c. If the contract is more than half complete but not almost complete, the profit to be
carried to the Profit and Loss Account of the year is computed as under:
2/3 × Notional profit × Cash Received/ Work Certified.
The balance to be treated as Reserve.
d.If the contract is almost compete, say 90% and above, the profit on completion is
estimated as under:
Cost of work certified XXX
Cost of work not certified XXX
Estimated costs to complete the contract XXX
Total A
Contract Price B
Estimated profit on completion = A–B
The profit to be taken to Profit and Loss Account is
Estimated profit on completion X Work certified/ contract price X Cash

Received/ work certified.
e. If there is a loss in any year, it is to be written off to profit and loss account of the
year.
(d) Sub contracting expenses and its treatment in cost accounts [June 2011 – 6(a), 4
Marks]
Answer
Sub-contracting is outsourcing a part of the job or contract to a person by a contractor.
Such handing over may be required due to different reasons like special nature of the
job, meeting time deadlines, limitations in available labour hours and machine facilities
etc. Cost associated with such sub-contracting is termed as sub-contract cost. Such sub
contract costs are charged as direct expenses in cost accounts.

Question No. 3
Explain the concept of 'Cost plus Contract'. What are its advantages and disadvantages?
[December 2001 – 1(b), 4 Marks] [December 2010 – 6(a), 2.5
Marks]
Answer
Under cost plus contract, the contract price is ascertained by adding a percentage of profit
to the total incurred cost on the contract/works. Such contracts are entered into when it is
not possible to estimate the contract cost with reasonable accuracy due to unstable
condition of material, labour services etc.
Advantages:
a) The contractor is assured of fixed percentage of profit. There is no risk of
incurring any loss on the contract.
b) It is useful specially when the work to be done is not definitely fixed at the time of
making the estimate.
c) Contractee can ensure himself about the cost of the contract as he is empowered to
examine the books and documents of the contractor.
Disadvantages:
The contractor may not have any inducement to avoid wastages and effect economy in
production to reduce cost.
Question No. 4
Explain “Escalation and De-escalation clause” in the context of contract costing.
[June 2019 – 3(c), 4 Marks]
Answer
Escalation clause is often provided in long-term contracts under which the settled contract
price is subject to enhancement on any likely increase in price or utilization of materials
and labor etc. Following are circumstances when this safeguard is provided to the
contractor that the contract price would be suitably enhanced:
a) When the market price of materials used for the contract work are anticipated to
increase beyond a limit in the future.
b) When quantity of materials used for the contract, is anticipated to be more than
estimated quantity due to the nature of the contract and the correct estimate was
not possible unless the work has been sufficiently progressed. It may also be due
to availability of inferior grades of raw materials resulting in more scraps and
spoilage.
c) When labor rates are anticipated to increase or where labor usages cannot be
correctly estimated on account of the nature of the contract.
Thus, an escalation clause is meant to safeguard the interest of the contractor against
unforeseen rise in cost. There may be a De-escalation clause or Reserve clause to provide
for any future decreases in price etc., so that benefit may be passed on to the contract.
Numerical Questions
Question No. 5
A contractor undertook a building contract on 1.1.2001. Data relating to the contract for the
year ended 31.3.2002 are as under.

Rs. Lacs
As on 1.4.2001
Work not certified 10
Materials at site 2
1.4.2001 to 31.3.2002
Materials Issued 60
Wages paid 36
Work certified 165
Materials returned 5
Plant hire 7
Direct expenses 9
Plant issued on 1.4.2001 50
Payment received 150
As on 31.3.2002
Materials at site 5
Work no certified 16
The plant is expected to have a scrap value of Rs. 10 lacs at the end of its life of 10 years. The
contract price is Rs. 200 lacs.
Required:
(i) Prepare contract account for the year ended 31st March 2002
(ii) Show the calculation of profit to be taken to profit & loss account.
(iii) Show the relevant Balance Sheet entries as at 31st March 2002
[June 2002 – 6(c), 8 Marks]
Answer
Contract Account
31st March 2002 Figure in Rs./lac
To By
Opening work not certified 10 Mat. at site 5
Material at site 2 Mat. returned 5
Material issued 60 Cost of contract 118
Labour 36
Plant 7
Direct expenses 9
Depreciation 4
____ ____
128 128
Cost of contract 118 Work certified 165

P/L 38 Work not certified 16
Reserve 25
--------- ---------
181 181
===== =====

Normal profit 63 lacs More than half complete

165 150
Completion 200 x 100 = 82.5% 2/3 x 63 x 165 = 38 to P/L
Cost of contract 18
Profit 38
Total 156
Cash received 150
WIP 6
(Rs. lacs)
Balance Sheet (extract)
Profit 38 Material at stock 5

Plant 50
Depreciation 4 46
WIP 6
Note:
Alternatively WIP can be computed as
(Rs. in lacs)
Worked certified 165
Work not certified 16
181
Less: Profit rescue 25
156
Less: Cash received 150
6
Question No. 6
The contract work that started on and from Kartik 1, 2058 reported the following details on
Chaitra 31, 2058.
Rs.
Raw materials 2,00,000
Wages paid 1,00,000
Expenses paid at site 50,000
Work uncertified 26,000
Wages payable on 31.12.2058 20,000
Plant at site on closing day 1,44,000
(at book value)
Plant returned to Head Office 54,000
on closing day (at book value)
Cash received as progress payment 3,20,000

(80% of work certified)

Contract Price 6,00,000
Insurance compensation of Rs. 15,000 was received for the material costing Rs. 20,000
destroyed by fire.
The rate depreciation charged was 20% p.a.
Required: Contract Account showing the reasonable profit required to be

transferred to Profit and Loss Account of the year.
[June 2003 – 5(a), 6+2=8 Marks]
Answer
Contract Account
For the 6 months ended Chaitra 31, 2058
To Raw material 2,00,000 By Plant at site (BV) 1,44,000

To Wages paid 1,00,000 By Plant returned (BV) 54,000
Add: Wages payable 20,000 1,20,000 By WIP C/d
To Expenses 50,000 Working Certified
Rs 320000
=
80
4,00,000
144000+5400 2,20,000 Work uncertified 26,000 4,26,000
To Plant = 90 By Cash A/c 15,000
To Notional Profit C/d 54,000 By P/L A/c (Loss) 5,000
6,44,000 6,44,000
 2 80  28,800 By Notional Profit b/d 54,000
To P/L A/c 54000 × 3 × 100
 
To WIP A/C (Reserve) 25,200
54,000 54,000
Question No. 7
The RP builder Ltd., engaged in contract works, who prepares its account on 31st December
each year has the following Trial Balance for the year end 31st December 2004.
Dr. Cr.
Share Capital shares for Rs. 10 each 36,000
st
Profit and Loss Account as on 1 Jan, 2004 2, 500
Provision for depreciation on plant and tools 6, 300
Contractee’s account, contract no. 202 128, 000
Creditors 8, 020
Land and Building (at cost) 8, 220
Plant and Tool (at cost) 5, 200
Bank Balance 4, 400

Contract No. 202 :

Material issued 50, 000
Direct Labour 93,000
Expenses 4, 000
Plant and tools at site at cost 16, 000
180, 820 180, 820
st
Contract no 202 with a contract price of Rs. 240,000 began on 1 Jan. 2004 and Contractee
pays 80% of the work completed and certified. The cost of work done Since certification is
estimated to be Rs. 1,600.
After the trial balance was extracted on 31st Dec.2004, plant costing Rs. 3, 200 was returned
to the stores and material sat site on that date were valued at Rs. 3, 000.
Provision is to be made for substandard cost amounting to Rs.600 incurred on Contract on

202 and for depreciation of all plant and tools @ 12.5% on cost.
Prepare contract no. 202 account showing the computation of profit, if any, for which credit
may be taken in 2004 and prepare the Balance sheet of the construction company on 31st
Dec.2004.
[June 2005 – 5(a), 8 Marks]
Answer
Contract no. 202 account for the year ended 2004
To material issued 50, 000 By plant returned 3, 200
To direct labour 93, 000 Less: Dep. @ 12.5% 400 2, 800
To expenses 4, 000 By material at site 3, 000
To plant and tools 16, 000 By plant at site 11, 200
To substandard costs 600 By work in progress
To balance c/d 15, 000 Work certified 160, 000
Work uncertified 1, 600
178, 600 178, 600
To P & L A/c 8, 000 By balance b/d 15, 000

To work in progress 7,000
15, 000 15, 000
Balance sheet as on year ended 2004
Share capital 36, 000 Land and Building 8, 220

Creditors 8, 020 Plant and tools
Profit and loss A\c 2, 500 At cost 5,200
Add: profit on the 8, 000 At site 16, 000
contract
Less: Depreciation 650 9,850
Provision for 600 21, 200 12,250
substandard costs Less : provision
for dep. 8,950

Work in progress 154, 600

Less : Contractee’s 128, 000 26, 600
A/c
Material at site 3, 000
Bank Balance 4, 400
54, 470 54,470
Working Notes :
1. Plant A/c
Plant sent to site 16,000
Less: Returned to store 3,200
12,800
Less : Dep @ 12.5% 1,600
11,200
2. Profit to be transferred from contract account :

Notional profit * 2/3 * cash received/ work certified
= 15, 000 * 2/3 * 128, 000/160, 000
= 8, 000
3. Amounts of work certified = 128, 000 * 100 = 160, 000

80
Add: uncertified works 1,600

161, 600
Less : reserve 7, 000
Work in progress 154, 600
4. Depreciation provision 6, 300

Add : Dep. on plant charged to store 400
Add: Plant on contract 1, 600
Other plants 650
Total 8, 950
Question No. 8
A building constructional contractor engaged in building construction work for negotiated
price of Rs. 15,00,000 extracts the following particulars from financial records.
Year I (Rs) Year II (Rs.)
Materials purchased 2,40,000 3,00,000
Wages 2,20,000 1,80,000
Chargeable expenses 60,000 75,000
Overheads 25,000 45,000
Plant introduced 2,00,000 50,000
Materials at site 20,000 25,000

Work certified 6,00,000 12,80,000

Work uncertified 40,000 65,000
The Progress payment made was 90%

Depreciate the plant by 20% p.a. on original cost.
Required : a. Contract Account for year I and II
b. Balance Sheet of year II
[June 2006 – 2(b), 7+2=9 Marks]
Answer
Contract Account
for the Year ended Year I
Rs. Rs.
To Material Purchased 2,40,000 By Materials at site 20,000
To Wages 2,20,000 By Plant at site 200000 – 1,60,000
40,000 =
To Chargeable expenses 60,000 By work in progress c/d
To overheads 25,000 Work certified 6,00,000
To Plant introduced 2,00,000 Work uncertified 40,000
To Notional Profit c/d 75,000
8,20,000 8,20,000
To Profit & Loss Account
1 90
Rs. 75,000 × × =
3 100 22,500 By Notional Profit b/d 75,000
To Work in Progress c/d

(reserve) 52,500
75,000 75,000
Contract Account
for the Year ended Year II
Rs. Rs.
To Opening balance b/d By Materials at site 25,000
Material 20,000 By Plant
1,60,000
Plant at site 1,60,000 Add purchase
50,000
Work in progress (6,40,000 - 5,87,500
52,500) 2,10,000
To Materials purchased 3,00,000 Less Depreciations
50,000
To Wages 1,80,000 (40,000+10,000) 1,60,000
To Chargeable expenses 75,000 By work in progress c/d
Work certified 12,80,000
To Overheads 45,500 Work uncertified 65,000
To Plant 50,000

To Notional profit c/d 1,12,000

15,30,000 15,30,000
To Profit and Loss Account
2 90 By Notional profit b/d 1,12,000
Rs.1,12,000 × ×
3 100 67,200
To work in progress c/d
(reserve) 44,800
1,12,000 1,12,000
Balance Sheet
as at end of Year II
Capital and Liabilities Amount Assets Amount

Rs. Rs.
Profit and Loss Account 67,200 Materials at site 25,000
Plant at site
160000 +50000 = 210000
Less: Depreciation
= 40,000+10,000 = 50,000 1,60,000
Work in progress
Work Uncertified 65,000
13,45,000
Less reserve 44,800
13,00,200
Less cash received
90% of Rs. 12,80,000 = 11,52,000 1,48,200
Question No. 9
A company undertook a contract for construction of a commercial complex. The construction
work commenced on 16.07.05 and the following data is available for the year ended on
15.07.06:
Contract Price 3,50,00,000
Work Certified 2,00,00,000
Progress payment received 1,50,00,000
Material issued to site 75,00,000
Planning and estimating costs 10,00,000
Direct Wages Paid 40,00,000
Material returned from site 2,50,000
Plant Hire Charges 17,50,000
Wage related costs 5,00,000
Site office costs 6,78,000

Head office expenses apportioned 3,75,000

Direct expenses incurred 9,02,000
Work not certified 1,49,000
The contractor owns a plant which originally cost Rs. 20 lakhs has been continuously in
use in this contract throughout the year. The residual value of the plant after 5 years of
life is expected to be Rs. 5 lakhs. Straight line method of depreciation is in use.
As on 15.7.06 the direct wages due and payable amounted to Rs. 2,70,000 and the
materials at site were estimated at Rs. 2,00,000.
Required:
(i.)Prepare the contract account for the year ended 15.07.06.
. (ii) Show the calculation of profit to be taken to the profit and loss account for the year.
(iii) Show the relevant balance sheet entries.
[December 2006 – 2, 8+4+3=15 Marks]
Answer
(i) Contract Account for the year ended 15.07.06
Particulars Amount Particulars Amount (Rs.)

(Rs.)
Material issued to site 75,00,000 Material returned from 2,50,000
site
Planning and 10,00,000 Material at site 2,00,000
estimating costs
Direct wages paid 40,00,000 Work in progress
Plant hire charges 17,50,000 Work certified 2,00,00,000
Wage related costs 5,00,000 Work uncertified 1,49,000
Site office costs 6,78,000
Head office expenses 3,75,000
apportioned
Direct expenses 9,02,000
incurred
Depreciation on plant 3,00,000
Direct wages accrued 2,70,000
Notional Profit c/d 33,24,000
Total 2,05,99,000 Total 2,05,99,000
Particulars Amount (Rs.) Particulars Amount (Rs.)
Profit and loss 16,62,000 National Profit b/d 33,24,000

account
Work in progress c/d 16,62,000
Total 33,24,000 Total 33,24,000

(ii)
Profit to be transferred to profit and loss account
Since the contract is between 50% and 90% completion, therefore, two thirds of the
notional profit, reduced by the proportion of cash received to work certified is to be
transferred to profit and loss account as show below:
= 2/3 X Notional Profit X Cash Received/ Work Certified
= 2/3 X Rs. 33,24,000 X Rs. 1,50,00,000/2,00,00,000
= Rs. 16,62,000
(iii.)
Balance Sheet extract as on 15.07.06
Liabilities Amount Assets Amount (Rs.)

(Rs.)
Profit and loss account 16,62,000 Material at site 2,00,000
Wages accrued 2,70,000 Plant at site 17,00,000
Work in progress 34,87,000
Working Notes:
Plant Depreciation
Original cost of plant – Rs. 20,00,000

Less: residual value – Rs. 5,00,000
Cost of plant used – Rs. 15,00,000
Life of plant : 5 years
Annual depreciation (Rs. 1,50,000/5) = Rs. 30,000
Work in progress = Rs. 2,01,49,000

Less: profit in reserve = Rs. 16,62,000
Difference = Rs. 1,84,87,000
Less: Cash received = Rs. 1,50,00,000
Net WIP = Rs. 34,87,000
Question No. 10
Brock Construction Ltd. commenced a contract on November 1, 2007. The total contract was
for NRs. 3,937,500. It was decided to estimate the total profit on the contract and to take to
the credit of Profit and Loss A/c that proportion of estimated profit on cash basis, which work
completed bore to the total contract. Actual expenditure for the period November 1, 2007 to
October 31, 2008 and estimated expenditure for November 1, 2008 to March 31, 2009 are
given below:
Nov1, 2007 to Oct 31, Nov 1, 2008 to Mar 31, 2009
2008 (Actual) NRs. (Estimated) NRs.

Material issued 675,000 1,237,500

Labor: Paid 450,000 562,500
Prepaid 25,000 -
Outstanding - 2,500
Plant purchased 375,000 -
Expenses: Paid 200,000 350,000
Outstanding 50,000 25,000
Plant returns to store 75,000 300,000
(historical cost) (on March 31, 2008) (on March 31, 2009)
Work certified 2,000,000 Full
Cash received 1,750,000
Material at site 75,000 37,500
The plant is subject to annual depreciation @ 33% on written down value method. The
contract is likely to be completed on March 31, 2009.
Required:
Prepare the contract A/c. Determine the profit on the contract for the year November 2007 to
October 2008 on prudent basis, which has to be credited to Profit and Loss A/c.
[June 2009 – 1(b), 10 Marks]
Answer
Brock Construction Ltd
Contract A/C
For the Period from November 1, 2007 to Oct 31, 2008
Debit Credit
Particulars NRs. Particulars NRs.
To Materials issued 6,75,000 By plant return 75,000
To Labor paid 450,000 Less: Dep (1/3) 10,417 64,583
Less: Prepaid 25,000 425,000 By WIP Certified 2,000,000
To Plant purchased 375,000 Uncertified 75,000 2,075,000
To Expenses paid 200,000 By plant at site 300,000
+ Outstanding 50,000 250,000 Less: Dep (1/3) 100,000 200,000
To Notional profit (NP) c/d 689,583 By materials at site 75,000
Total 2,414,583 Total 2,414,583
To P/L A/C (W.N. 1) 148,580 By NP b/d 689,583
To work –in progress 541,003
(Profit in reserve) 689,583 689,583
Working Note: 1
PL Account = Estimated Profit * (Cash Received/Work Certified) * (Work Certified/
Contract Price)
= NRs. 334,305 * (1,750,000 / 2,000,000) * (2,000,000 / 3,937,500)
= NRs. 148,580

Where estimated profit is derived as per below,
Brock Construction Ltd

Contract A/C
For the Period from 1 November, 2007 to March 31, 2009
Debit Credit
Particulars NRs Particulars NRs
To Materials issued 1,912,500 By plant returned to 64,583
(675,000 + 1,237,500) store on 31/03/08
To Labor paid and 1,015,000 By plant returned to 172,222
outstanding stores on 31/3/09:
(425,000 + 587,500 + 2,500) Cost 300,000
Less: Dep.(1/3) 100,000
Dep.5 months 27,778
To Plant purchased 375,000 By Contractee a/c 3,937,500
To expenses 575,000 By Material at site 37,500
(250,000 + 325,000)
To estimated profit 334,305
Total 4,211,805 Total 4,211,805
Question No. 11
Sulochana Builders undertook a contract for Rs. 5,00,000 on first July 2009. On 30th June
2010 when the accounts were closed, the following details about contact were gathered:
Rs. Rs. Rs.
Material purchased 200000 Wages paid 45000 General expenses 10000
Plant purchased 50000 Material on hand 125000 Wages accrued 5000
Work certified 200000 (30.06.2010) (30.06.2010)
Cash received 100000 Work uncertified 15000
The above contract contained an escalation clause, which read as follows:

“In the event of prices of materials and rates of wages increase by more than 5%, the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case.”
It was found that since the date of signing the agreement the prices of materials and wage
rates increased by 25%. The value of the work certified does not take into account the effect
of the above clause. Depreciation on plant @10% is to be charged on purchased value.
Prepare the contract account. [December 2010 – 4, 10 Marks]
Answer
Contract A/C of Sulochana Builders
(For the year ending 30th June 2010)
Rs. By work in progress A/C: Rs.
To materials 200,000 Work certified 200,000
‘’ Wage Work uncertified 15,000
45000 50,000 ‘’ Material in hand 125,000
‘’ wages accrued ‘’ Contract 5,000

5000 10,000 escalation(Note 1)

5,000
‘’ General Expenses 80,000 345,000
‘’ Plant Depreciation 345,000 80,000
‘’ Balance c/d (Notional 13,333.33 By Balance b/d
profit) 66,666.67 80,000
‘’ P & L A/C (Note 2) 80,000
‘’ Work in progress
Note – 1
Calculation of escalation amount
Material and wages increased by 25%
(a) Increase in material price = Rs. 15,000
(Rs. 200000 – Rs. 125000) * (25/125)
(b) Increase in wages = 10,000
Rs. 50000 *(25/125)
Total Increase 25,000
It is 5% of contract price
Escalation is 25% of the rise in the cost of material and wage beyond 5% in each case.
25% increase – Rs. 25000
5% increase – Rs. 5000
Escalation = 25% of (Rs. 25,000 - Rs. 5000) = Rs. 5,000
Note – 2
Profit to be credited to P& L A/C
Profit = 1/3 * Cash received/ Work certified * Notional Profit = 1/3 *
100,000/200,000 * 80,000 = Rs. 13,333.33
Since Contract completion is less than 50%, 1/3rd profit as restricted by ratio of cash
received to work certified is transferred to P & L A/C.
Question No. 12
Sharma Engineering Company undertakes long-term contracts which involve the fabrications
of pre-stressed concrete blocks and the erection of the same on consumer’s site.
The following information is supplied regarding the contract which is incomplete on 32
Ashadh 2067:
Rs.
Cost incurred:
Fabrication costs to date:
Direct materials 280,000
Direct labour 90,000
Overheads 75,000
445,000
Erection cost to date 15,000
Total: 460,000
Contract price 819,000
Cash received on account 600,000
Technical estimate of work completed to date:
Fabrication 80%
Direct labour and overheads 75%
Erection 25%
You are required to prepare a statement for submission to the management indicating therein
the:
i) Estimated profit on the completion of the contract, and
ii) Estimated profit to-date on the contract. [December 2010 – 4(a), 4.5+4.5=9
Marks]
Answer
Statement showing the Estimated Profit to date and on Completion of Contract
Cost Elements % Cost to Date % Further Total
Completion (Amount in Completion Cost Rs. Cost Rs.
Rs.)
Fabrication Cost:
Direct materials 80 280,000 20 70,000 350,000
Direct labour 75 90,000 25 30,000 120,000
Overheads 75 75,000 25 25,000 100,000
Sub-total: Fabrication Cost 445,000 125,000 570,000
Erection cost 25 15,000 75 45,000 60,000
Total Rs. 460,000 170,000 630,000
Estimated profit 138,000 51,000 189,000
(See Working Note 1) 598,000 221,000 819,000
Working Notes:
1. Estimated profit to date has been calculated as follows:
Profit on the whole contract x Costs incurred so far = 189,000 x 460,000 = Rs. 138,000
Total contract costs 630,000
The amount of profit to date can also alternatively be calculated on the following basis:
Estimated profit on the whole contract x Cash received/Contract price
= 189,000 x 600,000 = Rs. 138,462.
819,000
It has been presumed that further costs will be incurred on the same pattern as they have been
incurred until now. There are no chances of increase in costs due to inflation or any other
reason.
Question No. 13
ABC Ltd. is a construction company, which has undertaken three contracts. Information for
the previous year along with other details is provided to you below;
Particulars Contract Contract Contract

A B C
(Rs.000) (Rs.000) (Rs.000)
Contract price 1,760 1,485 2,420
Balances brought forward at the beginning of
the year:

Material on site 20 30
Written down value of plant and
machinery 77 374
Wages accrued 5 10
Transactions during previous year:
Profit previously transferred to profit and
loss a/c 35
Cost of work certified (cost of sales) 418 814
Transactions during current year:
Material delivered to site 88 220 396
Wages paid 45 100 220
Salaries and other cost 15 40 50
Written down value of plant issued to site 190 35
Head office expenses apportioned during 10 20 50
the year
Balances carried forward at the end of the
year:
Material on site 20
Written down value of plant and
machinery 150 20 230
Wages accrued 5 10 15
Value of work certified at the end of the year
200 860 2100
Cost of work not certified at the end of the
year 55
The agreed retention rate is 10% of the value of work certified by the contractee’s
architect. Contract C is scheduled to be handed over to the contractee in the near future.
It is estimated that Rs. 305,000 shall be needed to be spent in addition to what has been
tabulated above to complete this particular contract. This amount includes an allowance
for plant depreciation, construction services and for contingencies.
You are required to prepare Contract Accounts for each of the three contracts and
recommend how much profit or loss should be taken up for the year.
[June 2011 – 3, 15
Marks]
Answer
Contract Accounts
(in Rs 000)
Particulars A B C Particulars A B C
Material on site 20 30 Wages accrued b/fwd 5 10
b/fwd
Plant on site b/fwd 77 374 Material on site c/fwd 20

Material control a/c 88 220 396 Plant on site c/fwd 150 20 230
Wages control a/c 45 100 220 Cost of work not 55
certified c/fwd
Salaries 15 40 50 Cost of sales – current 183 497 840
period (balance) c/fwd
Plant control a/c 190 35
Apportionment of 10 20 50
HO expenses
c/fwd
Total 353 522 1,135 Total 353 522 1,135
Cost of sales b/fwd 183 497 840 Attributable sales 183 442 1,122
revenue (current period)*
Profit taken this 282 Loss taken (WN-1) 55
period (WN-V)
Total 183 497 1,122 Total 183 497 1,122
Cost of work not 55 Wages accrued b/fwd 5 10 15
certified b/fwd
Material on site 20
b/fwd
Plant on site b/fwd 150 20 230
Recommendation
Working Note
I. Profit taken plus cost of sales for the current period or cost of sales less loss to date
II. Profit/loss on the three contracts are calculated by deducting the cost of sales (both
previous years and current year) from the value of work certified
(Rs 000)
Contract Profit/(Loss) Remarks
( Value of WC- Cost of sales)
Contract A 17 (Rs 200 – Rs 183)
Contract B (55) (Rs 860 – Rs 915)
Contract C 446 (Rs 2,100 – Rs 1,654)
III. Contract A:
No profit has been taken for Contract A as it is in very early stages of completion
IV. Contract B:
Prudence concept has been utilized for Contract B. All loss has been taken.
V. Contract C:
Computation of profit taken for Contract C is as follows
(Rs 000)
Cost of work certified(cost of sales to date = 814 + 840) 1,654
Cost of work not certified 55
Estimated costs to complete 305

Estimated cost of contract 2,014

Anticipated profit 406
(0.90 × Rs 2,100)
Profit taken = × Rs 406 less profit previously transferred
Rs 2,420
= Rs 3,17,000 – Rs 35,000 = Rs 2,82,000
Question No. 14
At the end of first year on 31st March, 2011 in the books of ABC Constructions Ltd. the
Bridge Contract Account stands debited with the cost of material issued, labour, overheads
expended and plant issued and it stands credited with material at site Rs. 25,000; material
returned Rs. 15,000 and plant at site Rs. 476,000 after charging depreciation at 15 percent.
The material issued, labour, overheads and plant issued debited to the contract account, are in
the ratio of 5: 4: 2: 4. The contractee's architect had certified 75 percent of the contract as
completed at the end of the year and 90 percent of the certified work value had been received
in cash Rs. 1,620,000. The accounts department informs that 2/3 of the profit on cash basis
credited to Profit and Loss account on the contract is Rs. 213,600
You are required to prepare the Bridge Contract Account showing the cost of work done but
uncertified. [June 2011 – 4(a), 8
Marks]
Answer
Bridge Contract Account for the year ended 31st March, 2011
Particulars Rs. Particulars Rs.
To Material issued 700,000 By Material at site 25,000
To Labour 560,000 By Material returned 15,000
To Overheads 280,000 By Plant at site 476,000
To Plant issued 560,000 By Work-in-Progress A/c:
To Notional Profit [W.N. 2] 356,000 Work certified 1,800,000
Work uncertified 140,000* 1,940,000
2,456,000 2,456,000
To P/L A/c 213,600 By Notional Profit b/d 356,000
To Reserve A/c 142,400
356,000 356,000
* Balancing figure.
Working Notes:
1. Calculation of the amount of Material issued, Labour, Overheads and Plant
issued:
(i) Cost of Plant issued = Rs. 476,000 × 100/85 = Rs. 560,000. [Depreciation @ 15%]
(ii) The ratio of Material issued, Labour, Overheads and Plant issued
had been given 5 : 4 : 2 : 4. So, the element wise amount would
be:
Material issued Rs. 560,000 × 5/4 = Rs. 700,000
Labour Rs. 560,000 × 4/4 = Rs. 560,000

Overheads Rs. 560,000 × 2/4 = Rs. 280,000

2. Calculation of amount of Notional Profit:
Profit taken to P/L A/c = Notional Profit × 2/3 × Cash Received/Work Certified.
Rs. 213,600 = Notional Profit × 2/3 × 90/100.
Notional Profit = Rs. 213,600 × 3/2 × 100/90
= Rs. 356,000.
3. Value of Work certified: Cash received being 90% of Work certified.
Cash Received × 100/90
= Rs. 1,620,000 × 100/90 = Rs. 1,800,000
Question No. 15
Hamro construction Pvt. Ltd. commenced a contract on Shrawan 1, 2066. The total contract
was for Rs. 2,712,500. It was decided to estimate the total profit and to take credit of P&L
A/c the proportion of estimated profit on cash basis which work completed bears to the total
contract. Actual expenditure in 2066-67 and estimated expenditure for 2067-68 are given
below:
Particulars 2066-67 (Actual) 2067-68 (Estimate)
Material Issued 456,000 814,000
Labour : Paid 305,000 380,000
: Outstanding 24,000 37,500
Plant Purchased 225,000 -
Expenses: Paid 100,000 175,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -
Plant returned to stores 75,000 150,000
(At historical Costs) (On 31 Chaitra, 2067)
Material at site 30,000 75,000
WIP Certified 1,275,000 Full
WIP uncertified 40,000 -
Cash Received 1,000,000 Full
The plant is subject to annual depreciation @ 20% WDV cost. The
contract is likely to be completed on Chaitra 2067.
Required:
i) Prepare the contract A/c for the year 2066-67.
ii) Estimate the profit on the contract for the year 2066-67 on prudent basis which
has to be credited to P/L A/c.
iii) Define Escalation Clause. [December 2011 – 1(a), 4+7+3=14 Marks]
Answer
Contract Account for the Year 2066-67
Particulars Amount Amount Particulars Amount Amount
To Material Issued 456,000 By Balance
C/D
To Labour Material at Site 30,000
Paid 305,000

Add: O/S 24,000 329,000

To Depreciation on 45,000 Work in 1,315,000
Plant Progress 1275000
Work Certified 40,000
Work
uncertified
To Expenses
Paid 100,000
Less: Prepaid 22,500 77,500
To Notional profit 437,500
1,345,000 1,345,000
To P&L a/c [ Refer 159,263 By Notional 437,500
Solutions (ii)] profit
To WIP Reserve 278,237
a/c
437,500 437,500
Cash Received
ii) Amount to be credited to P&𝐿 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 × Contract Price
1,000,000
= 432,000 ×
2,712,500
= 159,263
Working Note
1. Calculation of Estimated profit
For the purpose of profit to be taken to P & L a/c, work certified is to be considered but only
that proportion of work certified is to be taken which related to cash received. Here the
formula is –
Cash received
Estimated profit x ------------------
Contract price
Particulars Cost to Date Cost to be incurred

Materials 426,000 769000
(456,000-30,000) (30,000+814,000-75,000)
Labour 329,000 393500
(305,000+ 24,000) (380,000-24000+37500)
Depreciation 45,000 18000
(150000 ×0.80×20%×9/12)
Expenses 77500 222500
(100000-22500) (175000+22500+25000)
877,500 1403,000
Total cost to be incurred 2,280,500
Contract price 2,712,500
Estimated Profit 432,000

Escalation Clause
This clause stipulates that in case the prices of material and labour specified in the contract
increase beyond the specified limit during the execution of contract, then such an increase
over and above the limit will be borne by the contractor and contractee in the agreed ratio.
Such an increase is calculated on the basis of the prices prevailing at the time of signing the
contract and the increase should have taken place during the execution of the contract.
Question No. 16
Alcon Construction Company Ltd. commenced its business of construction on 1st April,
2010. The Trial Balance as on 31st March, 2011 showed the following balances:
Debit Credit
Particulars
Rs. Rs.
Share capital 1,000,000
Cash received on account of contract - 80% of work certified 1,200,000
Land and Buildings 300,000
Machinery at cost (75% at site) 400,000
Bank balances 40,000
Material at site 400,000
Direct Wages 550,000
Expenses at site 20,000
Lorries and Vehicles 300,000
Furniture 10,000
Office Equipment 100,000
Office Expenses 5,000
Postage and Telegrams 20,000
Rate and Taxes 30,000
Fuel and Power 25,000
2,200,000 2,200,000
The contract price is Rs. 3,000,000 and work certified is Rs. 1,500,000. The work
completed since certification is estimated at Rs. 10,000 (at cost). Machinery costing
Rs. 20,000 was returned to stores at the end of the year. Stock of material at site on 31st
March, 2011 was of the value of Rs. 50,000. Wages outstanding were Rs. 2,000.
Depreciation on machinery is at 10% per annum.
Prepare Contract Account showing the profit from the contract and also show how the work-
in-progress will appear in the Balance Sheet as at 31st March, 2011.
Answer
Contract Account
For the year ending 31st March, 2011
Particulars Rs. Rs. Particulars Rs. Rs.
By Work-in-
To Materials 400,000
progress:
To Machinery (400,000 × 75%) 300,000 Work Certified 1,500,000
Work
To Wages 550,000 10,000 1,510,000
Uncertified
Add: 2,000 552,000 By Machinery 20,000

Outstanding returned
To Expenses at Less:
20,000 2,000 18,000
site Depreciation
To Notional Profit c/d 558,000 By Machinery at site 280,000
Less:
28,000 252,000
Depreciation
By Material at site 50,000
1,830,000 1,830,000
To Profit & Loss By Notional Profit
297,600 558,000
A/c (W.N. i) b/d
To WIP – Reserve (balancing
260,400
figure)
558,000 558,000
Extracts from Balance Sheet as at 31st March, 2011
Liabilities Rs. Rs. Assets Rs. Rs.
Work-in-progress:
Work Certified 1,500,000
Work Uncertified 10,000
1,510,000
Less: Reserve 260,400
1,249,600
Less: Cash received 1,200,000 49,600
Working Notes:
(i) Profit taken to Profit & Loss Account:
(Rs. 558,000 × 2 / 3 × 80 / 100) = Rs. 297,600
(ii)Postage and Telegrams, Office Expenses, Rates and Taxes, Fuel
and Power, Depreciation on Machinery Costing Rs. 100,000
(25%) will be charged to Profit and Loss Account of the company
Question No. 17
Deluxe Ltd. undertook a contract for Rs. 500,000 as on 1st July 2011. On 30th June 2012,
when the accounts were closed, the following details about the contract were gathered.
Rs.
Materials purchased 100,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
th
Materials on hand on 30 June 2012 25,000
Wages accrued on 30th June 2012 5,000
Work certified 200,000
Cash received 150,000
Depreciation of plant 5,000
The above contract contained an escalation clause which read as follows.

In the event of materials and rates of wages increase by more than 5% the contract price
would be increased accordingly by 25% of the rise in the cost of materials and wages beyond
5% in each case.
It was found that since the date of signing the agreement, the prices of materials and wage
rates increased by 25%. The value of work certified does not take into account the effects of
the above clause.
Prepare Contract Account. [December 2012 – 3(b), 10 Marks]
Answer
Contract A/c for the Year Ended 30th June 2012
Dr. Cr.
To Materials 1,00,000 By Work-in-progress A/c:
To Wages paid 45, 000 Work certified
2,00, 000
To Wages outstanding 5, 000 Work uncertified 15, 000
To General expenses 10, 000 Materials on hand 25, 000
To Depreciation of Plant 5, 000 Contract escalation * 5, 000
To Balance c/d – notional profit 80, 000
Total 2,45, 000 Total 2,45, 000
To Profit and Loss A/c # 20, 000 By Balance b/d

80, 000
To Transfer to Reserve 60, 000
Total 80, 000 Total 80, 000
* Escalation:
Materials /wages increased by 25%
[a] Increase in material price [Rs.100000 – Rs.25000] 25/125 = Rs.15,000
[b] Increase in wages Rs.50,000 x 25/125 = Rs.10,000
Total Increase = [a] + [b] = Rs.25,000
This increase is 5% of the contract price, hence escalation clause apply. Escalation is 25% of
the rise in the cost of materials and wages beyond 5% in each case.
∴ Escalation = (25%-5%)×25000=5,000
# Amount of profit to be credited to Profit and Loss A/c: As the contract is less than 50%
complete, the following formula will have to be used for computing the amount of profit to
be credited to the Profit and Loss A/c:-
= 1/3 ×(Cash Received/Work Certified) × Notional Profit

= 1/3 × (Rs.1, 50, 000/2,00,000) × Rs.80,000
= Rs.20,000
Question No. 18

A contractor commenced a contract on 1-1-2013. The costing records concerning the

said contract reveal the following information as on 30-9-2013:
Rs.
Material sent to site 774,300
Labour paid 1,079,000
Labour outstanding as on 30-9-2013 102,500
Salary to engineer 20,500 per month
Cost of plant sent to site (1-1-2013) 771,000
th
Salary to supervisor – 3/4 time devoted to contract 9,000 per month
Administration and other expenses 460,000
Prepaid administration expenses 10,000
Material in hand at site as on 30-9-2013 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the
end of life Rs. 50,000. Some of materials costing Rs. 13,500 was found unsuitable and
sold for Rs. 10,000. Contract price was Rs. 4,500,000. On 30-9-2013 two third of the
contract was completed. The architect issued certificate covering 50% of the contract
price and contractor has been paid Rs. 2,000,000 on account. Depreciation on plant is
charged on straight line basis.
Prepare Contract Account. [December 2013 – 4(a), 8

Marks]
Answer
Contract Account
For the period 1-1-2013 to 30-9-2013
To Materials issued 774,300 By Bank – Materials sold 10,000
To Labour 1,079,000 By P/L A/c – Loss 3,500
Add: Outstanding 102,500 1,181,500 By Material in hand 75,800
By Cost of contract
To Salary to engineer (20,500 × 9) 184,500 2,639,000
c/d
To Salary to supervisor (9,000 × 9
(balancing figure)
× ¾) 60,750
To Admn.
460,000
expenses
Less: Prepaid 10,000 450,000
To Depreciation on plant (WN:1) 77,250
2,728,300 2,728,300
To Cost of contract b/d 2,639,000 By Work-in-Progress:
To Notional Profit c/d 270,750 Work certified
(balancing figure) 50% of
Rs. 4,500,000 2,250,000
Work uncertified
659,750
(WN:2)
2,909,750 2,909,750

To P/L A/c (WN:3) 160,444 By Notional Profit b/d 270,750

To Reserve
110,306
(balancing figure)
270,750 270,750
Working Notes:
1. Calculation of depreciation on plant:
Rs.
Cost of plant 771,000
Less: Residual value 50,000
Depreciable amount 721,000
Estimated life 7 years
Depreciation per annum 103,000
Depreciation for 9 months [Rs. 103,000 × 9 / 12] 77,250
2. Cost of work uncertified

Cost of contract completed is Rs. 2,639,000 which represent 2/3rd of the contract. Hence,
cost of 100% of the contract will be (Rs. 2,639,000 / 2 × 3) = Rs. 39,58,500.
Therefore cost of 50% of the contract certified is 19,79,250. Hence, cost of works
uncertified = 2,639,000 - 19,79,250 = 6,59,750
3. Calculation of Profit to be transferred:

2 Cash Re ceived
Notional Pr ofit × ×
3 Work Certified
=Rs. 270,750× (2/3)×(2,000,000/2,250,000)
=Rs. 160,444
Question No. 19
Super Builder Constructions are engaged in building contracts. One of their contracts
commenced 15 months ago remains unfinished. The following information relating to the
contract has been prepared for the year just ended:
Particulars Rs. ’000

Value of work certified at the end of the year 2,420
Cost of work not yet certified at the end of year 44
Opening balances:
Cost of work completed 330
Materials on site (physical stock) 11
During the year:
Materials delivered to site 671
Wages 638
Hire of plant 121
Other expenses 99
Closing balance : Materials on site (physical stock) 22

As soon as materials are delivered to the site, they are charged to the contract account.
A record is also kept of materials as they are actually used on the contract.
Periodically a stock check is made and any discrepancy between book stock and
physical stock is transferred to a general “Contract Material Discrepancy” account.
This is absorbed back to each contract, currently at the rate of 0.5% of materials
booked. The stock check at the year-end revealed a stock shortage of Rs. 5,500.
In addition to direct charges listed above, general overhead are charged to contracts at
5% of value of work certified. General overhead of Rs. 16,500 had been absorbed into
the cost of work completed at the beginning of the year. It has been estimated that
further costs to compete the contract will be Rs. 242,000. This estimate included the
cost of materials on site at the end of the year just finished and also a provision for
rectification.
Required
i) Determine the profitability of the above contract and recommend how much profit
should be taken for the year just ended 2013.
ii) State how your recommendation in above would be affected if the Contract Price
was Rs. 44 lakhs (rather than Rs. 27.50 lakhs) and if no estimate has been made of
costs to completion. Assume retention money = 20%.
[June 2014 – 3(a), 8+2=10 Marks]
Answer:
i) Super Builder Constructions
Contract Account for the year ended 2013
Particulars Rs.'000 Particulars Rs.'000
To Work-in-progress b/d 330.00 By Work-in-progress a/c:
To Materials b/d 11.00 Work certified 2,420.00
To Materials issued 671.00 Work uncertified 44.00
To Wages 638.00 By Material discrepancy A/c 5.50
To Plant hire charges 121.00 By Materials on site 22.00
To Other expenses 99.00
To Material discrepancy A/c 3.30
[Rs. (11 + 671 - 22) × 0.5%]
To General overheads 104.50
(Rs. 2,420 × 5% – Rs. 16.50)
To Notional profit c/d 513.70
2,491.50 2,491.50
To Profit and Loss A/c – transfer 490.78 By Notional profit b/d 513.70
To Reserve c/d 22.92
513.70 513.70
Working notes (Amount in '000):
(1) Calculation of estimated profit:
Cost incurred to date = Rs. (2,491.50 – 513.70 – 5.50 – 22.00)
= Rs. 1,950.30

Estimated total costs = Cost to date + Further estimated costs

= Rs. 1,950.30 + Rs. 242.00
= Rs. 2,192.30
Estimated total profit = Contract Price – Estimated total costs
= Rs. 2,750.00 – Rs. 2,192.30
= Rs. 557.70
(2) Profit to be taken to profit & loss A/c:
Percentage of completion = (Work certified / Contract price) × 100
= (Rs. 2,420 / Rs. 2,750) × 100
= 88%
Profit to be recognized = Estimated profit × Work certified /
Contract price
= Rs. 557.70 × Rs. 2,420 / Rs. 2,750
= Rs. 490.78
ii) If contract price were Rs. 44 lakhs and no cost estimation has been made:
Percentage of completion = (Rs. 2,420 / Rs. 4,400) ×100 = 55%
Therefore, profit recognition will be based on notional profit
Cash received = Rs. 2,420 × 80% = Rs. 1,936
Profit to be recognized = 2 / 3 × Notional profit × Cash received /
Work certified
= 2 / 3 × Rs. 513.70 × Rs. 1,936 / Rs. 2,420
= Rs. 273.97
Question No. 20
Shakti Engineers are engaged in construction and erection of a bridge under a long-term
contract. The cost incurred up to 31.03.2014 was as under:
Fabrication Rs. In Lakhs

Direct Material 280
Direct Labour 100
Overheads 60
440
Erection cost to date 110
550
The contract price is Rs. 11 crores and the cash received on account till 31.03.2014 was Rs.
6 crores.
The technical estimate of the contract indicates the following degree of completion of
work. Fabrication: Direct Material, 70%, Direct Labour and Overheads 60% Erection
40%.
You are required to estimate the profit that could be taken to Profit and Loss Account
against this partly completed contract as at 31.03.2014.

Answer
Estimation of Profit to be taken to Profit and Loss Account against partly completed
contract as at 31.03.2014.
Profit to be taken to P/L Account= 2/3 X Notional profit X Cash received
Work certified
(Refer to working notes 1,2,3,&4)
= 2/3 X Rs. 92.48 lakhs X Rs. 600 lakhs
Rs. 642.48 lakhs
= Rs. 57.576 lakhs
Working Notes:
1. Statement showing estimated profit to date and future profit on the completion of
contract
Particulars Cost to date Further Cost Total Cost
% Amount % Amount
Completion Rs. Completion Rs. Rs.
To date (a) to be done (b) (a)+(b)
Direct Material 70 280.00 30 120.00 400.00
Direct labour 60 100.00 40 66.67 166.67
Overheads 60 60.00 40 40.00 100.00
Total Fabrication cost (A) 440.00 226.67 666.67
Erection cost: (B) 40 110.00 60 165.00 275.00
Total estimated costs: (A+B) 550.00 391.67 941.67
Profit(Refer to working note 2) 92.48 65.85 158.33
642.48 457.52 1,100.00
2. Profit to date (notional profit) and future are calculated as below:

Profit to date (notional profit) = Estimated profit on whole contract X cost to date
Total Cost
= Rs. 158.33 X Rs. 550
Rs. 941.67
= Rs. 92.48 ( Lakhs)
Future Profit = Rs. 158- Rs. 92.48

= Rs. 65.85
3. Work certified
= cost of the contract to date + profit to date
= Rs. 550 + Rs. 92.49 = Rs. 642.48 lakhs
4. Degree of completion of contract to date

= Cost of the contract to date X 100
Contract Price
= Rs. 642.48 lakhs X 100
Rs. 1,100 lakhs
= 58.40%

Question No. 21
ABC Ltd is a construction company, which has undertaken three contracts. Information for
the previous year along with other details is provided to you below;
Contract A Contract B Contract C

(Rs. 000) (Rs. 000) (Rs. 000)
Contract price 1,760 1,485 2,420
Balances brought forward at the
beginning of the year:
Material on site 20 30
Written down value of plant and machinery 77 374
Wages accrued 5 10
Transactions during previous year:
Profit previously transferred to profit and loss a/c 35
Cost of work certified (cost of sales) 418 814
Transactions during current year:
Material delivered to site 88 220 396
Wages paid 45 100 220
Salaries and other cost 15 40 50
Written down value of plant issued to site 190 35
Head office expenses apportioned during the 10 20 50
Year
Balances c/fwd at the end of the year:
Material on site 20
Written down value of plant and machinery 150 20 230
Value of work certified at the end of the year 200 8 60 2,100
Cost of work not certified at the end of the year 55
The agreed retention rate is 10% of the value of work certified by the contractee’s architect.
Contract C is scheduled to be handed over to the contractee in the near future. It is estimated
that Rs. 305,000 shall be needed to be spent in addition to what has been tabulated above to
complete this particular contract. This amount includes an allowance for plant depreciation,
construction services and for contingencies.
Required:
Prepare contract accounts for each of the three contracts and recommend how much profit or
loss should be taken up for the year. [July 2015 – 3(b), 10 Marks]
Answer
Contract Accounts
(in Rs. ‘000)
A B C A B C
Materi sit
al on e 20 30 Wages accrued 5 10
b/fwd b/fwd

Materi
Plant on site b/fwd 77 374 al on site 20
c/fwd
Material control Plant on site
a/c 88 220 396 c/fwd 150 20 230
Cost
Wages control a/c 45 100 220 of work not 55
certified
c/fwd
Salarie Cost
s 15 40 50 of sales – 183 497 840
current period
(balance)
c/fwd
Plant control
a/c 190 35
Apportionme
nt of 10 20 50
HO expenses
c/fwd
353 522 1,135 353 522 1,135

Attributable
Cost of sales b/fwd 183 497 840 sales 183 442 1,122
revenu
e (current
period)
*
Loss
Profit taken this 282 taken 55
period
183497 1,122 183 497 1,122

Wage
Cost of work not certified 55 s Accrued 5 10 15
b/fwd b/fwd
Materi * Profit
al on site 20 taken
b/fwd plus cost
Plant on site of sales
b/fwd 150 20 230 for the
current
period or cost of sales less loss to date

Note
 Profit/loss on the three contracts are calculated by deducting the cost of

sales (both previous years and current year) from the value of work
certified
(Rs 000)
Contract A 17 (Rs 200 – Rs 183)
Contract B (55) (Rs 860 – Rs 915)
(Rs 2,100 – Rs
Contract C 446 1,654)
Recommendation
Computation of profit taken for Contract C is as
follows
(Rs 000)
Cost of work certified(cost of sales to date =
814 + 840) 1,654
Cost of work not certified 55
Estimated costs to
complete 305
Estimated cost of contract 2,014
Anticipated profit 406
Rs 406 less profit previously
Profit taken =(0.90R s 2 ,1 0 0 ) transferred
Rs 2,420
= Rs 3,17,000 – Rs 35,000 = Rs 2,82,000
 No profit has been taken for Contract A as it is in very early stages of completion
 Prudence concept has been utilized for Contract B. All loss has been taken.
Question No. 22
Trisha Construction Ltd., who prepares its account on 31st December each year, commenced
a contract on 1st April 2014. The costing records concerning the said contract reveal the
following information on 31st December, 2014;
Rs.
Materials charged to site 258,100
Labour engaged 560,500
Foremen’s salary 79,300
Plants costing Rs. 260,000 had been on site for 146 days. Their working life is estimated at 7
years and their final scrap value at Rs. 15,000. A supervisor, who is paid Rs. 4,000 p.m., has
devoted approximately three-fourths of his time to this contract. The administrative and other

expenses amount to Rs. 140,000. Materials in hand at site on 31st December, 2014 cost Rs.
25,400. Some of the material costing Rs. 4,500 was found unsuitable and was sold for Rs.
4,000 and a part of the plant costing Rs. 5,500 (on 31.12.2014) unsuited to the contract was
sold at a profit of Rs. 1,000.
The contract price as originally negotiated was Rs. 2,200,000 but it was accepted by the
contractor for Rs. 2,000,000. On 31st December, 2014, two thirds of the contract was
completed. Architect’s certificate had been issued covering 50% of the contract price and Rs.
750,000 had so far been paid on account.
Prepare contract account and state how much profit or loss should be included in the financial
accounts to 31st December, 2014. Workings should be clearly given. Depreciation is charged
on time basis.
Also prepare the Contractee’s account and show how these accounts should appear in the
balance sheet as on 31st December, 2014. [December 2015 – 3(b),
Marks]
Answer
Trisha Construction Ltd.
Contract Account
(For the period of 9 months: between 1st April and 31st Dec. 2014)
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Materials 2,58,100 By Materials at site 25,400
To Labour engaged 5,60,500 By Materials sold 4,000
To Foremen’s salary 79,300 By Profit & Loss A/c 500
To Supervisor’s salary (W.N. 1) 27,000 (Loss on material sale)
To Depreciation of plant (W.N.2) 14,000 By Cost of work done c/d 10,49,000
To Administrative and other
expenses 1,40,000
10,78,900 10,78,900
To Cost of work done b/d 10,49,000 By Work-in-Progress
To Notional Profit c/d 2,13,250 Work certified 10,00,000
Work uncertified (W.N.3) 2,62,250
12,62,250 12,62,250
To Profit & Loss A/c (W.N.4) 1,06,625 By Notional Profit b/d 2,13,250
To Profit Reserve 1,06,625
2,13,250 2,13,250
Profit transferred to P & L A/c = 2/3 × Rs. 2,13,250 × Cash received / Work Certified
= 2/3 × Rs. 2,13,250 × Rs. 7,50,000/Rs. 10,00,000
= Rs. 1,06,625
Contractee’s Account
Dr. Cr.


Rs. Rs.
To Balance c/d 7,50,000 By Cash 7,50,000
Balance Sheet
As on 31st December, 2014 (extracts)
Liabilities Amount Assets Amount Amount
Rs. Rs. Rs.
Profit & Loss A/c (W.N.4) 1,07,125* Work-in-Progress
Work Uncertified 2,62,250
12,62,250
Less : Reserve 1,06,625
11,55,625
Less: Cash 7,50,000 4,05,625
Received Material 25,400
at site 2,40,500*
Plant at site (W.N.5)
Working Notes :
1. Supervisor’s Salary = ¾ × (9 months × Rs. 4,000) = Rs. 27,000
2. Depreciation of Plant = Rs. 2,60,000 Rs.15,000 × 146 = Rs.14,000
7 Years 365
3. Cost of Work Uncertified:
Cost of 2/3rd of the Contract is Rs. 10,49,000
Hence the Cost of the Contract is Rs. 10,49,000 × 3/2 = Rs. 15,73,500.
The cost of 50% of the Contract, which has been completed and certified by the
Architect is Rs. 7,86,750 (Rs. 15,73,500 ÷ 2).
The Cost of Work Uncertified = Cost of work done - Cost of Work Certified is
= Rs. 10,49,000 – Rs. 7,86,750
= Rs. 2,62,250
4. Profit & Loss Acccount

Rs. Rs.
To Contract A/c 500 By Contract A/c 1,06,625
(Loss on the sale of (Profit transferred)
material) To Balance c/d 1,07,125* By Profit on the Sale of Plant 1,000
1,07,625 1,07,625
5. Plant Account
Dr. Cr.
Rs. Rs.
To Balance b/d 2,60,000 By Current A/c (Depreciation) 14,000

To P & L A/c 1,000 By Cash Sale 6,500

(Profit on Sale of Plant) By Balance c/d 2,40,500*
2,61,000 2,61,000
Note : Plant A/c can also form part of Contract A/c.

Note: If ledger is not prepared but figure correct then ok.
Question No. 23
Rex Ltd. commenced a contract on1-7-2015 .The total contract price was Rs. 5,00,000 but
Rex Limited accepted the same for Rs. 4,50,000. It was decided to estimate total profit and
take to the credit profit & loss Account that proportion of estimated profit on cash basis
which the work completed bore to the total contract. Actual expenditure till 31-12-2015 and
estimated expenditure in 2016 are given below:
Expenses Actual till 31-12- Estimated for
2015(Rs) 2016(Rs)
Materials 75,000 1,30,000
Labor 55,000 60,000
Plane Purchase(original cost) 40,000 -
Miscellaneous Expenses 20,000 35,500
Plant returned to Store at 10,000 25,000
Original Cost on 31.12.2015) (on 30.9.2016)
Material At site 5,000 -
Work Certified 2,00,000 Full
Work Un Certified 7,500 Nil
Cash Received 1,80,000 Full
The plant is subject to annual depreciation @20% of original cost .The contract is
likely to complete on 30.9.2016.
It is the policy of the company to charge depreciation on time basis.
You are require to prepare the contract account for the year ended 31.12.2015.
Answer
Rex Limited
Contract Account for the year ending 31-12-2015
Particular Amount Particular Amount
Rs. Rs.
To Material 75,000 By plant returned to 9,000
store
To Labor 55,000 By plant at site 27,000
To plant 40,000 By material at site 5,000
To misc. Expenses 20,000 By Work in progress
Work Un Certified 7,500

To P&L A/c 26,400

To working progress 32,100
Reserve
2,48,500 2,48,500
Working notes
1. Memorandum Contract Account
1-7-2015to 30-9-2016
Particular Amount Particular Amount
Rs. Rs.
To Material(75,000+1,30,000) By plant return to 27,750
2,05,000 stores(9,000+18,750)
To Labor (55,000+60,0000 1,15,000 By plant at site(5,000- 3,750
1,250)
To plant 40,000 By contractee’s account 4,50,000
To misc. Expenses 55,500
(20,000+35,500)
To Estimated P&L A/c 66,000
4,81,500 4,81,500
2.Profit to be transfer to Profit &Loss A/C on the contract ending on 31st December 2015
=Estimated profit× Cash Received× Work Certified
Work certified Total contract Price
=Rs 66,000× Rs1,80,000× Rs,2,00,000
Rs2,00,000 Rs4,50,000
=Rs 26,400
3.(1) Plant return to store on 31-12-2015
Original cost Rs 10,000
Less : Depreciation @20% for six month Rs 1000
Rs 9,000
(2) Plant at site on 31-12-2015
=Original cost of plant-Plant return-Depreciation
= 40,000-10000-3000
=Rs.27,000
(3) ) Plant return to store on 30-9-2016
Less Depreciation @20% for six month Rs 6,250
Rs 18,750
(4)Plant at site on 30-9-2016#
Less: Depreciation for Fifteens months Rs 1,250
Rs 3,750
# Alternatively, it could have also been assumed that plant costing Rs. 5,000 (i.e. 40,000-
35,000) was exhausted at the contract site itself during 2016 and it was a normal loss.
Consequently the figure of the profit etc. would have changed accordingly.
Question No. 24

Deluxe Limited undertook a contract for Rs. 5,00,000 on 1st July 2016. On 30th June 2017,
when the accounts were closed, the following details about the contract were gathered:
Rs. Rs.
Wages accrued
Materials purchased 1,00,000 30.6.2017 5,000
Wage paid 45,000 Work Certified 2,00,000
General expenses 10,000 Cash received 1,50,000
Plant purchased 50,000 Work Uncertified 15,000
Materials on hand
30.6.2017 25,000 Depreciation on plant 5,000
The above contract contained an escalation clause which reads as follows:
In the event of prices of materials and rates of wages increase by more than 5%, the
contract price will be increased accordingly by 25% of the rise in the cost of materials
and wages beyond 5% in each case.
It was found that since the date of signing the agreement the prices of materials and
wages rates increased by 25%. The value of the work certified does not take into
account the effect of above clause.
Prepare the contract account. [June 2017 – 3(b), 8
Marks]
Answer
In the Books of Deluxe Ltd. For the period 1st July 2016- 30th June 2017.
Contract Account
Rs.
To Materials 1,00,000 By Work-in-progress:
To Wages (45,000 +
5,000) 50,000 Work certified 2,00,000
To General expenses 10,000 Work uncertified 15,000
To Depreciation on By Contract
Plant 5,000 escalation(WN: 1) 5,000
To Profit : P&L (WN:
2) 20,000 By Materials in hand 25,000
WIP
(Reserve) 60,000
2,45,000 2,45,000
Working Notes:
1. Escalation Charges:
(a)Material
Total increase up to 5% beyond
Effect of increase in 75000*(25/125) 75,000*(5/125)
Price of Materials =15,000 =3,000 =12,000
(b)Wage
Effect of increase in 50,000*(25/125) 50,000*( 5/125)
Wage rate =10,000 =2,000 =8,000
Total Increase (a-b) =25,000 =5,000 =20,000
Increase in contract price
(25% of Increase beyond 5%) 20,000*(25/100)= 5000

2. Computation of Profit transferred to Profit & Loss Account:

Since more than 1/4th but less than ½ of the contract has been completed, 1/3
of the profit earned as reduced on cash basis has been transferred to Profit and
Loss Account.
80,000 * 1/3 * 1, 50,000/ 2, 00,000 = Rs. 20,000.
Question No. 25
Juntara Construction Ltd. undertook a contract for Rs. 5,00,000 on 1st July, 2015. On 30th June
2016 when the accounts were closed, the following details about the contract were gathered:
Particulars Rs.
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant Purchased 50,000
Materials on hand 30-6-2016 25,000
Wages accrued 30-6-2016 5,000
Cash received 1,50,000
Depreciation of plant 5,000
The above contract contained escalation clauses which read as follows:

“In the event of prices of materials and rates of wages increase by more than 5% the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case”.
It was found that since the date of signing the agreement the prices of materials and wage
rates increased by 25%. The value of the work certified does not take into account the effect
of the above clause.
Prepare the contract account. [December 2017 – 4(b), 7
Marks]
Answer
In the books of Juntara construction Ltd.
Contract Account
Dr. for the period 1st July 2015 to 30th June 2016
Cr.
To, Material purchased A/c 1,00,000 By, Material on hand 25,000
To, Wages A/c 50,000 By, Work certified 2,00,000
To, General Expenses A/c 10,000 By, Work uncertified 15,000 2,15,000
To, Depreciation on plant 5,000 By, Escalation claim 5,000
To, Notional Profit c/d 80,000
2,45,000 2,45,000
To, P & L A/c 20,000 By, Notional Profit b/d 80,000
To, Reserve c/d 60,000

80,000 80,000
Working Notes:
1. Contract Escalation
Cost of material & wages incurred = Rs. (1,00,000 + 45,000 + 5,000 – 25,000 )
= Rs.1,25,000
Cost of material & wages before increase in prices = Rs. (1,25,000 x 100/125 )
= Rs.1,00,000
Increase in contract price = 25/100 [Rs.1,25,000 – (Rs.1,00,000 x 105/100)]
= Rs.5,000
2. Percentage of completion of Contract
Work Certified = 2,00,000 × 100 = 40%
Contract Price 5,00,000
3. Profit to be transferred to P&L Account

1/3 x Notional Profit x Cash Received/Work Certified
=1/3 x Rs.80,000 x Rs.1,50,000/Rs.2,00,000
=Rs. 20,000
Question No. 26
Kalika Limited obtained a contract No. 999 for Rs. 50 lacs. The following details are available
in respect of this contract for the year ended Ashad 31, 2074:
Rs.
Materials purchased 1,60,000
Materials issued from stores 5,00,000
Wages and salaries paid 7,00,000
Drawing and maps 60,000
Sundry expenses 15,000
Electricity charges 25,000
Plant hire expenses 60,000
Sub-contract cost 20,000
Materials returned to stores 30,000
Materials returned to suppliers 20,000
The following balances relating to the contract No. 999 for the year ended on Ashad 31,
2073 and Ashad 31, 2074 are available:
as on 31st Ashad, 2073 as on 31st Ashad, 2074

Work certified 12,00,000 35,00,000
Work uncertified 20,000 40,000
Materials at site 15,000 30,000
Wages outstanding 10,000 20,000

The contractor receives 75% of work certified in cash.

Prepare Contract Account. [June 2018 – 4(b), 5 Marks]
Answer
In the books of Kalika Ltd.
Contract No. 999 Account for the year ended 31st Ashad, 2074
Dr. Cr.
Amount
Particulars Particulars Amount (Rs.)
(Rs.)
By Material
To Work in progress bld: 30,000
returned to store
By Material
-Work certified 12,00,000 20,000
returned to suppliers
By Stock (Material)
-Work uncertified 20,000 30,000
c/d
15,000 By Work in
To Stock (Materials) bld
progress c/d:
To Material purchased 1,60,000 -Work certified 35,00,000
To Material issued 5,00,000 -Work uncertified 40,000
To Wages paid 7,00,000
Less: Opening 0/s (10,000)
Add: Closing 0/s 20,000 7,10,000
To Drawing and maps* 60,000
To Sundry expenses 15,000
To Electricity charges 25,000
To Plant hire expenses 60,000
To Sub- contract cost 20,000
To Notional profit cld
(balancing figure) 8,35,000
36,20,000 36,20,000
By Notional profit
To Costing P& L Alc (W N -1) 4,17,500 8,35,000
b/d
To WIP Reserve (balancing
4,17,500
figure)
8,35,000 8,35,000
*Assumed that expenses incurred for drawing and maps are used exclusively for this contract
only.
Working Note:
% Completion of contract = Work certified/Contract price×100%
= 35,00,000/50,00,000×100%
= 70%
Profit to be transferred to Costing Profit & Loss Account

=2/3*Notional profit* Cash received/Work certified

= 2/3*8,35,000*75/100
= Rs. 4,17,500

CHAPTER 7:
PROCESS COSTING

Question No. 1
Distinguish Between:
(a) Normal Process Loss and Abnormal Process Loss [June 2007 – 6(d), 4 Marks]
Answer
Normal Process Loss:
It is defined as the loss of material, which is inherent in the nature of work. Such a loss
can be reasonably anticipated from the nature of the material, nature of operation, the
experience and technical data. The cost of normal process loss in practice is absorbed by
good units produced under the process. The amount realized by the sale of normal process
loss units should be credited to the process account.
Abnormal Process Loss:
It is defined as the loss in excess of the pre-determined loss. This type of loss may occur
due to the carelessness of the worker, a bad plant design or operation etc. Such a loss
cannot obviously be estimated in advance. But it can be kept under control by taking
suitable measures. The cost of an abnormal process loss unit is equal to the cost of a good
unit. The total cost of abnormal process loss is not treated as a part of the cost of the
product. In fact, the total cost of abnormal process loss is debited to costing profit and
loss account
(b) Abnormal Loss and abnormal Gain

[June 2011 – 5(e), 4 Marks] [June 2014 – 5(b), 2.5 Marks]
Answer
Abnormal loss:
It may occur due to the carelessness of workers, a bad plant design or operation etc. Such
a loss cannot obviously be estimated in advance. But it can be kept under control by
taking suitable measures. The cost of an abnormal process loss unit is equal to the cost of
a good unit. The total cost of abnormal process loss is credited to the process account
from which it arise. Cost of abnormal process loss is not treated as a part of the cost of the
product. In fact, the total cost of abnormal process loss is debited to costing profit and
loss account.
Abnormal gain:
Sometimes, loss under a process is less than the anticipated normal figure. In other
words, the actual production exceeds the expected figures. Under such a situation the
difference between actual and expected loss or actual and expected production is known
as abnormal gain. So abnormal gain may be defined as unexpected gain in production
under normal condition. The process account under which abnormal gain arises is debited
with the abnormal gain. The cost of abnormal gain is computed on the basis of normal
production
Question No. 2
Write short notes on:

(a) Abnormal gain in process costing.

[December 2009 – 6(b), 4 Marks] [December 2016 – 6(b), 2.5 Marks]
Answer
If in a process, the actual process loss, which is inherent in a process, is less than the
estimated normal loss, the difference is considered as abnormal gain. Abnormal gain is
accounted for the same way as abnormal process loss.
The concerned account is debited with the abnormal gain units and value, and the
abnormal gain account is credited. The abnormal gain account debited with the figure of
reduced loss in units and value and the balance of the abnormal gain account is
transferred to the costing profit and loss account
(b) Operation costing [June 2012 – 6(d), 5 Marks] [December 2012 – 6(d), 5
Marks] [December 2015 – 6(d), Marks]
Answer
It is defined as the refinement of process costing. It is concerned with the determination
of the cost of each operation rather than the process. In those industries where a process
consists of distinct operations, the method of costing applied or used is called operation
costing. Operation costing offers better scope for control. It facilitate the computation of
unit operation cost at the end of each operation by dividing the total operation cost by
total input units. It is the category of the basic costing method, applicable, where
standardized goods or services result from a sequence of repetitive and more or less
continuous operations, or processes to which costs are charged before being averaged
over the units produced during the period. The two costing methods included under this
head are process costing and service costing.
Question No. 3
Briefly explain treatment of Normal Process Loss, Abnormal Process Loss and Abnormal
gain. [December 2004 – 5(b), 7 Marks]
Answer
Loss of material in inherent during processing operation. The loss of material under different
process arises due to reasons like evaporation or changes in the moisture content etc. Process
loss is defined as the loss of material arising during the course of a processing operation and is
equal to the difference between the input quantity of the material and its output. There are two
types of material losses viz. (i) normal loss and (ii) abnormal loss.
Normal Process Loss – It is defined as the loss of material which is inherent in the nature of
work. Such a loss can be reasonably anticipated from the nature of the material, nature of
operation, the experience and technical data. The cost of normal process loss in practice is
absorbed by good units produced under the process. The amount realized by the sale of
normal process loss units should be credited to the process account.
Abnormal Process Loss – It is defined as the loss in excess of the pre-determined loss. This
type of loss may occur due to the carelessness of workers, a bad plant design or operation etc.

Such a loss cannot obviously be estimated in advance. But it can be kept under control by
taking suitable measures. The cost of abnormal process unit is equal to the cost of a good
unit. The total cost of abnormal process loss is not treated as a part of the cost of the product.
In fact, the total cost of abnormal process loss is debited to costing profit and loss account.
Abnormal Gain – Sometimes, loss under a process is less than the anticipated normal figure.
In other words, the actual production exceeds the expected figures. Under such a situation the
difference between actual and expected loss or actual and expected production is known as
abnormal gain. So, abnormal gain may be defined as unexpected gain in production under
normal conditions. The process account under which abnormal gain arises is debited with the
abnormal gain. The cost of abnormal gain is computed on the basis of normal production.
Question No. 4
What is meant by Equivalent Production Units in Process Costing?
[June 2001 – 3(a), 6 Marks] [December 2007 – 5(d), 4 Marks]
Answer
Equivalent production units mean converting the incomplete production units into their
equivalent completed units. Under each process, an estimate is made of the percentage
completion of work-in-progress with regard to different elements of cost, Viz. material,
labour and overheads. It is important that the estimate of percentage of completion should be
as accurate as possible.
The formula for computing equivalent completed units is:
Equivalent Completed — Actual number of units in × Percentage of

units the process of manufacture work completed
The calculation of equivalent completed units is required to ascertain the cost of work-
in-progress at the start and at end of the process.
Question No. 5
Explain the methods of valuation of work-in-process.
Answer
The valuation of work-in-process can be made in the following three ways, depending upon
the assumptions made regarding the flow of costs.
First-in-first out (FIFO) method
Last-in-first out (LIFO) method
Average cost method
A brief account of the procedure followed for the valuation of work-in-process under the
above three methods is as follows;
FIFO method:

According to this method the units first entering the process are completed first. Thus the
units completed during a period would consist partly of the units which were incomplete at
the beginning of the period and partly of the units introduced during the period. The cost of
completed units is affected by the value of the opening inventory, which is based on the cost
of the previous period. The closing inventory of work-in-process is valued at its current cost.
LIFO method:
According to these method units last entering the process are to be completed first. The
completed units will be shown at their current cost and the closing-work in process will
continue to appear at the cost of the opening inventory of work-in-progress along with current
cost of work in progress if any.
Average cost method:
According to this method opening inventory of work-in-process and its costs are merged with
the production and cost of the current period, respectively. An average cost per unit is
determined by dividing the total cost by the total equivalent units, to ascertain the value of the
units completed and units in process.
Numerical Questions
Question No. 6
1,200 kgs of a material were charged to Process I at the rate of Rs 2 per kg. The direct labour
accounted for Rs 200 and other departmental expenses amounted to Rs 7,060. The normal
loss is 10% of the input whereas the net production was 1,000 kgs. If the process scrap is
saleable at Re 1 per kg. Calculate the value of normal loss and abnormal loss and show the
ledger account of Process I. [June
2008 – 2(a), 7 Marks]
Answer
Process I A/C
Particulars Unit Cost Amount Particulars Units Cost Amount

Per Per
Unit Unit
To material 1200 2 2400 By Normal loss 120 1 120
To direct labour 200 By transfer to 1,000 8.833 8833
Process II
By 7060 By Abnormal 80 707
Departmental loss
Expenses
1,200 9,660 1,200 9,660
Working note:
Cost per unit = (9660 -120)/ 1,080 = Rs 8.833
Normal loss A/C
Particulars Unit Amount Particulars Units Amount

To Process I 120 120 By Bank 120 120

120 120 120 120
Abnormal loss A/C

Particulars Amount Particulars Amounts
To Process I 707 By Bank(80 X 1) 80
By P/L A/C 627
707 707
Question No. 7
A product passes through three processes AA, BB and CC. 20,000 units @ Rs. 2 per unit
were issued to Process AA. The other direct expenses are as under:
Process AA (Rs.) Process BB (Rs.) Process CC (Rs.)
Direct Labour 10,000 20,000 15,000
Direct Expenses 2,500 5,575 4,015
The wastage in Process AA and Process BB are 5% and in Process CC 10%. The wastage in
various processes are sold at the following rates:
Process AA @ Re. 1 per unit
Process BB @ Rs. 5 per unit
Process CC @ Rs. 7 per unit
The overhead charges were 150% of direct labour. The output of each process is immediately
transferred to the next process and output of process CC is transferred to finished stock.
You are required to show the Process accounts. [June 2001 – 3(b), 10 Marks]
Answer
Process AA Account
Qty. Rate Rs. Qty. Rate Rs.
Units Rs. Units Rs.
To Units Int. 20,00 2.00 40,00 By Wastage 1,000 1.00 1000
0 0
To Direct 10,00 By Process BB 19,00 3.50 66,500
Labour 0 Output 0
transferred
To Direct exp. 2,500
To Overheads 15,00
@ 150% on 0
DW
20,00 67,50 20,00 67,500
0 0 0

Process BB Account
Units Rs. Units Rs.
To Process AA 19,00 3.50 66,500 By Wastage 950 5 4,750
0
To Direct 20,000 By Process CC 18,05 6.50 1,17,32
Labour Output 0 5
transferred
To Overheads 30,000
@ 150% on
DL
19,00 1,22,07 19,00 1,22,07
0 5 0 5
Process CC Account
Units Rs. Units Rs.
To Process BB 18,05 6.50 1,17,32 By Wastage 1,805 7 12,635
0 5
To Direct 15,000 By Finished 16,24 9 1,46,205
Labour Goods Stock 5
A/C
To Overheads 22,500
@ 150% on
DL
18,05 1,58,84 18,05 1,58,840
0 0 0
Question No. 8
In a company, raw material is introduced in Process A and the finished output of Process A
Becomes the input of Process B. The finished output of Process B is inturn transferred to the
warehouse. The following information has been gathered for a period:
Process A Process B
Raw Materials @ Rs. 10 per kg 10,000 Kg –
Direct materials Rs. 60,000 20,000
Direct wages Rs. 80,000 60,000
Production overheads Rs. 40,000 30,000
Output 8,800 Kg 8,400 Kg

Normal Loss 10% 5%

Normal loss realisation per Kg. Rs. 2 Rs. 3
You are required to prepare the process accounts and abnormal effectives account.
[June 2002 – 4(c), 8 Marks]
Answer
Process - A
Rs. Rs.
To By
Raw Materials 10000 x 10 100000 Normal loss 1000 x 2 2000
Direct Materials 60000 Ab Loss 200 x 30.8889 6178
Direct Wages 80000 Trf. To Process B 271822
Prod. Overheads 40000 ______
280000 280000
Input 1000 Total debits 280000

Normal Loss 10% 1000 Cr. for Normal Loss 2000
Should be output 9000 Net debits 278000
Actual output 8800 ÷ 9000 = 30.8889
Ab Loss 200
Process - B
Rs. Rs.
To By
Process A 8800x30.8889 271822 Normal loss 440 x 3 1320
Direct Materials 20000 Trf. To Ware house 382322
Direct Labour 60000 8400 x 45.5146
Prod. Overheads 30000
Abnormal Gain 40x45.5146 1820 ______
383642 383642
Input 8800 Total debits 381822

Normal Loss 5% 440 Cr. for Normal Loss 1320
Should be output 8360
Actual output 8400 380502 ÷ 8360_______
Ab. Loss 40 45.514.6

Abnormal effectives A/c
Rs. Rs.
To Process A 200 6178 By Process B 40 1820

By Sales of A 200 x 2/- 400
By P/L A/c 3958
_____ _____
6178 6178
Question No. 9
A firm produces products through Crushing Process and Finishing Process.
The normal losses of each process are 5% in Crushing and 10% in Finishing Process.
Scrap value recovered out of the sale of the normal loss quantities of Crushing Process and
Finishing Process are Rs. 3 per unit and Rs. 5 per unit respectively.
Main raw material issued to Crushing Process was 20,000 units at Rs. 2 per unit.
Crushing Process (Rs.) Finishing Process (Rs.)

Subsidiary Materials 55,000 80,000
Direct labour 50,000 60,000
Other overall expenses 29,000 31,000
Actual outputs realized during the period were 18,000 units from Crushing Process and
16,500 units from Finishing Process.
Required: 1. Crushing Process Account showing cost per unit of output.

2. Finishing Process Account showing cost per unit of output.
[June 2003 – 4(b), 3+3=6 Marks]
Answer
1. Crushing Process
To Main Raw 20,000 40,000 By Normal Loss 1,000 3,000
Material
To Subsidiary 55,000 5% at Rs. 3/ unit
Material
To Direct Labour 50,000 By Abnormal Loss 1,000 9,000
To Other Overall 29,000 By Finishing Process 18,000 1,62,000
Exp. at Rs. 9/ unit
20,000 1,74,000 20,000 1,74,000

2. Finishing Process
To Crushing Process 18,000 1,62,000 By Normal loss 1,800 9,000
To Subsidiary 80,000 at 10% of Rs. 5/unit
Material
To Direct Labour 60,000 By Finished goods 16,500 3,30,000
To Other Overall 31,000 at Rs. 20/ unit
Exp.
To Abnormal 300 6,000
Effective
18,300 3,39,000 18,300 3,39,000
Question No. 10
An industry produces goods on batch basis which need to be processed by crushing and then
by finishing to realize finished goods.
Input quantity of 10,00 units costing Rs. 25,000 was introduced in crushing process.
Crushing Finishing
Process Process
Subsidiary materials in Rs. 21,300 18,650

Direct wages in Rs. 20,000 17,000
Work expenses in Rs. 10,000 9,000
Normal loss 5% 10%
Disposal of normal loss per 100 units in Rs. 60 150
Output in units 9,400 8,500
Required: Process Account. [June 2004 – 5(b), 8
Marks]
Answer
Crushing Process Account
To Input quantity 10,000 25,000 By Normal loss 500 300

To Subsidiary 21,300 By Abnormal loss 100 800
Mat.
To Direct Wages 20,000 By Finishing Process
at
To Work _____ 10,000 Rs. 8 each 9,400 75,200
Expenses
10,000 76,300 10,000 76,300

Finishing Process Account
To Crushing 9,400 75,200 By Normal loss 940 1,410

To Subsidiary 18,650 By Finishing goods 8,500 119,00
at 0
To Direct Wages 17,000 Rs. 14 each
To Work 9,000
Expenses
To Abnormal 40 560 _____ ______
gain
9,440 120,41 9,440 120,41
0 0
Question No.11
ABC Limited operated process costing. During the month of January 2004, 10,000
Units costing NPR 3 per unit were introduced in process II. There was no work in
Progress at the beginning. The other information is given below :
Expenses debited to the process :

i. Direct Material NPR 19,600
ii. Labour NPR 23,316
iii. Overheads NPR 44,689
Normal loss in process : 1% of input

Closing work in progress : 350 units and degree of completion is as follows.
Material 100%
Labour and Overheads 50%
Finished output :9,500 units

Degree of completion of abnormal losses :
Material 100%
Labour and Overhead 80%
Units scrapped as normal loss were sold at Re.1 per unit;

All the units of abnormal losses were sold at Re.2.50 per unit.
You are required to prepare :
i. statement of Equivalent Productions;

ii. statement of cost of finished goods, abnormal loss and closing work in
progress:

iii. Process II account;

iv. Abnormal Loss account. [December 2005 – 5, 16 Marks]
Answer
Statement of Equivalent Production (Process II )

Total Materials Labour Overhead
Units
Units Compl. Units Compl. Units. Compl.
Finished output 9500 9500 100% 9500 100% 9500 100%
Normal loss 100
Abnormal Loss 50 50 100% 40 80% 40 80%
(bal figure)
Closing WIP 350 350 100% 175 50% 175 50%
Total 10,000 9900 9715 9715
tatement of cost per equivalent unit
Material Labour Overhead
Units introduced (10,000*3) 30,000
Add: Direct Material 19,600
Total 49,600
Less : Scrap sale 100
Balance 49,500 23,316 44,689
Cost per equiv. units 49,500 23,316 41,689

9900 9715 9715
=5 = 2.4 = 4.6
Total cost per unit of production = 5+2.4+4.6 = Rs.12
Statement of cost
Finished goods = 9500 * 12 = 1, 14,000

Abnormal loss
Material 50 * 5 = 250
Labour 40 * 2.4 = 96
Overhead 40 * 4.6 = 184
Closing WIP
Material 350 * 5 = 1,750
Labour 175 * 2.4 = 420
Overhead 175 * 4.6 = 805 2,975
Total 1,16,975

Process II Account
Units Amount Units Amount
To unit introduced 10,000 30,000 By Normal Loss 100 100
To Direct Material 19,600 By Abnormal Loss 50 530
To Labour 23,316 By Finished output 9500 1,14,000
To Overhead 44,689 By Closing WIP 350 2,975
10,000 1,17,605 10,000 1,17,605
Abnormal Loss A/c

Particulars (Dr) Amount Particulars (cr) Amount
To Process A/C 530 By Costing P/L A/C 405
By Normal Loss A/c 125
530 530
Question No.12
The following date relate to process Q of a Multiprocess Company:
i. Opening work in process 4,000 units

Degree of completion :
Materials 100% Rs. 24,000
Labour 60% Rs. 14,400
Overheads 50% Rs. 7,600
ii. Received during the month of Shrawan

2062, from Process - P 40,000 units
iii. Expenses incurred in Process Q during the

month :
Materials Rs. 99,000
Labour Rs. 1,58,200
Overheads Rs. 59,120
iv. Closing work in process : 3,000 units

Degree of completion :
Materials 100%
Labour 50%
Overheads 40%

v. Units Scrapped 4,000 units

Degree of completion:
Materials 100%
Labour 80%
Overheads 70%
vi. Normal Loss : 5% of current inputs
Complete units are transferred to warehouse.

You are required to prepare (using FIFO method) :
a. Equivalent units statement.
b. Statement of cost per equivalent unit and total cost.
c. Process Q account.
d. Any other account necessary. [June 2006 – 2, 15 Marks]
Answer
Statement of equivalent production
Output./ lte Total Direct Direct Overhea
Material labour ds %
% %
Qty Qty. Qty.
Opening wip processed 4000 0 0 40 1600 50 2000
Units started & finished 3100 100 3100 100 3100 100 31000
0 0 0
Abnormal loss 4000 100 4000 80 3200 70 2800
Closing wip 3000 100 3000 50 1500 40 1200
Equivalent Production 3800 3730 37000
0 0
Statement of cost per equivalent unit
Direct material = 99,000/38,000 = 2.60526316

Direct Labour = 1,58,200/37,300 = 4.24128686
Overheads = 59120/37,000 = 1.59783784
Statement of cost apportionment
Opening stock further Direct material -

processe
Direct Labour 1600*4.24129 6,786

Overheads 2000*1.59784 3,196

9,982
Started & finished Direct material 31000*2.60526 80,763
Direct Labour 31000*4.24129 131,480
Overheads 31000*1.59784 49,533
261,776
Total 271,758
Cost of opening 46,000
Cost of finished goods 317,758
Abnormal Loss Direct material 4000*2.60526 10,421

Direct Labour 3200*4.24129 13,572
Overheads 2800*1.59784 4,474
28,467
Closing WIP Direct material 3000*2.60526 7,816

Direct Labour 1500*4.24129 6,362
Overheads 1200*1.59784 1,917
16,095
Question No.13
The finished product of a manufacturing company passes through three processes, Process I,
Process II and Process III. The normal wastage in each process is 5%, 7% and 10%
respectively for the processes I, II and III respectively (calculated with reference to the
number of units fed into each process). The scrap generated out of wastage has a sale value of
Rs. 0.70, Rs. 0.80 and Rupee 1 per unit in the process I, II and III respectively.
The output of each process is transferred to the next process and the finished output emerges
from the process III are transferred to stock. There was no stock of work-in-process in any
process in a particular month.
The details of cost data for the month are given below:
Process I Process II Process III
Materials Used (Rs.) 1,20,000 40,000 40,000
Direct Labour Cost (Rs.) 80,000 60,000 60,000
Production Expenses (Rs.) 40,000 40,000 28,000
Output in Units (Actual) 38,000 34,600 32,000
Process I was fed with 40,000 units of raw input at a cost of Rs. 3,20,000.
You are required to prepare Process I, II and III accounts. [December 2007 – 2(a), 10
Marks]

Answer
Process I Account
Units Rs. Units Rs.
To Units Introduced 40,000 3,20,000 By Normal Loss A/C 2,000 1,400
@ Rs. 0.70 per unit
To Materials Used 120,000 By Process II A/C 38,000 5,58,600
@ Rs. 14.70 per unit
To Direct Labor Cost 80,000
To Production Exps. 40,000
40,000 5,60,000 40,000 5,60,000
Process II Account
Units Rs. Units Rs.
To Process I A/C 38,000 5,58,600 By Normal Loss A/C 2,660 2,128
@ Rs. 0.80 per unit
To Materials Used 40,000 By Abnormal Loss 740 14,584
A/C
To Direct Labour Cost 60,000 By Process III A/C 34,600 6,81,888
(Balancing Figure)
38,000 6,98,600 38,000 6,98,600
Process III Account

Units Rs. Units Rs.
To Process II A/C 34,600 6,81,888 By Normal Loss A/c 3,460 3,460
@ Re. 1.00 per unit
To Materials Used 40,000 By Finished Stock A/c 32,000 8,28,700
To Direct Labour Cost 60,000
Sub-total: 8,09,888
To Abnormal Gain 860 22,272
A/C
35,460 8,32,160 35,460 832,160
Working Notes:
1. Abnormal Loss in Process II (Units):
Abnormal Loss = Input in Process II – Normal Loss in Process II – Output in Process II
= 38,000 – 7% of 38,000 – 34,600 (Given) = 38,000 – 2,660 – 34,600

= 38,000 – 37,260 = 740 Units
2. Abnormal Loss in Process II (Amount):

Abnormal Loss = Abnormal Loss X Total Input (in Amount) – Normal Loss (in
Amount)
(Unit) Total Input (Units) – Normal Loss Output (Units)
= 740 X 698,600 – 2,128 = Rs. 14,584
38,000 – 2,660
3. Abnormal Gain in Process III (Units):

Abnormal Gain = Output of Process III + Normal Loss of Process III – Input of Process
III
= 32,000 + 3,460 – 34,600 = 860 Units
4. Abnormal Gain in Process III (Amount ):

Abnormal Gain = Abnormal Gain (Unit) X Total Input (in Amount) – Normal
Loss
Before Abnormal Gain (in Amount)
Total Input (Units) – Normal Loss Output (Units)

= 860 X 809,888 – 3,460 = 860 X 806,428 = Rs. 22,272.
34,600 – 3,460 31,140
Question No. 14
Under mentioned information have been taken from the records of Kathmandu Limited for the
month ending Ashadh, 2065. The company applies First-in-fist-out (FIFO) method to value its
equivalent production.
Direct materials added in Process III
(Opening WIP) 20,000 units at NRs.257,500
Transfer from Process II 530,000 units at NRs.4,115,000
Transferred to Process IV 480,000 units
Closing stock of Process III 50,000 units
Units scrapped 20,000 units
Direct material added in Process III Rs. 1,976,000
Direct wages Rs. 976,000
Production Overheads Rs. 488,000
Degree of completion:
Opening Stock Closing Stock Scrap
Materials 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%

The normal loss in the process was 5% of production and scrap was sold at NRs.3 per unit.
You are required to prepare Process Cost accounts for Process III.
[June 2009 – 1(a), 14 Marks]
Answer
Kathmandu Limited
Process III A/c
For the month ending Asadh 2065
Particulars Units (NRs.) Particulars Units (NRs.)
To bal b/d 20,000 257,500 By Normal Loss 25,000 75,000
To Process II A/c 530,000 4,115,000 By process IV A/c 480,000 7,197,500
(6,900,000 +
40,000+257,500)
To Direct Material 1,976,000 By bal C/d 5,000 615,000
To Direct Wages 976,000
To Prodn. Ohs 488,000
To Abnormal Gain 5,000 75,000
Total 555,000 7,887,500 Total 510,000 7,887,500
Working Notes
Statement of Equivalent Production
Input Output Equivalent production
Item Units Item Units Material % Material % Labor %
A B &
Op 20,000 Work on op
WIP 20 000 - 0 4 000 20 8 000 40
Proces Introduced &
transfe 530,00
completed
(480,000- 460,00 10 460,0 10
20,000) 0 460,000 0 460,000 100 00 0
480,00 468,0
0 460,000 464,000 00
Normal Loss 25,000 0 0 0 0 0 0

(20000+530000 – 50000) x 5%
10 25,00
Cl WIP 50,000 50,000 0 35,000 70 0 50
555,00 493,0
0 510,000 499,000 00

Input Output Equivalent production

Item Units Item Units Material % Material % Labor %
A B &
10 10
Ab. Gain 5,000 5,000 0 5,000 100 5,000 0
550,00 550,00 488,0
Total 0 Total 0 505,000 494,000 00
Statement of Cost for each Element

Element of Cost Cost (NRs.) Equivalent Production. Cost per unit NRs.
Material A
Transfer from previous. Process 4,115,000
Less: Scrap value of Normal Loss
25,000 × NRs.3 75,000
4,040,000 505,000 8
Material B 1,976,000 494,000 4
Wages 976,000 488,000 2
Overheads 488,000 488,000 1
Total 7,480,000 15
Process Cost Sheet (in Rs)

Rs.
Op WIP (for completion) Mat B 4,000 x NRs.4 = 16,000
Wages 8,000 x NRs.2 = 16,000
OHs. 8,000 x NRs.1 = 8,000
40,000
Introduced and completely processed during the period 460,000x NRs.15 = 6,900,000
Closing WIP Mat A 50,000 x NRs.8 = 400,000

Mat B 35,000 x NRs.4 = 140,000
Wages 25,000 x NRs.2 = 50,000
OHs 25,000 x NRs.1 = 25000
615,000
Abnormal Gain 5,000 x NRs.15 = 75,000
Question No.15
Kathmandu Chemical Company Limited carries on production operation in two processes.
Material first passed through process I, where a compound is produced. A loss in weight

takes place at the start of processing. The following data which can be assumed to be
representative, relates to the month just ended:
Quantities: Kg.
Material input 200,000
Opening work-in-process (half processed) 40,000
Work completed 160,000
Closing work-in-process (two third completed) 30,000
Costs: Rs.
Material input 75,000
Processing cost 102,000
Opening work-in-process:
Materials 20,000
Processing costs 12,000
Normal process loss in quantity may be assumed to be 20% of material input. Any
quantity of the compound can be sold for Rs. 1.60 per kg. Alternatively, it can be
transferred to process II for further processing and packing to be sold as supercomp for
Rs. 2.00 per kg. Further materials are added in process II which yield 2 kgs of
supercomp for every kg of the process I compound used.
Of the 160,000 kgs per month of work completed in process I, 40,000 kgs are sold as
compound and 120,000 kgs passed through process II for sale as supercomp. Process II
has facilities to handle up to 160,000 kgs of compound per month, if required. The
monthly cost incurred in process II (other than the cost of the compound) are:
120,000 kgs of compound inputs 160,000 kgs of compound inputs

Rs. Rs.
Materials 120,000 160,000
Processing cost 120,000 140,000
i) Determine using the average cost method, the cost per kg of compound in process
I and the value of both completed and closing work in process for the month just
ended.
ii) Advise whether it is worthwhile to process 120,000 kgs of compound further?
[December 2009 – 4(a), 6+4=10 Marks]
Answer
i. Process I
Input Output Equivalent units
Material Conversion cost
Particulars Units Particulars Units Unit % Unit %
(kg) (kg) Completion Completion

Opening 40,000 Normal loss 40,000 - -

WIP
New 200,000 Units Intro- 160,000 160,000 100% 160,000 100%
material duced and
introduced completed
Abnormal 10,000 10,000 100% 10,000 100%
loss
Closing WIP 30,000 30,000 100% 20,000 2/3rd
240,000 240,000 200,000 190,000
Process I
Statement of Cost for Each Element
Elements of Cost of Cost in Total Cost Equivalent Cost per Kg.

Cost Opening WIP Process units (kg) (Rs.)
Material Rs. 20,000 Rs. 75,000 Rs. 95,000 200,000 0.475
Conversion 12,000 102,000 114,000 190,000 0.600
Cost
32,000 177,000 209,000 1.075
Statement of apportionment of cost
Units completed Elements Equivalent Cost per Cost Total

units (kg) unit (Rs.) cost
Work completed Material 160,000 0.475 76,000
Conversion cost 160,000 0.600 96,000 172,000
Value of WIP completed Material 30,000 0.475 14,250
Conversion 20,000 0.600 12,000 26,250
Note: The work of abnormal loss can also be found out like “work completed” but it has not
been asked in the question.
ii. There can be two approaches to this problem:
Approach I – Total Cost and Revenue approach
Statement showing comparative data to decide whether 120,000 kg of

compound should be processed further

Alternative I Alternative II
Sell immediately after process I Process further
Sales 120,000 X Rs. 192,000 Sales 240,000 X Rs. 2 480,000
Rs. 1.60
Less: Cost from 129,000
process I 120,000 129,000 Cost from process I
X Rs. 1.075 120,000 X Rs. 1.075
Material in process II 120,000
Processing cost in 120,000 369,000
process II
63,000 111,000
Conclusion: The company should take the decision to process further. It will increase
the profit by Rs. 48,000 (111,000 – 63,000).
Approach II – Incremental Cost and Incremental Revenue
Incremental revenue:
Sales 120,000 X Rs. 2 Rs. 240,000
120,000 X (2 – 1.60) Rs. 48,000 Rs. 288,000
Incremental cost:
Material in process II Rs. 120,000
Processing costs in process II Rs. 120,000 Rs. 240,000
Rs. 48,000
Conclusion: Since there is an incremental profit of Rs. 48,000 (288,000 – 240,000) due
to the decision to process, the company should opt for the processing of the compound.
Question No. 16
A product is finished in three stages I, II, III. At the first stage a quantity of 72,000 Kg. was
delivered at cost of Rs. 2.50 per Kg. The entire material was consumed.
The production particulars with the allocated expenses were as indicated in the table below.
Stage Input Output Direct wages Fixed overhead Variable
Overhead
% %
I 72,000 67,680 7,500 150 200
II 65,000 60,125 12,000 125 150
III 55,600 50,000 14,500 200 (On direct wages) 250 (On direct
wages)

The producer, as was his usual practice assessed his cost at Rs. 6.77 per kg based on his input
expenditure and the finished output. With a selling price of Rs 7.50 per kg, he estimated his
profit at Rs. 36,500. If you do not approve of his assessment of the end results of the operation,
convince him of the real end-results in a tabular form. You should assume the normal wastage
as only 5% on input at each stage and any excess wastage should not be allowed to inflate the
cost of the end product. [June 2010 – 3, 15 Marks
Answer
Statement Showing Production and Cost Data
Production Particular Stage 1 Stage2 Stage3
Kgs Kgs Kgs
Input 72,000 65,000 55,600
Output:
Normal loss 3,600 3,250 2,780
Abnormal loss 720 1,625 2,820
Closing stock 2680 4,525
Transfer to next stage/F. Goods 65000 55,600 50,000
72,000 65,000 55,600
Cost Rs Rs Rs
Input Material 180,000 203,125 223,413
Direct Wages 7,500 12,000 14,500
Fixed Overhead 11,250 15,000 29,000
Variable Overhead 15,000 18,000 36,250
Total Cost 213,750 248,125 303,163
Distributionof Cost:
Cost of Abnormal loss 2,250 6,530 16,186
Cost of closing stock 8,375* 18,182** ***
Cost of deliveries 203,125 223,413 286,977
213,750 248,125 303,163
* Rs . 2,13,750 ÷(72,000kg-3,600kg) or@Rs. 3.125 per kg.

** Rs. 248,125 ÷(65,000kg-3,250kg) or@Rs. 4.0182per kg
*** Rs. 3,03,163 ÷(55,600kg-2,780kg) or Rs. 5.7395per kg
The profit for the producer will be:

Sales realization (50,000×Rs 7.50) Rs. 375,000
Less :Normal processing cost 286,977
----------------
Margin 88,023
Less: Cost of abnormal loss
Stage 1 2,250

Stage 2 6,530
Stage 3 16,186 24,966
--------------
Net profit 63,057
Producers Estimated Profit Rs . 36,500
Add Stock held over
Stage 1 Rs. 8,375
Stage 2 18,182 26,557
------------
63,057
Question No.17
Jagger Products Ltd. manufactures toy dolls in a moulding process. The management
accountant has been taken ill and you have been requested to assist in identifying the usual
monthly adjustments to measure output and cost of output.
Opening work-in-progress amounted to 8000 dolls, with costs attached of materials Rs.
398,400 and labour/conversion of Rs. 384,000. Materials are added at the beginning of the
moulding process. Opening work-in-progress is 50% complete in terms of labour/conversion
costs.
During the month, a further 40000 dolls have been input to the process, incurring material
costs of Rs. 2,400,000 and labour/conversion costs of Rs. 3,993,600. Completed dolls totaled
42000 in the month, leaving 6000 in work-in-progress, 60% complete in terms of
labour/conversion costs.
The company operates a FIFO approach to accounting for stock movements.
You are required to compute/prepare:

i) Equivalent unit statement and cost per equivalent unit;
ii) Costs attached to closing work-in-progress;
iii) Costs attached to units started and completed;
iv) Costs attached to completion of opening work-in-progress.
[June 2010 – 2(a), 4+2+2+2=10 Marks]

Answer
Equivalent unit statement
Particulars Materials Labour/ Remarks
Conversion
Units Units
Opening work-in-progress 0 4000 (8000 units 50% complete in
terms of labour/ conversion)
Units started and completed 34000 34000 (40000 units less closing WIP of
6000 units on FIFO basis)
Closing work-in-progress 6000 3600 (6000 units 60% complete in
terms of labour/ conversion)
Equivalent units 40000 41600
Rs. Rs. Total (Rs.)
Costs to be accounted for 2,400,000 3,993,600 6,393,600
incurred in the month
Costs per equivalent unit 60 96 156
(ii)
Costs attached to closing work-in-progress
Particulars of costs Equivalent Rate per Total costs (Rs.)
Unit Unit (Rs.)
Materials 6000 60 360,000
Labour/ conversion 3600 96 345,600
Total 705,600
(iii)
Costs attached to unit started and completed
Unit Unit (Rs.)
Total costs 34000 156 5,304,000
(iv)
Costs attached to completion of ope ning work-in-progress
Unit Unit (Rs.)
Materials (already complete) 0
Labour/ conversion 4000 96 384,000
Total 384,000
Note:
In completing opening work-in-progress, costs incurred last month and brought forward
(Materials Rs.398,400 and Labour/ conversion Rs.384,000) will also be transferred to finished
goods.

Question No.18
Oriens Co. produces three products A, B and C, which pass through process I, process II and
process III. The following statement shows related importance of each product in each
process.
Process I Process II Process III
Points Points Points
Product A 3 2 3
Product B 1 1 2
Product C 2 3 1
Cost details for each process for the month of November, 2010 are as follows:
Process I Process II Process III Total
Materials Rs. 8,000 Rs. 11,000 Rs. 6,000 Rs. 25,000
Labour 8,000 11,000 3,000 22,000
Overhead 10,000 11,000 5,000 26,000
Total 26,000 33,000 14,000 73,000
Production for the month is as follows:
Product A = 300 units; Product B = 200 units and Product C = 100 units
Prepare :
i) Statement of weighted average production, and
ii) Statement showing cost of each type of product. [December 2010 – 1(b), 12 M
Answer
Period: November 2010
Output: Product A= 300 units
Product B= 200 units
Product C= 100 units
Statement of Weighted Average Production

Products Production Weighted production (Points)
(Units) Process I Process II Process III Total
A 300 900 600 900 2,400
B 200 200 200 400 800
C 100 200 300 100 600
Total 600 1,300 1,100 1,400 3,800
iii) Statement of Cost for each type of Product
S. Items Process (Rs.) Total Production Total
No. I II III (Rs.) (Units) Cost
(Rs.)
1. Total cost in each 26,000 33,000 14,000 73,000
process
2. Total points in cost 1,300 1,100 1,400

process
3. Cost per point (1/2) 20 30 10
4. Weighted for one 3 2 3
unit of product A
(in points)
5. Unit cost of product 60 60 30 150 300 45,000
A
unit of product B (in
points)
B
unit of product C (in
points)
C
Total process cost during the period 73,000
Question No.19
The finished product of a manufacturing company passes through three processes I, II and
III. The normal wastage in each process is 5%, 8% and 15% of the input fed respectively.
The scrap generated out of wastage has a sale value of Re. 1 per unit, Rs. 1.5 per unit and Rs.
2 per unit in the processes I, II, and III respectively. The output of each process is transferred
to the next processes and the finished output emerged from process III is transferred to stock.
There was no stock of working progress in any process.
Details of cost data for the period are given below:
Particulars Processes Processes Processes

I II III
Materials 2,00,000 40,000 40,000
used (Rs.)
Direct 79,850 57,250 63,450
Labour
Cost (Rs.)
Production 38,995 38,375 29,230
Expenses
(Rs.)
Output in 38,950 34,600 30,000
Units
(actual)

41,000 units of raw material at Rs. 3,39,360 was introduced at the beginning of process I.
Prepare the Process Accounts along with the working notes for valuation of abnormal
gain and abnormal loss. [June 2012 – 2, 15 Marks]
Answer
Process I Account
Particulars Units(Nos.) Amount(Rs.) Particulars Units(Nos.) Amount(Rs.)
By Normal
To Units introduced 41000 339360 Loss
(5% @ Re 1
To Materials used 200000 per unit) 2050 2050
To Direct Labour 79850
To Production By Tansfer to
Expenses 38995 Process II 38950 656155
41000 658205 41000 658205
Process II Account
To Trans. From By Normal
Process I A/c 38950 656155 Loss
(8% @ Rs 1.5
per unit) 3116 4674
By Abnormal
To Materials used 40000 Loss (WN1) 1234 27105
To Direct Labour 57250
To Production By Tansfer to
Expenses 38375 Process II 34600 760001
38950 791780 38950 791780
Process III Account

By Normal
To Transfer from Loss
(15% @ Re. 2
Process II Account 34600 760001 per unit) 5190 10380.00
To Materials used 40000 By Tansfer to

Finished
To Direct Labour 63450 Stock Ac 30000 900001
To Production
Expenses 29230
To Abnormal Gain A/c 590 17700
35190 910381 35190 910381
Working note 1
Calculation of Abnormal
Loss
Input 38950
Normal Loss 3116
Required Output 35834
Actual Output 34600
Abnormal Loss 1234
Working Note 2
Calculation of Abnormal
Gain
Input 34600
Normal Loss 5190
Required Output 29410
Actual Output 30000
Abnormal Gain 590
Valuation of Abnormal
Gain
Total proces cost 892681

Less;Normal Loss Scrap 10380
Net process cost 882301
Normal Output 29410
Per unit Cost 30.00
Question No.20
Exclusive Cable Ltd. manufactures plastic pipes (Normal) from a material which gets
completed in two processes; Fabrication and Finishing. The details of material used and
expenses for production of the Normal Product for the month of Chaitra 2068 were as below:
Fabrication Process:

15,000 kgs of material were used during the month and out of the same, 13,500 kgs were
fabricated and transferred to Finishing Process and 1,500 kgs remained as work- in- progress.
The closing work-in-progress was 1/3rd completed in respect of labour and overheads. There
was no work-in-progress at the beginning of the month. The cost of material used was
Rs.1,800,000 and cost of labour and overheads incurred in the process was Rs. 414,000.
Finishing Process:
There were 900 kgs of product in work-in-progress at the beginning of the month. The
opening work-in-progress was 1/3rd completed in respect of labour and overheads. The cost
of work-in-progress was Rs. 141,000. At the end of the month there were 600 kgs of product
as work-in-progress. The closing work-in-progress was 25% complete in respect of labour
and overheads. The company incurred Rs. 273,000 for labour and overheads in this process
during the month.
The finished product (Normal) produced after completion of Finishing Process is sold at Rs.
200 per kg.
Seeing the demand for durable products to be used in buildings, the management of the
company is considering production of more durable and better plastic pipes (Advanced) by
further treatment of the finished product (Normal) of Finishing Process. This Advanced
product could be sold at Rs. 235 per kg in the market. The treatment plant installation costs
Rs. 8,000,000 and the cost for treating the quantity produced by Finishing Process in the
month is estimated to be Rs. 345,000. For the implementation of this plan, the management
desires a minimum return on investment of 25% per annum.
Required:
b) Prepare equivalent unit statement for both processes and show the cost of closing stock and
completed units.
c) Prepare process accounts.
d) Prepare profitability statement of the Normal Product.
e) Determine whether the implementation of the management's plan to produce Advanced
Product is acceptable.
[June 2012 – 1, 8+4+2+6=20 Marks]

Answer
a)
Equivalent Unit Statement for Fabrication Process
Particulars Material Completion Labour & Completion
% Overheads %
Opening WIP (kgs) (work done in this period) - - - -
Completed Unit (kgs) (Input - Closing Stock) 13,500 100 13,500 100
Closing WIP (kgs) (work done in this period) 1,500 100 500 33.33
Total Equivalent Units (kgs) (work done in this period) 15,000 14,000
Cost incurred (Rs.) 1,800,000 414,000
Cost per equivalent unit (Rs.) 120 29.57
Cost of Closing Stock of WIP Rs.

Material Cost (1500 kgs x Rs.120) 180,000
Labour cost (500 kgs x Rs.29.57) 14,785
Total 194,785
Cost of completed stock (transferred to next process) Rs.

Cost of Opening stock of WIP -
Material Cost of input 1,800,000
Labour cost incurred 414,000
Less: cost of closing stock of WIP 194,785
Total 2,019,215
Equivalent Unit Statement for Finishing Process

Particulars Material Completion Labour & Completion
% Overheads %
Opening WIP (kgs) (work done in this period) - - 600 66.67
Completed Unit (kgs) (Input - Closing Stock) 12,900 100 12,900 100
Closing WIP (kgs) (work done in this period) 600 100 150 25
Total Equivalent Units (kgs) (work done in this period) 13,500 13,650
Cost incurred (Rs.) 2,019,215 273,000
Cost per equivalent unit (Rs.) 149.57 20
Cost of Closing Stock of WIP Rs.

Material Cost (600 kgs x 149.57) 89,742
Labour Cost (150 kgs x 20) 3,000
Total 92,742

Cost of completed stock Rs.

Cost of Opening stock of WIP 141,000
Material Cost of input 2,019,215
Labour cost incurred 273,000
Less: cost of closing stock of WIP 92,742
Total 2,340,473
Assumption: FIFO method of inventory issue for production process.
b)
Fabrication Process A/c
Particulars Unit (Kg) Amount (Rs.) Particulars Unit (Kg) Amount (Rs.)
To materials a/c 15,000 1,800,000 By Finishing Process a/c 13,500 2,019,215
To labour & overheads a/c 414,000 By closing stock (WIP) a/c 1,500 194,785
15,000 2,214,000 15,000 2,214,000
Finishing Process A/c

Particulars Unit (Kg) Amount (Rs.) Particulars Unit (Kg) Amount (Rs.)
To opening stock (WIP) a/c 900 141,000 By Finished stock a/c 13,800 2,340,473
To Fabrication process a/c 13,500 2,019,215 By closing stock (WIP) a/c 600 92,742
To labour & overheads a/c 273,000
14,400 2,433,215 14,400 2,433,215
c)
Profitability Statement of Normal Product
Sales (13800 kgs @ Rs.200 per kg.) 2,760,000
Less: cost of production (from finishing process) 2,340,473
Profit for the month 419,527
d)
Statement of evaluation of management's plan of further treatment of Normal Product
Sales after further treatment (13800 kgs @ Rs.235/kg) 3,243,000
Less: Cost of Production
Cost of Normal Product from Finishing Process 2,340,473
Further treatment cost incurred 345,000 2,685,473
Profit per month 557,527
Less: Profit per month without further treatment 419,527
Additional profit per month due to further treatment 138,000
Return on Investment (%) 20.70% per annum

(138000 x 12 x 100/ 8,000,000)

Recommendation:
Considering the management's desired rate of return on investment of 25%,
the plan of further treatment is not acceptable becasue it gives only 20.70%
of return on investment.
Question No. 21
A certain product passes through three processes before it is transferred to finished stock. The
following information is obtained for the month of May, 2012:
Process I Process II Process III Finished stock
Particulars
Rs. Rs. Rs. Rs.
Opening stock 3,000 4,800 6,000 12,000
Direct material 24,000 7,200 9,000 -
Direct labour 21,000 24,000 21,000 -
Factory overhead 12,000 14,400 12,000 -
Closing stock 6,000 2,400 9,000 18,000
Inter process profits for opening
stock 840 1,620 3,900
Output of Process Accounts is transferred at a profit of 25%, 20% and 10% on transfer price
respectively. Stocks in process are valued at prime cost and finished stock has been valued at
the price at which it was received from process III. Sales during the period were Rs. 2,40,000.
Prepare Process Accounts showing profit element at each stage, the valuation of stock for the
balance sheet and other related workings. [December 2012 – 1, 20 Marks]
Answer:
Process I Account
Particulars Total Cost Profit Particulars Total Cost Profit
To Opening stock 3,000 3,000 By Process II A/c 72,000 54,000 18,000
To Direct material 24,000 24,000
To Wages 21,000 21,000
48,000 48,000
Less: Closing stock 6,000 6,000
Prime Cost 42,000 42,000
To Factory overheads 12,000 12,000
54,000 54,000
To Profit 18,000 18,000
72,000 54,000 18,000 72,000 54,000 18,000
Working Notes:
Gross Profit = Profit % ÷ (100 % - Profit %) × Cost

= 25 ÷ (100 - 25) × Rs. 54,000

= 25 ÷ 75 × Rs. 54,000
= Rs. 18,000
Process II Account
To Opening stock 4,800 3,960 840 By Process
III A/c 150,000 101,579 48,421
To Process I A/c 72,000 54,000 18,000
To Wages 24,000 24,000
108,000 89,160 18,840
Less: Closing stock 2,400 1,981 419
Prime Cost 105,600 87,179 18,421
To Mfg. overheads 14,400 14,400
120,000 101,579 18,421
To Profit 30,000 30,000
150,000 101,579 48,421 150,000 101,579 48,421
Working Notes:
= 20 ÷ (100 - 20) × Rs. 120,000
= 20 ÷ 80 × Rs. 120,000
= Rs. 30,000
Profit element in the Closing Stock = Profit element in opening stock + Profit element in
the previous process ÷ Total input Cost of the process × Closing stock
= [(Rs. 18,000 + Rs. 840) ÷ Rs. 108,000] × Rs. 2,400
= Rs. 419
Hence the cost of closing stock = Value of closing stock – Profit element
= Rs. 2,400 – Rs. 419
=Rs 1,981
Process III Account
To Opening stock 6,000 4,380 1,620 By Finished
Stock A/c 210,000 141,380 68,620
To Process II A/c 150,000 101,579 48,421
To Wages 21,000 21,000

186,000 135,959 50,041

Less: Closing
9,000 6,579 2,421
stock
Prime Cost 177,000 1,29,380 47,620
To Mfg overheads 12,000 12,000
189,000 141,380 47,620
To Profit 21,000 21,000
210,000 141,380 68,620 210,000 141,380 68,620
Working Notes:
= 10 ÷ (100 - 10) × Rs. 189,000
= 10 ÷ 90 × Rs. 189,000
= Rs 21,000
Profit element in the closing Stock = Profit element in opening stock + Profit element in the
previous process ÷ Total Relevant Cost of the process × Closing stock
= [(Rs. 48,421 + Rs. 1,620) ÷ Rs. 186,000] × Rs. 9,000
= Rs. 2,421
Hence the cost of closing stock = Value of closing stock – Profit element
= Rs. 9,000 – Rs. 2,421
= Rs. 6,579
Finished Stock A/c
To Opening stock 12,000 8,100 3,900 By Sales 240,000 137,360 102,640
To Process III A/c 210,000 141,380 68,620
222,000 149,480 72,520
To Closing stock 18,000 12,120 5,880
204,000 137,360 66,640
To Profit 36,000 36,000
240,000 137,360 102,640 240,000 137,360 102,640
Working Notes:
Gross Profit = Sales – Cost
= Rs. (240,000 – 204,000) = Rs. 36,000
Profit element earned by earlier process and included in end stock:
Profit element in opening stock + Profit element transferred from Process III ÷ Total Cost of
Inputs × Closing stock
= Rs. (72,520 ÷ 222,000) × Rs. 18,000 = Rs. 5,880
Cost of Closing Stock = Value of Closing Stock – Profit element

= Rs. (18,000 – 5,880) = Rs. 12,120
Stock Valuation for Balance Sheet purpose:

Stock will appear in the Balance Sheet at cost as revealed in the cost column of Process
Account and Finished Goods Account as below:
Rs.
Stock in Process I 6,000
Stock in Process II 1,981
Stock in Process III 6,579
Finished Stock 12,120
Total 26,680
Question No. 22
Rajat Chemicals Ltd., a company within the chemical industry, mixes powdered ingredients
in two different processes to produce one product. The output of Process 1 becomes the input
of Process 2 and the output of Process 2 is transferred to the packing department.
Following are the information pertaining to the week ended 11th June 2012;
Process 1
Input:
Material A: 6,000 kilograms at Rs. 1 per kilogram
Material B: 4,000 kilograms at Rs. 2 per kilogram
Mixing Labour: 430 hours at Rs. 4 per hour
Normal Loss: 5% of weight input, disposed off at 32 paisa per kilogram
Output: 9,200 kilograms
There is no work-in-process at the beginning or end of the week.
Process 2
Input:
Material C: 6,600 kilograms at Rs. 2.50 per kilogram
Material D: 4,200 kilograms at Rs. 1.50 per kilogram
Flavoring Essence: Rs. 600
Mixing Labour: 370 hours at Rs. 4 per hour
Normal Waste: 5% of weight input with no disposal value
Output: 18,000 kilograms.
There is no work-in-process at the beginning of the week but 1,000 kilograms are in process
at the end of the week and estimated to be only 50% complete so far as labour and overhead
were concerned.
Overhead of Rs. 6,400 incurred by the two processes is to be absorbed on the basis of mixing
labour hours.
Required:

ix) Prepare Process 1 and 2 Account.

x) Prepare Abnormal Loss Account and Packing Department Account.
xi) Calculate equivalent units produced.
[December 2012 – 1(a), 9+4+3=16 Marks]
Answer
Dr. Process 1 Cr.

Per Kg. Per Kg.
Particulars Kg Rs. Rs. Particulars Kg Rs. Rs.
0.3
To Material A 6,000 1.00 6,000 By Normal Loss 500 2 160
By Abnormal 2.0
To Material B 4,000 2.00 8,000 Loss (W.N. 2) 300 0 600
To Mixing Labor
(430 hours @ Rs.4) 1,720 By Transfer to
To Overhead(W.N. 1) 3,440 Process 2 9,200 2 18,400
Total 10,000 19,160 Total 10,000 19,160
Dr. Process 2 Cr.

Per Kg. Per Kg.
By Normal
To Process 1 9,200 2.00 18,400 Loss 1,000 - -
To Material C 6,600 2.50 16,500 By Work-in-
To Material D 4,200 1.50 6,300 progress
To Flavoring Essence 600 (W.N.3) 1,000 - 2,320
To Mixing Labour
(370 hours @ Rs.4) 1,480
By Packing
To Overhead (W.N.1) 2,960 Department 18,000 2.44 43,920
Total 20,000 46,240 Total 20,000 46,240
ii.
Abnormal Loss Account
Dr. Cr.
Per Kg. Per Kg.
To Process 1 300 2.00 600 By Normal Loss 300 0.32 96

By Balance to P/L A/C 504

Total 300 600 Total 300 600
Packing Department Account

Dr. Cr.
Per Kg. Per Kg.
To Process 2 18,000 2.44 43,920 By Balance C/D 18,000 2.44 43,920
Total 18,000 43,920 Total 18,000 43,920
iii. Statement of equivalent unit
Output Equivalent Units

Particulars Unit Material Labour Overhead
Completed 18,000 18,000 18,000 18,000

WIP (100% Material, 50%
Labour and Overhead) 1,000 1,000 500 500
Labour and Overhead - - - -
Normal Waste 1,000 - - -
Total 20,000 19,000 18,500 18,500
Wo
rking Notes:
1. Total overhead expenses : Rs. 6,400
Total labour hours in Process 1 and 2 = 800
Overhead absorption rate = Rs. 6,400/800 hours = Rs. 8 per labour hour
Overhead under Process 1 = 430 × Rs. 8 = Rs. 3,440
Overhead under Process 2 = 370 × Rs. 8 = Rs. 2,960
2. Cost of 9,500 Kg. of output is = ( Rs.19,160 – Rs. 160) i.e., Rs. 19,000
Hence cost per kg. of output is Re. 2.00
3. Cost per Equivalent Unit and WIP

Material = Rs. 41,800 / 19,000 = Rs. 2.20
Labour = Rs. 1,480 / 18,500 = Rs. 0.08
Overhead = Rs. 2,960 / 18,500 = Rs. 0.16
W.I.P.
Material = 1,000 × Rs. 2.20 = Rs. 2,200

Labour = 500 × 0.08 P = Rs. 40

Overhead = 500 × 0.16 P = Rs. 80
Rs. 2,320
Question No. 23
From the following information for the month of October 2012, prepare Process III cost
account:
Opening WIP in Process III : 1,800 units at Rs. 27,000

Transfer from Process II : 47,700 units at Rs. 536,625
Transferred to warehouse : 43,200 units
Closing WIP of Process III : 4,500 units
Units scrapped : 1,800 units
Direct material added in Process III : Rs. 177,840
Direct Wages : Rs. 87,840
Production Overheads : Rs. 43,920
Degree of Completion:
Opening Stock Closing Stock Scrap
Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%
The normal loss in the process was 5% of the production and scrap was sold at Rs. 6.75 per
unit.
[June 2013 – 3(a), 15 Marks]
Answer
(Process III)
Equivalent production
Input Output Material Material Labour and
Received from added in overheads
Process II Process III
Details Quantity Quantity Quantity % Quantity % Quantity %

Units units units units units

Op WIP 1800 Work on Op. WIP 1,,800 - - 360 20 720 40
Process II 47700 Introduced and 41400 41,400 100 41,400 100 41,400 100
Transfer completed during the
month (Bal. fig.)
Normal Loss (5% of 2,250 - - - - - -
45,000 units)
Closing WIP 4,500 4,500 100 3,150 70 2,250 50
49,950 45,900 44,910 44,370
Abnormal gain -450 -450 100 -450 100 -450 100
Total 49,520 49,500 45,450 44,460 43,920
Working Note
(i) Production units = Opening units + Units transferred from Process II – Closing
Units
= 1800 units + 47,700 units -4500 units
= 45000 units
(ii) Abnormal gain(units) = Production-Normal Loss-Transfer to warehouse
= 45,000-(5% of 45,000)-43,200
= 450
Statement of Cost
Cost Rs. Equivalent units Cost per equivalent unit Rs.
Material Received from Process II 536,625
Less: Scrap value of normal loss 15,187.50
(2,250 units x Rs. 6.75)
521,437.50 45,450 11.4728

Material added in Process III 177,840 44,460 4.0000
Labour 87,840 43,920 2.0000
Overheads 43,920 43,920 1.0000
8,31,037.50 18.4728

Statement of Apportionment of Process Cost

Rs.
Opening WIP Material From Process II 27,000
Completed opening WIP - Material added in Process III 360 units x Rs. 4=Rs. 1440
1,800 units
Wages 720 units x Rs. 2= Rs. 1440
Overheads 720 units x Rs. 1= Rs. 720 3,600
Introduced and completed 41400 units x Rs. 18.4728 7,64,773
41,400 units
Total cost of 43,200 finished 7,95,373

goods units
Closing WIP -4,500 units Material from Process II 4,500 units x Rs. 11.4728 51,628
Material in process III 3,150 units x Rs. 4 12,600
Wages 2,250 units x Rs.2 4,500
Overheads 2,250 units x Re.1 2,250
70,978
Abnormal gain -450 units 450 units x Rs. 18.4728 8,313
Process III A/c

Units Rs. Units Rs.
To Balance b/d 1800 27,000 By Normal Loss 2250 15,187
To Process II a/c 47700 5,36,625 By Finished goods stock 43200 7,95,373
To Direct Material 1,77,840
To Direct Wages 87,840
To Production overheads 43,920 By Closing WIP 4500 70,978
To Abnormal gain 450 8,313
49,950 881,538 49,950 881,538
Question No. 24
PQR Limited produces two joint products P and Q together with a by-product R, from a
single main process (process 1). Product P is sold at the point of separation for Rs.5 per kg.,
whereas product Q is sold for Rs.7 per kg. after further processing into product Q2. By-
product R is sold without further processing for Rs.1.75 per kg. Process 1 is closely
monitored by a team of chemists, who planned the output per 1000 kg of input materials to be
as follows:
Product P 500 kg.

Product Q 350 kg.
Product R 100 kg.
Toxic waste 50 kg.
The toxic waste is disposed of at a cost of Rs.1.50 per kg, and arises at the end of
processing.Process 2, which is used for further processing of product Q into product Q2,
has the following cost structure:
Fixed costs Rs.6,000 per week

Variable costs Rs.1.50 per kg. processed
The following actual data relate to the first week of accounting period 10:
Process 1
Opening work in process Nil
Materials input 10,000 kg.costing Rs.15,000
Direct labour Rs.10,000
Variable overhead Rs.4,000
Fixed overhead Rs.6,000
Outputs:
Product P 4,800 kg.
Product Q 3,600 kg.
Product R 1,000 kg.
Toxic waste 600 kg.
Closing work in progress Nil
Process 2
Opening work in process Nil
Input of product Q 3,600 kg.
Output of product Q2 3,300 kg.
Closing work in progress 300 kg, 50% converted
Conversion costs were incurred in accordance with the planned cost structure.
Required:
a) Prepare the main process account for the first week of period 10 using the final sales
value method to attribute pre-separation costs to joint products.
b) Prepare the toxic waste accounts and process 2 accounts for the first week of period
10.

c) Advise the management of PQR Limited whether or not, on purely financial grounds,
it should continue to process product Q into product Q2:
(i) if product Q could be sold at the point of separation for Rs.4.30 per kg; and
(ii) if 60% of the weekly fixed costs of process 2 were avoided by not processing
product Q further. [June 2016 – 1,
7+7+6=20 Marks]
Answer
a) Normal loss (toxic waste) = 50 kg per ,000 kg of input (i.e. 5%)
Actual input = 10,000 kg
Abnormal loss = Actual toxic waste (600) less normal loss (500) = 100 kg
By-product R net revenues of Rs.1750 are credited to the joint (main) process account
and normal and abnormal losses are valued at the average cost per unit of output:
Net cost of production (35,750-1,750)/ Expected output of the joint products (8,500
kg) = Rs.4
The cost of the output of the joint products is Rs.33,600 (8,400 kg ×Rs.4) and this is
to be allocated to the individual products on the basis of final sales value (i.e. 4,800
kg ×Rs.5 = Rs.24,000 for P and 3600 kg ×Rs.7 = Rs.25 200 for Q):
P = Rs.24 000/Rs.49 200 ×Rs.33 600 = Rs.16 390
Q = Rs.25 200/Rs,49 200 ×Rs.33 600 = Rs.17 210
The main process account is as follows:

Main process account
Kg Rs. Kg Rs.
Materials 10,000 15,000 P Finished 4,800 16,390
goods
Direct Labor 10,000 Q Process 2 3,600 17,210
Variable Overhead 4,000 By-Product R 1,000 1,750
Fixed Overhead 6,000 Normal 500
Toxic Waste
Toxic Waste 750 Abnormal 100 400
disposal A/c Toxic Waste
10,000 35,750 10,000 35,750
b)
Normal Waste A/c
Rs. Rs.
Bank 750 Main Process 750
Account
750 750

Abnormal toxic waste account

Rs. Rs.
Main Process 400 Profit and Loss 550
Account Account
To bank ( 100 ×1.50) 150
550 550
Process 2 account
Kg Rs. Kg Rs.
Main Process Q 3,600 17,210 Finished 3,300 26,465
Goods Q (
Note 2)
Fixed Cost 6,000 Closing 300 1,920
Work in
Progress
( Note 2)
Variable Cost 5,175
( Note 1)
3,600 28,385 3,600 28,385
Notes:
Note1. 3300 + (50% * 300) * Rs.1.50 = Rs.5175
Note2.
Rs. Completed WIP Total Cost Per
Units Equivalent Equivalent Unit
Units Units
Previous Process Cost 17,210 3,300 300 3,600 Rs.4.78
Conversion Cost 11,175 3,300 150 3,450 Rs.3.24
Rs.8.02
Therefore,
Rs.
Completed Units (3,300 × Rs.8.02) 26,465
WIP (300×Rs.4.78 + 150×Rs.3.24) 1,920
Total 28,385
(c)
Incremental sales revenue per kg from further processing (Rs.7 – Rs.4.30) Rs.2.70
Incremental (variable) cost per kg of further processing Rs.1.50
Incremental contribution per kg from further processing Rs.1.20

At an output of 3600 kg the incremental contribution is Rs. 4320

Avoidable fixed costs Rs.3600
Net benefit Rs.720
Since the net benefit increased by Rs. 720 under further processing, it should be further
processed.
Question No. 25
Pathibhara Paints Ltd. produces product ‘Royal Play’ a special effect paint which passes
through two processes before it is completed and transferred to finished stock. The following
data relates to Chaitra 2073.
Particulars Process-I Process-II Finished Stock
Rs. Rs. Rs.
Opening Stock 1,50,000 1,80,000 4,50,000
Direct Materials 3,00,000 3,15,000 -
Direct Wages 2,24,000 2,25,000 -
Factory Overheads 2,10,000 90,000 -
Closing Stock 74,000 90,000 2,25,000
Inter process profit included
in Opening Stock NIL 30,000 1,65,000
Output of Process-I is transferred to Process-II at 25 percent profit on the transfer price,
whereas output of process-II is transferred to finished stock at 25 percent on total cost.
Stocks in processes are valued at prime cost. Finished stock is valued at the price at
which it is received from process-II. Sales for the month is Rs. 28,00,000.
Required:
i) Process-I account.
ii) Process-II account.
iii) Finished stock account. [June 2017 – 2(b), 2+4+4=10 Marks]
Answer
Process-I account
Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost Profit
(Rs.) (Rs.) (Rs.)
To - By
Opening transfer to
Balance 1,50,000 1,50,000 Process-II 10,80,000 8,10,000 2,70,000
To Direct -
Materials 3,00,000 3,00,000
To Direct -
Wages 2,24,000 2,24,000
6,74,000 6,74,000 -

Less: -
Closing
Stock 74,000 74,000
Prime Cost 6,00,000 6,00,000 -
To Factory -
Overheads 2,10,000 2,10,000
Total cost 8,10,000 8,10,000 -
Profit 25%
on transfer
price
(33.33% on
cost) 2,70,000 - 2,70,000
10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000
Process-II account
Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost (Rs.) Profit
(Rs.) (Rs.)
To By
Opening transfer to
Balance 1,80,000 1,50,000 30,000 Finished
Stock 22,50,000 15,15,000 7,35,000
To Direct -
Materials 3,15,000 3,15,000
To Direct -
Wages 2,25,000 2,25,000
To
Transfer
from
Process-I 10,80,000 8,10,000 2,70,000
18,00,000 15,00,000 3,00,000
Less:
Closing
Stock 90,000 75,000 15,000
Prime Cost 17,10,000 14,25,000 2,85000
To Factory
Overheads 90,000 90,000 -
Total cost 18,00,000 15,15,000 2,85,000

Profit 20%
on transfer
price (25%
on cost) 4,50,000 - 4,50,000
22,50,000 15,15,000 7,35,000 22,50,000 15,15,000 7,35,000
Working note:
Profit element in closing stock- Process-II = Rs.(3,00,000/18,00,000) × Rs. 90,000
= Rs. 15,000
Finished stock account

Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost (Rs.) Profit
(Rs.) (Rs.)
To By Sales 28,00,000 16,50,000 11,50,000
Opening
Balance 4,50,000 2,85,000 1,65,000
To
Transfer
from
Process-II 22,50,000 15,15,000 7,35,000
27,00,000 18,00,000 9,00,000
Less:
Closing
Stock 2,25,000 1,50,000 75,000
Total cost 24,75,000 16,50,000 8,25,000
Profit
(Balancing
figure) 3,25,000 - 3,25,000
28,00,000 16,50,000 11,50,000 28,00,000 16,50,000 11,50,000
Working note:
Profit element in closing stock-Finished stock = Rs. (9,00,000/27,00,000) × Rs.
2,25,000
= Rs. 75,000
Question No. 26
A product passes from Process-I and Process-II. Materials issued to Process-I amounted to Rs.
80,000, Wages Rs. 60,000 and manufacturing overheads were Rs. 54,000. Normal loss
anticipated was 5% of input. 9,100 units of output were produced and transferred from
Process-I. There were no opening stocks. Input raw material issued to Process I were 10,000
units. Scrap has realizable value of Rs. 4 per unit.

You are required to show:

i) Process-I account,
ii) Value of normal loss,
iii) Value of abnormal loss and
iv) Value of units transferred to Process-II [December 2018 – 4(a), 5 Marks]
Answer:
i) Process I Account
Dr. Cr.
Particulars Units Amount Particulars Units Amount

(Rs.) (Rs.)
To Material 10,000 80,000 By Normal loss (5%) @4 500 2,000
To Wages - 60,000 By Abnormal Loss 400 8,084
(Qty.- Bal. Fig) @
20.2105
To Overhead - 54,000 By Process II @20.2105 9,100 183,916
10,000 1,94,000 10,000 1,94,000
ii) Cost/Unit = 194000 - 2000

10000 - 500
= 20.2105

CHAPTER 8:
JOINT AND BY PRODUCTS

Question No. 1
Distinguish between
(a) Joint Product and By-product
[June 2005 – 6(a), 4 Marks] [December 2005 – 6(b), 4 Marks] [June 2011 – 5(d), 5
Marks]
Answer
a. Joint products are distinctly different major products that are inevitably produced
simultaneously from common inputs or by common process whereas by-product is a
product which is recovered incidentally from the material used in the manufacture of
recognized main product.
b. If revenue from each of the products is more or less equal in amount, they are treated
a joint products. If one item has a relatively higher sales value, it is called main
product and the other one by-product
c. In case of joint product, the manufacturing objective is to produce both the product
whereas if the firm wants to produce of particular product and another product is
simultaneously produced it is a by product.
Alternative Answer
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 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.
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 material 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. Examples of by-products
are molasses in the manufacture of sugar, tar, ammonia and benzole obtained on
carbonization of coal and in the manufacture of sugar, tar ammonia and benzole obtained
on carbonization of coal and glycerin obtained in the manufacture of soap.
Question No. 2
Write Short Notes on
(a) Co-product, By-product and waste [June 2004 – 7(b), 4 Marks]
Answer
In case of co-products, the production of one or more co-products are proceeded without
the production of other products. Co-products do not necessarily arise out of the same

operation or materials. Changes in production of co-product will not necessarily lead to a

change in the production of other product.
By-products however are secondary products. They are produced from the same raw-
materials and same process operations, but they are secondary result of operation. The
relationship between main product and by-product changes with changes in economic or
industrial conditions or with advancement of science. However, what is a by-product of
one industry may be a main product of another. Eg. butter-milk is the by-product of a
dairy industry producing butter and cheese.
Waste represents discarded substances having no value. Resources are consumed but no
economic benefit is obtained. Input loss may either be physical or economic.
Question No. 3
Discuss the accounting treatment of by-product cost in cost accounting.
Answer
Treatment of by product cost in cost accounting:
a. When they are of small total value - the amount realised from their sale may be dealt
as below:
i. The sales value of the by products may be credited to the profit and loss account
and no credit be given in the cost accounts. The credit to P&L a/c is treated either
as misc. income or additional sale revenue.
ii. The sale proceeds of the by product may be treated as deductions from the total
costs.
b. When the by products are of considerable total value - they may be regarded as joint
products rather than as by products.
c. Where they require further processing the net realisable value of the by product at the
split off point may be arrived at by subtracting the further processing cost from the
realisable value of by products.
Question No. 4
State the methods of apportionment of joint costs to joint products.
[June 2002 – 3(a), 3 Marks]
Answer
Methods of apportionment of joint costs to joint products
a. Physical unit method
b. Average unit cost method
c. Survey method
d. Contribution margin method
e. Market value method
i. At the point of separation
ii. After further processing
f. Net realisable value

Practical Questions
Question No. 5
Three joint products are produced by passing raw materials through two consecutive
Processes. Output from process 1 is transferred to process 2 from which the three joint
products are produced and immediately sold. The data regarding the processes for Shrawan,
2060 is given below:
Process I Process II
Direct material 1,250 kg. at Rs. 4 per kg. Rs. 5,000

Direct Labour Rs. 3,125 Rs. 3,450
Overheads Rs. 2,250 Rs. 3,450
Normal Loss 10% of input Nil
Scrap value of loss Rs. 2 per kilos
Output 1,150 kilo Joint products
A - 450 Kgs
B - 400 Kgs
C - 300 Kgs
There were no opening closing stocks in either process and the selling pricess of the
output from process 2 were: Joint product A: Rs. 18 per Kg.; Joint product B: Rs. 15 per
kg; Joint product C: Rs. 10 per kg.
a. Prepare an account for process 1 together with any loss or Gain accounts you
consider necessary to record the months activities.
b. Calculate the profit attributable to each of the joint produced by apportioning the
total cost from process 2: (i) According to weight of output. (ii) By the market value
of production. [December 2003 – 3(a),
16 Marks]
Answer
Process – I Account
Particulars Unit Rat Amoun Particulars Unit Rat Amount

e t e
To Materials 125 4 5,000 By Normal Loss 125 2 250
0
To Labour 3,125 By Process II 1150 9 10,350
A/c
To Overheads 2,250
To Abnormal 25 9 225
Gain
127 10,600 1275 10,600
5

Abnormal Gain A/c

To Normal Loss 25 2 50 By Process I A/c 25 9 225
To Costing P & L 175
25 225 25 225
Normal Loss A/c
To Process I A/c 125 2 250 By Normal Loss 25 2 50
By Gen. Ledger 100 2 200
Adj. A/c
125 2 250 125 250
Statement Showing Profit

Weight of output as base to apportion Joint Cost
Products
A B C Total
Joint Cost (4:5:4:3) 4,050 3,600 2,700 10,350
Further Processing Cost:
Labour 1,350 1,200 900 3,450

Overhead 1,350 1,200 900 3,450
Total Cost 6,750 6,000 4,500 17,250
Profit 1,350 – (1,500) (150)
Sales 8,100 6,000 3,000 17,100
Statement of Profit
Market Value as base to apportion Joint Cost
Products
A B C Total
Joint Cost 4,903 3,632 1,815 10,350
Further Processing Cost:
Labour 1,634 1,211 605 3,450

Overheads 1,634 1,211 605 3,450

Total Cost 8,171 66,054 3,025 17,250

Profit/(Loss) (71) (54) (25) (150)
Sales 8,100 6,000 3,000 17,100
Question No.6
Gulf Petrolube, in the course of refining of crude oil obtains four joint products A, B, C and
D. The total cost till the split off point was Rs. 97,600. The output and sales in the year 2006
were as follows:-
Product Output (Gallons) Sales (Rs.) Separate Costs
A 5,00,000 1,15,000 30,000
B 10,000 10,000 6,000
C 5,000 4,000 Nil
D 9,000 30,000 1,000
Required:
i. Calculate the net income for each of the products if the joint costs are apportioned on
the basis of net realizable values at split off point of the different products.
ii. What would be the net income of the company form each product if it decides to sell
the products at split off point itself at the following sale price.
Product Price
A Rs. 0.15
B Rs. 0.50
C Rs. 0.80
D Rs. 3
Assume joint cost being apportioned on the market value of the products at the time
of split off.
(iii) In case the company expects to operate at the same level of production and sales in
the year 2007, could the company increase the net income by altering its processing
decisions? If so, what would be expected overall net income? Which products should
be processed further and which should be sold at split off point? Assume that all costs
incurred after the split off are variable and joint costs are apportioned on the basis of
net realizable value at split off point. [December 2006 – 3, 6+3+6=15 Marks]
Answer
(i)
Share in joint costs of Rs. 97,600 apportioned in the ratio of net realizable value at split off
point:
A = Rs. 85,000/ Rs. 1,22,000 × Rs. 97,600 = Rs. 68,000
B = Rs. 4,000/ Rs. 1,22,000 × Rs. 97,600 = Rs. 3,200
C = Rs. 4,000/ Rs. 1,22,000 × Rs. 97,600 = Rs. 3,200
D = Rs. 29,000/ Rs. 1,22,000 × Rs. 97,600 = Rs. 23,200

The net realizable value at split off has been arrived as under:
Products Sale value Split off costs Realizable value
A 1,15,000 30,000 85,000
B 10,000 6,000 4,000
C 4,000 Nil 4,000
D 30,000 1,000 29,000
Total 1,22,000
Net Realisable Value

A B C D
Net Realisable Value 85,000 4,000 4,000 29,000
Less: Share of Joint Costs 68,000 3,200 3,200 23,200
Net Income 17,000 800 800 5,800
ii. If the products are sold at the point of split off
Product Output Price Sales Joint cost Net Income

apportioned
A 5,00,000 0.15 75,000 65,946 9,054
B 10,000 0.50 5,000 4,396 604
C 5,000 0.8 4,000 3,517 483
D 9,000 3 27,000 23,741 3,259
Total 1,11,000 97,600 13,400
A = 75,000/1,11,000 × 97,600 = 65,947

B = 5,000/1,11,000 × 97,600 = 4,396
C = 4,000/1,11,000 × 97,600 = 3,517
D = 27,000/1,11,000 × 97,600 = 23,741
(iii.) If the suggestion is accepted the position will be as under:

Product Sales after Sales at Incremental Incremental Net
processing split off sales cost gain
A 1,15,000 75,000 Rs. 40,000 30,000 10,000

B 10,000 5,000 Rs. 5,000 6,000 (1,000)
C 4,000 4,000 Nil Nil Nil
D 30,000 27,000 3,000 1,000 2,000
Total 11,000

If Product B is sold at split off, the position shall be as under:
Product Sales after Separate Joint Costs Total Cost Net gain
processing Costs
A 1,15,000 30,000 68,000 98,000 17,000
B 5,000 Nil 3,200 3,200 1,800
C 4,000 Nil 3,200 3,200 800
D 30,000 1,000 23,200 24,200 5,800
Total 25,400
Question No.7
S. Engineering Ltd. produces 2,00,000; 30,000; 25,000; 20,000 and 75,000 units of five
products Excel, Supreme, Ordinary, Power and Eco respectively in a manufacturing process
and sells them at Rs. 17, Rs. 13, Rs. 8, Rs. 10 and Rs. 14 per unit. Except product Power
remaining products can be further processed and then can be sold at Rs. 25, Rs. 17, Rs. 12
and Rs. 20 per unit in case of Excel, Supreme, Ordinary and Eco respectively.
Raw material costs Rs. 35,90,000 and other manufacturing expenses cost Rs. 5,47,000 in the
manufacturing process which are absorbed on the products on the basis of their 'Net
realizable value'. The further processing costs of Excel, Supreme, Ordinary and Eco are Rs.
12,50,000, Rs. 1,50,000, Rs. 50,000 and Rs. 1,50,000 respectively. Fixed costs are Rs.
4,73,000.
You are required to prepare the following in respect of the coming year:
a) Statement showing income forecast of the company assuming that none of its
products are to be further processed.
b) Statement showing income forecast of the company assuming that products Excel,
Supreme, Ordinary and Eco are to be processed further.
Can you suggest any other production plan whereby the company can maximize its
profits? If yes, then submit a statement showing income forecast arising out of adoption
of that plan.
[June 2007 – 1, 20 Marks]
Answer
a) Statement showing income forecast of S. Engineering Ltd. assuming that none of its
products are further processed.
Products
Excel Rs. Supreme Ordinary Power Eco. Rs. Total
Rs. Rs. Rs.
Sales Revenue 34,00,000 3,90,000 2,00,000 2,00,000 10,50,000 52,40,000

Less: Apportioned
Joint Cost (Working 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
Note)
Excess of Revenue
over Joint Cost 7,75,000 1,38,000 25,000 60,000 1,05,000 11,03,000
Less: Fixed Cost 4,73,000
Profit 6,30,000
b) Statement showing income forecast of S. Engineering Ltd. assuming that products Excel,
Supreme, Ordinary and Eco are further processed:
Products
Rs. Rs. Rs.
Revenue 50,00,000 5,10,000 3,00,000 2,00,000 15,00,000 75,10,000
Less: Apportioned
Joint Cost 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
Further Processing 12,50,000 1,50,000 50,000 - 1,50,000 16,00,000
Cost
Excess of Revenue
over Joint Cost 11,25,000 1,08,000 75,000 60,000 4,05,000 17,73,000
Profit 13,00,000
Working Note: 1
Statement showing apportionment of Joint Costs on net realizable value basis.
Products Sales Value Post Net Realizable Apportioned
Separation Value Joint Cost
1 (Rs.) 2 (Rs.) 1 + 2 = 3 (Rs.) 4 (Rs.)
Excel 50,00,000
(2,00,000 unit × Rs. 25) 12,50,000 37,50,000 26,25,000
Supreme 5,10,000
(30,000 × Rs. 17) 1,50,000 3,60,000 2,52,000
Ordinary 3,00,000
(25,000 × Rs. 12) 50,000 2,50,000 1,75,000
Power 2,00,000
(20,000 × Rs. 10) - 2,00,000 1,40,000
Eco 15,00,000
(75,000 × Rs. 20) 1,50,000 13,50,000 9,45,000
59,10,000 41,37,000

Total Joint Cost = Raw Material Costs + Manufacturing Exp.` `

= Rs. 35,90,000 + Rs. 5,47,000 = 41,37,000
Suggested production plan for Maximizing Profits

As we compare the figures of Revenue over cost of manufacturing in the above statements it
is observed that the concern is earning more after further processing except for one product
Supreme (lose by Rs. 30,000). Hence, the best production plan will be to sell Excel, Ordinary
and Eco after further processing and Supreme and Power at the point of split off. The profit
statement based on this suggested production plan is as below:
Production
Rs. Rs. Rs.
Sales Revenue 50,00,000 3,90,000 3,00,000 2,00,000 15,00,000 73,90,000
Apportioned Joint 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
Cost
Further Processing 12,50,000 - 50,000 - 1,50,000 14,50,000
Cost
Total Manufacturing
Cost 38,75,000 2,52,000 2,25,000 1,40,000 10,95,000 55,87,000
Excess of Revenue
over Manufacturing 11,25,000 1,38,000 75,000 60,000 4,05,000 18,03,000
Cost
Profit 13,30,000
Question No. 8
Two Products A and B are obtained in a crude form and require further processing at a cost of
Rs. 5 for A and Rs 4 for B per unit before sale. Assuming a net margin of 25 percent on cost,
their sale prices are fixed at Rs 13.75 and Rs 8.75 per unit respectively. During the period, the
joint cost was Rs 88,000 and the outputs were:
A: 8,000 units
B: 6,000 units
Ascertain the joint cost per unit. [June 2008 – 2(b), 6
Marks]
Answer
Statement for ascertaining joint cost per unit
Product A B
Output Units 8,000 6,000
-------------------------------------------------------------------------------------

Selling price per unit 13.75 8.75

Less: Margin@25% on cost or
20% of sales 2.75 1.75
Cost of sales 11.00 7.00

Less: Post split off cost 5.00 4.00
Output cost per unit 6.00 3.00
Share in joint cost of A and B can be

Obtained at a ratio 8:3
(Working notes) 64,000 24,000
Joint cost per unit 8.00 4.00
(64,000/8000 units) (24,000/6000 units)
Working Notes:
Products A B
Units 8,000 6,000

Total output costs 48,000 18,000
(8000 X Rs 6) (6,000 X Rs 3)
Ratio between total output cost of
Two type of products 8 3
Question No. 9
The joint cost of making 80 units of product A, 120 units of product B and 160 units of
product C is Rs 49,500. The selling prices of products A, B and C are Rs 40, Rs 30 and Rs 20
respectively.
Required:
Apportionment of joint cost among the products on the basis of (i) physical unit (ii) sales
value and (iii) selling price. [December 2008 – 1(a), 3x2=6 Marks]
Answer
i) Apportionment on physical unit basis
Products Units Cost apportionment ratio Apportioned Joint

Cost
A 80 2/9 11,000
B 120 3/9 16,500
C 160 4/9 22,000
Total 360 49,500

ii) Apportionment on Sales Value basis
Products Units Unit Sales Ratio Apportioned Cost

Sold S.P. Value
A 80 40 3200 8/25 1,5840
B 120 30 3600 9/25 17,820
C 160 20 3200 8/25 15,840
Total 360 10000 49,500
iii)Apportionment on selling price basis-
Products Unit S.P. Cost apportionment ratio Apportioned Joint

Cost
A 40 4/9 22,000
B 30 3/9 16,500
C 20 2/9 11,000
Total 90 49,500
Question No. 10
Naya Nepal Ltd. produces 200,000; 30,000; 25,000; 20,000 and 75,000 units of its five
products A, B, C, D and E respectively in a manufacturing process and sell them at Rs 17; Rs
13; Rs 8; Rs 10 and Rs 14 per unit. Except product D remaining products can be further
processed and then can be sold at Rs 25; Rs 17; Rs 12; and Rs 20 per unit in case of A, B, C
and E respectively.
Raw material costs Rs 35,90,000 and other manufacturing expenses costs Rs 547,000
in the manufacturing process which are absorbed on the products on the basis of their net
realizable value. The further processing costs of A, B, C and E are Rs 1,250,000; Rs 150,000;
Rs 50,000 and Rs 150,000 respectively. Fixed costs are Rs 473,000.
You are required to prepare the following in respect of the coming year:
Statement showing income forecast of the company assuming that none of its products is to
be further processed.
(i) Statement showing income forecast of the company assuming that products A, B, C and E
are further processed.
Is there any other production plan whereby the company can maximize its profit? If yes,
then submit a statement showing income forecast arising out of adoption of that plan.
[December 2009 – 1(a), 14
Marks]

Answer
Statement showing income forecast of the company
Assuming that none of its products is further processed
Products A B C D E
Units 200,000 30,000 25,000 20,000 75,000
Rate 17 13 8 10 14
Sales Revenue 3,400,000 390,000 200,000 200,000 1,050,000 5,240,000
Less: 2,625,000 252,000 175,000 140,000 945,000
Apportioned 41,37,000
Joint Cost
Excess of 775,000 138,000 25,000 60,000 105,000 1,103,000
revenue over
joint cost of
manufacturing
Less: Fixed 473,000
Cost
Profit 630,000
Statement showing income forecast of the company;

assuming that products A,B,C and E are further processed
A B C D E Total
Units 200,000 30,000 25,000 20,000 75,000
Rate 25 17 12 10 20
Sales Revenue 5,000,000 510,000 300,000 200,000 1,500,000 7,510,000
Less: Further 1,250,000 150,000 50,000 - 150,000 1,600,000
processing cost
Less: Apportioned 2,625,000 252,000 175,000 140,000 945,000 41,37,000
Joint Cost
Total manufacturing 3,875,000 402,000 225,000 140,000 1,095,000 5,737,000
cost
Excess of revenue 11,25,000 108,000 75,000 60,000 405,000 1,773,000
over joint cost of
manufacturing
Less: Fixed Cost 473,000
Profit 1,300,000
Suggested Production plan for maximizing profits

On comparing the figures of excess of revenue over cost of manufacturing on the above
statements it is observed that the company is earning more after further processing of A,C
and E products but is loosing Rs 30,000 in case of product B. Hence the best production

plan will be to sell A, C and E after further processing and B, D at the point of spilt off. The
profit statement based on this suggested production plan is as below:
A B C D E Total
Units 200,000 30,000 25,000 20,000 75,000
Rate 25 13 12 10 20
Sales Revenue 5,000,000 390,000 300,000 200,000 1,500,000 7,390,000
Less: Further 1,250,000 50,000 - 150,000 1,450,000
processing cost
Less: 2,625,000 252,000 175,000 140,000 945,000
Apportioned 41,37,000
Joint Cost
Total 3,875,000 252,000 225,000 140,000 1,095,000 5,587,000
manufacturing
cost
Excess of 11,25,000 138,000 75,000 60,000 405,000 1,803,000
revenue over
joint cost of
manufacturing
Profit 1,330,000
Working Notes:
i) Statement showing Net realizable value and Apportionment of joint costs
Products Sales value Post Net Apportioned
Rs Separation Realizable joint costs Rs
(1) Cost .Rs Value Rs (4)
(2) (1)-(2)=(3)
A 5,000,000 1,250,000 3,750,000 2,625,000
(200,000×Rs 25)
B 510,000 150,000 360,000 252,000
( 30,000 units
×17)
C 300,000 50,000 250,000 175,000
( 25,000 units
×12)
D 200,000 - 200,000 140,000
(20,000 units
×10)
E 1,500,000 150,000 1,350,000 945,000
( 75,000 units

×20)
5,910,000 4,137,000
Total Joint Costs= Raw materials + Manufacturing Expenses

= Rs 3,590,000 + Rs 547,000
= Rs 4,137,000
ii) Apportionment of joint costs

Product Net Joint cost apportionment Apportioned
Realizable Total Joint Cost × NRV of each product joint cost
value Total NRV
A 3,750,000 4,137,000 × 3,750,000 2,625,000
5,910,000
B 360,000 4,137,000 × 360,000 252,000
5,910,000
C 250,000 4,137,000 × 250,000 175,000
5,910,000
D 200,000 4,137,000 × 200,000 140,000
5,910,000
E 1,350,000 4,137,000 × 1,350,000 945,000
5,910,000
5,910,000 4,137,000
Question No.11
In a manufacturing concern, production of A yields by products B and C. The joint expenses
of manufacture are:
Materials Rs. 8,500, Labour Rs. 9,000, Overheads Rs. 7,500, Subsequent expenses are as
follows:
Materials Labour Overhead
A 2,500 1,900 1,500
B 1,200 1,600 900
C 1,400 2,000 1,050
Selling prices: A Rs. 30,000; B Rs. 20,000; C Rs. 15,000

Profit on selling prices A= 40%; B = 30%; C = 25%
Apportion the joint expenses and ascertain profit of each product

Answer
Statement of Cost and Profit
Particulars A (Rs.) B(Rs.) C(Rs.) Total (Rs.)
Selling price (S.P.) 30,000 20,000 15,000 65,000
Less: profit on S.P.
A 40%,B30% & C25% 12,000 6,000 3,750 21,750
Cost of sales 18,000 14,000 11,250 43,250
Less: Selling & Distribution 1,938 1,293 969 4,200
expenses
Cost of production 16,062 12,707 10,281 39,050
Less: Subsequent expenses 5,900 3,700 4,450 14,050
Joint Cost 10,162 9,007 5,831 25,000
Joint Cost may be apportioned in the ratio of 10,162:9,007:5,831
Particulars A (Rs.) B (Rs.) C (Rs.) Total (Rs.)
Joint Costs 10,162 9,007 5,831 25,000
Subsequent expenses 5,900 3,700 4,450 14,050
Cost of production 16,062 12,707 10,281 39050
Selling & Distribution expenses 1,938 1,293 969 4,200
18,000 14,000 11,250 43,250
Profit 12,000 6,000 3,750 21,750
Sales 30,000 20,000 15,000 65,000
Note: Total of joint cost of Rs.25,000 and subsequent expenses of Rs. 14,050 comes to Rs.
39,050. While the total of cost of sales comes to Rs. 43,250. The difference of Rs. 4,200 is
assumed to be Selling & Distribution expenses, which is apportioned on the basis of selling
price.
Question No.12
A farm incurred Rs. 65,000 of production cost in a joint process to grow a crop with two joint
products, A and B. The following are data related to the operations:
Joint Tons of Sales Price per Per Ton Separate Per Ton Separate Per Ton
Products Production Ton at Split-off costs if sold at costs if processed Final Sales
(Rs.) Split-off (Rs.) further (Rs.) Price (Rs.)
A 45 950 50 236 1,450
B 20 1200 110 200 1,600
You are required to allocate the joint process cost to A and B using:
i) Sales value at split-off.
ii) Net realizable value at split-off.
iii) Approximated net realizable after split-off. [December 2010 – 3(a), 2+3+3=8
Marks]

Answer
(i) Allocation of the joint process cost using the sales value at split-off
Joint Tons of Sales Sales Ratio of Joint Allocated

Products Production Price per Value Allocation Cost Joint
Ton at (Rs.) (Rs.) Cost
Split-off (Rs.)
(Rs.)
A 45 950 42,750 64% 65,000 41,600
B 20 1200 24,000 36% 65,000 23,400
Total 65 66,750 65,000
Working note 1:
Ratio of Allocation = Sales Value of Each Product/ Total Sales Value
A= 42750/66750 =0.64 =64%
B= 24000/66750 =0.36 =36%
(ii) Allocation of the joint process cost using the net realizable value at split-off
Joint Tons of NRP per Net Ratio of Joint Allocated

Products Production Ton at Realizable Allocation Cost Joint
Split-off Value (Rs.) Cost
(Rs.) (Rs.) (Rs.)
A 45 900 40,500 65% 65,000 42,250
B 20 1,090 21,800 35% 65,000 22,750
Total 65 62,300 65,000
Working note 2:
NRP at split-off = SP at split-off – sales cost at split off
A= Rs.950-Rs.50=Rs.900
B= Rs.1,200-Rs.110= Rs.1,090
Ratio of Allocation = NRV of Each Product/ Total NRV

A= 40500/62300 =0.65 =65%
B= 21800/62300 =0.35 =35%
(iii) Allocation of the joint process cost using the approximated net realizable value
after split-off
Joint Tons of Approx. Approx. Ratio of Joint Allocated

Products Production NRP per Net Allocation Cost Joint
Ton after Realizable Cost

Split-off Value (Rs.) (Rs.)

(Rs.) (Rs.)
A 45 1,164 52,380 67% 65,000 43,550
B 20 1,290 25,800 33% 65,000 21,450
Total 65 78,180 65,000
Working note 3:
NRP at split-off = Final SP – sales cost at split off – further processing cost
A= Rs.1,450-Rs.50-Rs.236=Rs.1,164
B= Rs.1,600-Rs.110-Rs.200= Rs.1,290
Ratio of Allocation = Approx. NRV of Each Product/ Total NRV

A= 52380/78180 =0.67 =67%
B= 25800/78180 =0.33 =33%
Question No. 13
A Company produces two joint products P and Q in 70 : 30 ratio from basic raw materials in
department A. The input output ratio of department A is 100 : 85. Product P can be sold at the
split of stage or can be processed further at department B and sold as product AR. The input
output ratio is 100 : 90 of department B. The department B is created to process product A
only and to make it product AR.
The selling prices per kg. are as under:
Product P Rs. 85
Product Q Rs. 290
Product AR Rs. 115
The production will be taken up in the next month.
Raw Materials 8,00,000 kgs.
Purchase price Rs. 80 per kg.
Monthly expenses:
Dept. A Dept. B
Rs. in lakhs Rs. in
lakhs
Direct Materials 35.00 5.00
Direct Labour 30.00 9.00
Variable overheads 45.00 18.00
Fixed overheads _40.00 _32.00
Total 150.00 64.00

Selling Expenses:
Rs. in lakhs
Product P 24.60
Product Q 21.60
Product AR 16.80
Required:
ii) Prepare a statement showing the apportionment of joint costs.
iii) State whether it is advisable to produce product AR or not.
[June 2011 – 2(b), 4+4=8 Marks]
Answer
Input in Dept. ‘A’ 800,000 kgs.
Yield 85%
Therefore output = 85% of 8,00,000 = 6,80,000 kgs.
Ratio of output for P and Q = 70 : 30
Product of P = 70% of 6,80,000 = 4,76,000 kgs.
Product of Q = 30% of 6,80,000 = 2,04,000 kgs.
(i) Statement showing apportionment of Joint cost

P Q
Total
Product Kgs. 4,76,000 2,04,000
Selling price per kg. Rs. 85.00 290.00
Rs. Lakhs Rs. Lakhs Rs. Lakhs
Sales 404.60 591.60 996.20
Less: Selling expenses __24.60 __21.60 __46.20
Net Sales _380 __570 _950
Ratio 40% 60% 100%
Rs. In lakhs
Raw materials (8,00,000 kgs. ×Rs. 80) 640
Process cost of department ‘A’ __150
__790
Apportionment of Joint Cost
(In the ratio of Net Sales i.e. P : Q, 40% : 60%)
joint cost of ‘P’ = Rs. 316 lakhs
Joint cost of ‘Q’ = Rs. 474 lakhs
(ii) Profitability statement of further processing of product ‘P’ and

converting it into product ‘AR’

Output = 90% of 4,76,000 kgs. = 4,28,400 kgs. Rs. in lakhs

Joint costs (As above) 316.00
Cost of department B 64.00
Selling expenses _16.80
396.80
Sales value (Rs. 115×4,28,400) 492.66
Profit (492.66-396.80) __95.86
If ‘P’ is not processed profitability is as under:

Rs. in lakhs
Sales 380.00
Less: joint expenses 316.00
Profit __64.00
Further processing of product ‘P’ and converting it into product ‘AR’ is beneficial to the
company because the profit is increased by Rs. 31.86 lakhs (95.86-64.00).
Question No.14
In a chemical manufacturing company, three products A, B and C emerges at a single split
off stage in department P. Product A is further processed in department Q, Product B in
department R and Product C in department S. There is no loss in further processing of any of
the three products. The cost data for a particular month are as under:
Rs.
Cost of raw materials introduced in department P 1,268,800
Direct Wages: Department P 384,000
Department Q 96,000
Department R 64,000
Department S 36,000
Factory overheads of Rs. 464,000 are to be apportioned to the departments on direct
wages basis. During the month under reference, the company sold all three products
after processing them further as under:
A B C
Output sold in kg. 44,000 40,000 20,000
Selling Price per kg. (Rs.) 32 24 16
There is no Opening or Closing Stocks. If these products were sold at the split off
stage i.e. without further processing, the selling prices would have been Rs. 20, Rs. 22
and Rs. 10 per kg. for A, B and C respectively.
Required:
i) Prepare a statement showing the apportionment of joint costs to three products.

ii) Prepare a statement showing product-wise and total profit for the month under
reference as per the company's current processing policy.
iii) What processing decision should have been taken to improve the profitability?
iv) Calculate the product-wise and total profit arising from your recommendation in
(iii). [December 2011 – 2(b), 3+3+2+2=10 Marks]
Answer
i) Statement showing the apportionment of joint costs to joint products:
Particulars A B C Total
Output sold in kg. 44,000 40,000 20,000
Selling price per kg. at split off (Rs.) 20 22 10
Sales value at split off (Rs.) 880,000 880,000 200,000 1,960,000
Ratio 22 22 5
Joint costs apportioned(W.N. a) 880,000 880,000 200,000 1,960,000
Working Note (a)
Computation of joint cost:
Cost of raw materials 1,268,800
Direct wages 384,000
Factory overhead (464000/580000×384000) 307,200
(Apportioned on direct wages basis.) 1,960,000
(ii) Statement showing product-wise and total profit for the month under reference
as per company's current processing policy:
Particulars A B C Total
Output sold in kg. 44,000 40,000 20,000
Selling price per kg. (Rs.) 32 24 16
Sales value (Rs.) 1,408,000 960,000 320,000 2,688,000
Joint costs (Rs.) 880,000 880,000 200,000 1,960,000
Further processing costs (Rs.)
172,800 115,200 64,800 352,800
W.N. (b)
Total costs (Rs.) 1,052,800 995,200 264,800 2,312,800
Profit / (Loss) (Rs.) 355,200 (35,200) 55,200 375,200
Working Note (b) Q R
S
Direct wages 96,000 64,000
36,000
Factory Overhead (464,000/580,000×96,000) (464,000/580,000×64,000)

(464,000/580,000×36,000)

(Apportioned on direct wages basis) =76,800 =51,200

=28,800
172,800 115,200
64,800
(iii) Statement of incremental profit on further processing:
Particulars A B C
Output sold in kg. 44,000 40,000 20,000
Incremental selling price per kg (Rs.) 12 2 6
Incremental sales value (Rs.) 528,000 80,000 120,000
Further processing costs (Rs.) 172,800 115,200 64,800
Profit / (Loss) (Rs.) 355,200 (35,200) 55,200
Processing decision:
44,000 kg of product A and 20,000 kg of product C should be further processed
because the incremental sales revenue generated after further processing is more than
the further processing costs incurred. 40,000 kg of product B should be sold at the
point of split off because the incremental revenue generated after further processing
is less than the further processing costs incurred.
(iv) Product-wise and total profit arising from the recommendation in (iii) is as follows:
Profit for A 355,200

Profit for C 55,200
Profit for B (At split -off)
Sales- (as per i above) 880,000
Less: Joint cost (W.N.a) 880,000
Profit /Loss Nil
Total Profit 410,400
W.N (C): Costs incurred in the department P are joint costs of products A, B and C.
Similarly costs incurred in the departments Q, R and S are further
processing costs of products A, B and C respectively.
Question No.15
Bright Chemicals Ltd. electrolyses common salt to obtain three joint products – Caustic Soda,
Chlorine and Hydrogen. During a casting period, the expenditure relating to the inputs for the
common process amounted to Rs. 4,20,000. After separation, the expenses amounting to Rs.
1,92,000, Rs. 90,000, Rs. 12,000 were incurred for Caustic Soda, Chlorine and Hydrogen
respectively.
The entire production was sold and Rs. 4,50,000, Rs. 3,00,000 and Rs. 72,000 were realized
for the Caustic Soda, Chlorine and Hydrogen respectively. The selling expenses were
estimated at 5% of realizations from sale. The management expected profits @ 10%, 5% and
4% of realization from sale of the Caustic Soda, Chlorine and Hydrogen respectively.

Draw the statement of apportionment of joint cost and the profitability of each product by
reverse cost method. [December 2012 – 4, 10 Marks]
Answer:
Statement of apportionment of Joint Cost and Profitability of the Caustic Soda,
Chlorine and Hydrogen by Reverse Cost Method
Particulars Caustic Chlorine Hydrogen Total
Soda (Rs.) (Rs.) (Rs.) (Rs.)
Realization from sale 450,000 300,000 72,000 822,000
Less: Expected profit (10%, 5%, 4%) 45,000 15,000 2,880 62,880
Less: Selling expenses (5%) 22,500 15,000 3,600 41,100
Estimated production cost 382,500 270,000 65,520 718,020
Less: After separation cost 192,000 90,000 12,000 294,000
Therefore, estimated Joint Cost 190,500 180,000 53,520 424,020
% of estimated Joint Cost 44.93% 42.45% 12.62% 100%
Actual Joint Cost apportioned in the ratio of
estimated joint cost 188,706 178,290 53,004 420,000
Add: After separation cost 192,000 90,000 12,000 294,000
Add: Selling cost 22,500 15,000 3,600 41,100
Total Cost 403,206 283,290 68,604 755,100
Profit realized (bal. figure) 46,794 16,710 3,396 66,900
Realization from sale 450,000 300,000 72,000 822,000
Question No.16
Chemicals Ltd. produces two joint products 'J' and 'K' in Department A from a basic raw
material. The input-output ratio of Department A is 100:90. Product 'J' which becomes the
input of Department B can be further processed in Department B to make one of the most
popular industrial product 'N'. The input-output ratio of Department B is 100:95.
Alternatively, product 'J' can also be sold at the split off stage. The selling prices of the
products are:
Product Selling price per Kg. (Rs.)
J 29.40
K 26.00
N 31.50
The raw material cost, departmental expenses, production data and selling expenses
envisaged in the budget are as under:
i. Raw material cost is Rs. 16 per Kg.
ii. Departmental expenses:
Particulars Department A (Rs. lakhs) Department B (Rs. lakhs)
Direct materials 10.00 3.00
Direct wages 15.00 5.00


Fixed overheads 25.00 10.00
iii. Production data and selling expenses:
Product Production (Kg.) Selling expenses (Rs.)
J - 100,000
K 850,000 200,000
N 475,000 200,000
Required:
i. Prepare a statement showing the apportionment of joint costs between products 'J'
and 'K'.
ii. Advise whether the company should process product 'J' further into product 'N' or
not. Show your workings.
iii. Prepare a statement of profitability based on your decision in (ii) above.
[December 2013 – 3(a), 7+5+3=15 Marks]
Answer
i. Statement showing the apportionment of joint costs between Products 'J' and 'K'
Particulars Product 'J' Product 'K' Total
Output (kgs) (WN: 1) 500,000 850,000 -
Selling price (Rs.) 29.40 26.00 -
Sales value (Rs.) 14,700,000 22,100,000 36,800,000
Less: Selling expenses (Rs.) 100,000 200,000 300,000
Market value at spilt off stage (Rs.) 14,600,000 21,900,000 36,500,000
Ratio (146:219) or (40:60) 40 60 100
Joint cost apportioned (Rs.) 12,400,000 18,600,000 31,000,000
Working notes:
1) Output of product 'J':
Production of product 'N' in department B: 475,000 kgs.
Process loss in department B is 5% of input.
Hence, input into department B: 475,000 × 100/95 = 500,000 kgs.
Output of product 'J' is equal to input into department B. Hence, output of 'J' =
500,000 kgs.
2) Input of raw materials into department A:

Total output of department A: 500,000 kgs. + 850,000 kgs = 1,350,000 kgs.
Process loss in department A is 10% of input
Hence, input into department A: 1,350,000 × 100/90 = 1,500,000 kgs.

3) Joint costs in department A:

Rs.
Raw material costs [1,500,000 × Rs. 16] 24,000,000
Direct materials 1,000,000
Variable overheads 2,000,000
Fixed overheads 2,500,000
Total joint costs 31,000,000
ii. Statement showing Profit or (Loss) when product 'J' is processed further into 'N'
Particulars Rs. Rs.
Sales value [475,000 × Rs. 31.50] 14,962,500
Less: Joint cost of product 'J' 12,400,000
Department B costs: Direct materials 300,000
Direct wages 500,000
Variable overheads 700,000
Selling expenses 200,000 15,100,000
Loss from further processing 137,500
Statement showing Profit or (Loss) when product 'J' is not processed further into 'N'
Particulars Rs. Rs.
Sales value [500,000 × Rs. 29.40] 14,700,000
Less: Joint cost of product 'J' 12,400,000
Selling expenses 100,000 12,500,000
Profit 2,200,000
Less: Under recovery of fixed overheads 1,000,000
Net Profit 1,200,000
The above statements show that there is a profit of Rs. 1,200,000 in case 'J' is not further
processed as compared to loss of Rs. 137,500 if 'J' is processed into N. Hence, further
processing of 'J' should not be undertaken. It should rather be sold at the split-off points.
Moreover, if it is assumed that fixed overheads to department B amounting to Rs. 10
lakhs can be avoided, if 'J' is not further processed, the amount of profit of would be Rs.
22 lakhs.
iii. Statement of profitability as per decision given in (b) above

Particulars Product 'J' Product 'K' Total
Output & Sales (kgs) 500,000 850,000 -
Selling price (Rs.) 29.40 26.00 -

Sales value (Rs.) 14,700,000 22,100,000 36,800,000

Joint cost (Rs.) 12,400,000 18,600,000 31,000,000
Selling expenses (Rs.) 100,000 200,000 300,000
Total costs (Rs.) 12,500,000 18,800,000 31,300,000
Profit (Rs.) 2,200,000 3,300,000 5,500,000
Less : Under recovery of fixed
1,000,000
overheads (Rs.)
Net Profit (Rs.) 4,500,000
Question No.17
C Ltd. operates a process which produces three joint products. In the period just ended costs
of production totaled Rs. 509,640. Output from the process during the period was:
Product - W 276,000 kilos
Product - X 334,000 kilos
Product - Y 134,000 kilos
There were no opening stocks of the three products. Products W and X are sold in this state.
Product Y is subjected to further processing. Sales of products W and X during the period
was:
Product - W 255,000 kilos at Rs. 0.945 per kilo
Product - X 312,000 kilos at Rs. 0.890 per kilo
128,000 kilos of product Y were further processed during the period. The balance of the
period production of the three products W, X and Y remained in stock at the end of the
period. The value of closing stock of individual products is calculated by apportioning costs
according to weight of output.
The additional costs in the period of further processing product Y, which is converted into
product Z were:
Direct labour Rs. 10,850
Production overhead Rs. 7,070
96,000 kilos of product Z were produced from the 128,000 kilos of product Y. A by-product
BP is also produced which can be sold for Rs. 0.12 per kilo. 8,000 kilos of BP were produced
and sold during the period.
Sales of product Z during the period were 94,000 kilos, with total revenue of Rs. 100,110.
Opening stock of product Z was 8,000 kilos, valued at Rs. 8,640. The FIFO method is used
for pricing transfers of product Z to cost of sales.
Selling and administration costs are charged to all main products when sold, at 10% of
revenue.
Required:
i) Prepare a profit and loss account for the period, identifying separately the
profitability of each of the three main products (W, X and Z).

ii) C Ltd has now received an offer from another company to purchase the total
output of product Y (i.e. before further processing) for Rs. 0.62 per kilo. Calculate
the viability of this alternative.
[June 2014 – 4(a), 12+3=15 Marks]
Answer:
Profit and loss account
Product W Product X Product Z Total
Rs. Rs. Rs. Rs.
Opening stock - - 8,640 8,640
Production cost 189,060 228,790 108,750 526,600
Closing stock (14,385) (15,070) (15,010) (44,465)
Cost of sales 174,675 213,720 102,380 490,775
Selling and administration costs 24,098 27,768 10,011 61,877
Total costs 198,773 241 488 112,391 552,652
Sales 240,975 277,680 100,110 618,765
Profit / (loss) 42,202 36,192 (12,281) 66,113
Workings notes:
(1) Joint process cost per kilo of output = (Rs. 509,640 / 744,000) = Rs. 0.685
(2) Production cost for products W, X and Y:
Rs.
Product W (276,000 kg × Rs. 0.685) 189,060
Product X (334,000 kg × Rs. 0.685) 228,790
Product Y (134,000 kg × Rs. 0.685) 91,790
(3) Closing stocks of products W and X:
Rs.
Product W (21,000 kg × Rs. 0.685) 14,385
Product X (22,000 kg × Rs. 0.685) 15,070
(4) Cost per kilo of product Z:
Rs.
Product Y (128,000 kg × Rs. 0.685) 87,680
Further processing costs 17,920
Less: by-product sales (8,000 kg × Rs. 0.12) 960
104,640
Cost per kilo (Rs.104,640 / 96,000) Rs. 1.09

(5) Closing stock relating to product Z:
Rs.
Closing stock of product Z (10,000 kg × Rs. 1.09) 10,900
Add closing stock of input Y (6,000 kg × Rs. 0.685) 4,110
Closing stock relating to product Z 15,010

(6) Production cost relating to final product Z:

Rs.
Product Y (134,000 kg × Rs. 0.685) 91,790
Further processing costs 17,920
Less: by-product sales 960
108,750
(7) Sales revenue of product W and X:
Product W: 255,000 kg @ Rs. 0.945 per kg Rs. 240,975
Product X: 312,000 kg @ Rs. 0.890 per kg Rs. 277,680
i) The joint costs are common and unavoidable to both alternatives, and are therefore not
relevant for the decision under consideration. Further processing from an input of
128,000 kg of Y has resulted in an output of 96,000 kg of Z. Thus it requires 1.33 kg of
Y to produce 1 kg of Z (128,000 / 96,000)
Rs.
Revenue per kilo for product Z (Rs.100,110 / 94,000) 1.065
Sale proceeds at split-off point (1.33 × Rs. 0.62) 0.823
Incremental revenue per kg from further processing 0.242
Incremental costs of further processing [(Rs. 17,920 – Rs. 960) / 96 000] 0.177
Incremental profit from further processing 0.065
It is assumed that selling and administration costs are fixed and will be unaffected by
which alternative is selected. The company should therefore process Y further into
product Z and not accept the offer from the other company to purchase the entire output
of product Y.
Question No.18
Xinhau Petrochemicals Nepal Ltd. purchases crude oil from China and processes it into more
refined products Such as Liquefied Petroleum Gas (LPG), Fuel oil and Gasoline commonly
known as Petrol. For the month of December 2015, the company purchased crude oil for Rs.
800,000, conversion costs incurred were Rs. 1,200,000 upto the split–off point, at which
time two salable products were produced, LPG and Fuel oil. Fuel oil could be further
processed into Gasoline.
Production and other relevant information for the month of December 2015 are as
follows.
Production Sales Sales price per ton
LPG 2,400 tons 2,400 tons Rs. 1,000
Fuel oil 1,600 tons ------ -------
Gasoline 1,000 tons 1,000 tons Rs. 4,000
The full production of Fuel oil was further processed at an incremental cost of Rs.
400,000 to yield 1,000 tons of Gasoline. There were no by-product or scrap from this

further processing of Fuel oil. The company did not have any opening and closing
stocks of any of above products for December 2015.
As there is very active market for Fuel oil, the company could have sold its entire
production for December 2015 at Rs. 1,500 per ton.

a) How the joint cost of Rs. 2,000,000 would be allocated between LPG and Fuel oil
under each of the methods viz. (i) sales value at split off (ii) physical measure
(tons) and (iii) estimated net realizable value?
b) The gross margin percentage of (i) LPG and (ii) Gasoline under the three methods
given in (a) above.
c) Indo Petro Ltd. offers to purchase 1,600 tons of Fuel oil in January 2016 at Rs
1,500 per ton. This would mean that no Gasoline would be produced in that month.
Will the acceptance of the offer affect the operating income of Xinhau
Petrochemicals Nepal Ltd. for January 2016?
Answer
(a) Xinhau Petrochemicals Nepal Ltd.
Statement of allocation of joint cost
LPG Fuel oil
(i) On the basis of sales value at split off:
Units (tons) 2,400 1,600
Price per unit (Rs.) 1,000 1,500
Sales value at split off stage 24,00,000 24,00,000
Allocation of Joint processing cost (1:1) 10,00,000 10,00,000
(ii) On the basis of Physical measure:

Units (tons) 2,400 1,600
(ii) On the basis of Net realizable value:

Units (tons) 2,400 1,000
Sales value 24,00,000 40,00,000
Further processing cost -------- (4,00,000)
Net realizable value 24,00,000 36,00,000
(b) Statement of Gross profit margin

LPG Gasoline
Sales (tons) 2,400 1,000

Sales value(A) 24,00,000 40,00,000
(i) On the basis of sales value at split off

Allocation of Joint processing cost 10,00,000 10,00,000
Further processing cost -------- 4,00,000
10,00,000 14,00,000
Gross Profit (B) 14,00,000 26,00,000
Gross profit margin (B/A x 100) 58.33% 65%
(ii) On the basis of Physical measure:

12,00,000 12,00,000
Gross Profit (B) 12,00,000 28,00,000
Gross profit margin (B/A x 100) 50% 70%
(iii) On the basis of Net realizable value:

8,00,000 16,00,000
Gross Profit (B) 16,00,000 24,00,000
Gross profit margin (B/A x 100) 66.67% 60%
(c) Statement of evaluation of Indo Petro Ltd.'s offer.

Incremental gain:
Saving in further processing cost Rs. 4,00,000
Incremental loss:
Loss of sales (Rs. 40,00,000 – Rs. 24,00,000) (Rs. 16,00,000)
Net incremental loss (Rs. 12,00,000)
Acceptance of the offer will reduce the operating income of Xinhau

Petrochemicals Nepal Ltd. for January 2016 by Rs. 12,00,000.
Question No.19
In a chemical manufacturing company, three products A, B and C emerge at a single split off
stage in department P. Product A is further processed in department Q, product B in
department R and product C in department S. There is no loss in further Processing of any of
the three products. The cost data for a month are as under:

Cost of raw materials introduced in department P Rs.

12,68,800
Departments Direct Wages (Rs )
P 3,84,000
Q 96,000
R 64,000
S 36,000
Factory overheads of Rs. 4,64,000 are to be apportioned to the departments on direct

wage basis.
During the month under reference, the company sold all three products after processing
them further as under:
Products A B C
Output sold (kg.) 44,000 40,000 20,000
Selling Price per kg. (Rs.) 32 24 16
There is no opening or closing stocks. If these products were sold at the split off stage,
that is, without further processing, the selling prices would have been Rs. 20, Rs. 22 and
Rs. 10 each per kg. respectively for A, B and C.
Required:
d) Prepare a statement showing the apportionment of joint costs to joint products.
e) Present a statement showing product-wise and total profit for the month under
reference as per the company’s current processing policy.
f) What processing decision should have been taken to improve the profitability of the
company?
g) Calculate the product-wise and total profit arising from your recommendation in (c)
above. [June 2017 – 1, 6+9+3+2=20 Marks]
Answer:
a) Statement showing the apportionment of joint costs to joint products
Products
A B C Total
Output sold Kg.: (I) 44,000 40,000 20,000
Selling price per kg. at split
20 22 10
off (Rs. ): (II)
Sales value at split off
8,80,000 8,80,000 2,00,000 19,60,000
(Rs.): (I) x (II)
Joint costs (costs incurred 8,80,000 8,80,000 2,00,000 19,60,000

in department
P (Rs.)
(apportioned on the basis of
sales value at the
point of split off) i.e.
(22:22:5) (Working Note
1)
b) Statement showing product-wise and total profit for the month under reference
(as per the company’s current processing policy)
Products
A B C Total
Output (kg.) : (a) 44,000 40,000 20,000
Selling price per kg. after
32 24 16
further processing (Rs. ): (b)
Sales value after further 14,08,000 9,60,000 3,20,000 26,88,000
processing (Rs. ).:(c) = {(a) x
(b)}
Joint costs (Rs. ): (d) 8,80,000 8,80,000 2,00,000 19,60,000
Further processing costs (Rs.):
(e)
(Working Note 2) 1,72,800 1,15,200 64,800 3,52,800
Total costs (Rs.): (f) = [(d) +
10,52,800 9,95,200 2,64,800 23,12,800
(e)}
Profit/ (Loss) (Rs.): [(c))– (f)} 3,55,200 (35,200) 55,200 3,75,200
Alternatively:
Incremental sales revenue

5,28,000 80,000 1,20,000
(Rs. )
(44,000 units (40,000 units (20,000 units
x Rs. 12) x Rs. 2) x Rs. 6)
Less: Further processing
costs (Rs. )
[Refer to Working Note 2 (ii)] 1,72,800 1,15,200 64,800
Incremental net profit / (loss) 3,55,200 (35,200) 55,200
c) Processing decision to improve the profitability of the company.

44,000 units of product A and 20,000 units of product C should be

further processed because the incremental sales revenue generated after
further processing is more than the further processing costs incurred.
40,000 units of product B should be sold at the point of-split off
because the incremental revenue generated after further processing is
less than the further processing costs.
d) The product wise and total profit arising from the recommendation in (c) above
is
as follows:
Product A B C Total
Profit (Rs. ) 3,55,200 - 55,200 4,10,400
Working Notes:
1. Statement of department-wise costs
P Q R S
(Rs.) (Rs.) (Rs.) (Rs.)
Raw materials 12,68,800
Wages 3,84,000 96,000 64,000 36,000
Overheads 3,07,200 76,800 51,200 28,800
(Apportioned on basis of the
departmental direct wages i.e.
96:24:16:9)
Total Cost 19,60,000 1,72,800 1,15,200 64,800
2. Joint costs and further processing costs

(i) Costs incurred in the department P are joint costs of products
A, B and C and are equal to Rs. 19,60,000.
(ii) Costs incurred in the departments Q, R and S are further
processing costs of products A, B and C respectively. Further
processing costs of products A, B and C thus are Rs. 1,72,800;
Rs. 1,15,200 and Rs. 64,800 respectively.
Question No. 20
The Management Team of Exe Ltd. is considering the possibility of undertaking a single
production process which jointly produces four products in standard proportions. The output
from each 10 kg. batch of raw material input in the process, together with net realizable
value per kg. of output immediately after the split-off point, is as under:

Output per 10 kg.

Material input Net realizable value per kg. of output (Rs.)
A 4 8
B 3 4
C 2 10
D 1 2
The costs of processing each 10 kg. input batch are Rs. 12 and the cost of the raw
material input is Rs. 4 per kg.
For each of the four material jointly produced there is the possibility of further
processing before sale. The further processing will entail manual operation and
mechanical processing as well as incurring some costs directly attributable to each
product. Details of the resources used in, and cost incurred by, the further processing as
well as the final price per kg. as under:
Materia Machine hours Labour Other direct Sales price

l hours cost
A 2 1 4 17
B 6 1 2 13
C 4 5 3 36
D 2 2 2 9
“Other direct costs” are variable costs but exclude the cost of labour, also a variable cost,
at Rs. 3 per labour hour. Apart from “other direct costs” and labour costs , all other costs
of this further processing are fixed and are expected amount to Rs. 3,40,000 per annum.
Exe Ltd. has the opportunity to process 1,00,000 kg. of the basic raw material per year
and machine capacity is capable of fully processing this amount.
The Managing Director feels that all products which are subjected to further processing
must be treated as joint products and all products to be sold immediately after the split-
off point without further processing are to be treated as by-products of the original
process. The net costs of the joint process are allocated to the joint products in the
proportion to the contribution of each product line, after considering the marginal costs
after the split-off point and the sales revenues.
However, the Managing Director is uncertain whether the Rs. 3,40,000 fixed production
costs of the further processing should be allocated to products in accordance with
machine or labour hours.

Required:
a) Specify which of the jointly produced materials should be subject to further
processing if the joint process is carried out.
b) Produce a product profitability report for the joint products, utilizing the Managing
Director’s approach to the determination of joint and by-products, for each of the
methods of allocating fixed production overhead he has mentioned. You may assume
all the production will be sold. [December 2017 – 1, 6+14=20
Marks]
Answer
a) Comparative statement of contribution per kg from further processing and net
realizable value per kg at the split-off point
Materials
A B D
(Rs.) (Rs.) C (Rs.) (Rs.)
Labour cost 3 3 15 6
Other direct cost 4 2 3 2
Marginal cost 7 5 18 8
Sale price 17 13 36 9
Contribution 10 8 18 1
Net realizable value per kg at the split-off point 8 4 10 2
Advantage (Disadvantage) of further processing 2 4 8 -1
The above statement shows that the further processing of materials A, B and C is
beneficial. Hence, they should be processed further. However, material D is giving loss as
a result of further processing. Hence, it should be sold out art spilt- off point.
b) Joint Products profitability Report

i. Statement of profitability when fixed production cost of further processing are
apportioned to product according to machine hours
Products
A B C Total
Output in kg 40,000 30,000 20,000
Rs. Rs. Rs. Rs.
Sales 6,80,000 3,90,000 7,20,000 17,90,000
Costs:
Joint costs (Working Notes 1 & 2) 2,00,000 1,20,000 1,80,000 5,00,000
Labour costs 1,20,000 90,000 3,00,000 5,10,000
Other direct costs 1,60,000 60,000 60,000 2,80,000

Fixed overheads (Working Note 3) 80,000 1,80,000 80,000 3,40,000

Total costs 5,60,000 4,50,000 6,20,000 16,30,000
Profit(loss) 1,20,000 -60,000 1,00,000 1,60,000
ii. .Statement of profitability when fixed production cost of further processing are
apportioned according to labour hours
Products
A B C Total
Rs. Rs. Rs. Rs.
Sales 6,80,000 3,90,000 7,20,000 17,90,000
Costs:
Joint costs (Working Notes 1 & 2) 2,00,000 1,20,000 1,80,000 5,00,000
Labour costs 1,20,000 90,000 3,00,000 5,10,000
Other direct costs 1,60,000 60,000 60,000 2,80,000
Fixed overheads (Working Note 3) 80,000 60,000 2,00,000 3,40,000
Total costs 5,60,000 3,30,000 7,40,000 16,30,000
Profit(loss) 1,20,000 60,000 -20,000 1,60,000
Working Notes:
1) Computation of Joint Costs: Rs.
Raw Material Input (1,00,000 * Rs.4) 4,00,000
Processing Costs (1,00,000 *Rs. 12/10) 1,20,000
5,20,000
Less: Net realizable value of by-product D (1/10 * 1,00,000 *Rs.2) 20,000
Joint costs 5,00,000
2) Apportionment of Joint Costs in proportion to the contribution of each product

Total Allocated Joint
Product Output Contribution per kg Total Contribution Costs
kg Rs. Rs. Rs.
A 40,000 10 4,00,000 2,00,000
B 30,000 8 2,40,000 1,20,000
C 20,000 18 3,60,000 1,80,000
10,00,000 5,00,000
3) Computation of overhead recovery rates on machine / labour hour basis

Total Output Machine Hours Labour hours
Product Per kg Total Per kg Total

A 40,000 2 80,000 1 40,000

B 30,000 6 1,80,000 1 30,000
C 20,000 4 80,000 5 1,00,000
3,40,000 1,70,000
Overhead Recovery Rates:

Per machine hour: Rs, 3,40,000/3,40,000 = Re. 1 per hour
Per labour hour: Rs. 3,40,000/1,70,000 = Rs, 2 per hour
Question No.21
Nepal Milk Chocolates manufactures and distributes chocolate products. It purchases Cocoa
beans and processes them into two intermediate products:
Chocolate powder liquor base
Milk chocolate liquor base
These two intermediate products become separately identifiable at a single split off point.
Every 500 pounds of cocoa beans yields 20 gallons of chocolate-powder liquor base and 30
gallons of milk-chocolate liquor base.
The chocolate powder liquor base is further processed into chocolate powder. Every 20
gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk
chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk
chocolate liquor base yields 340 pounds of milk chocolate.
Production and sales data for October, 2018 are:

Cocoa beans processed 7,500 pounds
Costs of processing Cocoa beans to split off point Rs. 712,500
(Including purchase of beans)
Production Sales Selling price
Chocolate powder 3,000 pounds 3,000 pounds Rs. 190 per pound
Milk chocolate 5,100 Pounds 5,100 Pounds Rs. 237.50 per pound
The separable costs of processing chocolate powder liquor into chocolate powder are Rs.
302,812.50 for the month of October, 2018. The separable costs of processing milk
chocolate liquor base into milk chocolate are Rs. 623,437.50 for the month of October 2018.
Nepal Milk processes both of its intermediate products into chocolate powder or milk
chocolate in full. There is an active market for these intermediate products. In October,
2018, Nepal Milk could have sold the chocolate powder liquor base for Rs. 997.50 a
gallon and the milk-chocolate liquor base for Rs. 1,235 a gallon.
Required:
i) Calculate how the joint cost of Rs. 712,500 would be allocated between the chocolate
powder and milk-chocolate liquor bases under the following methods:
a) Sales value at split off point

b) Physical measure (gallons)

c) Estimated net realisable value (NRV) and
d) Constant gross-margin percentage NRV.
ii) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor
bases under each of the methods in requirements (i) above?
iii) Could Nepal Milk have increased its operating income by a change in its decision to fully
process both of its intermediate products? Show your computations.
Answer:
i) Comparison of alternative Joint-Cost Allocation Methods:
a) Sales Value at Split-off Point Method
Chocolate Milk Total
powder liquor base chocolate liquor base
Sales value of
products at Rs. 2,99,250* Rs. 5,55,750** Rs 8,55,000
split off
Weights 0.35 0.65 1.00
Joint cost
Rs. 2,49,375 Rs. 4,63,125 Rs. 7,12,500
allocated
(Rs. 7,12,500 × 0.35) (Rs. 7,12,500 × 0.65)
*(3,000 lbs ÷ 200 lbs) × 20 gallon × Rs. 997.50 = Rs. 2,99,250

** (5,100 lbs ÷ 340 lbs) × 30 gallon × Rs. 1,235 = Rs. 5,55,750
b)
Physical Measure Method
Chocolate powder Milk chocolate liquor Total
liquor base base
Output 300 gallon* 450 gallon** 750 gallons
Weight 300/750 = 0.40 450/750 = 0.60 1.00
Joint cost
Rs. 2,85,000 Rs. 4,27,500 Rs. 7,12,500
allocated
(Rs. 7,12,500 x (Rs. 7,12,500 x 0.60)
0.40)
*(3,000 lbs ÷ 200 lbs) × 20 gallon = 300 gallon

** (5,100 lbs ÷ 340 lbs) × 30 gallon = 450 gallon
c) Net Realisable Value (NRV) Method

Chocolate Total
Milk chocolate
powder liquor
liquor base
base
Final sales value of Rs. 5,70,000 Rs. 12,11,250 Rs. 17,81,250
production (3,000 lbs × Rs. (5,100 lbs × Rs.
190) 237.50)
Less: Separable
Rs. 3,02,812.50 Rs. 6,23,437.50 Rs. 9,26,250
costs
Net value at Rs. 2,67,187.50 Rs. 5,87,812.50 Rs. 8,55,000
realisable
split off
point
Weight 0.3125 0.6875 1.00
(2,67,187.50 ÷ (5,87,812.5 ÷
8,55,000) 8,55,000)
Joint cost allocated Rs. 2,22,656.25 Rs. 4,89,843.75 Rs. 7,12,500
(Rs. 7,12,500 x (Rs. 7,12,500 x
0.3125) 0.6875)
d) Constant Gross Margin( %) NRV method

Chocolate Milk chocolate Total
powder Liquor liquor Base
base
Final sales
value of Rs. 5,70,000 Rs. 12,11,250 Rs. 17,81,250
production
Less:
Gross
Rs. 45,600 Rs. 96,900 Rs. 1,42,500
margin*
8%
Cost of
goods
Rs. 5,24,400 Rs. 11,14,350 Rs. 16,38,750
available
for sale
Less:
Separable Rs. 3,02,812.50 Rs. 6,23,437.50 Rs. 9,26,250
costs
Joint cost
Rs. 2,21,587.50 Rs. 4,90,912.50 Rs. 7,12,500
allocated
*Final sales value of total production = Rs. 17,81,250

Less: Joint and separable cost = Rs. 16,38,750 (Rs. 7,12,500 + Rs. 9,26,250)
Gross Margin = Rs. 1,42,500
Gross margin (%) = 1,42,500/17,81,250× 100 = 8%
ii) Chocolate powder liquor base

(Amount in Rs.)
Sales value at Physical Estimated net Constant
Split off Measure Realisable Value Gross Margin NRV
Final sale
value of
5,70,000 5,70,000 5,70,000 5,70,000
Chocolate
Powder
Less:
Separable 3,02,812.50 3,02,812.50 3,02,812.50 3,02,812.50
costs
Less: Joint
2,49,375 2,85,000 2,22,656.25 2,21,587.50
costs
Gross Margin 17,812.50 (17,812.50) 44,531.25 45,600
Gross Margin
3.125% (3.125%) 7.8125% 8.00%
%
Milk chocolate liquor base (Amount in Rs. )

Sales value at Physical Estimated net Constant
split off measure realisable Gross margin
NRV
Final sale value of milk
12,11,250 12,11,250 12,11,250 12,11,250
chocolate
Less: Separable costs 6,23,437.50 6,23,437.50 6,23,437.50 6,23,437.50
Less: Joint costs 4,63,125 4,27,500 4,89,843.75 4,90,912.5
Gross Margin 1,24,687.50 1,60,312.50 97,968.75 96,900
Gross Margin % 10.29% 13.24% 8.09% 8.00%
iii) Further processing of Chocolate powder liquor base into Chocolate

powder
(Amount in Rs. )
Incremental revenue {Rs. 5,70,000 – (Rs. 997.50 x 300
2,70,750
gallon)}
Less: Incremental costs 3,02,812.50
Incremental operating income (32,062.50)

Further processing of Milk Chocolate liquor base into Milk Chocolate.

(Amount in Rs.)
Incremental revenue {Rs. 12,11,250 – (Rs. 1,235 x 450
6,55,500
gallon)}
Less: Incremental cost 6,23,437.50
Incremental operating income 32,062.50
The above computations show that Nepal Milk Chocolates could increase operating
income by Rs. 32,062.50 if chocolate liquor base is sold at split off point and milk
chocolate liquor base is processed further.

CHAPTER 9:
OPERATING COSTING

Question No. 1
(a) Operation cost and Operating cost.
[December 2003 – 7(d), 4 Marks] [December 2006 – 5(i),5 Marks]
Answer
Operation cost is the cost of each operation of production process. It is different from process
cost.
Operating cost is the cost of providing or operating a service. This term is used in service
sector undertakings.
Alternative Answer
Operation Costing
It is a method of costing, which is employed in industries where mass or repetitive production
is carried out or where articles or components have to be stocked in semi-finished stage to
facilitate the execution of special orders, or for convenience of issue for later operations. The
procedure of costing is broadly the same as for process costing except that cost unit is an
operation instead of a process. For example, the manufacturing of handles for bicycles
involves a number of operations such as those of cutting steel sheets into proper strips,
moulding, machining and finally polishing. The cost of each of these operations may be
found out separately.
Operating Costing
This system is employed where expenses are incurred for service providing companies such
as transportation companies, electricity companies, railway companies etc. The total expenses
regarding operation are divided by the units as may be appropriate e.g. total number of
passenger / km in case of Transport Companies.
(b) Running Charges and Maintenance Charges [December 2012 – 5(d), 2.5 Marks]
Answer
Running charges and maintenance charges both are the parts of total costs in operating
costing. These are used to prepare a cost statement in an industry where services are
rendered and goods are not produced.
Running charges are variable costs relating to rendering of services, where as
maintenance charges are generally in the nature of semi-variable or semi-fixed costs. The
items to be included in running charges and maintenance charges depend on the nature of
the operation. For example, cost of fuel in transport sector, cost of food items in
restaurant are running charges; besides the cost of repairs and spares in transport sector
and the cost of lighting, consumable stores etc. in hotels are maintenance charges. To find
out per unit cost of services rendered, the costs are required to be segregated into variable
and fixed costs. Therefore, the maintenance charges require to be segregated into variable
and fixed costs

Question No.2
(a) Absolute Tonne-kms and Commercial Tonne-Kms
[December 2001 – 4(b), 2 Marks] [December 2008 – 4(b), 2 Marks]
Answer
Absolute tonne-kms
Absolute tonnes - kms. are the sum total of tonnes - kms, arrived at by multiplying
various distances by respective load quantities carried.
Commercial tonne-kms.
Commercial tonnes - kms. are arrived at by multiplying total distance kms. by average
load quantity.
(b) Standard Load [December 2007 – 5(a), 4 Marks]

Answer
An alternative unit for the distribution of transport cost is the 'standard' load. Where the
goods to be transported are of varying bulk and weight, the calculation of actual number
of tonne-kilometres is not an easy matter. For example, if a business delivers its own
products by its own transport, the cost per tonne - kilometres may be most misleading, for
an article may have a bulk which is twice that of the other, though of the same weight. In
such a case 'standard load' is selected as unit, i.e., the load which a lorry would carry. This
would have reference both to a bulk and weight and would give an efficient method for
distributing the cost of transport over different departments. Thus, if the turnover of
various departments is reduced to 'standard load' by first calculating their weight and then
the bulk of article produced, the costs of distributing the product would be easily
ascertained.
(c) Operating Costing [June 2018 – 6(a), 2.5 Marks]

Answer
It is the method of ascertaining costs of providing or operating a service. This method of
costing is applied by those undertaking which provide service rather than production of
commodities. The emphasis under operating costing is on the ascertainment of cost of
services rather than on the cost of manufacturing a product. This costing method is
usually made use of by transport companies, gas and water works department, electricity
supply companies, canteens, hospitals, theatres, schools etc.
Question No. 3
What do you understand by operating costing? Describe its essential features and state
where it can be usefully implemented. [December 2009 – 6(e), 4 Marks]

Answer
Operating costs are the costs incurred by undertaking which do not manufacture any products
but provide a service. Such undertaking for example are- Transport concerns, Gas agencies;
Electricity undertaking; Hospitals; Theaters etc. Because of varied nature of activities carried
out by the service undertaking, the cost system used is different from that followed in
manufacturing concerns.
The essential features of operating costs are as follows:
i) The operating costs can be classified under three categories. For example in the case of
transport undertaking these three categories are as follows:
• Operating and running charges. It includes expenses of variable nature. For
example expenses on petrol, diesel, lubricating oil and grease etc.
• Maintenance charges: These expenses are of semi variable nature and includes the
cost of tyres and tubes, repairs and maintenance, spares and accessories, overhaul
etc.
• Fixed and standing charges: These charges includes garage rent, insurance, road
license, depreciation, interest on capital, salary of operating manager.
ii) The cost unit is a double unit like passenger-mile, patients bed
Question No. 4
Specify the methods of costing and cost units applicable to the following industries:
• Toy making
• Cement
• Radio
• Bicycle
• Ship building
• Hospital [June 2008 – 6(a), 5 Marks]
Answer
The various method of costing and unit of cost used for the given industries are as follows;
Industry Method of Costing Unit of Cost
Toy Making Batch Per batch
Cement Unit Per ton or per bag
Radio Multiple per radio or per batch
Bicycle Multiple Per bicycle
Ship Building Contract Per ship
Hospital Operating Per bed per day or per patient per day
Question No. 5
State the appropriate ‘cost unit’ for the following industries:
i) Steel
ii) Bricks making

iii) Sugar
iv) Power [June 2010 – 6(a), 2 Marks]
Answer
Industry Cost Unit
i) Steel : Per ton
ii) Bricks making : Per 1000 bricks
iii) Sugar : Per quintal or 100 kg.
iv) Power : Kilo-watt hour
Question No. 6
The more kilometers you travel with your own vehicle, the cheaper it becomes. “Comment
briefly on this statement”. [December 2014 – 6(b), 2.5 Marks]
Answer
The cost per kilometre, (if one travels in his own vehicle) will decline when he travels more
kilometers. This is because the majority of costs for running and maintaining vehicles are of
fixed and the component of fixed cost per kilometre goes on decreasing with an increase in
kilometre travel. Hence, the given statement is true.
Numerical Questions
Question No. 7
A Cement Company presently brings limestone to its factory from a nearby quarry and the
rate paid for transportation of limestone from the quarry located 6 km away from the factory
is Rs. 45 per tonne.
The company is considering a proposal to buy its own truck and has the option of buying
either a 8 tonne capacity or a 5 tonne capacity truck.
The following informations are available:

8 tonne truck 5 tonne truck
Purchase price Rs. 8,50,000 Rs. 7,00,000

Life in years 5 5
Scrap value at the end of 5th year Rs. 50,000 Rs. 30,000
Km per litre of diesel 3 4
Repair/maintenance p.a. per truck Rs. 48,000 Rs. 36,000
Other fixed expenses p.a. Rs. 36,000 Rs. 24,000
Lubricants and sundries per 100 km Rs. 20 Rs. 20
Each truck will daily make 5 trips (to and fro) on an average of 24 days in a month.
Cost of diesel is Rs. 20 per litre.
Salary of drivers - Rs. 3,000 per month - Two extra drivers will be employed to work as
relievers.

The capacity of the Cement Plant is 9,600 tonnes per month of limestone crushed.
Prepare a Comparative Cost Sheet on the basis of above data showing Transport Cost per
tonne of operating 8 tonne and 6 tonne truck at full capacity utilisation. [December 2001 –
4(c), 10 Marks]
Answer
8 tonne capacity 5 tonne capacity

truck truck
Tonnes to be carried at full capacity 9600 9600

Total trips per day 5 5
No. of days per months 24 24
Total trips per months 120 120
Tonnes carried per truck 960 600
Number of trucks required 10 16
No. of drivers reqd. including relievers 12 18
Distance covered in one trip 6 km x 2 12 12
Total km. Run per truck p.m. (120 x 12) 1440 1440
Total km. Run by all truck p.m. 144000 23040
Km. Per litre of diesel 3 4
Diesel required (litres) 4800 5760
Monthly cost sheet

Rs. Rs.
Diesel @ Rs. 20 per litre 96000 115200

Lubricants & sundries @ 20 per 100 km 2880 4608
Repair & Maintenance 40000 48000
Drivers salary 36000 54000
Depreciation (800000 x 10/5x12),
(670000 x 16/5 x 12) 133333 178666
Other fixed expenses 3000 2000
-------------- --------------
Total 311213 402474
Tonnes carried 9600 9600
Cost per tonne Rs. 32.418 41.924
------------- -------------

Question No. 8
A license to ply a mini-bus between stations A and B covering a distance of 25 km. has been
obtained. The mini-bus will make 8 round trips in a day for 25 days in a month. It has a
seating capacity of 30 passengers and on an average 60% occupancy is expected throughout.
The purchase price of the bus is Rs. 600,000. It has a life of 10 years with a salvage value of
Rs. 10,000 at the end of its life. The details of the operating expenses are as under:
Insurance Rs. 12,000 per annum

Garage rent Rs. 2,000 per quarter
Road Tax Rs. 3,000 per annum
Repairs Rs. 4,000 per quarter
Administration Rs. 1,000 per month
Driver's salary Rs. 3,000 per month
Conductor's salary Rs. 2,000 per month
Tyres and Tubes Rs. 3,000 per quarter
Diesel Rs. 12 per litre
Oil and Sundries Rs. 20 per 100 Km run
The mini-bus consumes a litre of diesel for every 4 km of run. Passenger tax is 20% on total
revenue (takings). The company requires a profit of 20% on takings.
You are required to prepare an annual cost sheet showing the cost per passenger km and the
one way fare per passenger from station A to B. [June 2002 – 7(c), 10 Marks]
Answer
Annual Cost Sheet:
Fixed costs Rs.
590000
Depreciation 600000 - 10000 = 10 59000
Insurance 12000
Garage Rent 2000 x 4 8000
Road Tax 3000
Repairs 4000 x 4 16000
Administration 1000 x 12 12000
Drivers 3000 x 12 36000
Conductor 2000 x 12 24000
Tyres & Tubes 3000 x 4 12000
120000 
Variables - Diesels @  4 x 2 360000
 
 20 
Fuel oil etc 100 x 12000 24000
 
________
566000

Km Run:
25 km x 2 x 8 mps x 25 days x 12 months = 120000 km
Passenger - Km
60
120000 x 30 passengers x 100 = 2160000
Calculation of Fare
Rs. 566000
Cost per Passenger - Km 2160000 = Rs. 0.262
Profit 20%
Tax 20%
Total 40%
Taking 100%
∴ Cost = 60 % = 0.262
0.262
Fare per Passenger - Km = 60 x 100 = 0.4367
Fare for 25 Km = 25 x 0.4367 = Rs. 10.92
Question No. 9
Every day five buses are providing up and down trips service in a 40 km. one way distance
route. Each bus has 25 seats capacity for passengers. Given below are the necessary details
obtained from the daily log sheet maintained for 30 days a month for 5 buses.
Rs.
Salary of Office Staff 36,000
Wages of drivers, conductors, cleaners 96,000
Garage charges 12,000
Interest, taxes, insurance etc. 1,20,000
Repair and maintenance 48,000
Diesel costs 57,600
Depreciation at the rate of Rs. 25 per running Km.
Lubricating oil mobil per running kilometer on an average is Rs. 1.00
Each bus runs on an average with 80% of the seat capacity.

Required: Statement reporting cost on the basis of behavioural pattern show

bus fare per passenger kilometer. [June 2003 – 5(b), 2+2+2+2=8
Marks]
Answer
Running km = 5 × 2 × 40 km × 30 days = 12,000 km
Passenger Km = 5bus × 2 ways × 40 km × 30 days × 25 seats × 80% capacity

= 2,40,000
Standing Charges:
Rs.
Salary of office staff 36,000
Wages of drivers 96,000
Garage charges 12,000
Interest, taxes, ..... 1,20,000
2,64,000 1.10
Semi-variable (Maintenance Exp.)
Repair & Maintenance 48,000
Lubricating at Rs. 1/ running Km 12,000
60,000 0.25
Running Charges:
Diesel costs 57,600 0.24
Depreciation at Rs. 25/running Km 3,00,000 1.25
3,57,600 1.49
Total 6,81,600 2.84
Question No. 10
A transport company has provided the following estimated figures.
i. Cost price of a micro-bus is Rs. 15,00,000 with 3,00,000 running kilometers
during life time.
ii. Diesel & oil cost for one kilometer is Rs. 12.
iii. Annual garage & registration charges are Rs. 24,000
iv. Driver's salary per month is Rs. 10,000
The micro-bus is expected to operate for 25 days a month with 20 passengers in 2 round trips
of 40 kilometers long route.
Required: Cost per passenger kilometer by showing standing and running chares.
[December 2003 – 4(a), 3+3=6 Marks]
Answer
Running kilometer = Distance × No of round trip 8 × days

= 40 Km × 2 round trips × 25 days

= 2000 R.Km per month
Passenger Kilometer = R.Km × seat Occupancy
= 2,000 R.Km ×* 20 passengers
= 40,000 P.Km
Calculation of cost per passengers kilometer
R.Km = 2,000
P.Km = 40,000
Standing Charges: Rs Cost per

Km
Rs15,00,000 = 1000
Depreciation = * 2,000 R.Km
3,00,000
Rs 24,000 = 2000
Garage and registration charges for one month =
12months
Driver's salary per month = 10,000
Total standing charges 22,000 0.55
Running expenses:
Diesel &oil cost at Rs 12 per Km 24,000 0.60
TOTAL 46,000 1.15
Question No. 11
A truck with a load capacity of 10 ton carries goods between two urban areas having a
distance of 50 km.
The truck operates a round trip each day for 25 days a month.
Full load is available on outward trip and only 60% load on return trip.
The estimated life of the truck is 10 years. The other details are listed below:
Cost of truck Rs. 7,200,000
Driver's wage Rs. 8,000 per month
Cleaner's wage Rs. 4,000 per month
Insurance & taxes Rs. 60,000 per year
Mobil oil and grease per 100 km Rs. 120 per litre (average)
Diesel Rs. 4,000 per tirp one way
Required:
i. Cost per to kilometer by showing standing charges and running expenses.
ii. Truck fare per ton kilometer if 20% profit on fare is to be earned.
[June 2004 – 3(b), 10 Marks]

Answer
Running kilometer = 50 k.m. × 2 way × 25 days = 2,500
Ton k.m. = (50 km × 10 ton × 25 days) + (50 km × 6 ton × 25 days) = 20,000
Standing Charges: Rs.

Rs. 7200000
Depreciation = = 60,000
10 years × 12 months
Driver's wage 8,000
Cleaner's wage 4,000
Insurance & taxes 5,000
77,000 3.85
Running expenses:
Rs. 120
Mobil oil and grease = 100km × 3,000 0.15
Diesel at Rs. 4,000 × 2 ways × 25 days = 2,00,000 10.00

2,03,000 _____
Total 2,80,000 14.00
20
Profit at 20% on fare means 80 × Rs. 14.00 3.50
Fare per ton kilometers 17.50
Question No. 12
The cost incurred by a city Taxi Cab for the month of April 2005 are as follows:-
Driver’s salary Rs.7, 840

Tires, tubes and Mobil @ Rs.448 per 500 km.
Repair and lubricants @ Rs.4.80 per 10 km
Petrol @ Rs.1.84 per kilometer.
The annual route license renewal charge for the current year was Rs. 9, 600. the taxi was
purchased at a cost of Rs.576, 000 five years before. The normal usable life of the taxi was
expected to be 12 years.
The taxi was insured and annual insurance premium payable was 8% p.a.
The total kilometer driven during April was 10, 000 with 80% passenger occupancy.
Required:
A statement showing taxi fare per effective km. with a provision of 20% for profit on taxi
fare by classifying expenses into standing charges and running expenses.
[June 2005 – 5(b), 3+5=8
Marks]

Answer :
Passengers occupancy = 10, 000km x 0.80 = 8, 000 km

Statement showing tax fare per effective kilometer
Running km = 10, 000
Effective km = 8, 000
Standing charges Rs. Cost per

Effective km.
Driver’s salary 7, 840
Route license = Rs.9, 600 ÷ 12 months = 800
Depreciation = Rs.576, 000
12 year x 12 months 4, 000
Total standing charges 12,640 1.58

Running expenses:
Petrol @ Rs.1.84 per km for 10, 000km 18,400 2.30
Repair @ Rs.4.80 per 10 km. for 10, 000 km. 4,800 0.60
Tyres @ Rs.448 per 500 km for 10, 000 km 8,960 1.12
Total running expenses 32,160 4.02
Total 44,800 5.60
Provision for profit 20% on profit = 1/4th of cost 11,200 1.40
Taxi fare 56,000 7.00
Question No. 13
You have been given a permit to run a bus on 20 km long route. The bus costs you Rs.
90,000. It has to be insured @ 3% p.a. and the annual tax will be Rs. 1,000. Garage rent is Rs.
100 p.m. Annual repairs will be Rs. 1,000 and the bus is likely to last for 5 years at the end of
which the scrap value is likely to be Rs. 6,000.
The driver's salary will be Rs. 150 p.m. and the conductors Rs. 100 together with 10% of the
takings as commission (to be shared equally by both). Stationery will cost Rs. 50 p.m. the
manager-cum-accountant's salary will be Rs. 250 p.m.
Diesel and oil be Rs. 25 per hundred kilometers. The bus will make three round trips for
carrying on the average 40 passengers on each trip. Assuming 15% profit on takings,
calculate the bus fare to be charged from each passenger. The bus will work on the average
25 days in a month.
[June 2007 – 3(b), 8 Marks]
Answer
Operating Cost Statement
Bus No.: DLP 4179
Carrying capacity: 401
Per annum Per 100 Passenger

Km.
1 2 3
Rs. Rs.
A. Standing Charges
Depreciation (90,000 – 6,000)/5 16,800
Tax 1,000
Insurance 2,700
Stationery 600
Manager’s salary 3,000
Total 24,100 1.6736
B. Maintenance Charges
Garage rent 1,200
Repairs 1,000
Total 2,200 0.1528
C. Operating or running charges
Diesel and oil 9,000
Driver’s salary 1,800
Conductor’s salary 1,200
Total 12,000 0.8333
Grand Total (A+B+C) 2.6597
Loading @ 25/75 0.8866
Fare per 100 passenger-km. 3.5463
Fare per passenger-km. = Rs. 0.0355
Working Notes:
i) Number of kms. Run in a month : 3×2×20×25 = 3,000
ii) Diesel & oil : 3,000×25/100 = 750
iii) Number of passenger-kms. per month : 3,000 × 40 = 1,20,000
per annum : 1,20,000×12 = 14,40,000
iv) Assuming total taking is Rs. 100, then commission to the driver and conductors
will have to be taken as Rs. 10/- i.e. 10% of takings and Rs. 15/- i.e. 15% of
takings as profit margin; the cost therefore be Rs. 75/-. On Rs. 75/- the loading
must be Rs.25/- to make the taking equal to Rs.100/-.
Question No. 14
A licence to ply a mini-bus between stations A and B covering a distance of 25 km. has been
obtained. The mini-bus will make 8 round trips in a day for 25 days in a month. It has a
seating capacity of 30 passengers and on an average 60% occupancy is expected throughout.

The purchase price of the bus is Rs. 6,00,000.It has a life of 10 years with a salvage value of
Rs. 10,000 at the end of its life. The details of the operating expenses are as under:
Insurance Rs.12,000 per annum

Garage rent Rs. 2,000 per quarter
Road Tax Rs. 3,000 per annum
Repairs Rs. 4,000 per quarter
Administration Rs. 1,000 per month
Driver’s salary Rs. 3,000 per month
Conductor’s salary Rs. 2,000 per month
Tyres and Tubes Rs. 3,000 per quarter
Diesel Rs. 12 per litre
Oil and Sundries Rs. 20 per 100 km run
The mini-bus consumes a litre of diesel for every 4 km of run. Passenger tax is 20% on
total (Gross) taking. The company requires a profit of 20% on total taking. You are
required:
To prepare an annual cost sheet showing the cost per passenger km and the one way fare
per passenger from station A to B. [December 2008 – 4(a), 8 Marks]
Answer
Annual operating cost sheet
Fixed costs: Rs.

Depreciation [(Rs.6,00,000-Rs.10,000) / 10 years] 59,000
Insurance 12,000
Garage rent (Rs.2,000 × 4 quarters) 8,000
Road tax 3,000
Repairs (Rs.4,000 × 4 quarters) 16,000
Administration (Rs.1,000 × 12 months) 12,000
Driver salary (Rs.3,000 × 12 months) 36,000
Conductor salary (Rs.2,000 × 12 months) 24,000
Tyres & Tubes (Rs.3,000 × 4 quarters) 12,000
Variable Costs:
Diesel 3,60,000
(Refer to working notes (i) & (ii))
Oil & Sundries:
Rs. 20 × 1,20,000 kms.= 24,000
100 kms.
Total fixed and variable costs 5,66,000

Cost per passenger km = Rs.5,66,000 = Rs.0.262

21,60,000 passenger kms.
(Refer to working note iii)
Profit 20% of Revenue (total taking)
Passenger Tax 20% of Revenue (total taking)

Total 40%
Revenue (Taking) 100%

∴Cost (per passenger km. 60%) = Rs.0.262
Or, Fare per passenger km = 0.262 × 100 = Rs.0.4367
60
Fare for 25 kms. = 25 kms. × Rs. 0.4367 = Rs.10.92
Working Note:
(i) Computation of km run:
25 km × 2 × 8 trips × 25 days × 12 months
= 1,20,000 kms.
(ii) Diesel. 1,20,000kms. × Rs 12/- =Rs.3,60,000

4kms.
(iii) Computation of passenger kms.

1,20,000 kms ×30 passengers × 60 = 21,60,000 passenger kms
100
Question No. 15
Alok Vidhyashram is a Public School having 25 buses each plying in different directions for
the transport of its school students. In view of large number of students availing of the bus
service, the buses work two shifts daily both in the morning and in the afternoon. The buses
are garaged in the school. The work load of the students has been so arranged that in the
morning, the first trip picks up senior students and the second trip plying an hour later picks
up junior students. Similarly, in the afternoon, the first trip takes the junior students and an
hour later the second trip takes the senior students home.
The distance travelled by each bus one way is 16 kms. The school works 24 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for the year 2008-2009 are as under:

Driver's salary payable for all the 12 months NRs.5,000 per month per driver.

Cleaner's salary payable for all the 12 months NRs.3,000 per month per cleaner (one cleaner
has been employed for every five buses)
License fees, taxes etc. NRs.2,300 per bus per annum

Insurance premium NRs.15,600 per bus per annum
Repairs and maintenance NRs.16,400 per bus per annum
Purchase price of the bus Rs.1,650,000 each
Life of the bus 16 years
Scrap value NRs.150,000
Diesel cost NRs.18.50 per liter
Each bus gives the average of 10 kms per liter of diesel. The seating capacity of each bus is
60 students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance travelled as under:
Students picked up and dropped Bus fee Percentage of students
within the range of distance from the availing this facility
school
4 kms 25% of full 15%
8 kms 50% of full 30%
16 kms Full 55%
Ignore interest. Since the bus fees have to be based on average cost.
a) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
b) Work out average cost per student per month in respect of:
i) Student coming from a distance of up to 4 kms from the school;
ii) Student coming from a distance of up to 8 kms from the school; and
iii) Student coming from a distance of up to 16 kms from the school
[June 2009 – 4, 7+3=10 Marks]
Answer
a. Alok Vidhyashram
Statement of Expenses
In operating a single bus and the fleet of 25 buses per annum
Particulars Per bus (NRs.) 25 buses (NRs.)
Running Cost:
Diesel (W.N.1) 56,832 1,420,800
A. Total Running Cost 56,832 1,420,800
B. Repairs and maintenance cost 16,400 410,000

Fixed Charges:
Driver's salary 60,000 1,500,000
Cleaner's salary 7,200 180,000
License fee, taxes etc. 2,300 57,500
Insurance 15,600 390,000
Depreciation NRs.(1,650,000 -150,000) ÷ 16 93.750 2,343,750
C. Total fixed charges 1,78,850 4,471,250
Total expenses ( A+ B+ C) 252,082 6,302,050
b. Average cost per student per month in respect of students' coming from distance of :
i) 4 kms from the school (NRs.252,082 /354) ÷ 12 NRs. 59.34
ii) 8 kms from the school (NRs.59.34 x 2) NRs.118.68
iii) 16 kms from the school ( NRs.59.34 x 4) NRs.237.36
Working Notes:
W.N. 1 Calculation of diesel cost per bus:

Number of trips made by a bus each day (two in the morning and two in the evening) =
4
Distance travelled in one trip both ways: (16 km x 2 trips) = 32
kms
Distance travelled per day by a bus: (32kms x 4 shifts) =
128 kms
Distance travelled during a month (128 kms x 24 days) =
3,072 kms
Distance travelled per year (3,072 kms x 10 months) =

30,720 kms
No of liters of diesel required per bus per year (30,720 kms/10 kms) =
3,072 liters
Cost of diesel per bus per year (3,072 liters x NRs.18.50) =
NRs.56,832
W.N. 2 Calculation of number of students per bus :
Bus capacity of 2 trips = 120 students

1/4th fare students (15% of 120) = 18 students
½ fare students (30% of 120) = 36 students
Or, equivalent to 1/4th fare students = 72 students
Full fare students (55% of 120) = 66 students
Or, equivalent to 1/4th fare students = 66 x 4 = 264 students

Total students (In terms of 1/4th fare students) = 18+ 72+ 264 = 354 students
Question No. 16
From the following information relating to a hotel, calculate the room rent to be charged per
day to give a profit of 25% on cost excluding interest.
i) Salary of staff NRs. 80,000 p.a.
ii) Wages of the room attendant: NRs. 2 per day
There is a room attendant for each room. He is paid wages only when the room is
occupied.
iii) Lighting, heating and power:
• The normal lighting expenses for a room for the whole month are NRs. 50, when
occupied.
• Power is used only in winter and the charges are NRs. 20 for a room, for the whole
month when occupied.
iv) Repairs to building NRs. 10,000 p.a.
v) Linen etc.: NRs. 4,800 p.a.
vi) Sundries: NRs. 6,600 p.a.
vii) Interior decoration and furnishing: NRs. 10,000 p.a.
viii) Depreciation @ 5% is to be charged on buildings costing NRs. 400,000 and 10% on
equipments.
ix) Interest to be charged @ 5% on investment in buildings and equipments amounting to
NRs. 500,000.
x) There are 100 rooms in the hotel, 80 percent of the rooms are generally occupied in
summer and 30 percent in winter. The period of summer and winter may be considered to
be of 6 months in each case. A month may be assumed of 30 days.
[June 2009 – 1(a), 10 Marks]
Answer
The room rent should be charged at NRs.15 per day to give a profit of 25% on cost
excluding interest. The same is calculated as per below
Operating cost statement showing room rent per day

Particulars Per annum
(A) Total cost NRs.
i. Staff salaries 80,000
ii. Room attendant's wages (W.N. 2) 39,600
iii. Lighting, heating and power (W.N. 3) 36,600
iv. Repair to buildings 10,000
v. Linen etc. 4,800
vi. Sundries 6,600
vii. Interior decoration and furnishing 10,000

viii. Deprecation: -
Building @ 5% 20,000
Other equipments@10% 10,000 30,000
(i.e., 10% of 5,00,000-4,00,000)
ix. Interests on Investments 5% on NRs. 5,00,000 25,000
Total 242,600
(B) Profit@25% on cost excluding interest, i.e., 25% on NRs.2,17,600
54,400
(C). Total rent to be charged for all rooms 2,97,000
(D) Room days (W.N. 1) 19,800
(E) Room rent per day (C/D) 15
Working notes:
W.N. 1 : Room days:

Particulars Days
Summer: 100 rooms* 6 months* 30 days*80/100 14,400
Winter: 100 rooms*6 months*30 days* 30/100 5,400
Total 19,800
W.N.2: Room attendant's wages:

Particulars NRs.
Summer: NRs. 2*100 rooms*80%*30 days* 6 months 28,800
Winter: NRs. 2* 100 rooms*30%*30 days*6months 10,800
Total 39,600
W.N.3: Lighting, heating and power:

Particulars NRs.
Lighting:
Summer: NRs. 50*6 months*100 rooms*80% 24,000
Winter: NRs. 50*6months*100 rooms*30% 9,000
Power:
Winter: NRs. 20*6 months*100 rooms*30% 3,600
Total 36,600
Question No. 17
Annapurna Cement Factory is located in Dharan. The required limestone for the factory is
brought from two different mines A and B. The distance from mine A and cement factory is
10 Km while distance from mine B to the factory is 15 Km. A fleet of lorries of 5 tonne

carrying capacity is used for the transport of limestone. The regular data shows that the
average speed of lorries in both mines are 30 Km. per hour. The lorry takes 10 minutes to
unload the limestone at the factory. At mine A loading time is 30 minutes and at mine B
loading time is 20 minutes.
You are given that the depreciation, driver wages, insurance and taxes is NRs 9 per hour
operated. Fuel, oil, tyres and maintenance cost is NRs 1.20 per Km. Draw up a report
showing the cost per tonne- kilometer of carrying mineral from each mine.
[June 2009 – 3(b), 10 Marks]
Answer
Statement showing the cost per Tonne- kilometer of
Carrying mineral from each mine
Mine A Mine B
Particulars NRs. NRs. Ref:
Fixed cost per trip:
(Driver’s wages, depreciation, Insurance and taxes)
A: 1 hour 20minutes @ NRs 9 per hour 12.00
B: 1 hour 30minutes @NRs 9 per hour 13.50 (W.N.1)
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
A: 20 kms NRs1.20 per km. 24.00
B: 30 kms NRs 1.20 per km 36.00
Total cost per trip 36.00 49.50
Cost per Tonne-km 0.72 0.66 (W.N.2)
Working notes:
W.N. 1 Mine A Mine B
Total operated time taken per trip
Running time to & fro 40 minutes 60 minutes
Unloading time 10 minutes 10 minutes
Loading time 30 minutes 20 minutes
Total operated time 80 minutes 90 minutes
1 hours 20 minutes 1 hour 30 minutes
W.N. 2
Effective tones-kms 50 75
(5 tonnes X 10 kms.) (5tonnes X 15 Kms.)
Total cost per trip NRs.36 NRs.49.50
Cost per tonne-km 0.72 0.66

(NRs 36/50tonnes-Kms) (NRs.49.50/75 tonnes-
Kms)

Question No. 18
The Unique Transport Company has been given a twenty kilometer long route to ply a bus.
The bus costs the company Rs. 100,000. It has been insured at 3% per annum. The annual road
tax amounts to Rs. 2,000. Garage rent is Rs. 400 per month. Annual repair is estimated to cost
Rs. 2,360 and the bus is likely to last for five years.
The salary of the driver and the conductor is Rs. 600 and Rs. 200 per month respectively in
addition to 10% of takings as commission to be shared equally by them. The manager's salary
is Rs. 1,400 per month and stationery will cost Rs. 100 per month. Petrol and oil cost Rs. 50
per 100 kilometers. The bus will make three round trips per day carrying on an average 40
passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an
average 25 days in a month, prepare operating cost statement on a full year basis and also
calculate the bus fare to be charged from each passenger per kilometer.
[June 2010 – 4, 10 Marks]
Answer:
Unique Transport Company
Statement showing Operating Cost of the bus per annum
A. Fixed Charges Rs.

Manager's Salary (Rs. 1,400 × 12) 16,800
Driver's Salary (Rs. 600 × 12) 7,200
Conductor's Salary (Rs.200 × 12) 2,400
Road Tax 2,000
Insurance (3% of Rs. 1,00,000) 3,000
Garage rent (Rs. 400 x 12) 4,800
Stationery (Rs. 100 × 12) 1,200
Depreciation (Rs. 1,00,000/5 years) 20,000
57,400
B. Maintenance Costs
Repairs 2,360
C. Running Charges
Petrol and Oil (36,000 Km* × Rs. 50)/100 18,000
Total Cost (A + B + C) 77,760
Add: 10 percent of takings for commission of Driver and Conductor
and 15 percent for desired profit i.e. 25 percent of takings or 33.33
percent on Total Cost 25,920
103,680
*Calculation of distance covered
(20 Km × 2 × 3 × 25 × 12 ) = 36,000 Km per annum

Calculation of bus fare to be charged

Effective Passenger Kilometers: =
1,440,000
(2 × 20 Km × 3 trips × 40 passengers × 25 days × 12 months)
Rate to be charged per kilometer from each passenger
(Rs. 1,03,680/14,40,000) = 7.2
Paisa
Question No. 19
Nepal Travels runs 20 buses in various routes of Kathmandu and Dhulikhel which are 25
kilometer apart. Seating capacity of each bus is 40 passengers. The expenses for the month of
Chaitra 2066 were as follows:
Salaries of the drivers and conductors : Rs. 2,60,000
Salaries of mechanical staff : Rs. 30,000
Diesel oil and lubricants : Rs. 4,80,000
Taxes and Insurance : Rs. 28,000
Repairs and Maintenance : Rs. 1,04,000
Depreciation : Rs. 4,18,000
Seating capacity utilized was 60%. All the buses ran 25 days of the month. Each bus
made four round-trips.
You are required to find:
Cost per passenger kilometer and cost per round trip per passenger.
[June 2010 – 2(c), 5 Marks]
Answer
Calculation of Cost per Passenger Km. & Cost per round trip
Since the two destinations are 25 kms. apart, a round trip will cover 50 kms.
Four round trips are made for 25 days
Total running in a month = 50 kms. X 4 trips X 25 days X 20 buses = 100,000
Kms
Seating Capacity utilized = 60% or 24 passengers
Therefore, passenger kilometer run = 24 X 100,000 = 2,400,000
Total cost per month = Rs. (260,000 + 30,000 + 480,000 + 28,000 + 104,000 +
418,000)
= Rs. 1,320,000
Cost per passenger kilometer = Rs. 1,320,000/Rs. 2,400,000 = Rs. 0.55
Cost per round trip per passenger = 50 X Rs. 0.55 = Rs. 27.50
Question No. 20
A company is considering three alternative proposals for conveyance facilities for its sales
executive who has to do considerable travelling, approximately 20,000 kilometers every year.
The proposals are as follows:

Proposal I: Purchase and maintain its own fleet of cars. The average cost of a car is
Rs. 1,500,000.
Proposal II: Allow the executive to use his own car and reimburse expenses at the
rate of Rs. 16.00 per kilometer and also bear insurance costs.
Proposal III: Hire car from an agency at Rs. 200,000 per year per car. The company
will have to bear costs of petrol, taxes and tyres.
The following further particulars are also available:
Petrol: Rs. 6 per km. Repairs and maintenance: Rs. 2.00 per km.
Tyre: Rs. 1.20 per km. Insurance: Rs. 12,000 per car per annum
Taxes: Rs. 8,000 per car Life of the car: 5 years with annual mileage of 20,000
kms. per annum
Resale value of the car: Rs. 300,000 at the end of the 5th year.
You are required to work out the relative costs of the three proposals and rank them.
Answer
Alternative Proposals _
I. Use of Company's Car II. Use of Own Car III. Use of Hired
Car Rs. Per annum Rs. per km. Rs. per km.
Rs. Per km.
Reimbursement (A) 16.00 10.00*
Fixed Cost (B)
Insurance 12,000 0.60** −
Taxes 8,000 −
Depreciation 240,000 −
Total: 260,000
Fixed cost per km. (Rs. 260,000/20,000 km.)13.00 0.40
Running and Maintenance Cost
Per car per km.
Petrol 6.00 − 6.00
Repairs and Maintenance 2.00 − −
Tyre 1.20 − 1.20
Total cost per km. (A + B + C) 22.20 16.60 17.60
Cost for 20,000 kms. 444,000 332,000 352,000
Ranking of Alternative Proposals: III I II
Decision: Alternative II is the best alternative among the available three alternatives.
Question No. 21
Chitwan Transport Private Ltd. Charges Rs. 2700 per ton for its 10 tons truck load from
Bharatpur to Kathmandu. Charges for the return journey are 20% lower than the upward
journey. However, no discounts are allowed for intermediate stations.

In Chaitra 2067, the truck made 10 upward journey to Kathmandu with full load out of
which 3 tones of one trip were unloaded at Malekhu. In the return journey to Bharatpur, the
truck carried full load thrice, 6 tones 6 times and 4 tons in the remaining backward journey.
It offloaded 9 tones together evenly from full load in Malekhu in its return journey.
Distance between Bharatpur to Kathmandu is 150 kilometers and Malekhu is 70 Km away
from Kathmandu.
Annual Fixed Cost and Maintenance charges are Rs. 97,200 and Rs. 60,000 respectively.
Running charges incurred for the month of Chaitra amounted to Rs. 90,000.
You are required to find out cost per absolute kilometer and profit for the month of Chaitra.
[June 2011 – 2, 15 Marks]

Answer
Operating Cost and Profit Statement for the month of Chaitra 2067
Particulars Amount(Rs)
Fixed Cost(97,200/12) 8,100
Maintenance Charges(60,000/12) 5,000
Running charges 90,000 10×2×150=3,000
Total Operating Cost 1,03,100 km
Cost per absolute ton kilometer 34.37
(1,03,100/3,000)
Total revenue(Working Note) 4,21,200
Profit 3,18,100
Working Note
Net revenue received for the month of Chaitra
For upward journey
10 trips X 10 tones X2700 =Rs.2,70,000
For return journey
3 trips X 10 tons X 2160 =Rs.64,800
6 trips X 6 tons X 2160 =Rs.77,760
1 trip X 4 tons X 2160 = Rs. 8,640 =Rs.1,51,200
Total revenue Rs.4,21,200
Question No. 22
Akash Hotel at Sundhara has both single and double deluxe rooms. The tariff of the double
rooms is set at 5/3 times of the rent of the single rooms. The number of the rooms and
operational costs per day per room are estimated as below:
Particulars Single Rooms Double Rooms
No of Rooms 100 50
Normal Occupancy 70% 70%

Variable Costs Rs. 224.78 Rs. 407.97

Fixed costs Rs. 200 Rs. 300
The average occupancy of both the single rooms and double rooms is expected to be around
70% throughout the year of 365 days. In fixing the room rent, the company desires to
maintain a margin of safety of 20%. The hotel has to pay a 13% Value added Tax on its net
tariff and fix the gross tariff accordingly.

a) Calculate the tariff per day per (i) single room and (ii) double room.
b) The hotel intends to reserve the normal occupancy of 30 single rooms for its privileged
customers at a discount (excluding VAT) of 10% of the net tariff rent. What increase in
the occupancy of the remaining single room days is required to compensate the loss
arising from the discount? [December 2011 – 3, 15 Marks]
Answer
1. The company desires a Margin Of safety of 20%. Hence, Break even is at 80% of the
Sales Revenue. At BES, Total Revenue = Total Cost. Hence, BES revenue = Total
Cost i.e. Variable Costs + Fixed Costs.
2. With the analysis, the room tariff is calculated as under for the two types of rooms:
Particulars Single Rooms Double Rooms
Number of Rooms 100 50
Variable Costs NPR 224.78 NPR 407.97
Fixed Costs NPR 200.00 NPR 300.00
Total Costs NPR 424.78 NPR 707.97
Revenue at BES of 80% NPR 424.78 NPR 707.97
= Total Costs
Hence, Desired Net NPR 530.98 NPR 884.96
Revenue to get 20%
MOS
Since VAT is 13%, the NPR 600.00 NPR 1,000.00
Tariff is
Hence Tarrif per day for a single room is NPR 600.00

Hence Tarrif per day for a double room is NPR 1,000.00
Required Increase in Occupancy of single rooms to be fulfilled from normal customers:
Revised
Particulars Existing Privilaged (10% Normal
Discount)

1. Single Rooms available 100 30 70
2. Occupancy Rate 70% 70% ?

3. Days per annum 365 365 365
4. Rent (net of tariff) NPR 530.98 NPR 477.88 NPR 530.98
5. Variable Costs NPR 224.78 NPR 224.78 NPR 224.78
6. Contribution per room NPR 306.20 NPR 253.10 NPR 306.20
–day
7. Total NPR 7,823,410 NPR 1,940,012 NPR
Contribution=(1)x(2)x(3)x(6) 5,883,289.91
Occupancy Rates for remaining single rooms

Contribution Required to maintain the existing margin of safety NPR7,823,282.25
Contribution from Privileged Customers at discounted tariff NPR1,939,992.34
Contribution from normal customers at increased tariff NPR5,883,289.91
Total room days available of single rooms for normal customers 25550
Total room days to be occupied for getting required contribution 19214
Required occupancy rate for normal customers (Working Note) 75.20%
Required increase in occupancy 5.20%
Working Note
Required occupancy rate for normal customers =
Total room days to be occupied for getting required contribution
Total room days available of single rooms for normal customers
19214
= 25550 = 0.7520 = 75.20%
Question No. 23
Siddhartha Transport Pvt. Ltd. has been given a route of 300 km. long to run bus. The bus
costs Rs. 4,000,000. It has been insured at 3% p.a. and the annual tax will amount to Rs.
2,000. Garage rent is Rs. 800 per month. Annual repairs will be Rs. 30,000 and the bus is
likely to last for 8 years. The driver and the conductor’s salary will be Rs. 15,000 and Rs.
10,000 per month respectively in addition to 10% of takings as commission, to be shared
equally. Office expenses including stationery will be Rs. 1,600 per month. A manager cum
accountant is employed for a monthly salary for Rs. 20,000. The bus gives mileage of 3 km.
per liter of fuel, which costs Rs. 85 per liter. The bus will make one round trip in 2 days
carrying on an average 40 passengers on each single way trip. The bus will run on an average
28 days in a month.
Required:

Assuming 20% profit on takings, calculate the bus fare to be charged from each passenger for
a single way trip, and bus fare per passenger km.
Answer
Statement showing charge per passenger for single way trip
Particulars Annual Amount Monthly Amount
(Rs.) (Rs.)
Standing charges:
Insurance premium @3% on Rs.4,000,000 120,000.00 10,000.00
Tax 2,000.00 166.67
Garage rent 800.00
Driver's salary 15,000.00
Conductor's salary 10,000.00
Office expenses 1,600.00
Manager cum accountant's salary 20,000.00
Total standing charges 57,566.67
Running expenses:
Depreciation 500,000.00 41,666.67
Repairs 30,000.00 2,500.00
Fuel 238,000.00
Total running charges excluding commission 282,166.67
Total cost without commission 339,733.33
Commission (WN1) 48,533.33
Total Cost 388,266.66
Profit 97066.67
Total Takings 485,333.33
Fare per passenger per single way trip (485,333.33/1120) 433.33
Fare per passenger km (485,333.33/336000) 1.44
Working Note:1
Let total taking be x
Commission = 10% of x = x/10
Profit = 20% of x = x/5
Now,
x = 339733.33+x/10+x/5
x-x/10-x/5 = 339733.33
(10x-x-2x)/10 =339733.33
7x = 3397333.30
x = 3397333.30/7
x = 485333.33
Now,
Commission = 10% of 485,333.33 = Rs.48,533.33
Profit = 20% of 48533.33 = Rs.97,066.67
Working Note:2
Average no.of passengers carried during the month (28/2×2×40) 1120
Average passenger km(28/2×2×40×300) 336000
Cost of fuel
Total distance (km) covered 300× 28 = 8,400
Fuel required = 8,400/3 = 2800 Litre.

Cost per liter = Rs. 85

Total cost = Rs. 85 × 2,800 = Rs. 228,000
Question No. 24
From the following information relating to a hotel, calculate the room rent to be charged to
give a profit of 25% on cost excluding interest.
iv) Salary to staffs – Rs. 1,022,000 per annum.
v) Wages of the room attendant – Rs. 40 per day. There is a room attendant for each
room. He is paid wages only when the room is occupied.
vi) Lighting and Heating power per month:
(a) Lighting expenses for each room are Rs. 1,000 when occupied.
(b) Heating power is used only in winter and the charges are Rs. 400 for a room
when occupied.
vii) Repairs to buildings – Rs. 100,000 per annum.
viii) License – Rs. 48,000 per annum.
ix) Sundries – Rs. 66,000 per annum.
x) Interior decoration and furnishing – Rs. 100,000 per annum.
xi) Depreciation @ 5% is to be charged on building costing Rs. 4,000,000 and @
10% on equipment.
xii) Interest to be charged @ 20% on investment on buildings and equipment
amounting to Rs. 5,000,000.
xiii) There are 100 rooms in the hotel. 80% of the rooms are generally occupied in
summer and 30% in winter. The period of summer and winter may be considered
to be of 6 months in each case and a month may be assumed of 30 days.
[June 2012 – 4(b), 8 Marks]
Answer
Operating Cost Statement showing Room Rent per Day
(Room days 19,800)
Particulars Rs. Rs.
Staff salaries 1,022,000
Room attendant's wages [Working note 2] 792,000
Lighting and heating power [Working note 3] 732,000
Repairs to buildings 100,000
Licence etc. 48,000
Sundries 66,000
Interior decoration and furnishing 100,000
Depreciation on:
Buildings (5% of Rs. 4,000,000) 200,000
Equipments [10% of Rs. (5,000,000 – 4,000,000)] 100,000 300,000
Total cost before charging interest 3,160,000

Interest on investment @ 20% 1,000,000

Total cost 4,160,000
Profit @ 25% on Rs. 3,160,000 790,000
Total rent to be charged for all rooms 4,950,000
Room – days [Working note 1] 19,800
Room rent per day 250
Working notes:
1. Calculation of Room Days:
Summer: (100 × 80 / 100 × 6 × 30) 14,400
Winter: (100 × 30 / 100 × 6 × 30) 5,400
Total 19,800
2. Calculation of Room Attendant's Wages:
Rs.
Summer: (Rs. 40 × 100 × 80 / 100 × 6 × 30) 576,000
Winter: (Rs. 40 × 100 × 30 / 100 × 6 × 30) 216,000
Total 792,000
3. Calculation of charges of Lighting and Heating Power:
Rs.
Lighting: Summer (Rs. 1,000 × 100 × 80 / 100 × 6) 480,000
Winter (Rs. 1,000 × 100 × 30 / 100 × 6) 180,000
Heating Power: Winter (Rs. 400 × 100 × 30 / 100 × 6) 72,000
Total 732,000
Question No. 25
PQ Limited plans to start a lodging house at a tourist center with a capacity of 32 single
occupancy rooms. Cost per day has been estimated as under:
Cost per day per room
(Rs.)
When occupied:
(i) Electricity and utilities 4
(ii) Linen, laundry and sanitary supplies 9
When unoccupied:
(iii) Dusting, sweeping and cleaning 2
15
Over and above these costs, the following expenses represent the estimate of fixed
charges per annum (365 days)

Staff expenses Rs. 3,20,000

Other office expenses` Rs. 64,000
Taxes, insurance, maintenance and depreciation Rs. 42,320
PQ Limited defines 100% occupancy to mean all the 32 rooms to fetch revenue for all
365 days.
You are required to answer the following, using a planning period of one year:
(a) What would be the tariff per day per room in order to reach break-even at an
occupancy level of 50%?
(b) What would be the profits, if the occupancy level reaches (i) 60% (ii) 70% and
(iii) 80% respectively?
(c) What would be the profits, if the tariff per day is reduced by 10% from the
answer in (a) above and the occupancy level is 100%?
[June 2013 – 2(b), 4+4+2=10 Marks]
Answer
(a) Tariff to break-even at 50% occupancy level
Fixed cost Rs. 4,26,320
Expenses when unoccupied Rs. 2 x 11,680 23,360
Expenses when occupied Rs. 13 x 5,840 75,920
5,25,600
Tariff per day to break-even: Rs. 5,25,600 /5,840 = Rs. 90
(b) Profit at various occupancy level
Contribution margin = (Rs. 90 – Rs. 13)= Rs. 77

Profit= (Man-days occupied – BEP man-days) x Contribution margin
Therefore,
Profit at 60% occupancy level =(7,008-5,840) x Rs. 77 = Rs. 89,936
(c) Contribution margin at reduced tariff = (0.90 x 90-13) = Rs. 68

Profit at 100% occupancy level = Contribution- Fixed Costs
= 11680 x Rs. 68- Rs, 426,320
= Rs. 367,920
Working Note:
100% occupancy = 32 x 365 days =11,680 room-days

50% occupancy = 0.5 x 11680 = 5840 room-days

60% occupancy = 0.6 x 11680 = 7008 room days
70% occupancy = 0.7 x 11680 = 8176 room-days
80% occupancy =0.8 x 11680 = 9344 room-days
Question No. 26
Pawanputra Air owns single jet aircraft and operates between Kathmandu and Delhi only.
Flights leave Kathmandu on Mondays and Thursdays and depart from Delhi on Wednesdays
and Saturdays. Pawanputra Air cannot afford any more flights between Kathmandu and
Delhi. Only tourist class seats are available on its flights and all tickets are booked by travel
agents. The following informations are collected.
Seating capacity per plane 360

Average passengers per flight 200
Flights per week 4
Flights per year 208
Average one way fare Rs. 5,000
Variable fuel cost Rs. 1,40,000 per flight
Food service to passengers (not charged to Passengers) Rs. 200 per passenger
Commission to travel agents 8% of fare
Fixed annual lease cost allocated to each flight Rs. 5,30,000 per flight
Fixed ground services (maintenance, check in,
Baggage handling cost) allocated to each flight Rs. 70,000 per flight
Fixed salaries of flight crew allocated to each flight Rs. 40,000 per flight
For the sake of simplicity assume that fuel cost are unaffected by the actual number of
passengers on a flight.
Required:
i) What is the operating income that Pawanputra Air makes on each way flight
between Kathmandu and Delhi?
ii) The market research department of Pawanputra Air indicates that lowering the
average one way fare to Rs. 4,800 will increase the average number of passenger
per flight to 212. Should Pawanputra Air lower its fare?
iii) Gem Travels, a tour operator approaches Pawanputra Air to charter its jet aircraft
twice each month, first to take Gem’s international tourists from Kathmandu to
Delhi and then bring the tourists back from Delhi to Kathmandu. If Pawanputra
Air accepts the offer, it will be able to offer only 184 (208 less 24) of its own
flights each year. The terms of the charter are:

(a) For each one-way flight Gem will pay Pawanputra Rs. 7,50,000 to charter the
plane and to use its flight crew and ground service staff.
(b) Gem will pay for fuel costs.
(c) Gem will pay for all food costs.
On purely financial considerations, should Pawanputra Air accept the offer from Gem
Travels?
[December 2014 – 4(a), 5+3+2=10 Marks]
Answer
i) Statement of operating income of Pawanputra Air for Kathmandu-Delhi flight (one
way)
Fare received (per flight): 200 passengers x Rs. 5,000

Rs.10,00,000
Variable costs (per flight)
Fuel cost Rs. 1,40,000
Food (200 x Rs. 200) 40,000
Commission to Travel Agents (8% of Rs. 10,00,000) 80,000 Rs.
2,60,000
Contribution per flight
Rs.7,40,000
Fixed cost (per flight)
Annual lease cost Rs. 5,30,000
Fixed ground service costs 70,000
Salaries of flight crew 40,000 Rs. 6,40,000
Operating income per flight
1,00,000
ii) Fare received (per flight): 212 passengers x Rs. 4,800

Rs.10,17,600
Variable costs (per flight)
Fuel cost Rs. 1,40,000
Food (212 x Rs. 200) 42,400
Commission to Travel Agents (8% of Rs. 10,17,600) 81,408 Rs.
2,63,808
Contribution per flight
Rs.7,53,792
Excess contribution due to lowering of fare (Rs. 7,53,792 – Rs. 7,40,000) = Rs.
13,792
Pawanputra Air should lower its fare as it would increase its contribution by Rs.
13,792

iii) For financial considerations to decide whether Pawanputra Air should charter its
plane to Gem Travels most profitable option i.e. option (b) should be used.
Contribution of Pawanputra Air under option (b) Rs. 7,53,792

Pawanputra Air would get (per flight) for charter of plane Rs. 7,50,000
As there is a loss of Rs. 3,792 per flight Pawanputra Air should not accept the offer.
Question No. 27
Arnav Automobiles distribute its goods to a regional dealer using a single lorry. The dealer’s
premises are 20km away by roads. The lorry has a capacity of 10 tones and makes the
journey twice a day 90% loaded on the outward journeys and 10% on return journeys. The
following information is available for a four weekly period during the year 2015:
Petrol Consumption 6 Km. per litre

Petrol Cost Rs. 64 per litre
Lubricants Rs. 125 per week
Driver’s Salary Rs. 2,000 per week
Repairs Rs. 1,250 per week
Garage Rent Rs. 1,30,000 per annum
Cost of lorry ( excluding tyres) Rs. 9,80,000
Life of lorry 80,000 km
Insurance Rs. 13,650 per annum
Cost of Tyres Rs. 28,000
Estimated value of lorry at end of its life Rs. 1,80,000
Vehicle Licence Cost Rs.5,200 per annum
Other Overhead Costs Rs.45,500 per annum
Life of Tyres 28,000 Kilometers
The lorry operates six days on aweek
Required:
i) A statement to show the cost of operating the vehicle for the four weekly period.
ii) Calculate the vehicle cost per Km and per tone Km.
Answer
i. Statement of total cost of operating the vehicle for the four weekly period
Particulars Rs. Rs.
A Running costs:
Petrol Cost ( W.N 1) 20,480

Lubricant ( Rs. 125 * 4 weeks) 500

𝑅𝑠.9,80,000−𝑅𝑠 1,80,000
Depreciation( ∗ 19,200
80,000 𝑘𝑚
1920 𝑘𝑚)
Depreciation(Tyre) 1920 42,100

(Rs.28,000/28,000km)*1920km.
B Standing Charges
Drivers salary ( Rs. 2000 * 4 weeks) 8,000
Garage rent ( 1,30,000/52*4) 10,000
Insurance ( Rs. 13,650/52 *4) 1,050
Vehicle Liscence ( Rs. 5,200/52 * 4) 400
Other Overhead Cost ( 45,500/52*4) 3500 22,950
C Maintenance Cost
Repairs ( Rs 1,250 * 4 weeks) 5,000 5,000

Total Cost( A+B+C) 70,050
𝑅𝑠 70,050
ii. Vehicle Cost per kilometer = 1,920𝑘𝑚
= Rs 36.48
Cost per tone-km .
Outward Journey: 20km * 9 tonne* 24 days* 2 trip = 8,640
Inward Journey : 20 km * 1 tonne * 24 days* 2 trip = 960
Total Tonne-km 9,600
𝑅𝑠 70,050
Cost per tone-km = 9600 𝑡𝑜𝑛𝑛𝑒−𝑘𝑚 = Rs 7.30
Working Note
1. Distance travelled = 20km * 2 ways*4 weeks* 6 days* 2 trips = 1,920km
1,920 𝑘𝑚
Cost of petrol = 6 𝑘𝑚 𝑝𝑒𝑟 𝑙𝑡𝑟. ∗ 𝑅𝑠 64 = Rs 20,480
Question No. 28
An Executive manager of Nepal Bank Ltd. spends Rs. 10.00 per kilometer on taxi fares for
his office work. He is considering two other alternatives, the purchase of a new Nano car or a
second hand Alto car. The estimated cost figures are as follows:
Items New Nano Car Old Alto Car
Purchase Price Rs. 1,35,000 Rs. 1,60,000
Sale price, after 5 years Rs. 25,000 Rs. 40,000
Repairs and servicing per annum Rs. 12,000 Rs. 18,000
Taxes and insurance per annum Rs. 3,200 Rs. 2,400
Petrol consumption per liter 20 km 15 km
Petrol/Diesel price, per liter Rs. 68 Rs. 42

He estimates that he has to travel 10,800 km. annually. Which of the three alternatives will be
economical? If his official visit increases and he has to do 18,000 km per annum what should
be his decision?
[June 2017 – 4(c), 5 Marks]
Answer
Statement showing comparative costs of alternatives modes of conveyance
New Nano Old Alto
Item Car Car Taxi
Rs. Rs. Rs.
Fixed costs per annum:
Repairs and servicing 12,000 18,000
Taxes and insurance 3,200 2,400
(A) Total 37,200 44,400
Variable costs per annum:
(B) Petrol Diesel: 10,800km 36,720 30,240
(C) Petrol Diesel: 18,000 km 61,200 50,400
Total Costs:
10,800 km (A+B) 73,920 74,640 1,08,000
18,000 km (A+C) 98,400 94,800 1,80,000
Conclusion. For present official tour of 10,800 km, the total cost for the
new Nano car is the lowest and thus this is the cheapest alternative. But
when official tour increases to 18,000 km per annum the old Alto car
will be cheapest.
Question No. 29
Budhanilkantha is a Public School having 25 buses each plying in different directions for the
transport of its school students. In view of large number of students availing of the bus service,
the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged
in the school. The workload of the students has been so arranged that in the morning, the first
trip picks up senior students and the second trip plying an hour later picks up junior students.
Similarly, in the afternoon, the first trip takes the junior students and an hour later the second
trip takes the senior students home.
The distance travelled by each bus, one way is 16 kms. The school works 24 days in a
month and remains closed for vacation in Mansir and Kartik. The bus fee, however, is
payable by the students for all the 12 months in a year.
The details of expenses for the year 2073-2074 are as under:

Driver's salary -payable for all the 12 months Rs. 5,000 per month per driver
Cleaner's salary payable for all the 12 months (one
cleaner has been employed for every five buses) Rs. 3,000 per month per cleaner
Licence Fees, Taxes etc. Rs. 2,300 per bus per annum
Insurance Premium Rs. 15,600 per bus per annum
Repairs and Maintenance Rs. 16,400 per bus per annum
Purchase price of the bus Rs 16,50,000 each
Life of the bus 16 years
Scrap value Rs. 1,50,000
Diesel Cost Rs. 18.50 per litre
Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus is
60 students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance travelled as under:
Students picked up and dropped within Bus fee Percentage of students

the range of distance from the school availing this facility
4 kms 25% of Ful 15%
8 kms 50% of Ful 30%
16 kms Ful 55%
Ignore interest. The bus fees has to be based on average cost, you are required to:
i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
ii) Work out average cost per student per month in respect of
(a) Students coming from a distance of upto 4 kms from the school;
(b) Students coming from a distance of upto 8 kms from the school; and
(c) Students coming from a distance of upto 16 kms from the school.
[June 2018 – 2(b), 10 Marks]
Answer:
i) Budhanilkantha Public School
Statement showing the expenses of operating a single bus and the fleet of 25
buses for a year
Particulars Fleet of 25
Per bus per annum buses per
annum
(Rs.) (Rs.)

Running costs : (A)

Diesel 56,832 14,20,800
(Refer to working note 1 )
Repairs & maintenance costs : 16,400 4,10,000
(B)
Fixed charges :
Driver's salary 60,000 15,00,000
Cleaners salary 7,200 1,80,000
Licence fee, taxes etc. 2,300 57,500
lnsurance 15,600 3,90,000
Depreciation 93,750 23,43,750
Total fixed charges : ( C ) 1,78,850 44,71,250
Total expenses: (A + B + C) 2,52,082 63,02,050
ii) Average cost per student per month in respect of students coming from a
distance of :
a) 4 kms. from the school

{Rs. 2,52,082 /(354 students x 12 months)} Rs. 59.34
(Refer to working note 2)
b) 8 kms from the school
(Rs. 59.34 x 2) Rs. 118.68
c) 16 kms from the school
(Rs. 59.34 x 4) Rs. 237.36
Working notes:
1. Calculation of diesel cost per bus;
No. of trips made by a bus each day : 4

Distance travelled in one trip both :
32 kms
ways
(16 kms x 2 trips)
Distance travelled per day by a bus :
128 krns
(32 kms x 4 shifts)
Distance travelled during a month : 3,072 kms
(128 kms x 24 days)
Distance travelled per year : 30,720 kms
(3,072 kms x 10 months)
No. of litres of diesel required per : 3,072 litres

bus per year

(30,720 kms /10 km)
Cost of diesel per bus per year : Rs. 56,832
(3,072 litres x Rs. 18.50)
2. Calculation of Equivalent Number of full fare paying student:

Distance % No Wt Equivalent
Within 4 km 15 18 25% 4.5
4-8 30 36 50% 18
8-16 55 66 100% 66
Total 120 88.5
Avg Cost/ full fare paying student = 252082

88.5x12
= 237.36
Question No. 30
'Jharna View Lodging' home is being run in a small hill station of Bhedetar of Dhankuta
District with 50 single rooms. The home offers concessional rates during six off- season
months in a year. During this period, half of the full room rent is charged. The
management’s profit margin is targeted at 20% of the room rent. The following are the cost
estimates and other details for the year ending on 31st March 2018. [Assume a month to be
of 30 days].
i) Occupancy during the season is 80% while in the off- season it is 40% only.
ii) Expenses:
• Staff salary [Excluding room attendants] Rs. 3,55,000
• Repairs to building Rs. 1,30,500
• Laundry and linen Rs. 45,000
• Interior decoration Rs. 1,05,500
• Sundry expenses Rs. 95,400
iii) Annual depreciation is to be provided for buildings @ 5% and on furniture and
equipments @ 15% on straight-line basis.
iv) Room attendants are paid Rs. 5 per room day on the basis of occupancy of the
rooms in a month.
v) Monthly lighting charges are Rs. 120 per room, except in four months in winter
(off-season) when it is Rs. 30 per room and this cost is on the basis of full
occupancy for a month.
vi) Total investment in the home is Rs. 100 lakhs of which Rs. 80 lakhs relate to
buildings and balance for furniture and equipment.
You are required to work out the room rent chargeable per day both during the season and
the off-season months on the basis of the foregoing information.

Answer:
i) Computation of Estimated Fixed Cost for the year ending 31st
March, 2018

Salary 3,55,000
Repairs 1,30,500
Laundry and linen 45,000
Interior decoration 1,05,500
Depreciation:
5% on Rs. 80 lakhs: Rs. 4,00,000
15% on Rs. 20 lakhs: Rs. 3,00,000 7,00,000
Sundry expenses 95,400
Total Fixed Cost 14,31,400
ii) Number of room days in a year:
Occupancy during season for 6 months @ 80% = (50 x 0.80 x 6 x 30) = 7,200
Off-season occupancy for 6 months @ 40% = (50 x 0.40 x 6 x 30) = 3,600
Total number of room days during a year = 10,800
iii) Attendant’s salary For 10,800 room days @ Rs. 5 per day = Rs.
54,000
iv) Light charges for 8 months

@ Rs. 120 per month per occupied room, i.e. Rs. 120/30 = Rs. 4 per room day.
Light charges for 4 months
@ Rs. 30 per month per occupied room, i.e. Rs. 30/30 = Rs. 1 per room day
Total lighting charges:

During season 6 months @ Rs. 4 for 7,200 room days = Rs.
28,800
During off season 2 months @ Rs. 4 for 1,200 days (2/6 x 3,600) = Rs.
4,800
During off season 4 months winter @ Re. 1 for 2,400 days (4/6 x 3600) = Rs.
2,400
Rs.
36,000

v)
Statement of Total Estimated Cost
Total Fixed Expenses as shown in (i) above (a) 14,31,400
Variable Running Cost (b)
Attendant’s salary as shown in (iii)above 54,000
Lighting charges as shown in (iv) above 36,000
9000
Total cost (a+b) 15,21,400
vi) Computation of total Full Room Days

During season : 7,200
Off-season : 1,800 (Equivalent to 50% rate of 3,600 days)
Total Full Room Days : 9,000
Computation of Room Rent

Cost per room day : Rs. 15,21,400 / 9,000 = Rs.169.04
Add: Profit margin at 20% of rent or 25% of cost = Rs. 42.26
Room Rent = Rs. 211.30
Therefore, during season, room rent of Rs. 211.30 is to be charged while in

the off-season room rent of Rs.105.65 (Rs. 211.30/2) is to be charged.

CHAPTER 10:
COST SHEET

Theoretical Questions:
Question No.1
Distinguish Between
(a) Production Account and Cost Sheet
[June 2011 – 5(b), 4 Marks] [December 2014 – 5(c), 2.5 Marks]
Answer
The following are the points of difference between a Production Account and a Cost
Sheet:
a. Production Account is based on double entry system whereas Cost Sheet is not based
on double entry system.
b. Production Account consists of two parts. The first part shows cost of the
components and total production cost. The second part shows the cost of sales and
profit for the period. Cost Sheet presents the elements of costs in a classified manner
and the cost is ascertained at different stages such as prime cost; works cost; cost of
production; cost of goods sold; cost of sales and total cost.
c. Production Account shows the cost in aggregate and thus facilitates comparison with
other financial accounts. Cost Sheet shows the cost in detail and analytical manner,
which facilitates comparison of cost for the purpose of cost control.
d. Production Account is not useful for preparing tenders or quotations. Estimated cost
sheets can be prepared on the basis of actual cost sheets and these are useful for
preparing tenders or quotations.
Numerical Questions:
Question No. 2
You are given the following information by Mr. George, Finance Controller in X Ltd., a
manufacturing company.
Particulars Rs.
Sales 1,000,000
Net Profit 118,000
Selling & Distribution overhead 25,000
Closing stock of finished goods 110,000
Opening stock of finished goods 90,000
Administration overheads 50,000
Closing work in progress 15,000
Opening work in progress 12,000
Factory Overheads 100,000
From the information given above, Mr. George needs your help to calculate the following:

i. Cost of Sales;
ii. Cost of goods sold;
iii. Cost of production;
iv. Factory cost;
v. Prime cost; and
vi. Raw material consumed. [December 2004 – 1(c), 12 Marks]
Answer
Particulars Rs.
Sales 1,000,000
Less: Net Profit 118,000
i. Cost of Sales 882,000
Less: Selling & Distribution overhead 25,000
ii. Cost of goods sold 857,000
Add: Closing stock of finished goods 110,000
Less: Opening stock of finished goods 90,000
iii. Cost of production 877,000
Less: Administration overheads 50,000
iv. Factory Cost 827,000
Add: Closing work in progress 15,000
Less: Opening work in progress 12,000
Work Cost 830,000
Less: Factory Overheads 100,000
v. Prime Cost 730,000
vi. Raw Material Consumed 490,000
Question No.3
The following budgeted cost information are available from the records of a manufacturing
concern:
Rs. in lakhs
Direct Wages: 6.00
Rolling Shop (120,000 hours) 14.40 20.40
Milling Shop (240000 hours)
Work Overheads (Allocation on Labour Hours) :
Rolling Shop 9.60
Milling Shop 28.80 38.40

Administration Overheads 24.00

Selling Overheads 28.80
Distribution overheads 14.40
The concern follows absorption method of costing. On the basis of above data, prepare a
schedule of overhead rates.
The Sales Division of the concern requires a cost estimate for a product for which following
information are available:
Direct Material: Material X 120 kg. @ Rs. 30 per kg.

Material Y 72 kg. @ Rs.55 per kg.
Direct Labour: Rolling Shop 40 hours @ Rs. 6 per hour
Milling Shop 70 hour @ Rs. 5 per hour.
You are required to work out the Cost Estimate showing cost per unit the above information
and the overheads rates so computed. [December 2004 – 6, 16 Marks]
Answer
Working Notes:
Statement of Budgeted Cost Rs. in Lakhs

Direct Wages 20.40
Works Overheads 38.40
Works Cost 120.00
Administration overheads 24.00
Cost of Production 144.00
Selling overheads 28.80
Distribution overheads 14.40
Total Cost 187.20
Schedule of overhead rates :

Work overheads:
Rolling Shop – Rs. 960,000/120.00 hours = Rs. 8 per labour hour

Milling Shop – Rs. 2,880,000/240,000 hours = Rs. 12 per labour hour
Admn overheads =24 lakhs/120 lakhs*100 =20% of works

cost
Selling overheads =28.80 lakhs/144 lakhs*100 =20% of cost of
production
Distribution overheads =14.40 lakhs/144 lakhs*100 =10% of cost of
production
Cost Estimate for a product

Elements of cost Amount Rs. Cost per unit Rs.

Direct Material
Material X – 120 kg*Rs.30=Rs.3,600
Material Y – 72 kg*Rs. 55=Rs 3,960 7,560 7,560
Direct Labour
Rolling Shop – 40 hrs*Rs.6=240
Milling Shop – 70 hrs*Rs.5=Rs. 350 590 590
Work Overheads
Rolling Shop – 40 hrs.*Rs.8 = Rs. 320
Miling Shop – 40 hrs.*Rs. 12 = Rs. 840 1,160 1,160
Work Cost 9,310 9,310
Admn overheads 20% of works cost 1,862 1,862
Cost of production (COP) 11,172 11,172
Selling overheads 20% of COP 2,234 2,234
Distribution overheads 10% of COP 1,117 1,117
Total Cost 14,523 14,523
Question No.4
The cost structure of an article, the selling price of which is Rs. 45,000 is as follows :
Direct material 50%

Direct Labour 20%
Overheads 30%
An increase of 15% in the cost of materials and of 25% in the cost of labour is
anticipated. These increased costs in relation to the present selling price would cause a 25%
decrease in the amount of present profit per article.

a. Prepare a statement of profit per article at present, and
b. The revised selling price to produce the same percentage of profit to sales
[June 2006 – 4,8 Marks]
Answer
a. Statement showing the profit at present
Rs.
Direct labour 6,000
Prime cost 21,000
Overheads 9,000
Cost of sales/ Production cost of goods sold 30,000
Net profit 15,000
Sales 45,000

b. Revised selling price to produce same percentage of profit to sales as before :

Rs.
Direct materials (15000*1.15) 17,250
Direct labour (6000*1.25) 7,500
Prime Cost 24,750
Overheads 9,000
Cost of sales/production cost of goods sold 33,750
Net Profit 16,875
Sales 50,625
Since profit is 1/3 when cost was Rs. 30,000 and selling price was Rs. 45,000 so, when
cost of sales is Rs. 33,750, sales will be Rs. 50,625.
Workings
Let X be the cost Y be profit
X+Y = 45000 ………………eqn 1
Again when cost increases
1.15x/2 +1.25x/5 +3x/10 +75y/100 = 45000 …………….. eqn 2
Solving eqn 1 and 2 we will get

X = 30000
Cost =30,000
Profit = 15,000
Selling price = 45,000
Profit ratio =15000/45000 = 1/3
Question No.5
The information relating to Electric and Electronics Centre for manufacturing of 10,000 units
of socket box during the year 2006 are as under:
Cost items Amount in Rs.
Material 90,000
Direct Wages 60,000
Power and Consumable Stores 12,000
Factory indirect wages 15,000
Lighting of Factory 5,500
Defective work (cost of rectification) 3,000
Clerical salaries and management expenses 30,000

Depreciation (office building) 3,500

Selling expenses 5,500
Sale proceeds of scrap 2,000
Depreciation (Factory) 1,500
Factory Repairs and Maintenance 10,000
The selling price of the product is Rs. 31.60 per unit. All the units produced were sold.
You are required to prepare cost sheet showing various elements of costs including costs
per unit. [December 2006 – 4,10 Marks]
Answer
Cost items Total Cost Cost per unit
Material 90,000 9
Direct Wages 60,000 6
Prime Cost 1,50,000
Factory Overheads:
Power and Consumable Stores 12,000
Factory Indirect Wages 15,000
Lightning of Factory 5,500
Defective Work (cost of rectification) 3,000
Depreciation (Factory) 1,500
Factory Repairs and Maintenance 10,000
47,000
Less: Sale Proceed of Scrap (2,000)
45,000 4.5
Works Cost 1,95,000 19.5
Office Overheads:
Clerical salaries and management 30,000
expenses
Depreciation (office building) 3,500
33,500 3.35
Cost of production 2,28,500 22.85
Selling Overheads:
Selling expenses 5,500 0.55

Cost of Goods Sold 2,34,000 23.4

Profit 82,000 8.2
Sales 3,16,000 31.6
Question No. 6
Explain the benefits of DPP (Direct Product Profitability) and prepare a statement of Direct
Product Profit of product AXE from the following data:
Bought in price = Rs. 10 per unit
Gross margin = 60% of the selling price
Warehouse costs = Rs. 5 per unit
Transport cost = Rs. 3 per unit
Store cost = Rs. 4 per unit
[June 2007 – 3(b), 5 Marks]
Answer
Benefits of DPP
The following are the benefits of Direct Product Profitability
 Better cost analysis
 Better pricing decisions
 Better management of stores and warehouse space
 The rationalization of product ranges.
Statement of Direct Product Profit of product AXE
Rs. Rs.
Selling price 25
Less: Bought-in price 10
Gross Margin 15
Less: Direct product costs:
Warehouse costs 5
Transport costs 3
Store costs 4 12
Direct product profit p.u. 3
Working Note:
Selling Price – Bought in price = Gross Margin
x – 10 = 0.6
or, x-10-0.6x = 0

or, 0.4x = 10
or, x = 10/0.4x
∴ x = 25
Question No.7
A job costing system is in use in a factory. The following cost data are available from the
books for the year ended 31st March, 2005.
Direct Material 9,00,000

Direct Wages 7,50,000
Profit 6,09,000
Selling & Distribution Overhead 5,25,000
Administrative Overhead 4,20,000
Factory Overhead 4,50,000
Required:
a) Prepare a cost sheet indicating the prime cost, works cost, production cost, cost of
sales and sales value.
b) In 2005-06, the factory has received an order for a number of jobs. It is estimated
that the direct materials would be Rs. 12,00,000 and direct labour would cost Rs.
7,50,000. What would be the price for these jobs if the factory intends to earn the
same rate of profit on sales, assuming that the selling and distribution overhead has
gone up by 15%? The factory recovers factory overhead as a percentage of
distribution overheads as a percentage of direct wages and administrative and
selling & distribution overheads as a percentage of works cost, based on the cost
rate prevalent in the previous year.
Answer
Cost Sheet
For the jobs carried out by the concern for the year ended 31st March 2005
Rs.
________
Prime Cost 16,50,000

_______
Works Cost 21,00,000

________
Production Cost 25,20,000
Selling a distribution Overhead 5,25,000

----------
Cost of Sales 30,45,000
Profit 6,09,000
_________
Sales Value 36,54,000
Cost Sheet
For the Loss carried out during the year 2005-06
Rs
(W.Note. 1)
Works Cost 2,400,000
(W. Note 2)
Production Cost 28,80,000
Selling & Distribution Overhead (W.Note.3) 6,90,000
________
Profit 7,14,000
Sales Value 42,84,000
Working Notes:
1. Factory Overhead Percentage of D. Wages

(to be changed during 2005-06)
= Factory overhead of 04-05
----------------------------------- x100
D. Wage of 04- 05
= 450000 x 100 = 60%
750000
= 60% of 7,50,000
= 4,50,000 ( For 05-06)
2. Administrative Overhead
Overhead of 04-05
----------------------- X100
Wage Cost of 04-05

4,20,000
= --------- X100 =20% of the wage cost
21,00,000
So, 24,00,000 X 20% = 480,000 (For 05-06)
3. Selling and Production Overhead

Selling & Distribution Overhead (04-05)
= -------------------------------------------------
Work Cost of 04-05
5,25,000
= ------------x 100
21,00,000
= 25% of Work Cost.
for 05- 06 = 2400,000x25%
= 6,00,000
The selling and distribution overhead after 15%
increase is 6,00,000x 1.15= 6,90,000.
4. Profit ( for 05-06)

= At the rate of profit of 04-05
Profit of 04- 05
= --------------------
Sale Value of 04-05
60,9000
= ------------ x 100 =16.67% of sales value
36,54,000
Which is 20% of cost of sales
For 05-06 20% of 35,70,000
= 7,14,000
Question No.8
Pashupati Electronics Ltd. furnishes the following information for 10,000 TV valves
manufactured during the year, 2008.
Rs. Rs.
Materials 90,000 Clerical Salaries and
Direct wages 60,000 Management expenses 33,500
Power and consumable stores 12,000 Selling expenses 5,500

Factory indirect wages 15,000 Sale proceeds of scraps 2,000

Lighting of factory 5,500
Defective work
(cost of rectification) 3,000 Plant repairs, Maintenance and
Depreciation
11,500
The net selling price was Rs. 31.60 per unit and all the units were sold.
As from 1st January, 2009 the selling price would be reduced to Rs. 31.00 per unit. It was
estimated that production could be increased in 2009 by 50% utilizing spare capacity.
Rates for materials and direct wages will increase by 10%.
You are required to prepare:

v) Cost sheet for the year, 2008, showing various elements of cost per unit, and
vi) Estimated cost and profit for 2009 assuming that 15,000 units will be produced and sold
during the year. Factory overheads are recovered as a percentage of direct wages and office
and selling expenses as a percentage of works cost. (Apply the same respective percentages
as in the previous year.) [December 2008 – 1(c), 10 Marks]
Answer
Cost Sheet of Pashupati Electronics
Output : 10,000 units Period : year ended 31st December, 2008

Total Per unit
Rs. Rs. Rs. Rs.
Materials 90,000 9.00
Wages 60,000 6.00
Prime Cost 1,50,000 15.00
Factory Overheads:
Power and Consumable Stores 12,000 1.20
Factory Indirect Wages 15,000 1.50
Lighting of Factory 5,500 0.55
Defective Work (cost of rectification) 3,000 0.30
Plant Repairs, Maintenance and
Depreciation 11,500 1.15
47,000 4.70
Less : Sale of Scraps 2,000 0.20
45,000 4.50
Works Cost 1,95,000 19.50
Office and Selling Expenses:

Clerical Salaries and
Management Expenses 33,500 3.35
Selling Expenses 5,500 0.55
39,000 3.90
Cost of Sales 2,34,000 23.40
Profits (balancing figure) 82,000 8.20
Sales 3,16,000 31.60
Note: The cost of rectification of defective works has been included in factory
overheads on the assumption that the defectives are normal. However, if the
defective work is due to abnormal causes, the cost of rectification should be charged
to the costing profit and loss account.
Estimated Cost Sheet for 2009
Estimated output 15,000 units

Total Per unit
Rs. Rs.
Materials : 15,000 × Rs. 9.90 1,48,500
9.90
Wages : 15,000 × Rs. 6.60 99,000
6.60
Prime Cost 2,47,500
16.50
Factory Overheads@ 75% of Wages (see Note 1) 74,250
4.95
Works Cost 3,21,750
21.45
Office and Selling Expenses @ 20% of Works Cost

(see Note 2) 64,350
4.29
25.74

Estimated Profit (balancing figure) 78,900

5.26
Sales : 15,000 * Rs. 31 4,65,000

31.00
Working Notes:
(1) Percentage of factory overhead on wages in 2008 = Rs.45,000/60,000×100=75%
(2) Percentage of office and selling expenses on works cost in 2008= Rs.
39,000/195,000×100 =20%
A manufacturing company has an installed capacity of 1,20,000 units per annum. The
cost structure of the product is as under:
Variable cost per unit Rs

Materials 8
Labour (subject to a minimum of Rs.56,000 per month) 8
Overheads 3
Fixed overheads - Rs.1,68,750 per annum. Semi variable overheads - Rs. 48,000
per annum at 60% capacity, which increases by Rs.6,000 per annum for increase
of every 10% of the capacity utilization or any part thereof, for the year as a
whole.
The capacity utilization expected for next year is estimated at 60% for two months,
75% for six months and 80% for the remaining part of the year. If the company is planning to
have a profit of 25% on selling price, calculate the selling price per unit assuming that there is
no opening and closing stock. [December 2009 – 1(b), 6 Marks]
a)
Capacity 60% 75% 80% Total
Rs. Rs. Rs. Rs.
Material 96,000 3,60,000 2,56,000 7,12,000
Wages 1,12,000 3,60,000 2,56,000 7,28,000
Overheads 36,000 1,35,000 96,000 2,67,000
Semi variable overheads 60,000
Total 19,35,750

Profit 25% on Selling Price (or 6,45,250

1/3 rd on cost)
Total 25,81,000
Total units 89,000
Selling price per unit 29
(2,581,000/89,000)
Working Notes:
i) Calculation of Capacity Utilization
No.of Months 2 6 4 Total
Capacity Utilisation 60% 75% 80%
Production/month 6,000 7,500 8,000
Total Prodn. 12,000 45,000 32,000 89,000
Total Production % (89000/120,000) 74.16
ii) Calculation of Semi variable cost

Amount (Rs)
Variable cost upto 60% capacity 48,000
Increase in semi variable cost for increase on production @ Rs 12,000
6000 for every 10% or part thereof
Total for 75% and 80% capacity 60,000
Question No.9
The books of New Life Company present the following data for the month of Jestha 2066.
The direct labour cost Rs 17,500 which is 175% of works overheads. Cost of goods sold
excluding administrative expenses Rs 56,000. Inventory details showed the following:
Particulars Jestha 1 Jestha 30
Raw Materials 8,000 10,600
WIP 10,500 14,500
Finished Goods 17,600 19,000
Further review of books disclosed that the selling expense is Rs 3,500, General
administrative expenses are Rs 2500 and the sale for the month is Rs 75,000.
You are required to
(i) Compute the value of materials purchased.
(ii) Prepare a cost statement showing the various elements of cost and also the profit earned.

Answer
i) Computation of the value of materials purchased.
Particulars Rs
Cost of goods sold 56,000
Add: Closing stock of finished goods 19,000
Total 75,000
Less: Opening stock (17,600)
Cost of goods manufactured 57,400
Add: Closing WIP 14,500
Less: Opening WIP (10,500)
Works cost 61,400
Less: Factory overheads 10,000
{17500/175}*100
Prime Cost 51,400
Less: Direct Labour (17,500)
Raw materials Consumed 33,900
Add: Closing stock of Raw materials 10,600
Raw materials available 44,500
Less: Opening stock of Raw materials (8,000)
Value of materials purchased 36,500
ii) Cost statement showing the various elements of cost and profit earned
Rs.
Raw materials Consumed 33,900
Direct labour cost 17,500
Prime cost 51,400
Add: Factory Overheads 10,000
Works Cost 61,400
Add: Opening WIP 10,500
Less: Closing WIP (14,500)
Cost of goods manufactured 57,400
Add: Opening Finished Goods 17,600
Less: Closing Finished Goods (19,000)
Costs of Goods Sold 56,000
Add: General administrative expenses 2,500

Add: Selling Expenses 3,500

Cost of sales 62,000
Profit 13,000
Sales 75,000
Question No. 10
A company is producing three types of products, A,B,C. The sales territory of the company is
divided into three areas X,Y and Z. The estimated sales for the year are as under:
Territories
X Y Z
Product Rs. Rs. Rs.
A 50,000 20,000
B 30,000 - 80,000
C - 70,000 40,000
Budgeted advertising cost is as under:

Territories
X Y Z Total
Rs. Rs. Rs.
Local cost 3,200 4,500 4,200 11,900
General - - - 5,800
You are required to find the advertising cost per cent on sales for each product and territory
showing how you will present the statement to management.
[June 2010 – 4(a), 10 Marks]
Answer
General advertising cost of Rs. 5,800 is allocated to territories on the basis of sales value, as
follows:
Sales Value General
advertising cost
Territory X: Product A 50,000 1,000
Product B 30,000 80,000 600 1,600
Territory Y: Product A 20,000 400
Product C 70,000 90,000 1,400 1,800
Territory Z: Product B 80,000 1,600
Product C 40,000 120,000 800 2,400
Total : 5,800

Local costs allocated to territories are apportioned to products on the basis of sales value:
Territory X: Product A 50,000 2,000
Product B 30,000 80,000 1,200 3,200
Territory Y: Product A 20,000 1,000
Product C 70,000 90,000 3,500 4,500
Territory Z: Product B 80,000 2,800
Product C 40,000 120,000 1,400 4,200
Total: 11,900
Presentation of advertisement cost to the management will be made in the following

statement:
Territories
X Y Z Total % on Sales
Product A 3,000 1,400 - 4,400 6.28
Product B 1,800 - 4,400 6,200 5.64
Product C - 4,900 2,200 7,100 6.45
Total 4,800 6,300 6,600 17,700 6.10
% on Sales 6.00 7.00 5.50 6.10
Question No.11
ABC Ltd. makes two types of polish-one for floors and one for cars. It sells both types to
industrial users only in litre containers. The specification for the two types per batch of 100
litres are:
Materials Floor Polish Car Polish

Delta 120 litres 100 litres
Gamma 20 Kg 10 Kg
Containers-per 100 Rs. 100 Rs. 100
Direct labour
Manufacturing 12 man-hours 16 man-hours
Primary Packing 5 man-hours 5 man-hours
During the six months to the end of September, the company expects to sell 15000 litres of
floor polish at Rs. 9 per litre and 25,000 litres of car polish at Rs. 7 per litre. Materials are
expected to cost Rs. 1 a litre for Delta and Rs. 8 a kg for Gamma.
Manufacturing wages in the industry look like being stable at Rs. 6 per hour
and packing wages at Rs. 4 per hour throughout the period.
Flexible overhead expense budgets are operated for manufacturing and packing departments
based on the number of man hours worked. These budgets for six months to end of September
are:

Manufacturing department Primary Packing Department

5,000 man-hours Rs. 40,000 1,700 man-hours Rs. 26,000
6.000 man-hours Rs. 50,000 1,900 man-hour Rs. 28,000
General administration overhead are budgeted at Rs. 37,000. At the beginning of the period
1st April, packed stocks will be:
Floor Polish 2,000 litres
Car Polish 3,000 litres
th
By the end of the period 30 September, it is desired to maintain the packed stocks of the
two products at 3,000 litres and 4,000 litres respectively.
Required:
a) A statement of the standard prime cost per 100 litres of each product.
b) A sale and production budget ( in quantities) for the six months to 30th September
c) A profit forecast for the period, show separate gross profits for the two products but do
not attempt to allocate overheads between them. No overheads are included in stock
valuations. [December 2010 – 3, 15 Marks]
Answer
a. Statement showing standard prime cost of 100 litres of each product

Particulars Floor Polish Car Polish
Delta@Rs 1/litre Rs 120 Rs 100
Gamma@Rs 8/kg 160 80
280 180
Container 100 100
Direct Labour:
Manufacturing@ Rs.6/hour 72 96
Primary packing 20 20
@Rs.4/hour
92 116
Standard prime cost 472 396

b. Sales and production Budgets (in liters) for the six months to 30th September
Particulars Floor Polish Car Polish

Sales (litres) 15,000 25,000
Add closing stock 3,000 4,000
Total 18,000 29,000
Less opening stock 2,000 3,000
Production 16,000 26,000
c. Statement showing profit forecast for the period

Particulars Floor Polish Car Polish Total
Quantity produced 16,000 lts 26,000 lts
Quantity sold 15,000 lts 25,000 lts
Rs. Rs. Rs.
Sales value 1,35,000 1,75,000 3,10,000
Less :Prime cost{Refer 70,800 99,000 169,800
to(a)}
Gross margin 64,200 76,000 1,40,200
Less Overheads:
Manufacturing Rs.
50,800(b)
Packing
30,000(c)
Administration 37,000 1,17,800
Net Profit for the period 22,400
Working Notes:
a) Floor Polish 15,000×Rs. 4.72=Rs 70,800
Car Polish 25,000×Rs. 3.96=Rs.99,000
b) Overheads for manufacturing

Man hours required:
Floor Polish= (12 hrs ÷ 100 litres) × 16,000 1920 hrs
Car Polish=(16hrs ÷ 100 litres)× 26,000 4160 hrs
6080 hrs
Overheads for 6,000hrs.(given) Rs
50,000
Overheads for next 80 hrs:[(Rs. 60,000- 50,000)÷ (7,000- 6,000)]× 80 =
800
Overheads for Manufacturing Dept. 50,800

c) Overheads for Primary Packing Manhours

required
Floor Polish (5 hrs÷ 100 litres) × 16,000 =
800 hrs
Car Polish (5 hrs ÷ 100 litres) × 26,000 =1300 hrs
2,100 hrs
Overheads for 2,100 hrs (Packing) 30,000
Note: As given in the question, no overheads are included in stock valuation.
Question No.12
Your company operates for 300 days a year on average. It is facing severe problem of electric
power cut in its day to day operation. The electricity supply is not available for nearly 4 hours
per day in average during total working hours of 7 hours per day for whole the year. This
situation is expected to prevail for nearly five more years. To cope with this situation, you are
considering the alternative sources of power generation, i.e. 140 KVA Generator Set and you
desire to know the cost per unit of electricity generated.
The following estimations are available:

xiv) Number of units to be generated per month is 10,000.
xv) Cost of Gen Set with installation charges is Rs.5 million. It is to be fully depreciated
within 5 years, after that period, it can be disposed off for Rs.250,000.
xvi) Regular cleaning and repair and maintenance cost per month is Rs.20,000.
xvii) The Gen Set will consume 22 Ltrs. of diesel per hour. The cost of diesel per liter is
Rs.65. Other fuel charge is Rs.65 per hour.
xviii) Two staffs are directly involved in operation and maintenance of the Gen Set, who are
paid salary at the rate of Rs.10,000 per month each.
xix) Share of administrative charges is Rs.10,000 per month.
[June 2011 – 2(a), 5 Marks]
Answer:
Calculation of the cost per unit of electricity generated
Units generated: 10000/ month

SN Particulars Cost per month Cost per unit Working Remarks
(Rs.) (Rs.)
a. Cost of diesel 143,000 14.30 (22 Ltr. x 4 hrs. x 300/ 12 days x Rs.65)
b. Other fuel charges 6,500 0.65 (Rs. 65x 4 hrs. x 300/ 12 days)
c. Repair & maintenance 20,000 2.00
d. Staff salary 20,000 2.00 (Rs.10000 x 2)
e. Depreciation charge 79,167 7.92 (Rs.5,000,000-250000/5/12)
f. Shared administrative charge 10,000 1.00
Total 278,667 27.87
Question No.13
A manufacturing company has pre-determined overhead recovery rates at 200% of the direct
wages for works expense, 10% of works cost as management expenses and 20% on cost of
production towards selling and distribution expenses. At the year-end it is found that works

overhead stand under- absorbed to the extent of 20% of direct wages, management expenses
show under-recovery of 10% of the absorbed amount and selling and distribution expenses
recovery resulted in over absorption of 30% of the absorbed amount.
Direct cost and selling price of the job X, Y and Z is given below.
Job X Job Y Job Z
Direct materials (Rs.) 50 40 30
Direct wages (Rs.) 30 25 20
Selling price (Rs.) 200 160 120
Find the profit or loss on the respective selling price both on the pre-determined cost and on
the basis of full absorption of overheads.
[June 2013 – 2(a), 10 Marks]
Answer
Statement of Cost of Production and Profit or Loss
Under Pre-determined Cost Basis
(Amount in Rs.)
Job X Job Y Job Z
Direct materials 50.00 40.00 30.00
Direct wages 30.00 25.00 20.00
Prime cost 80.00 65.00 50.00
Works expenses [200% of direct wages] 60.00 50.00 40.00
Works cost 140.00 115.00 90.00
Management expenses [10% of works cost] 14.00 11.50 9.00
Cost of production 154.00 126.50 99.00
Selling & distribution expenses [20% of cost of production] 30.80 25.30 19.80
Total costs 184.80 151.80 118.80
Profit (Balancing figure) 15.20 8.20 1.20
Selling price 200.00 160.00 120.00
Statement of Cost of Production and Profit or Loss

Under Full Absorption of Overheads Basis
(Amount in Rs.)
Job X Job Y Job Z
Direct wages 30.00 25.00 20.00
Prime cost 80.00 65.00 50.00

Works expenses [220% of direct wages] 66.00 55.00 44.00

Works cost 146.00 120.00 94.00
Management expenses [Working note 1] 15.40 12.65 9.90
Cost of production 161.40 132.65 103.90
Selling & distribution expenses [Working note 2] 21.56 17.71 13.86
Total costs 182.96 150.36 117.76
Profit (Balancing figure) 17.04 9.64 2.24
Selling price 200.00 160.00 120.00
Working notes:
1. Management expenses:
Job X Job Y Job Z
Rs. Rs. Rs.
Amount on pre-determined basis 14.00 11.50 9.00
Add: 10% for under absorption 1.40 1.15 0.90
Actual expenses 15.40 12.65 9.90
2. Selling & distribution expenses:
Job X Job Y Job Z
Rs. Rs. Rs.
Amount on pre-determined basis 30.80 25.30 19.80
Less: 30% for over absorption 9.24 7.59 5.94
Actual expenses 21.56 17.71 13.86
Question No. 14
The cost structure of an article the selling price of which is Rs. 45,000 is as follows:
Direct Material 50%
Direct Labour 20%
Overheads 30%
An increase of 15% in the cost of direct materials and of 25% in the cost of direct labour is
anticipated. These increased costs in relation to the present selling price would cause a 25%
decrease in the amount of present profit per article.
Required:
i) Prepare a statement of profit per article at present, and
ii) Calculate the revised selling price to produce the same percentage of profit to sales as before.
[June 2013 – 4(a), 5+3=8 Marks]
Answer

Let the total cost of the article be "X".

Now,
Present condition Revised condition
Direct Material 0.5x 0.575x
Direct Labour 0.2x 0.250x
Overheads 0.3x 0.300x
Total 1.0x 1.125x
Selling Price Rs. 45,000 Rs. 45,000
Profit (Rs. 45,000 – x) (Rs. 45,000 – 1.125x)
From the above exercise, following equation can be made:

(Rs. 45,000 – x) – (Rs. 45,000 – 1.125x) = 25% of (Rs. 45,000 – x)
Or, -x + 1.125x = Rs. 11,250 – 0.25x
Or, 0.375x = Rs. 11,250
Or, x = Rs. 30,000.
Statement of profit per article under present condition

Rs.
Direct Material Rs. 30,000 × 0.5 15,000
Direct Labour Rs. 30,000 × 0.2 6,000
Overheads Rs. 30,000 × 0.3 9,000
Total Cost 30,000
Profit (balancing figure) 15,000
Percentage of profit to cost [Rs. 15,000 / Rs. 30,000 × 100] 50%
Percentage of profit to selling price [Rs. 15,000 / Rs. 45,000 × 100] 33.33%
Statement of profit per article under revised condition

Rs.
Direct Material Rs. 30,000 × 0.575 17,250
Direct Labour Rs. 30,000 × 0.250 7,500
Overheads Rs. 30,000 × 0.300 9,000
Total Cost 33,750
Profit (50% of cost or 33.33% of selling price) 16,875

Question No.15
Maharjan Industries is feeling the effects of a general recession in the industry. Its budget for
the coming year is based on an output of only 500 tonnes of castings a month, which is less
than half of its capacity. The prices of castings vary with the composition of the metal and the
shape of the mould, but they average Rs. 175 a tonne. The following details are from the
monthly production cost budget at the 500 tonne level:
Particulars Core Melting and Moulding Clearing &

making pouring grinding
(Rs.) (Rs.) (Rs.) (Rs.)
Labour 10,000 16,000 6,000 4,500
Variable overhead 3,000 1,000 1,000 1,000
Fixed overhead 5,000 9,000 2,000 1,000
Total 18,000 26,000 9,000 6,500
Labour & overhead
Per direct labour hour 9.00 6.50 6.00 5.20
Operating at this level has brought the company to the brink of break-even. It is feared that if
the lack of work continues, the company may have to lay-off some of the most highly skilled
workers whom it would be difficult to get back when the volume picks up later on. No
wonder, the works Manager at his juncture, welcomes an order for 90,000 castings. To be
delivered on a regular schedule during the next six months. As the immediate concern of the
works Manager is to keep his work force together, occupied, he does not want to lose the
order and is ready to recommend a quote on a no profit on loss basis. Materials required
would cost Re. 1 per casting after deducting scrap credits. The direct labour hours per casting
required for each department would be:
Core making 0.09

Melting & pouring 0.15
Moulding 0.06
Cleaning & grinding 0.06
Variable overhead would bear a normal relationship to labour cost in the melting and pouring
department and in the moulding department. In core making, cleaning and grinding however,
the extra labour requirements would not be accompanied by proportionate increases in
variable overhead. Variable overhead would increase by Rs. 1.20 for every additional labour
hour in core making and by 30 paise for every additional labour hour in cleaning and
grinding. Standard wage rates are in operation in each department and no labour variances are
anticipated. To handle an order as large as this, certain increases in fixed factory overhead
would be necessary amounting to Rs. 1,000 a month for all departments put together.
Production for this order would be spread evenly over the six months period.
Required:

a) Prepare a revised monthly labour and overhead cost budget, reflecting the addition of
this order.
b) Determine the lowest price at which quotation can be given for 90,000 casting without
incurring a loss. [July 2015 – 1, 20 Marks]
Answer
a)
Maharjan Industries
Revised monthly Labour & overhead cost budget
(After the acceptance of an order for 90,000 castings)
Core Melting Moulding Clearing & Total

Making and grinding
pouring
Rs. Rs. Rs. Rs.
Labour 16,750 25,000 9,600 7,740 59,090
Variable overhead 4,620 1,563 1,600 1,270 9,053
Fixed overhead 5,000 9,000 2,000 1,000 17,000
Total 26,370 35,563 13,200 10,010 85,143
Incremental fixed factory cost 1,000
Total labour and overhead cost 86,143
Working Notes:
(i) Current labour hours per month in each department are obtained by dividing the total
labour and overheads by the figure of labour and overheads per direct labour hour as
follows:
Core Making Melting and pouring Moulding Clearing & grinding
Rs. 18,000/9 hrs Rs. 26,000/6.50hrs Rs.9000/6hrs Rs. 6,500/5.2hrs

= 2,000 hrs =4,000 hrs =1,500 hrs =1,250hrs
(ii) 90,000 castings spread over 6 months give a production of 15,000 castings per month.
Incremental labour hours per month are got by multiplying the 15,000 castings by direct
labour hours per casting as under:
Rs. Rs. 15,000×0.15 Rs. 15,000×0.06 Rs. 15,000×0.09

15,000×0.09 = = 2,250 hrs = 900 hrs = 900 hrs
1,350 hrs

(iii) Wages rate per hour is found by dividing labour cost by direct labour hours as under:
Rs. 10,000/2,000hrs Rs. 16,000/4,000hrs Rs.6,000/1,500 hrs Rs. 4,500/1,250 hrs

= Rs.5 = Rs.4 = Rs.4 = Rs.3.60
(iv) Revised monthly labour cost:

In Core making: Rs. 10,000 + (1,350×Rs. 5) = Rs. 16,750
In Melting & pouring: Rs. 16,000 + (2,250×Rs. 4) = Rs. 25,000
In Moulding: Rs. 6,000 + (900×Rs. 4) = Rs. 9,600
In cleaning & grinding: Rs. 4,500 + (900×Rs. 3.60) = Rs. 7,740
(v) Revised monthly variable overhead cost:
In core making,
Existing charges Rs. 3,000 + Rs. 1.20×1,350 (incremental hours)
= Rs. 3,000 + Rs. 1,620
= Rs. 4,620
In the Melting and pouring department,

It is 1/16 of labour cost. Hence revised variable overhead cost.
= Rs. 25,000×1/16
= Rs. 1,563
In moulding department
It is 1/6 of labour cost. Hence revised variable overhead
cost =9600×1/6
=1600
In clearing & grinding Department,
Existing charges Rs. 1,000 plus Rs. 0.30×900 (incremental hours)
= Rs. 1,000+ Rs. 270
= Rs. 1,270
(b) Determination of the lowest price at which quotation can be given for 90,000
castings without incurring a loss:
Rs. Rs.
Materials cost (15,000 casting per month @ Re. 1 each) 15,000

Labour and overhead cost:

Revised budget (above) 86,143
Less: Current budget (Rs.18,000 +Rs. 26,000 +Rs. 9,000+Rs. 6,500) 59,500 26,643
Total incremental cost for 15,000 castings 41,643
Lowest price at which quotation can be given for 90,000 castings:

Rs.41,643 × 90,000 casting
15,000 hrs
= Rs. 249,858
Question No.16
From the following particulars make out a monthly cost sheet or production account of ABC
manufacturing company showing cost per ton and percentage of cost used in each item of
output:
January 2015:
Tons Rate Per ton (Rs.) Amount (Rs.)
Coal used 5,000 12.50
Coke produced 3,500 25.00
Tar Produced 210 50.00
Sulphate of ammonia produced 49 150.00
Benzolproduced 48 65.00
Raw materials used 8,750
Wages paid 3,585
Repairs and renewals 2,815
General charges 4,050
[June 2016 – 4(b), 5 Marks]
Answer
1. Calculation of Joint Cost:
Particulars Amount
Coal used 62,500
(5,000x12.5)
Raw Material used 8,750
Wages Paid 3,585
Repair & Renewals 2,815
General Charges 4,050
81,700
2. Statement showing Segregation of Joint Cost

(Sales Value Method)
Joint Product Selling Price/ton Qty (Ton) Sales Value
Joint Cost

(a) (b) (a x b)
Coke 25 3,500 87,500
65,905.3
Tar 50 210 10,500
7,908.7
Sulphate of Amonia 150 49 7,350 5,536
Benzol 65 48 3,120 2,350
Total 1,08,470
81,700
3. Statement showing Cost Sheet:
Product Amt (a) Qty (b) Cost/ton(a/b)
Percentage of Cost
Coke 65,905.3 3,500 18.63
80.67%
Tar 7,908.7 210 37.66
9.68%
Sulphate of Amonia 5,536 49 112.98
6.78%
Benzol 2,350 48 48.96
2.88% 81,700
100%
Note:
Alternative Physical Output Method can be used for segregation of
joint cost.
Question No.17
The following information is related to the Himalayan Coffee House located at City Centre,
Kathmandu:
No. of coffee cups sold in January 2015 Average cost for making a cup of
coffee
1,000 5.50
1,200 5.00
You have just been appointed as an accountant of the Himalayan Coffee House. The Coffee
House sold 1500 cups of coffee in February, 2015 at the average selling price of Rs.5.00 per
cup. One of the board member said that there is a loss in February month. Do you agree?
[June 2016 – 4(c), 5 Marks]
Answer
Total Cost at 1,000 cups = No. of cups x Average Cost
= 1,000 x 5.50 = Rs. 5,500
Total Cost at 1,200 cups = No. of cups x Average Cost
= 1,200 x 5.00 = Rs. 6,000
Variable Cost per unit = Difference in Cost
Difference in Units

= 6,000-5,500/ 1,200-1,000
=500/200 = Rs. 2.50 per unit
Fixed Cost = Total Cost- Variable cost per unit x No. of Cups
= 6,000 - ( 2.50x 1,200) = 6,000-3,000 = Rs. 3,000
Total Cost at 1,500 coffee cups = Fixed Cost + Variable cost
= 3,000+(1500 x 2.5)
= Rs. 6,750
Sales Value of 1,500 coffee cups = 1500 x 5 = Rs 7,500
Profit on sales of 1500 cups of Coffee = 7,500- 6,750 = Rs. 750
Conclusion: I do not agree with the board member since there is a profit of Rs. 750.
Question No.18
The Margos company has just completed operation for the year 2017. The company’s
Assistant Accountant(who is very inexperienced) prepared the following Profit and Loss
Account for the years activities:
Rs.
Sales 32,00,000
Operating Expenses: Rs.
Insurance 40,000
Gas Electricity and water 1,00,000
Direct Labour Cost 6,00,000
Indirect Labour Cost 1,20,000
Depreciation of Factory Equipment 1,60,000
Raw Materials purchased during the year 12,00,000
Rent 4,00,000
Selling and Admn. Overheads 3,20,000
29,40,000
Net Profit 2,60,000
You have been asked to assist the company in preparing correct Profit & Loss Account for
the year 2017. The following additional information is available:
1) The company is a manufacturing firm that produces a product for sale to outside
customers.
2) 80 percent of the rent paid applies to factory operation and the remainder to Selling
and Administration activities.
3) No raw materials were on hand on 1st January. However, raw material of the value of
Rs 1,50,000 purchased during 2017 were still on hand on 31st December. The remainder was
used in production during the year.
4) 70 percent of the Insurance and 90% of the Gas Electricity and Water paid apply to
factory operations the remainder apply to selling and Administration activities.
5) Work in Progress and finished goods inventories were

1st January 31st December

Work in progress Rs. 4,20,000 Rs. 4,80,000
Finished goods Rs. 5,40,000 Rs. 4,00,000
Required:
i) A statement of cost of goods manufactured in 2017, and
ii) A corrected Profit & loss Account for the year ended 31st December, 2017.
[June 2018 – 2(a), 10 Marks]
Answer
b) Statement of Cost of Goods Manufactured in 2017.
Direct Material consumed :Purchased in Rs .12,00,000
Less: Closing Stock 1,50,000 Rs 10,50,000
Direct Labour 6,00,000
Manufacturing Overhead:
Indirect labour 1,20,000
Gas . Electricity and Water(90% of Rs. 1,00,000) 90,000
Insurance(70% of Rs. 40,000) 28,000
Depreciation 1,60,000
Rent(80% of Rs. 4,00,000) 3,20,000 7,18,000
23,68,000
Add: Opening Work –in-progress 4,20,000
27,88,000
Less: Closing Work –in – progress 4,80,000
Cost of Goods manufactured 23,08,000
(b) Corrected Profit & Loss Account
for the year ended December 31, 2017
Rs Rs
Sales 32,00,000
Less: Cost of Sales:
Cost of goods manufacture (as per ‘a’) 23,08,000
Add: Opening stock of finished goods 5,40,000
28,48,000
Less: Closing stock of finished goods 4,00,000
Cost of goods sold 24,48,000
Add: Selling Adm:
Selling & Admn. Overhead 3,20,000
Rent (20% of Rs. 4,00,000) 80,000
Insurance (30% of Rs. 40,000) 12,000
Gas.Electricity & Wate 10% of Rs. 1,00,000) 10,000 4,22,000
Cost sales 28,70,000
Profit 3,30,000

Question No.19
Following costs were incurred in producing 800 MT of M.S. Rods:
Amount ( Rs.)
Materials 280,000
Labor 100,000
Processing Charges 100,000
Total cost 480,000
Of the total output, 10% was defective and had to be sold after a discount of 10% of the
normal price. The scrap arising out of the production realized a sum of Rs. 8,760. The
sale price is calculated to yield 15% profit on sales. You are required to find out the normal
price as well as the discounted price of per MT of M.S. Rods.
[June 2019 – 4(a), 5 Marks]
Answer:
Cost of Production of M.S. RODS.

Materials Rs. 280,000
Labor 100,000
Processing Charges 100,000
Total cost 480,000
Less: Sale value of scrap materials 8,760
Net cost of Production 471,240
Profit @ 15% of sales or 15/85 of cost 83,160
Total Sales Value 554,400
Equivalent Good Production MT 792
Price of good production=554400/792 =Rs 700
Discounted price of Defective Production (Rs. 700 - 70) Rs. 630
Working Notes
M.T.
Equivalent unit of sales 800
Less: Defective production @ 10% 80
Total production ( good only) 720
Add: Equivalent of defective production @ 90% of 80 72
Equivalent Good Production 792

Question No.20
From the following figures, calculate cost of production and profit for the month of March
2019.
Amount (Rs.) Amount (Rs.)

Stock on 1st March, 2019 Purchase of raw 2,857,000
materials
Raw materials 606,000 Sale of finished goods 13,400,000
Finished goods 359,000 Direct wages 3,750,000
Stock on 31st March, 2019 Factory expenses 2,125,000
Raw materials 750,000 Office and 1,034,000
administration expenses
Finished goods 309,000 Selling and distribution 750,000
expenses
Work-in-process: Sale of scrap 26,000
On 1st March, 2019 1,256,000
On 31st March, 2019 1,422,000
[June 2019 – 4(c), 5 Marks]
Answer
Calculation of cost of production and profit for the month ended March, 2019
Materials consumed
-Operating stock 6,06,000
-Add: Purchases 28,57,000
34,63,000
-Less: Closing stock (7,50,000) 27,13,000
Prime cost 64,63,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Factory cost 84,22,000
Less: Sale of scrap (26,000)
Cost of Production 83,96,000
Add: Opening stock of finished goods 3,59,000
Less: Closing stock of finished goods (3,09,000)

Cost of goods sold 84,46,000

Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
Cost of sales 1,02,30,000
Profit (balancing figure) 31,70,000
Sales 1,34,00,000

CHAPTER 11:
INTEGRATED AND NON-INTEGRATED ACCOUNTING SYSTEM

Question No. 1
(a) Cost accounting and financial accounting
[December 2006 – 5(iv),5 Marks] [December 2012 – 5(a)(ii), 5 Marks]
Answer
Cost accounting is branch of accounting, which has developed because of the limitations
of Financial Accounting from the point of view of management control and internal
reporting. Financial accounting is wider in scope and cost accounting is a sub set of
financial accounting.
Cost accounting with the aid of budgeting, standard costing and marginal costing has
filled the limitation of financial accounting with respect to forecasting, planning, decision
making, controlling and assessment.
Financial accounting portrays the overall picture of the results or activities carried on by
an enterprise during a period and its financial position at the end of the year. Cost
accounting relates to recording of all income and expenditures and the preparation of
periodical statements and reports with the object of ascertaining and controlling costs.
Alternative Answer:
S.No Basis of differencesFinancial Accounting Cost accounting
1 Purposes To prepare P&L account and To provide details cost
Balance sheet for presentation information to management i.e.,
to shareholders and other internal user
external users
2 Statutory This is mandatory under It is voluntary except in
requirement companies Act, income tax act specified industries
etc.
3 Cost and profit It reveals overall profit /loss It reveals cost and profit or loss
analysis and cost. of each product, department etc.
4 Control aspects It lays emphasis on recording It lays emphasis on cost control
of transactions
5 Periodicity P&L account and balance Cost statements are regularly
sheet reported annually and frequently prepared at short
intervals and presented to
management
6 Past and future cost It is concerned with past It is concerned with past and
records future costs.
Question No.2
Write short notes on the following
(a) Reasons for including interest and financial charges in cost accounting.
[December 2006 – 6(iv), 4 Marks] [December 2007 – 6(c), 4 Marks]

Answer
The question of whether manual labour should be replaced with capital intensive machine
cannot be correctly decided without taking the interest factor into consideration.
The comparison of operations, different processes etc. without due consideration of the
interest factor may lead to misleading results. This is particularly true in case of stock
held for maturing such as timber, liquor, which cost more on account of rent and interest.
Wages are reward for labour and interest is reward for capital. True profit cannot be
ascertained without deducting interest expenses.
The inclusion of interest is of particular importance where articles of different values are
produced and capital invested in each case varies considerably. Due consideration to the
interest charge is absolutely necessary while quoting prices, otherwise prices quoted may
be so low as to leave little margin on payment of interest on capital borrowed.
While submitting tenders for cost plus contracts etc. interest must be taken into account.
In inventory control interest is an important item to be considered. Where large stocks are
kept the advantage of one time purchase is offset by increase in interest charges.
Alternative Answer:
Organizations pay interest on capital borrowed in the form of loan and debentures. There
is debate on whether or not to include interest on capital in cost accounts and unanimous
view on the issue is not forthcoming. The main point of contention on this issue is
regarding the inclusion of interest not actually paid in the costs. Whether interest on
capital should be included as part of the costs depends very much on the circumstance of
the case and also on the policy of the management.
The arguments put forward for and against the inclusion of interest in costs are briefly
explained below:
Arguments for inclusion of interest on capital in the Costs:
a. From the economists view point, interest is a reward on capital in the same way
wages are considered reward of labour. Since wages are included in the costs,
interest should also be treated similarly.
b. Different products, operations and processes utilize different capital facilities. For
instance, some operations may be capital intensive whereas others may be labour
intensive. Comparison of costs and assessment of true level of profit can be made
only by including interest in the costs.
c. In the evaluation of alternative proposals involving decision to buy or
manufacture, purchase or hire of equipment, inclusion of interest on cost is a must.
d. Construction contracts have different length of time for completion. The effect of
time element can be brought about correctly by the inclusion of interest in costs.
e. Effect of retaining large inventory is influenced can be more accurately assessed
by including interest in costs.

Arguments against inclusion of interest on capital in the Costs:

a. From the accountant’s perspective, investment of capital is rewarded through profit
and there is no need to charge interest to costs.
b. Cost accounts should take into consideration the actual expenditure only.
c. Interest should be met out of profits since it is an item of pure finance.
d. There is difficulty in determining the computed rate of interest and capital
employed. These will have to be frequently computed and adjusted from time to
time. This introduces an element of approximation in costs and brings unnecessary
complications.
e. Interest has the effect of inflating the values of work-in-progress and finished stock.
When it is not paid, it is bound to distort the true profits by inclusion of unrealized
income.
(b) Name the various reports that may be provided by the Cost Accounting Department
of a big manufacturing company for the use of its executives. [June 2010 – 6(a),
4Marks]
Answer
Various reports that may be provided by the Cost Accounting Department of a big
manufacturing Company for the use of its executives are as under:
a. Cost Sheets
b. Statements of material consumption
c. Statements of labour utilization
d. Overheads incurred compared with budgets
e. Sales effected compared with budgets
f. Reconciliation of actual profit with estimated profit
g. The total cost of inventory carried
h. The total cost of abnormally spoiled work in factory and abnormal losses in
stores
i. Labour turnover statements
j. Expenses incurred on research and development compared with budgeted
amounts.
(c) Main objectives of cost accounting [June 2010 – 6(b), 4Marks]

The Main objectives of Cost Accounting are
a. Ascertainment of cost.
b. Determination of selling price.
c. Cost control and cost reduction.
d. Ascertaining the project of each activity.
e. Assisting management in decision-making.
f. Determination of break-even point.

(d) Financial expenses which are not included in cost. [June 2010 – 6(d), 4Marks]
Answer
Financial expenses which are not included in cost accounting are as follows:
a. Interest on debentures and deposit
b. Gratuity
c. Pension
d. Bonus of Employee,
e. Income Tax,
f. Preliminary Expenses
g. Discount on issue of Share
h. Underwriting Commissions
(e) General Ledger Adjustment Account
[December 2010 – 6(c), 5 Marks] [June 2011 – 6(b), 4 Marks]

Answer
General Ledger Adjustment Account
It is the account maintained in the cost ledger. Such accounts are kept to record all
records of income and expenditure. It performs the function of completing double entry in
the cost accounts. All accounts pertaining to fixed assets and accounts related to outsiders
are recorded in these accounts. It does not include personal accounts which are recorded
only in financial accounts.
(f) Functions of management accounting system [June 2011 – 6(a), 2.5 Marks]
Answer
Management accounting systems provide information to assist managers in their planning
and control activities. Management accounting activities include collecting, classifying,
processing, analyzing, and reporting information to managers. It is so designed that its
information help decision making within the firm. Its scope include information on sales
backlogs, unit quantities, prices, demands on capacity resources, and extensive
performance measures based on physical or non financial measures. The challenge is to
develop management accounting practices that support the basic managerial tasks of
organizing, planning, and controlling operations to achieve excellence throughout the
organization.
(g) Advantages of Cost Accounting System [December 2011 – 6(e), 4 Marks]
Answer
Important advantages of cost accounting systems may be listed as below:
a. A good Cost Accounting System helps to identify unprofitable activities, losses or
inefficiencies in any form.

b. Cost Accounting is quite useful for price fixation. It serves as a guide to test the
adequacy of selling prices. The price determined may be useful for preparing
estimates or filling tenders.
c. The use of cost accounting technique viz., variance analysis, points out the deviations
from the predetermined level and thus demands suitable action to eliminate such
deviations in future.
d. The cost of idle capacity can be easily worked out, when a concern is not working to
full capacity.
e. The marginal cost has linear relationship with production volume and hence in
formulating and solving “Linear Programming Problems”, marginal cost is useful.
(h) Cost accounting system [December 2016 – 6(a), 2.5 Marks]

Answer
A cost accounting system is a system that accumulates costs, assigns them to cost
objects, that is products, jobs, process, etc. and reports cost information. In addition to
this, a proper cost accounting system assist management in the planning and control of
business operation, in analyzing product profitability, and in accomplishing business
objectives through optimum utilization of available resources.
(i) Stock control account [December 2017 – 6(d), 2.5 Marks]

Answer
The account is prepared for each of the following cost items.
I. Raw Material: This account has opening stock and purchases on debit side and material
issues on credit side.
II.WIP: This account is debited with opening stock and factory overhead and credited
with cost of goods finished .The closing stock, if any, will be carried forward to the next
year.
III. Finished stock: This account is known as the finished goods account also. It is debited
with goods finished and credited with the cost of sales.
The above stock accounts are usually used in place of the stock and purchase account
which is maintained in the financial book.
Question No. 3
Explain the need for reconciliation between cost and financial accounts.
[June 2002 – 4(a), 4 Marks]
Answer
i. Items included in financial accounts but not in cost accounts
(a) Appropriation of profits
(b) Matters of pure finance
ii. Items included in cost accounts but not in financial accounts e.g. national
rent
iii. Under or over absorption of overheads.

iv. Different methods of valuation of stocks.
Question No. 4
What are the prerequisites of integrated accounting system.
[June 2002 – 7(b), 3 Marks] [June 2016 – 6(b), 2.5 Marks]
Answer
Prerequisites of integrated accounting:
a. The management should decide about the extent of integration - i.e. whether total
integration or upto prime cost stage.
b. A suitable coding system should be developed.
c. An agreed routine for treatment of say provisions, accounts etc. to be decided
upon.
d. Perfect coordination should exit between staff responsible for financial and cost
accounts.
Question No.5
Discuss briefly about the principle accounts normally maintained under Non-Integrated
Accounting System. Also differentiate integrated accounting system from Non-
Integrated Accounting System. [December 2003 –
5(b), 6 Marks]
Answer
These are the principle accounts normally maintained under non-integrated accounting
system.
i. Cost Ledger Control/General Ledger Adjustment A/c
ii. Store Ledger Control A/c
iii. W.I.P. Control A/c
iv. Finished Goods Control A/c
v. Wage Control A/c
vi. Factory Overheads Control A/c
vii. Administration Overheads Control A/c
viii. Selling & Distribution Overheads Control A/c
ix. Cost of Sales A/c
x. Costing Profit & Loss A/c
xi. Overhead Adjustment A/c
Difference between Integrated & Non-integrated Accounting System :
i. In case of Integrated Accounting System. Single set at books of account is

maintained but in case of non-integrated accounting system separate set of
books is maintained for costing and financial records.

ii. In case of integrated accounting system, there is no need of reconciling

costing profit and financial profit but in case of non-integrated accounting
system, reconciliation is most.
Question No.6
Control Accounts [June 2004 – 7(c), 4
Marks]
Answer
These accounts are maintained for the purpose of exercising control over these subsidiary
ledgers maintained under cost account department i.e. in accordance with non-integrated
accounting system and also to complete double entry in cost accounts. They summarise
masses of detailed information contained in the subsidiary ledgers and thus provide immense
help to management in policy formulation. They also facilitate reconciliation of cost and
financial accounts.
The important cost control accounts are as follows:
1. Store Ledger Control A/c
2. W-I-P Ledger Control A/c
3. Finished Goods Ledger Control A/c
4. General Ledger Adjustment A/c
Question No.7
What is Integrated Accounting System? List out advantages of this system.
[December 2005 – 2(a), 4Marks] [June 2006 – 5(c), 4 Marks]
Answer
Integrated Accounts is the name given to a system of accounting, whereby cost and financial
accounts are kept in the same set of books. There will be no separate sets of books for
costing and financial records. Integrated accounts provide or meet out fully the information
requirement for costing as well as for financial accounts. For costing, it provide information
useful for ascertaining the cost of each product, job, process, operation of any other
identifiable activity and for carrying necessary analysis. Integrated accounts provide
relevant information, which is necessary for preparing profit and loss account and the
balance sheets as per the requirements of law and also helps in exercising effective control
over the liabilities and assets of its business.
The main advantages of integrated accounting system are as follows :-

a. The question of reconciling costing profit and financial project does not arise, as there
is one figure of profit only.
b. Due to use of one set of books, there is a significant extends of saving in efforts made.
c. No delay is caused in obtaining information as it is provided from books of original
entry.
d. It is economical as it is based on the concept of “Centralization of Accounting
Function”

Question No. 8
Explain with reason for including the interest on capital in cost account.
[June 2006 – 6(b), 4 Marks]
Answer
The following arguments are generally advanced in favor of interest to be included in
overhead expenses :
i. Computation of total cost is impossible unless interest is taken into account. Interest
is an element of cost and therefore, should be included in cost. This is specially true
in business where raw materials in different stages can be used. Thus, a timber
merchant, if he buys standing trees and seasons the timber himself, would incur a
large amount of costs as interest. Another merchant who buys his timber already
seasoned would automatically have to pay a higher price : obviously, this price
includes interest.
ii. Interest is the cost of be paid for the use of capital; capital is also a factor of
production just as labour. Thus, if wages are included in cost of production, why not
interest ?
iii. If interest is not included in cost calculation, a number of managerial decisions may
be taken question of interest assumes importance, since, if interest is not included,
the cost accountant may conclude that machinery is cheaper.
iv. Inclusion of interest also allows comparison of profit on different jobs.
v. In inventory control, interest is an important item to be considered. Where large
stocks are kept, the advantage of one time purchase is offset by increase in interest
charges.
vi. While submitting tenders for cost plus contracts, etc., interest must be taken into
account.
Question No.9
Discuss the essentials of a good Cost Accounting System. [June 2008 – 6(c), 5 Marks]
Answer
a. It should be tailor-made, practical, simple and capable of meeting the requirements
of a business concern.
b.The data to be used by the Cost Accounting System should be accurate; otherwise it
may distort the output of the system.
c. Necessary cooperation and participation of executives from various departments of
the concern is essential for developing a good system of cost accounting.
d.The cost of installing and operating the system should justify the results.
e. A carefully phased program should be prepared by using network analysis for the
introduction of the system.
f. Management should have faith in the costing system and should also provide a helping
hand for its development and success.

Question No.10
Reasons for disagreement of profits as per Cost Accounting and Financial Accounting.
[June 2009 – 6(b), 5 Marks]
Answer
Reasons for disagreement of profits as per Cost Accounting and Financial Accounting are
because of the following:
Items included in the financial accounts but not in Cost Accounts
a. Appropriation of profits, Transfer to General Reserve, Dividend paid/ received;
b. Income tax and other corporate charges;
c. Interest Incomes, Matters of pure finance;
d. Interest received on bank deposits/investments; amd
e. Written off expenditures , Transfer fees , Profit / losses on capital assets
Items included in Cost Accounting
f. Opportunity cost of building owned.
g. Interest on capital employed in production
h. Salary of proprietor.
Question No.11
Explain the advantages and disadvantages of integral accounting. [December 2009 –
4(b), 5 Marks]
Answer
Integral accounting implies a system of accounting where both cost and financial accounts
are maintained in one set of books. The system is designed in a way so as to provide full
information required for costing as well as financial purposes. In other words, the system
provides information for ascertaining the cost of each product, job or process besides making
possible ascertainment of marginal cost, variances, abnormal losses and gains, etc. It also
makes possible fur the management to have accounts to see that the business maintains full
control over its assets and liabilities and prepares the profit and loss account and the balance
sheet as per requirement of law.
Advantages:
The main advantages which accrue on account of adoption of this system are as follows:
a. Duplication of works and keeping unnecessary accounts such as cost ledger control
account and general ledger adjustment account, purchase account, as well as stores
ledger control account is eliminated. This saves both time and expenditure.
b. The system ensures inclusion of all legitimate expenditure in cost accounts and serves
as an automatic check on the correctness of the cost data. Correct and reliable cost data
creates confidence in the management.
c. The need for reconciling the profits as shown by cost and financial books does not at all
arise as there will be one figure for profit or loss.

d. The system ensures better coordination between cost and financial staff. The fact that
cost accounting and financial accounting are complementary to each other is better
appreciated.
e. The system is particularly helpful under mechanized system of accounting.
Disadvantages:
The system suffers from the following disadvantages:
a. The system causes delay in providing information. Since the system is expected to serve
both the costing and the financial requirement, it gets complicated.
b. The need for preparing a reconciliation statement may still be felt since generally 100%
integration is not possible.
c. The system does not suit large concerns which require detailed cost and financial
information on a continuing basis.
Question No.12
What is integral accounting? Briefly describe its main features. [June 2010 – 3(b),
5 Marks]
Answer
Under integral accounting, financial and costing transactions are recorded in one self-
contained ledger called integral ledger. When integral accounting is used, there will be no
need for reconciliation of costing and financial results.
Features of Integral Accounting
The principal features of integral accounting are as follows:
a. Records are maintained to undertake complete analysis of cost and sales.
b. Complete details regarding all receipts and payments are kept.
c. Records to show all the details of assets and liabilities are kept. This system does not
use a notional account to represent all impersonal accounts.
In non-integral system, a cost control account or general ledger adjustment account is used in
cost ledger. In integral accounting system, this adjustment account is not used. Instead,
detailed accounts for assets and liabilities are maintained.
In integral system, all accounts necessary for the classification of cost is used. The use of
following accounts replaces the general ledger adjustment account as used in non-integral
accounting system:
a. Bank account
b. Debtors account
c. Creditors account
d. Provision for depreciation account
e. Discount account
f. Fixed assets account
g. Share Capital account, etc.

Question No.13
Explain briefly the factors to be considered before establishing an integrated cost
accounting system. [December 2011 – 4(c), 4 Marks]
Answer
The following factors should be considered before establishing an integrated cost accounting
system:
a. Degree of integration: The degree of integration should be determined. Some
business firms may integrate up to the stage of prime cost or factory cost. On the
other hand, many undertakings integrate the whole of the records.
b. Control accounts: In place of classifying expenditure according to its nature,
control accounts may be prepared for each of the elements of cost, such as:
Material Control Account
Direct Labor Control Account
Factory Overhead Control Account
Administrative Overhead Control Account
Selling and Distribution Overhead Control Account
Some of the above control accounts should be separated into fixed and variable
depending on the circumstances.
c. Cost accumulation purposes: Full details about the cost data are provided in the
cost accounting department so as achieve the following objectives;
i. To provide the necessary costing data
ii. To form the basis of journal entries so that the control accounts can be
cleared to suitable revenue accounts resulting into a cost of sales
accounts
d. Provision for accrued expenses, prepayments and stocks should be dealt with by
transfers to suitable suspense accounts, so that the balance remaining in each
control account represents the charges for the period.
Question No.14
Express your views:
Interest should not be included in cost accounts since it is not an item of cost and would
vary with different methods of financing. [July 2015 – 5(b), 5 Marks]
Answer
Treatment of interest as part of cost has always been controversial. However, the arguments
for not including interest as part of cost is as follows:
Payment of interest depends entirely on the financing policies and financing pattern. A firm
working with proprietor’s capital only will have no interest to pay whereas a firm working
with borrowed capital will have to pay a large amount of interest. In reality, whether a firm
raises a certain sum of money from the proprietor or borrows from the outside does not make
difference as far as production efficiencies are concerned. Hence, the cost where production
is being made with proprietor’s fund will have favorable results resulting wrong conclusions.
Even if notional interest on proprietor’s capital is included in the cost of production, this

would result in as adding profit component since the closing stock will be valued at a higher
figure.
Another difficulty is to work out the amount of capital on which interest is to be worked out.
While a fixed capital is readily ascertainable, the working capital keeps on changing and may
be used by different departments or projects not related to production at different points of
time.
Though it is not practical to include interest in cost of production, excluding altogether may lead to wrong m
included as part of cost where interest is material.
Question No.15
There is generally a divergence between financial profits and cost profits. Explain this
statement and give reasons for such divergence. [June 2018 – 5(c), 4 Marks]
Answer
Financial accounts are concerned with the ascertainment of profit or loss for the whole
operation of the organization or a relatively long period usually a year, without being too
much concerned with cost computation, whereas cost accounts are provided for ascertaining
the profit or loss made by manufacturing or product division/products for cost comparison
and preparation and use of variety of cost statements. As these two sets of accounts are
maintained in different forms or follow different approach, it is quite natural that their results
may also differ. Invariably, the profit and loss revealed by the financial accounts may not
agree with the profit or loss as per cost accounts.
Reasons for Disagreement

Disagreements between financial profits and cost profits may arise due to the following
reasons:
a. Items shown only in financial accounts: There are certain items which are included in
financial accounts but find no place in cost accounts. These may be–
i. Purely financial charges: e.g., loss on sale of fixed assets, discount on issue of
shares, damages payable, etc.
ii. Purely financial income: e.g. profit on sale of fixed assets, interest received,
transfer fees, etc.
iii. Appropriation of profits: e.g. dividends, income-tax, transfer to reserves, etc.
b. Items included in cost accounts only: There are certain items which are included in cost
accounts but not in financial accounts, e.g. notional interest on capital, notional rent on
premises owned, etc.
c. Over or under absorption of overheads : In cost accounts overheads are charged to
production on pre-determined rates while financial accounts show the actual amount of
overheads. If the overheads charged are not equal to the amount of overheads incurred,
the difference gives rise to over or under absorption causing difference in profits.

d. Different bases of stock valuation: In financial books, stocks are valued at cost or market
price whichever is less. However, in cost accounts stock of materials may be valued on
FIFO, LIFO, average method, etc. and work-in-progress may be valued at prime cost or
works cost, thus, there is difference in profits.
e. Different methods of charging depreciation: The amount of depreciation charged may be
different in two sets of books either because of the different methods of calculating
depreciation or the rates adopted, hence the profits may be different.
f. Abnormal gains and losses: Abnormal gains and losses may completely be excluded from
cost accounts or may be taken to costing profit and loss account. If it is excluded, costing
profit/loss will differ from financial profit/loss and adjustment will be required.
Question No.16
You have been asked to install a costing system in a manufacturing company. What
practical difficulties you expect and how would you overcome those difficulties?
[June 2019 – 5(c), 4 Marks]
Answer
The practical difficulties that arise while installing a costing system in a manufacturing
company are as follows:
a. Lack of top management support: Installation of a costing system does not receive the
adequate support of top management. They consider it as interference in their work.
They believe that such a system will involve additional paperwork. They also have a
misconception in their minds that the system is meant for keeping a check on their
activities.
b. Resistance from cost accounting departmental staff: The staff resists because of fear of
losing their jobs and importance, after the implementation of the new system.
c. Non co-operation from user departments: The foremen, supervisor and other staff
members may not co-operate in providing requisite data, as this would not only add to
their responsibilities but will also increase paper work of the entire team as well.
d. Shortage of trained staff: Since cost accounting system’s installation involves specialized
work, there may be a shortage of trained staff.
To overcome these practical difficulties, necessary steps required are:
a. To sell the idea to top management – To convince them of the utility of the system.
b. Resistance and non-co-operation can be overcome by behavioral approach. To deal
with the staff concerned effectively.
c. Proper training should be given to the staff at each level
d. Regular meetings should be held with the cost accounting staff, user departments,
staff and top management to clarify their doubts
Numerical Questions
Question No. 17
From the following information, write-up Control accounts in the General Ledger and
prepare the Trial Balance:

Rs.
Opening balances: Share Capital 5,00,000
Reserves 3,00,000
Plant & Machinery 5,00,000
Sundry Creditors 3,00,000
Sundry Debtors 3,00,000
Bank 50,000
Cash 50,000
Stock 2,00,000
Transactions during the year were as follows:

Rs.
Purchase of Stores 12,00,000
Stores issued to Production 12,00,000
Stores in hand 1,00,000
Wages (Direct) incurred 7,00,000
Direct wages charged to production 6,50,000
Manufacturing expenses incurred 4,00,000
Manufacturing expenses charged to production 3,75,000
Selling and distribution expenses 2,00,000
Finished Stock production (at cost) 20,00,000
Sales 30,00,000
Closing Stock 1,00,000
Payment to Creditors 10,00,000
Receipts from Debtors 20,00,000
Cost and Financial records are integrated and books are kept accordingly.
[June 2001 – 6(b), 12 Marks]
Answer
In General Ledger
Store Ledger Control Account
Particular Amount Rs. Particular Amount Rs.
To Balance b/d 2,00,000 By Work-in-progress A/C 12,00,000
To Sundry Creditors 12,00,000 By Inventory Adjustment 1,00,000
A/C
By Balance c/d 1,00,000
Total 14,00,000 Total 14,00,000

Wages Control Account

To Bank 7,00,000 By Work-in-progress A/C 6,50,000
By Balance c/d 50,000
Total 7,00,000 Total 7,00,000
Work-in-Progress Account
To Store Ledger 12,00,000 By Finished Stock Control 20,00,000
Control
To Wages Control A/C 6,50,000 By Balance c/d 2,25,000
To Overhead Control 3,75,000
Overhead Control Account

To Bank 4,00,000 By Work-in-progress A/C 3,75,000
Total 4,00,000 Total 4,00,000
Cost of Sales Account

Particular Amount Particular Amount Rs.
Rs.
To Finished Stock A/C 20,00,000 By Balance c/d 22,00,000
To Selling & 2,00,000
Distribution
Total 22,00,000 Total 22,00,000
Sundry Debtors Account

To Balance b/d 3,00,000 By Cash 20,00,000
To Sales A/C 30,00,000 By Balance c/d 13,00,000
Total 33,00,000 Total 33,00,000
Sundry Creditors account

To Cash 10,00,000 By Balance b/d 3,00,000
To Balance c/d 5,00,000 By Stores Ledger Control 12,00,000
A/c
Total 15,00,000 Total 15,00,000

Bank Account
To Balance b/d 50,000 By Sundry Creditors 10,00,000
To Sundry Debtors 20,00,000 By Wages Control A/c 7,00,000
To Balance c/d 2,50,000 By Overhead Control A/c 4,00,000
By Selling & Distribution 2,00,000
A/c
Total 23,00,000 Total 23,00,000
Trial Balance
Rs. Rs.
Share Capital 5,00,000
Reserves 3,00,000
Plant 5,00,000
Bank 2,50,000
Cash 50,000
Stores Ledger Control Account 1,00,000
Wages Control Account 50,000
WIP Control A/C 2,25,000
Overhead Control A/C 25,000
Inventory Adjustment A/C 1,00,000
Cost of Sales A/C 22,00,000
Sales A/C 30,00,000
Sundry Debtors A/C 13,00,000
Sundry Creditors A/C 5,00,000
45,50,000 45,50,000
Question No. 18
A business enterprise has been maintaining integrated accounting system. The transaction for
the last month are given below:
Rs.
Material purchased (60% cash) 3,00,000
Material supplied to production 2,50,000
Wages paid and charged to production 1,50,000
Work expenses paid & charged to production 90,000
Selling and distribution expenses paid 50,000
Cost of finished goods 4,00,000
Sales revenue (20% credit sales) 6,50,000

Required: Journal entries by giving narrations in the books of the enterprise

[June 2003 – 7(a), 10 Marks]
Answer
Store Ledger Control A/c Dr. 3,00,000
To Sundry Creditors 1,20,000
To Bank A/c 1,80,000
(Being purchase of materials in cash & credit)
WIP Control A/c Dr 250,000
To store ledger control A/c 250,000
Wages Control A/c Dr. 1,50,000

To Bank A/c 1,50,000
WIP Control A/c Dr. 1,50,000

To Wage Control A/c 1,50,000
Work Expenses Control A/c Dr. 90,000

To Bank A/c 90,000
WIP Control A/c Dr. 90,000

To Work Expenses Control A/c 90,000
Selling and Distribution Expenses Control A/c Dr. 50,000

To Bank A/c 50,000
Finished Goods Ledger Control A/c Dr. 4,00,000

To WIP Control A/c 4,00,000
Cost of Sales A/c Dr. 4,50,000

To Finished Goods Ledger Control A/c 4,00,000
To Selling & Distribution Expenses Control A/c 50,000
Sundry Debtors A/c Dr. 1,30,000

Bank A/c Dr. 5,20,000
To Sales A/c 6,50,000
(Need naration also)
Question No.19

ABC Ltd. operates a cost accounting system, which is not integrated with financial
accounting system. At the beginning of January 2004, the opening balance in cost ledger was:
Stores ledger control account 95,400

Work in progress control account 1, 37,350
Finished goods control account 66,250
Cost ledger control account 299,000
During the month the following transactions took place:

Materials:
Purchases 49,700
Issue to production 61,400
Issue to general maintenance 1,650
Issue to construction of manufacturing 7,850
Equipment
Gross factory wages paid 134,500
Out of above wages, Rs.12, 500 were incurred on the construction of manufacturing
equipments, Rs.35, 750 were indirect wages and the balance was direct.
Production overhead: Actual amount incurred excluding items shown above, was Rs.30, 000
was absorbed by the manufacturing equipment under construction and under absorbed
overheads written off at the end of the month amounted to Rs.7, 550.
Royalty payments: One of the components produced is manufactured under license and Rs.
2,250 shall be paid to the inventory for the month’s production of that particular component.
Selling overhead Rs.24, 000

Sales Rs.420, 000
The company’s gross profit margin is 20% on factory cost. At the end of January 2004,
stocks of work in progress had increased by Rs.12, 000. The manufacturing equipment under
the construction was completed within the month and transferred out of the cost ledger at the
end of the month.
You are required to prepare the relevant control accounts, costing profit and loss account, and
any other accounts you consider necessary to record the above transaction in cost ledger for
January 2004. [June 2005 – 2, 16
Marks]
Answer.
Cost Ledger Control Account
Sale 420, 000 Balance b\f 299, 000
Capital under construction A\C 50, 350 Stores ledger A/c 49, 700

Balance c\f 229, 900 Wages control A\c 134, 500

Production overhead 152, 350
WIP A\c 2, 250
Selling overhead A\c 24, 000
Profit 38, 450
700, 250 700, 250
Stores Ledger Control A\C
Balance b\d 95, 400 WIP A/c 61, 400

Cost ledger cost A\c 49, 700 Production overhead 1, 650
Capital A\c 7, 850
Balance c\d 74, 200
145, 100 145, 100
Wage Control A\C
Cost ledger A\c 134, 500 Production overhead 35, 750

Capital A\c 12, 500
WIP A\c 86, 250
134, 500 134, 500
Work in Progress A\c
Balance b\f 137, 350 Finished good cont. A\c 290, 100
Stock ledger 61, 400 Balance c\f 149, 350
Wages control a\c 86, 250
Cost control(royalty) 2, 250
439, 450 439, 450
Production overhead control A/c

Store ledger a\c 1,650 Capital a\c 30, 000
Wages control a\c 35, 750 WIP a\c (balance) 152, 200
Cost ledger cont. a\c 152, 350 Capital P\L 7, 550
189, 750 189, 750

Finished Good Control A\c

Balance b/f 66, 250 Cost of sales 350, 000
WIP A\c 290, 100 Balance 6, 350
356, 350 356, 350
Capital under Construction A\C

Stores ledger A\c 7, 850 Cost ledger control A\c 50,350
Wages control A\c 12, 500
Production overhead A\c 30, 000
50, 350 50, 350
Sales A\C
Costing P\L A\c 420, 000 Cost ledger cont. A\c 420, 000
420, 000 420, 000
Cost of Sales A\c

Finished goods A\c 350, 000 Costing P\L A\C 350, 000
350,000 350, 000
Selling Overhead A\c

Cost ledger A\c 24, 000 Costing P\L 24, 000
24, 000 24, 000
Costing P|L A\c

Selling overhead A\c 24, 000 Sales 420, 000
Cost of sales 350, 000
Profit 38, 450
420, 000 420, 000
Question No.20
Trading and Profit & Loss Account of LG Electronics Limited for the year ended on 32nd
Ashadh 2065 is as follows:
Dr. Cr.
To Materials consumed 23,010,000 By Sales (30,000 units) 48,750,000
To Direct wages 12,057,500 By Finished goods
To Production Overheads 6,922,500 Stock (1,000 units) 1,300,000
To Administration
Overheads 3,103,750 By Work-in-progress:
To Selling and Materials 552,500
Distribution
Overheads 3,688,750 Wages 260,000
To preliminary Expenses Production
written off 227,500 Overheads 162,500 975,000
To Goodwill written off 455,000
To Fines 32,500 By Dividends
To Interest on Mortgage 130,000 received 3,900,000
To Loss on Sale of
machine 162,500 By Interest on
To Taxation 1,950,000 bank deposits 650,000
To Net Profit for the year 3,835,000
55,575,000 55,575,000
The Cost Accounting records of LG Electronics Limited show the following:

Production overheads have been charged to work-in-progress at 20% on Prime cost.
Administration Overheads have been recovered at Rs. 97.5 per finished Unit. Selling and
distribution Overheads have been recovered at Rs. 130 per Unit sold. The Under- or
Over-absorption of Overheads has not been transferred to costing P/L A/c.
Required:
a) Prepare a proforma Costing Profit & Loss account, indicating net profit.
b) Prepare Control accounts for production overheads, administration Overheads and
selling & distribution Overheads.
c) Prepare a statement reconciling the profit disclosed by the cost records with that
shown in financial accounts. [December 2008 – 3, 4+4+7=15 Marks]

Answer
a) Costing Profit & Loss A/c
Particulars Rs.
Materials 23,010,000
Wages 12,057,500
Production overheads (20% of Prime Cost) 7,013,500
42,081,000
Less: Work in Progress (975,000)
Manufacturing cost incurred during the period 41,106,000
Add: Admn. Ohs (97.5 x 31,000 units) 3,022,500
Less Cl. Stock of Finished goods (44128500 × (1,423,500)
1,000/31,000)
Cost of Goods Sold 42,705,000
Add Selling & distribution OHs ( 30,000× Rs. 130) 3,900,000
Profit 2,145,000
Sales 48,750,000
b) Control Accounts
Production OH A/c
Particulars Rs Particulars Rs
To Gen Ledger Adj. A/c 6,922,500 By WIP A/c 7,013,500
To Bal. C/d 91,000
7,013,500 7,013,500
Admn. OH A/c
To Gen Ledger Adj. A/c By 3,022,500
Finished
3,103,750 Goods
By bal c/d 81,250
3,103,750 3,103,750

Selling & Distribution OHs A/c

To Gen. Ledger Adj A/c 3,688,750 By Cost of 3,900,000
Sales A/c
To bal c/d 211,250
3,900,000 3,900,000
c) Reconciliation Statement
Particulars Amount
Profits as per cost accounts R
2,145,00
Add: Prodn. OHs over absorbed 91,000 0
Selling & distribution OHs Over absorbed 211,250

Dividend received 3,900,000
Interest on bank deposits 650,000 4,852,25
0
Less: Admn. Ohs. under-absorbed 81,250
Preliminary exp. w/off 227,500
Goodwill w/off 455,000
Fines 32,500
Interest on Mortgage 130,000
Loss on sale of machinery 162,500
Taxation 1,950,000
Lower Valuation of Finished stock in Fin. A/c 123,500 (3,162,2
50)
(1,423,500 - 1,300,000)
Profit as per Financial Accounts 3,835,00
0
Question No. 21
The Best Limited has furnished you the following information from the financial books for
the year ended 15th July, 2008:
Profit & Loss Account
For the year ended 15th July 2008


Opening stock of finished
goods: Sales 10,250 units 3,587,500
500 units @ NRs.175 each 87,500 Closing stock of finished goods:
250 units @ NRs.250
Materials consumed 1,300,000 each 62,500
Wages 750,000
Gross Profit c/d 1,512,500
3,650,000 3,650,000
Factory overheads 473,750 Gross Profit b/d 1,512,500
Administration overheads 530,000 Interest 1,250
Selling expenses 275,000 Rent Received 50,000
Bad Debts 20,000
Preliminary expenses 25,000
Net Profit 240,000
1,563,750 1,563,750
The analysis of the cost sheet of the company reveals the following:
i) the cost of materials as NRs.130 per unit;
ii) the labor cost as NRs.75 per unit;
iii) the factory overheads are absorbed at 60% of labor cost;
iv) the administration overheads are absorbed at 20% of factory cost;
v) selling expenses are charged at NRs.30 per unit;
vi) the opening stock of finished goods is valued at NRs.225 per unit.
You are required to prepare:

a) The cost sheet showing the number of units produced and the cost of production, by
elements of costs, per unit and in total.
b) The statement of profit or loss as per cost-accounts for the year ended 15th July, 2008.
c) The statement showing the reconciliation of profit or loss as shown by the cost accounts
with the profit as shown by the financial accounts. [June 2009 – 2, 15
Marks]
Answer
(a) We have,
Units Produced = Units Sold + Closing Stock - Opening Stock
= 10,250 + 250 – 500
= 10,000 Units
Cost Sheet of M/s Best Ltd.

For the year ended 15th July, 2008

Cost per unit Total Cost
Material 130 1,300,000
Labor 75 750,000
Factory Overheads
60% of Labor Cost 45 450,000
Factory Cost 250 2,500,000
Administrative Overheads
20 % of Factory cost 50 500,000
Total Cost of Production 300 3,000,000
(b) Statement of Profit or Loss as per Cost Accounts (for the year ended 15th July, 2008)
No. of Amount
Particulars Units (NRs.)
Opening stock of finished goods; 500 x NRs.225 500 112,500
Add: Cost of Production at NRs.300 per unit 10,000 3,000,000
Total 10,500 3,112,500
Less: Closing stock of finished goods @ NRs.300 per unit 250 75,000
Cost of goods sold 10,250 3,037,500
Selling expenses @ NRs.30 per unit 10,250 307,500
Cost of sales 10,250 3,345,000
Sales revenue 10,250 3,587,500
Profit 242,500
(c) Statement of profit reconciliation

Profit as per Cost Accounts -- 242,500
Add:
Selling expenses over-absorbed (NRs.307,500 – NRs.275,000) 32,500
Overvaluation of op stock in Cost A/c (NRs.112,500 – NRs.87,500) 25,000
Income excluded Cost Accounts:
• Interest 1250
• Rent 50,000 108,750
Less: Under recovery of overheads in Cost Accounts
Factory overheads:
(NRs.473,750 – NRs.450,000 23,750
Administrative Overheads


(NRs.530,000 – NRs.500,000) 30,000
Over valuation of closing stock in Cost Accounts:
(NRs.75,000 – NRs.62,500) 12,500
Expenses excluded from Cost Accounts:
Bad Debts 20,000
Preliminary expenses 25,000 (111,250)
Profit as per financial accounts 240,000
Question No.22
Following figures are extracted from the financial accounts of Serve More Ltd. for the year
ended 31 Ashad 2066.
Amount. Rs Amount. Rs
Sales (20,000 units) 5,000,000
Materials 2,000,000
Wages 1,000,000
Factory Overheads 900,000
Administrative Overheads 520,000
Selling and distribution overhead 360,000
Finished Goods ( 1,230 units) 300,000
Work in Progress
Materials 60,000
Labour 40,000
Factory Overheads 40,000 140,000
Goodwill written off 400,000
Interest paid on capital 40,000
In the costing records, Factory overheads is charged at 100% of wages, Administrative

overhead 10% of factory cost and selling and distribution overhead at the rate of Rs 20
per unit sold. Ascertain the profit as per Financial and Cost Records and reconcile them.
Answer
Serve More Ltd
Profit and loss account
For the year ended 31 Ashad 2066
Dr. Cr.
Particulars Amount. Particulars Amount

Rs Rs
To Opening stock - By Sales ( 20,000 units) 5,000,000
To Materials 20,00,000 By Closing Stock (1230) 300,000
To Wages 1,000,000 By WIP 140,000
To Factory overheads 900,000
To Administrative overheads 520,000
To Selling and administrative 360,000
overhead
To Goodwill written off 400,000
To Interest on Capital 40,000
To Net profit 220,000
5,440,000 5,440,000
Cost profit and loss statement

(For the Year Ended 31 Ashad 2066)
Particulars Amount(Rs)
Materials 2,000,000
Wages 1,000,000
Add: Factory overheads @ 100% of wages 1,000,000
Less: Closing WIP (140,000)
Factory Cost 3,860,000
Administrative overheads @( 10% of factory Cost 386,000
Total cost of Production 4,246,000
Less: Closing Stock of finished goods ( 1,230 units) (246,000)
Cost of production (20,000 units) 4,000,000
Selling and distribution Expenses @ 20 per unit 400,000
Cost of sales (20,000 units) 4,400,000
Sales Revenue (20,000 units) 5,000,000
Profit 600,000
Reconciliation statement
Profit as per cost records 600,000
Add: Factory OH over absorbed 100,000
(Rs 1,000,000-900,000)
Selling and administrative expenses over absorbed 40,000
(Rs 400,000-360,000)

Difference in valuation of closing stock of finished goods 54,000 194,000

( Rs 300,000-246,000)
794,000
Less: Administrative overheads under absorbed 134,000
( Rs 520,000- 386,000)
Goodwill written off 400,000
Interest on capital 40,000 (574,000)
Profit as per financial records 220,000
Working Notes
a. Cost of the closing stock as per the cost accounting
Cost of production of 21,230 units 4,246,000
Cost per unit 200
Cost of 1,230 units @ Rs 200 per unit 246,000
Alternatively, it can be valued excluding the administrative overhead.
Question No.23
The following figures have been extracted from the financial accounts of V Ltd. for the first
year of its operations:
Rs.
Direct Material consumption
Productive wages 30,000
Factory overheads 16,000
Selling & distribution overheads 9,600
Bad debt written off 800
Preliminary expenses written off 400
Legal charges 100
Dividend received 1,000
Interest received on bank deposits 200
Sales (12,000 units) 120,000
Closing stock:
Finished goods (400 units) 3,200
Work in progress 2,400
The cost account for the same period reveal that direct material consumption was Rs.
56,000. Factory overhead is recovered at 20% on prime cost. Administration overhead is
recovered at 60 paisa per unit of production. Selling & distribution overheads at 80 paisa

per unit sold. Prepare the Profit & Loss Accounts both as per financial records and as per
cost records. Also reconcile the profits as per the two records. [June 2010 –
1(c), 10 Marks]
Answer
Financial records
Profits and loss account
Dr Cr
To materials 50,000 By sales (12,000 units) 1,20,000
To wages 30,000 By closing stock of 3,200
F.G.(400 units)
To factory overheads 16,000 By W.I.P. 2,400
To gross profit 29,600
Total 1,25,600 Total 1,25,600
To admn. Overheads 7,000 By gross profit 29,600

To S & D overheads 9,600 By dividend 1,000
To bad debts 800 By interest received 200
To prel. Expenses w/o 400
To legal charges 100
To net profit 12,900
Total 30,800 Total 30,800
Cost records
Statement showing cost of sales and profit Rs.
Direct wages 30,000
Prime cost 86,000
Works overhead (20% on prime cost) 17,200
103,200
Less: closing works in progress 24,00
Factory cost 100,800
Administration overhead (12,400X0.60) 7,440
Cost of production 108,240
Less: finished goods (closing) (1,08,240/12,400X400) 3,492
Cost of production of goods sold 104,748
Selling overheads (12,000 X 0.80) 9,600
Cost of sales (12,000 units) 114,348

Profit as per cost accounts 5,652
Sales (12,000 units) 120,000

Profit as per financial records Rs. 12,900
Add: difference in valuation of closing stock (Rs. 3,492-3200) 292
Expenses not recorded in cost accounts :
Bad debts 800
Preliminary expenses 400
Legal charges 100 1,300
14.492
Less: Materials over absorbed in the cost accounts 6,000
Works overheads over-absorbed in cost accounts 1,200
Administration overheads over-absorbed 440
Non-operating income 1,200 8,840
Question No.24
In a factory, works overheads are absorbed at 60% of labour cost and office overheads are 20
% of works cost.
You are required to prepare the following if total expenditure consists of material Rs.
200,000; wages Rs. 150,000; factory expenses Rs. 100,000 and office expenses is Rs. 85,000.
10% of the output is in stock at the end and sales are Rs. 520,000.
i) Cost sheet,
ii) Trading and Profit and Loss Account, and
iii) Reconciliation Statement [December 2010 – 3(b), 3.5+3.5+1=8 Marks]
Answer
i) Cost Sheet
Particulars Amount
Rs.
Material 2,00,000
Wages 1,50,000
Prime Cost 3,50,000
Factory Overhead (60% of Rs. 1,50,000) 90,000
Works Cost 4,40,000
Office Overheads (20% of works cost) 88,000
Cost of goods sold Rs.

5,28,000∗90
100
4,75,200

Profit 44,800
Sales 5,20,000
Profit as per accounts= Rs. 44,800
ii) Trading and Profit and Loss Account
Dr. Cr.
Rs. Rs.
To Material 2,00,000 By Sales 5,20,000
To Wages 1,50,000 By Closing Stock
5,28,000 ∗ 10
100
To Gross profit c/d 2,22,800 52,800
5,72,800 5,72,800
To Factory Expenses 1,00,000 By Gross Profit b/d 2,22,800
To Office Expenses 85,000
To Net Profit c/d 37,800
2,22,800 2,22,800
iii) Reconciliation Statement
Rs.
Add: Overcharged in Cost accounts: Office overheads 3,000
47,800
Less: Undercharged in Cost accounts: Factory Overhead 10,000
Profit as per financial records 37,800
Question No.25
The manufacturing cost of a work order is Rs. 1,000. 8% of the production against that order
is spoiled and the rejection is estimated to have a realizable value of Rs. 20 only. The normal
rate of spoilage is 2%.
You are required to record this in the costing journal. [December 2010 – 3(c), 4 Marks]
Answer
Actual loss is Rs.60, i.e. Rs. 80 less Rs. 20 recoverable as materials. Of this net loss, Rs. 15
is normal and Rs. 45 is the abnormal loss to be debited to the Costing profit and Loss
account. The accounting entries necessary for recording the above facts would be:
Rs. Rs.
Materials Control Account Dr. 20
Overhead Control account Dr. 15
Costing Profit and Loss Account Dr. 45
To Work-in Progress Control Account 80

In the case of defectives, being inherent in the manufacturing process, the rectification cost
may be charged to the specific jobs in which they have arisen. In case defectives cannot be
identified with jobs, the cost of rectification may be treated as factory overheads. Abnormal
defectives should be written off to the costing Profit and Loss Account.
Question No.26
The following information is the extracted from the financial accounts of a manufacturing
company for the last financial year:
Rs.'000
Raw material consumed 5,000
Direct wages 3,000
Works overhead 1,600
Office overhead 700
Selling overhead 960
Bad debts 120
Legal charges 10
Interest received 120
Sales (120,000 units @ Rs.100) 12,000
Closing inventory of WIP 240
Closing inventory of Finished goods (4,000 units) 320
The following information is extracted from the cost accounts for the same financial year:
Raw material consumed- Rs. 5,600,000
Recovery of works overhead- @ 20% on prime cost
Recovery of office overhead- @ Rs. 6 per unit of output
Recovery of selling overhead- @ Rs. 8 per unit sold.
Required:
i) Prepare financial profit and loss account and Cost sheet for the financial year.
ii) Reconcile the difference in profit under the two sets of accounts.
Answer
Financial Profit & Loss Account
Particulars Rs.'000 Particulars Rs.'000
To Raw material consumed 5,000 By Sales 12,000
To Direct wages 3,000 By Closing inventory:
To Works overhead 1,600 WIP 240
To Office overhead 700 Finished goods 320
To Selling overhead 960 By Interest received 120

To Bad debts 120

To Legal charges 10
To Net profit 1,290
12,680 12,680
Cost Sheet
For the financial year
Particulars Rs.'000 Rs.'000
Raw material consumed 5,600
Direct wages 3,000
Prime Cost 8,600
Works overhead (20% on Prime cost) 1,720
10320
Less: Closing WIP (240)
Works Cost 10,080
Office overhead (Rs.6 *124,000) 744
Cost of production 10,824
Less: Closing Finished goods (10,824*4000/124000) (349)
Cost of goods sold 10,475
Selling overhead (Rs.8 * 120,000) 960
Cost of sales 11,435
Net profit 565
Sales 12,000
Note: Unit produced = Sold unit + closing inventory
ii.
Reconciliation Statement
Particulars Rs.'000 Rs.'000
Add:
Closing inventory of finished goods overvalued in cost 29
accounts
Bad debts not charged in cost accounts 120
Legal charges not charged in cost accounts 10 159
1449
Less:
Raw material overcharged in cost accounts 600
Works overhead over absorbed in cost accounts 120

Office overhead over absorbed in cost accounts 44

Interest received not included in cost accounts 120 884
Profit as per cost accounts 565
Question No.27
Shyam Enterprises operating an integral system of accounting. The following transactions
incurred for the year end 2012.
Transaction Amount (Rs.)

Raw material Purchased (40% in cash) 10, 00,000
Material issued to production 6, 00,000
Wages paid (50% Direct) 2, 00,000
Wages charged to production 1, 20,000
Factory Overhead paid 1, 20,000
Factory Overhead charged to Production 110,000
Selling and distribution overhead paid 30,000
Finished goods finalized at cost 6, 50,000
Sales (70% in credit) 11, 00,000
Closing stock of finished goods -
Payment received from Customer 3, 00,000
Paid to supplier 5, 00,000
You are required to pass journal Entries in the books of Shyam Enterprises under integrated
system of accounting for the period ended 2012. [June 2013 – 3(b), 5 Marks]
Answer
Journal Entries in the books of Shyam Enterprises under integrated system of accounting for
the period ended 2012.
Store Ledger Control A/C Rs.10,00,000

To Sundry Creditors A/C Rs.6,00,000
To Cash/Bank A/C Rs.400,000
(Material purchased)
.............
Work-in-Progress Control A/C Rs.6,00,000

To Store Ledger Control A/C Rs.6,00,000
( Material issued to production)
.............
Wages Control A/C Rs.200,000


(Wages Paid)
.............
Work-in-Progress Control A/C Rs.1,20,000

To Wages Control A/C Rs.1,20,000
(Wages charged to production)
.............
Factory Overhead Control A/C Rs.120,000

( Factory overhead paid)
.............
Work –in Progress Control A/C Rs.110,000

To Factory Overhead Control A/C Rs.110,000
(Factory overhead charged to production)
.............
Selling and Distribution Overhead Control A/C Rs.30,000

To cash/Bank A/C Rs.30,000
(Selling/distribution overhead paid)
.............
Finished Stock Ledger Control A/C Rs.650,000

To Work-in-progress Control A/C Rs.650,000
(Cost of finished goods transferred from work in progress)
.............
Cost of Sales A/C Rs.6,80,000

To Finished Stock Ledger Control A/C Rs.650,000
To Selling and Distribution control A/C Rs.30,000
.............
Sundry Debtors Account Rs.770,000

Cash/Bank A/C Rs.330,000
To Sales Control Account Rs.11,00,000
(Finished stock sold)
.............
Cash/Bank Account Rs.300,000

To Sundry Debtors A/C Rs.300,000

( Amount received from customer)

.............
Sundry Creditors A/C Rs.500,000

( Payment made to creditors)
.............
Question No.28
The following information is available from the financial books of a company having a normal
production capacity of 60,000 units for the year ended 31st March, 2014:
• Sales Rs. 10,00,000 ( 50,000 units)

• There was no opening and closing stock of finished units.
• Direct Material and direct wages cost were Rs. 5,00,000 and Rs. 2,50,000
respectively.
• Actual factory expenses were Rs. 1,50,000 of which 60% are fixed.
• Actual administrative expenses were Rs. 45,000 which are completely fixed.
• Actual selling and distribution expenses were Rs. 30,000 of which 40% are fixed.
• Interest and dividends received Rs. 15,000.
i) Find out profit as per financial books for the year ended 31st March, 2014.
ii) Prepare the cost sheet and ascertain the profit as per cost accounts for the year
ended 31st March 2014 assuming that the indirect expenses are absorbed on the
basis of normal production capacity; and
iii) Prepare a statement reconciling profit shown by financial and cost books.
[December 2014 – 2(a), 3+4+3=10 Marks]
Answer
i)
As per Financial Books
Profit and Loss Account
( for the year ended 31st March 2014)
To Direct Material Rs. 5,00,000 By Sales ( 50,000 units) Rs. 10,00,000

To Direct Wages 2,50,000 By Interest and dividend 15,000
To Factory Expenses ( Actual) 1,50,000
To Admn. Exenses 45,000
To Selling and Distribution 30,000
To Profit 40,000 _____________
10,15,000 10,15,000
As per above account, profit is Rs. 40,000 for the year ended 31st March, 2014.

ii)
Cost Sheet
( for the year ended 31st March, 2014)
________________________________________________________________________
_________
Normal Production capacity ( units) 60,000
Sales/ Production ( units) 50,000
Direct material Rs. 5,00,000

Prime cost 7,50,000
Factory overhead - Variable Rs. 60,000
- Fixed Rs. 90,000 X 5/6 75,000 1,35,000
Works cost 8,85,000
Administrative expenses Rs. 45,000 X 5/6 37,500
Total cost of production 9,22,500
Selling and distribution expenses
- Variable Rs. 18,000
- Fixed Rs. 12,000 X 5/6 10000 28,000
Profit ( balance) 49,500
Sales 10,00,000
iii)
Reconciliation Statement
Profit as per Cost Accounts Rs. 49,500
Add: Income from dividend ( not considered in Cost Accounts) 15,000
64,500
Less: Expenses undercharged in Cost Accounts:

i) Factory expenses ( 1,50,000-1,35,000) 15,000
ii) Adm. Expenses ( 45,000-37,500) 7,500
iii) Selling & Distribution ( 30,000-28,000) 2,000 24500
Profit as per financial accounts
40,000
Question No.29
The following information has been extracted from the cost records of a manufacturing
company during 2070/71.

Rs.
Stores
Opening balance 9,000
Purchases 48,000
Transfer from WIP 24,000
Issue to work-in –progress 48,000
Issue for repairs 6,000
Deficiency found in stock 1,800
Work-in-progress
Direct wages applied 18,000
Overhead charged 72,000
Closing balance 12,000
The entire production of the year 2070/71 is sold at a profit of 10% on cost from
work-in-progress. The total amount of wages paid and overhead incurred during the
year was Rs. 21,000 and Rs. 75,000 respectively.
Required:
Draw General Ledger Adjustment account, Stores Ledger Control account, Work-in –
progress Control account, Overheads Control Account and Costing Profit and Loss
account.
[July 2015 – 4(a), 10 Mar
Answer
General Ledger Adjustment Account
To Costing P&L A/c 1,32,000 By Balance b/d 27,000
To Balance c/d 51,000 By Stores Ledger Control A/c 48,000
By Wages Control A/c 21,000
By Overheads Control A/c 75,000
By Costing P&L A/c 12,000
(Profit)
1,83,000 1,83,000
Stores Ledger control Account

To Balance b/d 9,000 By Work-in-progress 48,000
To General Ledger Adjustment A/c 48,000 By Overheads Control A/c 6,000
To Work-in-progress Control A/c 24,000 By Overheads Control A/c 1,800*
(Deficiency)

81,000 81,000
*Deficiency is treated as normal loss (Alternatively can be treated as abnormal Loss)
Work-in-process control Account

To Balance b/d 18,000 By Stores Ledger Control A/c 24,000
To Stores Ledger Control A/c 48,000 By Costing P& L A/c 1,20,000
(Balancing figures being cost
of finished goods)
To Wages Control A/c 18,000 By Balance c/d 12,000
To Overheads Control A/c 72,000
1,56,000 1,56,000
Overheads control Account

To Stores Ledger Control A/c 6,000 By Work-in-progress Control A/c 72,000
To Stores Ledger Control A/c 1,800 By Balance c/d 13,800
(Under-absorption)
To Wages Control A/c 3,000
(21,000-18,000)
To General Ledger Adjustment A/c 75,000
85,800 85,800
Costing Profit & loss Account

To Work-in-progress Control A/c 1,20,000 By General Ledger Adjustment A/c 1,32,000
(Sales: 1,20,000+12,000)
To General Ledger Adjustment A/c 12,000
(Profit)
1,32,000 1,32,000
Question No.30
A manufacturing company disclosed a net loss of Rs. 3,47,000 as per their Cost Accounts for
the year ended March 31,2016. The financial accounts however disclosed a net loss of Rs.
5,10,000 for the same period. The following information was revealed as a result of scrutiny
of the figures of both the sets of accounts.
(Rs.)
Factory overheads under-absorbed 40,000
Administration overheads over-absorbed 60,000

Depreciation charged in financial accounts 3,25,000

Depreciation charged in cost accounts 2,75,000
Interest on investments not included in cost accounts 96,000
Income-tax provided 54,000
Interest on loan funds in financial accounts 2,45,000
Transfer fees (credit in financial books) 24,000
Stores adjustment (credit in financial books) 14,000
Prepare a memorandum reconciliation account. [June 2016 – 4(a), 5 Marks]
Answer
Memorandum Reconciliation Account
Dr,
Cr.
( Rs.) (Rs.)
To net loss as per Costing books 3,47,000 By Administration overheads 60,000
over recovered in cost accounts
To Factory overheads under 40,000 By Interest on investment not 96,000
absorbed in Cost Accounts included in cost accounts
To Depreciation under charged 50,000 By Transfer fees in financial 24,000
in Cost Accounts books
To income-Tax not provided in 54,000 By Store adjustment (Credit in 14,000
cost accounts financial books)
To Interest on loan funds in 2,45,000 By Dividend received in 32,000
financial accounts financial books
By Net loss as per financial 5,10,000
books
7,36,000 7,36,000
Question No.31
The financial books of a company reveal the following data for the year ended 31st March,
2016:
Amount(Rs.)
Opening Stock
Finished goods 625 units 53,125
01.04.2015 to 31.03.2016
Raw materials consumed 8,40,000


Factory Overheads 4,22,000
Administrative Overheads 1,98,000
Dividend Paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest Received 38,000
Rent Received 46,000
Sales 12,615 units 22,80,000
Closing Stock
Finished Goods 415 units 45,650
Work-In-Progress 41,200
The cost records provided as under:

• Factory overheads are absorbed at 70% of direct wages.
• Administrative overheads are recovered at 15% of factory cost.
• Selling and distribution overheads are charged at Rs. 3 per unit sold.
• Opening stock of finished goods is valued at Rs. 120 per unit.
• The company values work-in-progress at factory cost for both financial and cost
profit reporting.
Required:
i) Prepare statements for the year ended 31st march, 2016 show
• The profit as per financial records
• The profit as per costing records
ii) Present a statement reconciling the profit as per costing records with the profit
as per financial records.
Answer
. Statement of profit as per financial records
( for the year ended March 31st , 2016)
Amount(Rs) Amount(Rs)
To opening stock of finished 53,125 By Sales 22,80,000
goods
To work in progress 46,000 By closing stock 45,650
of finished goods
To raw materials consumed 8,40,000 By work-in- 41,200
progress
To Direct Labour 6,10,000 By rent received 46,000
To factory overheads 4,22,000 By interest 38,000

received
To Admin overheads 1,98,000
To Selling and Distribution 72,000
overheads
To Dividend paid 1,22,000
To Bad Debts 18,000
To Profit 69,725
24,50,850 24,50,850
Statement of profit as per costing records

(for the yended March 31st, 2016)
Amount(Rs)
Sales Revenue(A) 22,80,000
(12,615 units)
Cost Of Sales:
Opening Stock 75,000
(625 units * Rs. 120)
Add: Cost of production of 12,405 units (W.N 1) 21,64,070
Less: Closing Stock 72,397
(Rs.21,64,070*415units)/12,405 units
Production cost of goods sold(12,615 units) 21,66,673
Selling & Distribution Overheads 37,845
(12,615 units * Rs. 3)
Cost of Sales: (B) 22,04,518
Profit (A)-(B) 75,482
2. Statement of Reconcilation
(Reconciling the profit as per costing records with the profit as per financial records)
(Rs.) (Rs.)
Profit as per Cost Accounts 75,482
Add: Administration Overheads over absorbed 84,270
(Rs.2,82,270-Rs.1,98,000)
Opening Stock Overvalued 21,875
(RS. 75,000- Rs 53,125)
Interest Received 38,000
Rent Received 46,000
Factory Overheads over recovered 5,000
(Rs 4,27,000- Rs 4,22,000)
2,70,627

Less: Selling and Distribution Overheads Under Recovered 34,155

( Rs 72,000- Rs 37,845)
Closing Stock Overvalued( RS 72,397-Rs 45,650) 26,747
Dividend 1,22,000
Bad Debts 18,000 (2,00,902)
Working Note:1 Rs.
Raw materials consumed 840,000
Factory overheads
70% of direct wages 427,000
1,877,000
Add: opening WIP 46,000
Less; Closing WIP (41,200)
Factory cost 1,881,800
Administrative overheads
15% of factory cost 282,270
Cost of production 2,164,070
Question No.32
Following information have been extracted from the cost records of XYZ Pvt. Ltd
Rs.
Stores:
Purchases 2,88,000
Transfer from WIP 1,44,000
Issue to WIP 2,88,000
Issue for repairs 36,000
Deficiency found in stock 10,800
Work-in-progress:
Opening balance 1,08,000
Direct wages applied 1,08,000
Overheads charged 4,32,000
Closing balance 72,000
Finished Production:
Entire production is sold at a profit of 15% on cost at WIP
Wages paid 1,26,000
Overheads incurred 4,50,000

Draw the Stores Ledger Control Account, Work-in-Progress Control Account, Overheads
Control Account and Costing Profit and Loss Account.
Answer:
Stores Ledger Control A/c
To Balance b/d 54,000 By Work in Process A/c 2,88,000
To General Ledger 2,88,000 By Overhead Control A/c 36,000
Adjustment A/c By Overhead Control A/c 10,800*

To Work in Process 1,44,000 (Deficiency)
A/c By Balance c/d 1,51,200
4,86,000 4,86,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)
Work in Progress Control A/c
Particulars Rs.
Particulars Rs.
To Balance b/d 1,08,000
By Stores Ledger Control 1,44,000
To Stores Ledger Control A/c 2,88,000
By Costing P/L A/c 7,20,000
To Wages Control A/c 1,08,000
(Balancing figures being
To Overheads Control a/c 4,32,000
of finished goods)
9,36,000 9,36,000
Overheads Control A/c
To Stores Ledger Control A/c 36,000 By Work in Process A/C 4,32,000
To Stores Ledger Control A/c 10,800 By Balance c/d 82,800
To Wages Control A/c 18,000 (Under absorption)
(Rs.1,26,000- Rs.1,08,000)
To Gen. Ledger Adjust. A/c 4,50,000
5,14,800 5,14,800
Costing Profit & Loss A/c
To Work in progress 7,20,000 By Gen. Ledger Adjust. A/c 8,28,000
To Gen. Ledger Adjust. 1,08,000 (Sales) (Rs. 7,20,000 × 115%)
(Profit)
8,28,000 8,28,000
Note: Overhead control A/C under absorption can be transferred to costing PL A/C.
Question No.33
The following figures have been extracted from the financial accounts of V-Wash ltd. for the
first year of its operations:

Direct Material consumption Rs. 50,000

Productive wages 30,000
Factory overheads 16,000
Selling & distribution overheads 9,600
Bad debt written off 800
Preliminary expenses written off 400
Legal charges 100
Interest received on bank deposits 200
Sales (12,000 units) 120,000
Closing stock:
Finished goods (400 units) 3,200
The cost account for the same period reveals that direct material consumption was Rs.
56,000. Factory overhead is recovered at 20% on prime cost. Administration overhead
is recovered at 60 paisa per unit of production. Selling & distribution overheads at 80
paisa per unit sold.
Prepare:
Profit & Loss Accounts both as per financial records and as per cost records. Also
reconcile the profits as per the two records.
Answer
Financial records
Profits and loss account
Dr Cr
To materials 50,000 By sales (12,000 units) 1,20,000
To wages 30,000 By closing stock of F.G.(400 3,200
units)
To factory overheads 16,000 By W.I.P. 2,400
To gross profit 29,600
1,25,600 1,25,600
To admn. Overheads 7,000 By gross profit 29,600
To S & D overheads 9,600 By dividend 1,000
To bad debts 800 By interest received 200
To prel. Expenses w/o 400
To legal charges 100

To net profit 12,900

30,800 30,800
Cost records
Statement showing cost of sales and profit Rs.
Direct materials
56,000
Direct wages
30,000
Prime cost
86,000
Works overhead (20% on prime cost)
17,200
1,03,200
Less: closing works in progress
24,00
Factory cost
1,00,800
Administration overhead (12,400X0.60)
7,440
Cost of production
1,08,240
Less: finished goods (closing) (1,08,240/12,400X400)
3,492
Cost of production of goods sold
1,04,748
Selling overheads (12,000 X 0.80)
9,600
Cost of sales (12,000 units)

1,14,348
Profit as per cost accounts
5,652
Sales (12,000 units)
1,20,000
Profit as per financial records Rs.
12,900
Add: difference in valuation of closing stock (Rs. 3,492-3200)
292
Expenses not recorded in cost accounts :
Bad debts 800
Preliminary expenses 400

Legal charges 100

1,300
14.492
Less: Materials over valued in the cost accounts 6,000
Works overheads over-absorbed in cost accounts 1,200
Administration overheads over-absorbed 440
Non-operating income 1,200
8,840
Profit as per cost accounts
5,652

CHAPTER 12:
MARGINAL COSTING

Question No. 1
Distinguish between
(a) Differential costing and Marginal Costing [June 2005 – 6(c), 4 Marks]
Answer
Differential cost analysis is possible in both absorption costing and Marginal costing.
The technique of Marginal costing requires a clear distinction between variable cost and
fixed costs whereas no such distinction is made in the case of differential costing. In
differential costing all total relevant costs irrespective of the face whether they are fixed
or variable are considered whereas in the case of marginal costing only variable are taken
into account.
Marginal costs may be incorporated in the accounting system whereas differential costs
are worked out separately as analysis statements.
In marginal costing margin of contribution and contribution ratio are the main yardstick
for performance evaluation and for decision making. In a differential costs analysis,
differential costs are compared with the incremental or decremental revenues, as the case
may be, and then arrive at a decision.
(b) Absorption costing and marginal costing [December 2010 – 5(d), 2.5
Marks] [December 2012 – 5(a)(i), 5 Marks]
Answer
Absorption costing does not recognize the difference between fixed costs and variable
costs. The statements prepared under this costing method explain in depth the past profits,
past losses and past costs but do not help in predicting the future results.
Marginal costing is the costing system in which variable costs are charged to the cost
units and fixed cost of the period are written off in full against the aggregate contribution.
The difference between absorption costing and marginal costing is summarized as
follows:
Absorption costing Marginal costing
1. Both fixed cost and variable costs are 1. Only variable cost is considered for these
considered for product costing and purposes.
inventory valuation.
2. Fixed cost is charged to the production. 2. Fixed overhead is treated as period cost and
profitability of products is judged in terms
of P/V ratio.
3. Net profit of each product is derived after 3. Data is presented to highlight the total
deducting fixed overheads. contribution and contribution of individual
products.
4. Due to the impact of fixed overheads, unit 4. Unit cost of production is not affected by
cost of production is affected due to the the difference in the level of opening and
difference in the level of opening and closing stock.;
closing stock.

(c) Shut Down Costs and Sunk Costs [June 2007 – 6(b), 4 Marks]
Answer
Shut Down Costs:
Those costs, which continue to be, incurred even when a plant is temporarily shutdown,
e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the
plant. In other words, all fixed costs, which cannot be avoided during the temporary
closure of a plant, will be known as shut down costs.
Sunk Costs:
Historical costs incurred in the past are known as sunk costs. They play no role in
decision making in the current period. For example, in the case of a decision relating to
the replacement of a machine, the written down value of the existing machine is sunk cost
and therefore, not considered.
(d) Absorption costing and Variable costing [June 2012 – 5(d), 2.5 Marks]
[June 2017 – 6(c), 2.5 Marks] [December 2018 – 6(c), 2.5 Marks]
Answer
Absorption costing treats the costs of all manufacturing components (direct material,
direct labour, variable overhead and fixed overhead) as inventoriable or product costs.
Costs incurred in the non-manufacturing areas are considered as period costs.
In contrast, variable costing is a cost accumulation method that includes only variable
production costs (direct material, direct labour, and variable overhead) as inventoriable or
product costs. Fixed manufacturing overhead is treated as period costs.
Two basic differences can be seen between absorption costing and variable costing. The
first difference is the way fixed overhead (FOH) is treated for product costing purposes.
Under absorption costing, FOH is considered a product cost because it advocates that
products cannot be made without the capacity provided by fixed manufacturing costs;
under variable costing, it is considered a period cost because it advocates that fixed
manufacturing costs would be incurred whether or not production occurs. The second
difference is in the presentation of costs on the income statement. Absorption costing
classifies expenses by function, whereas variable costing categorizes expenses first by
behavior and then may further classify them by function.
Alternative Answer:
The basic difference between absorption and variable costing relates to the handling of
fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead
is treated as a period cost and is deducted in full from the current periods revenue. The
other differences are:
a. The value of closing stock under absorption costing will be more as the unit cost under it
is more than the variable cost.

b. The cost of manufacturing under variable costing is less than the absorption costing
c. Variable costing takes contribution margin as the basis for decision making and
absorption costing takes the profit as the basis
d. Absorption of overheads is a major issue under absorption costing and it is a non-issue
under variable costing.
e. Absorption costing is accepted for external reporting and the variable costing is found to
be useful to decision -making by the management, hence internal orientation.
(e) Opportunity Cost and Sunk Cost [June 2013 – 5(d), 2.5 Marks]
Answer
Opportunity cost refers to the value of sacrifice made or benefit of opportunity forgone in
accepting an alternative course of action. For example, a firm financing its expansion
project by withdrawing money from its bank deposits. In such a case the loss of interest
on the bank deposit is the opportunity cost for carrying out the expansion project.
Historical costs incurred in the past are known as sunk costs. They play no role in
decision making in the current period. For example, in the case of a decision relating to
the replacement of a machine, the written down value of the existing machine is a sunk
cost and therefore not considered.
(f) Contribution and Profit [December 2013 – 5(b), 2.5 Marks]

Answer
Contribution Profit
It includes fixed cost and profit. It does not include Fixed cost.
Marginal Costing technique uses the concept Profit is the accounting concept to
of contribution. determine profit or loss of a business
concern.
At break-even point, contribution equals to Only the sales in excess of break-even
Fixed cost. points results in profit.
Contribution concept is used in managerial Profit is computed to determine the
decision making. profitability of product and the concern.
(g) Indifference point and Break-even Point [December 2014 – 5(b), 2.5
Marks]
Answer
Particulars Indifference Point Break-Even Point
Definition Indifference Point is the level of BEP is the level of sales at which
Sales at which Total costs and there is neither a Profit nor a Loss
Profits of two options are equal. to the firm. At BEP,
the total Contribution equals
Fixed Cost.

Formula Indifference Point (in Rs.) = Break Even Point (in Rs.) =
Difference in Fixed Cost Difference Fixed Cost
in Var. Cost PV ratio
ratio or PV ratio
Significance It is the activity level at which Total It is the activity level at which the
Cost under two alternatives are Total Revenue
equal. from a product mix is equal to its
Total cost.
Purpose Used to choose between two Used for profit planning.
alternative
options for achieving the same
objective.
Question No. 2
Write short notes on the following:
(a) P/V Ratio [June 2007 – 5(e), 4 Marks]
Answer
This term is important for studying the profitability of operations of a business. Profit-
volume ratio establishes a relationship between the contribution and the sales value. The
ratio can be shown in the form of a percentage also. The formula can be expressed thus:
Contribution Sales − Variable cos ts

P/V Ratio = =
Sales Sales
This ratio can also be called as ‘Contribution/ Sales’ ratio. This ratio can also be known
by comparing the change in contribution to change in sales or change in profit to change
in sales. Any increase in contribution would mean increase in profit only because fixed
costs are assumed to be constant at all levels of production. Thus,
Change in Contribution Change in profit

P/V Ratio = =
Change in sales Change in Sales
This ratio would remain constant at different levels of production since variable costs as a
proportion to sales remain constant at various levels.
(b) Capacity Cost [June 2012 – 6(b)(ii), 2.5 Marks]

Answer
Capacity cost is an alternative term used for fixed cost. It represents cost of providing
facilities of a system for a particular period. Capacity cost can be classified further into
standby cost and enabling cost. Standby cost is that cost which continues to be incurred

even if operations or facilities are shutdown temporarily. Examples are depreciation,

property taxes, management salaries etc. Enabling cost is the cost which can be avoided
by a temporary shutdown, but it must be incurred if production is resumed.
(c) Engineered Cost and Differential Cost [December 2018 – 6(d), 2.5
Marks]
Answer
Engineered costs are costs that result specifically from a clear cause and effect
relationship between inputs and outputs. The relationship is usually personally
observable. Examples of inputs are direct material cost, direct labour cost. Examples
of output are car, computer etc.
Differential costs represent the change in total cost due to change in activity level,
technology, process or method of production, etc. Example, if total cost under
alternative I is Rs. 30,000 and alternative II is Rs. 50,000, then differential cost is Rs.
20,000.
Question No. 3
How profit-volume ratio can be improved? [June 2001 – 6(a), 4 Marks]
Answer
The profit-volume ratio shows the relationship between the contribution and sales-value. It
can be improved by:
a. Reducing variable cost
b. Increasing selling price
c. In case of a multi-product company, by increasing the proportion of products
having higher P/V ratio in the overall sales mix.
Question No. 4
What is Differential Costing? Mention some of its applications.
[June 2001 – 1(c), 2 Marks] [December 2001 – 5(a), 4 Marks]
Answer
Differential costing refers to the technique wherein decisions are based on differential costs.
Differential cost is the change in total cost from the adoption of an alternative course of
action. When costs are charged because of producing more or less of the products, due to
change in method of production etc. the change in cost is know as differential cost.
Applications:
a. Determination of the most profitable levels of production and price.
b. Accepting / offering the lower price.
c. Further processing.
d. Determining the suitable purchase price of the raw material.

Question No.5
Outline the limitations of break even analysis. [June 2002 – 3(b), 4 Marks]
Answer
Limitations of break even analysis
a. Variable cost line need not necessarily be a straight line because of increasing and
decreasing returns.
b. Selling price will not be a constant factor because of discounts to be allowed.
c. When number of products are produced separate breakeven charts are required to
be prepared.
d. Breakeven analysis ignores capital employed which is an essential factor.
e. It presumes that costs are reliably divided into fixed and variable.
f. It also presumes that production and sales are synchronized.
Question No. 6
Write about the advantages of marginal costing. [June 2003 – 1(c), 5 Marks]
Answer
1. Pricing decision becomes easy.
2. Overheads are recovered on pre-determined rate to avoid under and over recovery
of overheads.
3. Show true profit since fixed expenses are written off to profit and loss account.
4. BEP location
5. Segregate expenses for control
6. Decision making becomes easy.
Question No.7
How is prime cost different from marginal cost. State the elements of cost included in
two types of cost. [June 2004 – 1(b), 4 Marks]
Answer
Prime cost is the aggregate of direct material cost and direct labour cost. The term 'direct'
indicates that elements of costs are traceable to a particular unit of output only direct costs are
part of this.
However, marginal cost is the cost of one unit of product or service which would be avoided
if that unit were not produced or provided. In practice this is measured by the total variable
cost attributable to one unit. Marginal cost can precisely be the sum of prime cost and
variable overheads.
Question No.8
What are the reasons for using breakeven chart in decision making ?
[June 2006 – 6(c), 4 Marks]
Answer

Following are the reasons for using breakeven chart in decision making :
i. Even a layman can understand the implication of decision through the chart.
ii. The ratio of profit, volume and cost facilitates the decision making process.
iii. It is easy, simple and understandable for presentation of date.
iv. The breakeven chart clearly indicates the level of safety, breakeven point and
danger level of sale and production volume.
Question No. 9
You are cost consultant of a manufacturing company. The company can sell only fifty
percentage of goods in domestic market. Now the company has received an export offer,
which can be met by utilizing the additional capacity. While pricing the product, the
cost accountant of the company suggested to use differential pricing while the factory
manager is of the view to use usual price as in domestic market. As a consultant, suggest
the management team for pricing the goods for export offer with reasons.
[June 2006 – 6(d), 4 Marks]
Answer
Fixed cost remains constant at every level of activity so it is irrelevant in decision making.
The company can not sell any more than fifty percentage of its capacity in local market. Now
if the company can sell any extra unit in oversees fixed cost remaining constant the additional
margin per unit will be additional net profit. So to compete in the foreign market we cannot
use domestic price rate as suggested by the factory manager. Local demand being exhausted
if any thing is realised by sale in foreign market the company should accept the offer. Further,
if any specific cost is incurred for that particular export purpose that too should be considered
in pricing. Hence, the differential pricing (additional cost for additional unit) as suggested by
the cost accountant should be used in pricing of the goods for oversees.
Question No.10
What is margin of safety? How can margin of safety be improved?
[December 2012 – 5(b), 5 Marks] [December 2016 – 6(c), 2.5 Marks]
Answer
Margin of safety is the excess of sales over the break even sales. The size of margin of safety
gives the strength of the business.
Mathematically it can be calculated as,
Margin Of safety = Profit/P.V. Ratio.
Measures for improving margin of safety:
a. Increasing the selling price provided the demand is inelastic so as to absorb
the increased prices.
b. Reduction in fixed expenses.
c. Reduction in variable expenses.
d. Increasing the sales volume provided capacity is available.
e. Substitution or introductions of a product mix such that more profitable lines
are introduced.

Question No.11
Explain the concept of key factor. [June 2014 – 6(c), 2.5 Marks]
Answer
Under marginal costing, profitability is ascertained as aggregate of contribution from all
products sold. With an objective to maximize profit, those products which yield highest
contribution are produced/sold in maximum quantities. It is generally assumed that there will
be no limitation which may create restriction in increasing quantities of one or more products.
But in practice, there may be number of factors which may create limitations. These may be
shortage of material, labor, plant capacity or sales. These are called key factors or limiting
factors. Hence, this will prevail:
Contribution per unit = contribution/key factor
Question No.12
What are the limitations of break-even chart? [December 2015 – 5(b), 5 Marks]
Answer
The break –even charge is a graphical representation of cost-volume profit
relationship. Limitations of break-even chart is as follows:
a. The variable cost line need not necessarily be a straight line because of the
poosibility of operation of law of increasing returns or law of decreasing
returns.
b. The selling price will not be constant factor. Any increase or decrease in output
is likely to have an influence on the selling price
c. When a number of products are produced, separate break-even charts will be
have to be calculated. This poses a problem of apportionment of fixed
expenses to each product.
d. Break –even charts ignore the capital employed in business which is one of the
important guiding factors in the determination of profitability.
Question No.13
Fixed costs are irrelevant for decision-making. What are the exceptions?
[June 2016 – 6(c), 4 Marks]
Answer
Fixed costs are unrelated to output and are generally irrelevant for decision-making purpose.
However, inthe following circumstances, Fixed Costs become relevant for decision-making.
a. When fixed costs are specifically incurred for any contract.

b. (When fixed costs are incremental in nature.
c. (When the fixed portion of semi-variable cost increases due to change in
level of activity consequentto acceptance of a contract.
d. When fixed costs are avoidable or discretionary.

e. When fixed costs are such that one cost is incurred in lieu of another (the
difference in costs willbe relevant for decision-making).
Question No.14
What is a Key Factor? How decisions are made when one of the production resources is
a Key Factor? [December 2016 – 3(c), 4
Marks]
Answer
The marginal costing technique provides that the product with highest contribution per unit is
preferred. This inference holds true so long as it is possible to sell as much as it can produce.
But sometimes an organization can sell all it produces but production is limited due to
scarcity of raw material, labour, electricity, plant capacity or capital.
These are called key factors or limiting factors. A key factor or limiting factor puts a limit on
production and profit of the firm. In such situation, management has to take a decision whose
production is to be increased, decreased or stopped. In such cases, selection of the product is
done on the basis of contribution per unit of scarce factor of production. The key factor or
scarce factor should be utilized in such a manner that contribution per unit of scarce resource
is the maximum.
Mathematically,
Profitability = Contribution
Key Factor
For example, if raw material is the limiting factor, the profitability of each product is
determined by contribution per Kg of raw material. If machine capacity is a limiting
factor then contribution per machine hour is calculated. It electricity is the limiting factor,
then contribution per unit of electricity of each product is calculated.
In case of Key factor situation, procedure of decision making is as under:
• Identify key factor
• Compute Total Contribution
• Compute Contribution per unit of Key Factor
• Rank the products based on Contribution per unit of key factor
• Allocate the key resources on basis of ranks.
Question No.15
What is the limitation of Break-even chart? [December 2017 – 3(c), 4 Marks]
Answer
Break even analysis is fundamentally a static analysis as it assumes almost
everything constant (e.g., constant total fixed costs, variable cost per unit, selling
price, productivity, sales mix in case of multi products etc.) The limitations which
make the assumptions to be unrealistic are given below:
a. All costs cannot be separated into fixed and variable components with accuracy.

b. Fixed costs may change because of change in management policy or after a range of
activity.
c. Variable cost per unit may change because of operation of law of increasing returns or
decreasing returns.
d. Selling price may change because of increase or decrease in output, market demand &
supply, competition etc.
e. In case of multiple products, the sales mix need not necessarily be constant.
f. In case of multiple products, separate break even points are to be calculated. This poses a
problem of apportionment of fixed costs to each product.
g. Entire production need not necessarily be sold in practice.
h. When a number of products are produced separate break-even chart will have to be
calculated. This poses a problem of apportionment of fixed expenses to each product.
i. Break-even charts ignore the capital employed in business which is one of the important
guiding factors in the determination of profitability.
Question No.16
What is the practical application of differential cost analysis?
Answer
Differential costing is a technique where mainly differential costs are considered relevant.
Differential cost is the difference in total costs between two acceptable alternative courses of
action. Differential cost analysis is usually made to facilitate managerial decisions of
following kind:
a. Determination of the most profitable levels of production and price
b. Acceptance of special orders – offer at a lower price or offering a quotation at
lower selling price in order to increase the capacity.
c. Sell a product as it is or after further processing
d. Determination of right price at which materials may be purchased
e. Decisions regarding alternative capital investment and plant replacement
f. Decisions such as changing the product mix, method of production, make or
buy, adding new product, etc.
Question No.17
What is CVP Analysis? Explain how CVP based Sensitivity Analysis can help Managers
cope with uncertainty. [December 2018 – 3(c), 4 Marks]
Answer
Cost-Volume-Profit Analysis (CVP Analysis) is the analysis of three variables, viz. Cost,
Volume and Profit which explores the relationship existing amongst Cost, Revenue, Activity
Levels and resulting Profit. It aims at measuring variations of Profits and Costs with Volume,
which is significant to business profit planning. CVP analysis makes use of the Marginal
Costing principles for planning and for making short-run decisions.

Sensitivity Analysis refers to analysis of the change in one factor on the other related factors.
For example, what will be the effect of a 10% increase in selling price on sales volume and
profits? It focuses on how a result will be changed if the original estimates of the underlying
assumptions change.
CVP based Sensitivity Analysis will help top management to get answers to questions like –
what will be the total profit if the sales mix is changed to include more of one product and
less of other product? or what will be the profit if fixed cost increase by 30% and variable
cost decline by 5%? etc.
CVP based Sensitivity Analysis can be performed in a spreadsheet package, i.e. computerized
CVP models. Computers will quickly show changes both graphically and numerically based
in data keyed in. Managers can study various combinations of changes in selling prices, Fixed
Cost, Variable Cost and product mix, and can react quickly without waiting for formal MIS
reports from the financial officer.
Numerical Questions
Question No. 18
The following are the estimated costs for product A:
Material per unit Rs. 12

Labour cost per unit Rs. 16
Variable expenses per unit Rs. 8
Fixed manufacturing expenses Rs. 72,000
Fixed selling expenses Rs. 2,16,000
i) If the selling price is Rs. 60 per unit, how many units have they to sell to
make a profit of 20% on Sales?
ii) If the demand for the product is 10,000 units, what selling price is to be
charged to make a Profit of Rs. 50,000?
[June 2001 – 7(a), 4+4=8 Marks]
Answer
Rs.
Selling Price per unit 60
Variable Cost per unit 36
Contribution per unit 24
Let the number of units to be sold be 'x'

Sales = Rs. 60x
Profit = 20% of Sales
Profit = 12x
Sales = Variable Cost + Fixed Cost + Profit

60x = 36x = Rs. 2,88,000 + 12x

or, x = 24,000 units
Desired Profit + Fixed Cost

Selling Price = Variable cost per unit + No. of units proposed to be sold
50000 + 288000
= Rs 36 + 10000
= Rs. 36 + 33.80
= Rs. 69.80 P.
Question No 19
A Company produces and sells five types of dolls for children using one common material,
which is available as per requirements at Rs. 4 per kg. Skilled labour required for production
is in short supply and is currently limited to 17,500 hours per month at Rs. 30 per hour.
Variable production overhead is Rs. 10 per labour hour and fixed production costs amount to
Rs. 80,000 p.m. variable selling and distribution overhead is 10% of Sales value, while fixed
selling, distribution and administration cost is Rs. 70,000 p.m. Further details are as under:
Doll Current Selling Price Raw Materials Direct Labour

Demand Units per unit Rs. required per unit hours required per
in kgs. unit hours
A 4,800 90 5 1.0
B 5,000 80 4 0.9
C 4,000 60 3 0.7
D 6,000 40 2 0.5
E 4,500 100 6 1.2
Required:
i. Optimum product-mix you would recommend.
ii. Profit likely to be earned as per mix suggested by you in (i)
iii. The Company has just received an export-order for 5,000 units of E to be supplied
within a month. It will be possible to manufacture this quantity only by engaging labour
on overtime paying double the normal rate. An extra amount of Rs. 12,000 have to be
incurred on production overhead. If the company want 10% profit on sales, what price it
should quote? [December 2001 – 1(c), 16 Marks]
Answer
Relative profitability of the dolls with labours as the limiting factor

Doll A B C D E
Rs. Rs. Rs. Rs. Rs.
Selling Price 90 80 60 40 100

------ ------ ------ ------ ------
Raw Material 20 16 12 8 24
Direct labour 30 27 21 15 36
Production O/h 10 9 7 5 12
Selling & dist. O/h 9 8 6 4 10
------ ------ ------ ------ ------
Total V.C. 69 60 46 32 82
Contribution / unit 21 20 14 8 18
Contribution / hour 21 22.22 20 16 15
Ranking II I III IV V
i. Optimum Production mix:
Doll Units Labour hours Cost/unit Total Contribution Rs.
B 5000 4500 20 100000/-

A 4800 4800 21 100800/-
C 4000 2800 14 56000/-
D 6000 3000 8 48000/-
E 2000 2400 (balance) 18 36000/-
------------- -------------
17500 Total 340800/-
Less F.C. 150000/-
-------------
Profit Rs. 190800/-
ii -------------
iii. Variable cost of 5000 units of E @ 82 Rs. 410000/-

Overtime wages to be paid @ Rs. 36 Rs. 180000/-
Extra production O/h Rs. 12,000/-
-----------------
Total Cost Rs. 602000/-
Profit at 10% of S.P. or 11.11% of cost Rs. 66882/-
----------------

Total Rs. 668882/-

----------------
Hence price to be quoted Rs. 133.77 per unit
Question No.20
Raj Limited manufactures 'X' Lubricant. The accounts of the Company showed a profit Rs.
14,00,000 from the manufacture of 'X' after charging fixed costs of Rs. 10,00,000. The item is
sold for Rs. 80 per unit and has a variable cost of Rs. 50 per unit. Market sensitivity tests
suggest the following responses to price changes:
Alternatives Selling Price Quantity Sold
reduced by increased by
A 5% 10%
B 7% 15%
C 10% 20%
D 12% 30%
E 15% 35%
Evaluate the alternatives and recommend the best alternative. [June 2001 – 4(a),
12 Marks]
Answer
Marginal Cost Statement
Present A B C D E
Selling Price 80 76 74.40 72 70.40 68
Variable Cost 50 50 50 50 50 50
Contribution per 30 26 24.40 22 20.40 18
unit
No. of units 80,000 88,000 92,000 96,000 1,04000 1,08,000
Contribution 24,00,00 22,88,00 22,44,80 21,12,00 21,21,60 19,44,00
0 0 0 0 0 0
Fixed Cost 10,00,00 10,00,00 10,00,00 10,00,00 10,00,00 10,00,00
0 0 0 0 0 0
Profit 14,00,00 12,88,00 12,44,80 11,12,00 11,21,60 9,44,000
0 0 0 0 0
On the whole present position is the best as it yields the maximum profit. Amongst
proposed alternatives ‘A’ gives the highest profit.
Question No. 21
A single product company furnishes the following data:

Year I Year II
Sales Rs. 24,00,000 ?

P/V ratio 1 30%
33 3 %
Margin of safety 25% 40%
While there was no change in the volume of sales in year II, the selling price was reduced
Calculate the Sales, Fixed Costs and profit for the year II. [December 2001 – 5(b), 6 Marks]
Answer
Year I
Contribution = s x p/v = Rs. 2400000 x 33 1/3

V.C. = s x (1 - p/v) = Rs. 1600000
MOS = 25% of 2400000 = 600000
Profit = MOS x P/v = 600000 x 33 1/3% = Rs. 200000
Fixed Cost = c-p = 800000 - 200000 = Rs. 600000
Year II
Since there was no change in volume of sales, hence vc is same as of Year I

vc = Rs. 1600000
s x p/v = c = s - v
s x 30% = s - 1600000
Total sales s = Rs. 2285714
BEP = 60% of total sales i.e. 2285714 = Rs. 1371428
Fixed cost = BEP x p/v = 1371428 x 30% = Rs. 411429
s - v = F+P
Rs. 2285714 - 1600000 = 411429 + P
Profit = Rs. 274285
Question No. 22
The operating data relating to two months of a firm are given below:
Month I Month II
Sales unit 300 340

Sales value Rs. 12,000 ?
Prime cost Rs. 4,500 ?
Overheads Rs. 6,000 Rs. 5,900

There is a reduction in fixed overheads by Rs. 500 in the second month. If the variable costs
increase by 20% in the second month, what should be the quantity to be sold in the second
month to earn the same profit per unit as in month I? [December 2001 – 5(c), 6 Marks]
Answer
Working notes:
i. Month I
Selling price = Rs. 12000 / 300 = Rs. 40 per unit
Prime cost = Rs. 4500 / 300 = Rs. 15 per unit
Profit = Rs. 1500 / 300 = Rs. 5 per unit
ii. Variable overhead / unit:

Total overheads in month II = Rs. 5900
Add: Saving in fixed O/h = Rs. 500
------------
Total at month I level Rs. 6400
Month Units Overheads
II 340 6400
I 300 6000
Variable o/h = 400 / 40 = Rs. 10 per unit
iii. Total overheads in month II = Rs. 6400

Less: variable O/h @ Rs. 10 = Rs. 3400
-----------
Fixed o/h Rs. 3000
Saving in fixed o/h Rs. 500
----------
Net fixed o/h for month II Rs. 2500
Month III
Selling price Rs. 40
Variable cost = (prime cost + variable o/h) x 1.20
(20% of increase) = (15 + 10) x 1.20 = Rs. 30
Contribution = Rs. 10
Profit = Rs. 5
--------
Balance for fixed cost Rs. 5
Number of units required = Rs. 2500/5 = 500 units

Question No.23
The working results of a company for the year 2001 are as under:
Direct materials Rs. 20 per unit
Direct wages Rs. 50 per unit
Variable overheads Rs. 15 per unit
Selling Price Rs. 156.25 per unit
Fixed Overheads Rs. 843,750 per annum
Sales Rs. 3,125,000 per annum
It is expected that during the year 2002, the material prices and variable
overheads will go up by 10% and 5% respectively. The overall direct labour
efficiency will increase by 12% and the wage rates will go up by 5%. The fixed
overheads are expected to increase by Rs.156,250.
The Marketing Manager states that the market will not absorb any increase in the
selling price. He feels that if the advertisement expenditure is sanctioned, the
sales quantity will increase as under:
Advertisement Expenses Rs. 100,000 242,500 400,000 575,000

Additional Sales units 2,000 4,000 6,000 8,000
Required:
(i) Present a statement of profitability for the year 2001.
(ii) Evaluate the alternative proposals put forth by the Marketing Manager and
determine the best output and sales level to be implemented.
(iii) Prepare a statement of profitability for the year 2002 after incorporating the
proposals chosen by you in (ii) above. [June 2002 – 1(c), 12 Marks]
Answer
Statement of profitability as at present i.e. year 2001
Sales Rs. 3125000 

 = 20000 units
 Rs. 156.25 
Rs.
Sales - 20,000 Units - 31,25,000

D. Materials @ Rs. 20 per unit 4,00,000
D. Labour @ Rs. 50 per unit 10,00,000
Variable OH @ Rs. 15 per unit 3,00,000
Total 17,00,000
Contribution 14,25,000

Fixed Overheads 8,43,750

Profit 5,81,250
Revised Cost Data and contribution for year 2002
Rs.
110
Direct Materials Rs. 20 x 100 = 22.00 (10% increase)
100 105
Direct Labour 50 x 112 44.64 x 100 = 46.88 (12% increase in efficiency and
5% increase in cost)
105
Variable Over Head 15 x 100 = 15.75 (5% increase in cost)
Total = 84.63
Contribution (Rs. 156.25 - Rs. 84.63) = 71.62
Alternatives I II III IV
Additional Sales Units 2000 4000 6000 8000
Contribution Rs. 143240 286480 429720 572960
Advertisement Rs. 100000 242500 400000 575000
Inc. Cont. Rs. 43240 43980 29720 (2040)
Profit is maximum at 4000 units. Therefore, company should go for a level of

production of 20,000 + 4,000 = 24,000 units.
Profitability for the year 2002
Units (20,000 + 4,000) 24,000
Rs.
Sales @ 156.25 37,50,000
Direct Mat. @ 22.00 5,28,000
Direct Labour @ 46.88 11,25,120
Variable Overhead @ 15.75 3,78,000
Total 20,31,120
Rs. Rs.
Fixed Costs:
Original 8,43,750

Increase 1,56,250
Advertisement 2,42,500 12,42,500
Profit 4,76,380
Question No.24
The necessary particulars noted out of the accounts of the last year of a firm are stated below:
Sales revenues of the 1st 6 months of the last year was Rs. 6,00,000 and of the 2nd 6 months
was Rs. 4,00,000.
P/V ratio was 60%
Safety margin on the total sales of the year was 25%.
Required: 1. BEP Sales (in Rs.)
2. Annual fixed costs [June 2003 – 1(b), 2+3=5 Marks]
Answer
P
L = 1-0.4 = 0.6
M Actual Sales - BEP sales

1. S = Actual Sales
Rs. 1000000 - BEP Sales

or, 0.25 = Rs. 1000000
or, BEP Sales = Rs. 10,00,000 - Rs. 25,000 = Rs. 7,50,000
2. BEP Sales = CM + F. Cost + Zero Profit

or, Rs. 7,50,000 = Rs. 7,50,000 × 0.6 + F. Cost + 0
or, F. Cost = Rs. 7,50,000 - Rs. 4,50,000 = Rs. 3,00,000
Question No.25
When you had completed your audit of the ABC Company, Management asks for your
assistance in arriving at a decision whether to continue manufacturing a part or to buy it from
an outside supplier. The part, which is named PCB, is a component used in some of the
finished products of the company.
From your audit working papers and from further investigation, you develop the following
data as being typical of the company's operations:
a. The annual requirement for PCB is 5,000 units. The lowest quotation from a
supplier was Rs. 8 per unit.
b. PCBs have been manufactured in the precision machinery department. If
they are purchased from an outside supplier, certain machinery will be sold
and will realise its books value.

c. The following were the total costs of the precision machinery department
during the year under audit when 5,000 PCBs were made:
Amount in Rs.
Material 67,500
Indirect Labour 20,000
Light and Heat 5,500
Power 3,000
Depreciation 10,000
Property Tax and insurance 8,000
Payroll Tax and others benefits 9,800
Others 5,000
d. The following precision machinery department cost appy to the manufacture

of PCBs:
Material Rs. 17,500
Power 300
Other 500
The sale of the equipment used for PCB would reduce the following costs by
the amounts indicated - depreciation Rs. 2,000; property tax and insurance
Rs. 1,000.
e. The following additional precision machinery department costs would be

incurred if PCBs were purchased from outside supplier: freights 50 paisa per
unit; indirect labour for receivig, materials handling, inspections etc. Rs.
5,000.
Required:
1. Advise the management.
2. Discuss the consideration in addition to the cost factors that you would bring
to its attention when assisting management to arrive at a decision whether to
make or buy PCBs. Include in your discussion the considerations that might
be applied to the evaluation of the outside supplier. [December 2003 –
1(b), 16 Marks]

Answer
Comparative Statement of Cost :
Making Cost Buying Cost
Amt. in Rs. Amt. in Rs. Per Unit
A. Making Cost
Material 17,500
Power 300
Other 500
Depreciation 2,000
Property Tax & Insurance 1,000
B. Buying Cost
Purchase Price 40,000 8.00
Freight 2,500 0.50
Material Handling 5,000 1.00
55,300 47,500 9.50
As buying cost Rs. 47,500 (9.50 per unit) is lesser than making cost of Rs. 55,300
(11.06 per unit), it is advised to buy PCB from outside supplier.
Other considerations for decision:

i. Available capacity
ii. Quality of material
iii. Goodwill of suppliers
iv. Terms & conditions of supply
Question No.26
XY Ltd. is manufacturing and selling two products: X and Y at selling price of Rs. 3 and Rs.
4 respectively. The following sales strategy has been outlined for the year 2060.
i. Sales planned for the year will be Rs. 360,000 in the case of X and Rs.
175,000 in the case of Y.
ii. To meet competition, the selling price of X will be reduced by 20% and that
of Y by 12½%.
iii. Break-even is planned at 60% of the total sales of each product.
iv. Profit for the year to be achieved is planned at Rs. 34,560 in the case of X
and Rs. 8,750 in the case of Y. This would be possible by launching a cost
reduction programme and reducing the present annual fixed expenses of rs.
67,500 allocated at Rs. 54,000 to X and Rs. 13,500 to Y.

You are required to present the proposal in financial terms giving clearly the number of units
to be sold X and Y to break even as well as the total number of units of X and Y to be sold
during the year. [December 2003 –
6(a), 12 Marks]
Answer
i. Statement of Sales
X Y
Sales 3,60,000 1,75,000

Selling Price 2.40 3.50
Sales in Units 1,50,000 50,000
Break-even sales at 60% 90,000 30,000
ii.
X Y
Sales 3,60,000 1,75,000

Break-even sales 2,16,000 1,05,000
Margin of (MS) Safety 1,44,000 70,000
Profit 34,560 8,750
Profit 
Profit Volume Ratio PVR =  × 100 24% 12.5%
 MS 
Contribution Margin (Sales × PV Ratio) 86,400 21,875
Fixed Cost (Contribution - Profit) 51,840 13,125
Current Fixed Cost 54,000 13,500
Reduction in Fixed Cost 2,160 375
Question No.27
A Ltd. produce two products for which details are as follows:
Products A (Rs.) Product B (Rs.)
Sales price/unit 12.00 7.50

Direct materials cost/unit 6.00 4.00
Direct labour hours/ unit 2hr. 1 hr.
Standard hourly rates 4 4
Variable overhead / unit 1 1
Fixed o/h budgeted 1,00,000

Total direct labour hours available 2,00,000 minimum production of product A is 30,000
units and B is 100,000 units.
Assume that materials are freely available and that materials and available direct labour can
be freely used for either of products, subject to the minimum production as stipulated above.
Suggest the best production program by outlining the steps along with the statements for the
purpose and show the net profit expected from this program. [June 2004 – 1(c), 12
Marks]
Answer
Statement showing contribution
Product (Per unit)

A B
Sales 12.00 7.50
Less: Variable Costs
Direct material cost 6.00 4.00
Direct labour 8.00 4.00
Contribution (3.00) (1.50)
Labour Hour required 2 1
Contribution per labour hour (1.50) (1.50)
Since, the contribution per labour hour is equal in both the product, production
program will be optimal either by giving preference to Product A or Product B.
The optimal product unit:
(a) Product Unit Hrs.

A 30,000 60,000
B 1,40,000 1,40,000
2,00,000
(b) A 50,000 1,00,000

B 1,00,000 1,00,000
2,00,000
Question No.28
A company is considering the possibility of purchasing from a supplier a component it now
makes. The supplier will provide the components in the necessary quantities at a unit price of
Rs. 9.00. Transportation and storage costs will be negligible.

The company produces the components from a single raw materials in economic lots of
2000 units at a cost of Rs. 2 per unit. Average annual demand is 20,000 units. The annual
holding costs is Rs. 0.25 per unit and the minimum stock level is set at 400 units. Direct
labour cost for the components are Rs. 6 per unit, fixed manufacturing overhead is charged at
a rate of Rs. 3 per unit based on a normal activity of 20000 units. The company also hires the
machine on which the components are produced at a rate of Rs. 2 per month.
Should the company make the components? [June 2004 – 4(a), 10 Marks]
Answer
Annual Consumption (A) = 20,000 units
Annual Holding Cost (C) = Rs. 0.25
Cost of Placing Order (O) = ?
Economic Order Quantity EOQ = 2000 units
2AO
EOQ =
C
2 × 20000 × O
or, 2000 = 0.25
or, O = Rs. 25
1
Average Stock Level = Min. Level + 2 EOQ
1
= 400 + 2 2000 = 1400 Units
Comparative cost statement
Making Cost (Rs.) Buying Cost (Rs.)

Storage Cost (1400 × 0.25) 350
20000  250
Ordering cost  2000 × 25
 
Material cost 40,000
Direct Labour Cost 120,000
Rental Charges 24
Purchase Price ________ 180,000
Total 160,624 180,000
Conclusion:
The company should make the component, till it has some alternative use for
existing capacity. If it is possible to find an alternative use for existing capacity so

that opportunity cost exceeds Rs. 19,376, buying will become better than
manufacturing. Fixed cost is not relevant for decision making.
Question No.29
From the following particular, find the most profitable product mix and prepare a statement
of profitability of that product mix:
Product A Product B Product C
Units budgeted to be produced and sold 1800 3000 1200
Selling Price per unit (Rs) 60 55 50
Direct Materials 5 Kg. 3 kg. 4 kg.
Direct Labour 4hrs. 3 hrs. 2 hrs.
Variable Overheads Rs. 7 Rs. 13 Rs. 8
Fixed Overheads Rs. 10 Rs.10 Rs. 10
Cost of Direct Materials per kg. Rs. 4 Rs.4 Rs. 4
Direct Labour Hour Rate Rs. 2 Rs.2 Rs. 2
Maximum Possible Units of Sales 4,000 1,500 1500
All the three products produced from the same direct material using the same type of
machines and labour. Direct labour, which is the key factor, is limited to 18,600 hours.
Answer
Statement of Contribution per Direct Labour Hour (DLH) – Rs
Product A Product B Product C
Direct Materials (e.g. 5 kg * Rs. 4) 20 12 16
Direct Wages (e.g. 4 hrs * Rs. 2) 8 6 4
Variable Overheads 7 13 8
Marginal Cost 35 31 28
Selling price 60 55 50
Contribution per unit 25 24 22
Contribution per DLH 25/4 24/3 22/2
=6.25 =8 =11
Priority III II I
Statement of Profitability on the basis of Budget
Product No. of Units DLH Contribution Total Amount Rs.
Per unit
A 1800 7200 25 45,000
B 3000 9000 24 72,000
C 1200 2400 22 26,400
Total 18600

Less : Fixed overheads

A (1800 * 10) = 18,000
B (3000* 10) = 30,000
C (1200* 10) = 12,000 60,000
Profit 83,400
Statement of most profitable product mix and profitability of that product mix
Product Priority No. of Units DLH
mix
C I 1500 (Maximum) 3,000
B II 5000 (Maximum) 15,000
A III 150 (600/4) 600 (balance)
18,600
Profitability
product No. of Units Contribution per unit Total Amount Rs.
C 1500 22 33,000
B 5000 24 120,000
A 150 25 3,750
Total Contribution 156,750
Less : Fixed ovh 60,000
Profit 96,750
Question No.30
Perfect pistons Ltd. produces piston at it company. The company has a machine capacity of
10, 000 hours to produce the components P,Q and R, which are required for manufacturing of
pistons. The machine hours however does not seem to be sufficed to produce these
components. The other relevant data are given under:
Components P Q R
Requirement in units 2500 4000 2000
Variable costs:
Direct material 35 25 25
Direct wages 10 8 10
Direct expenses 10 20 10
Fixed overhead 7 6 11
Total production 62 59 56

Direct expenses related to the machine hour, which cost Rs. 10 per hour.
The purchase Manager informed that supply of the above components can be
obtained at the following prices from outside:
P : 60
Q : 59
R : 52
The production manager has come up with another idea of operating second shift
to meet the required production of the components. The company has however to
pay 25% extra over the normal wages for second shift operations.
You are now required to compute:

i. which component and in what quantities should be manufactured in the
10, 000 hours of the machine hours available?
ii. Whether it would be profitable to manufacture the balance of components required on
a second shift basis instead of buying from outside.
[June 2005 – 1(b), 10+4=14 Marks]
Answer
Analysis of Marginal Cost and Buying Cost
Component P Q R
Direct Expenses Rs.10 Rs.20 Rs.10

Machine hour per unit 1 2 1
Marginal costs to make :
Direct Material 35 25 25
Direct Wages 10 8 10
Direct Expenses 10 20 10
Marginal Costs 55 53 45
Bought out price 60 59 52
Excess of buying cost 5 6 7
Machine hour per unit 1 2 1
Excess of buying price per unit of
Limiting factor 5 3 7
Ranking II III I
Calculation of optimal product mix:
Available capacity 10, 000

Hours
Product R (2000* 1 hour) 2, 000
Remaining 8, 000
Product P (2, 500 * 1 hour) 2, 500
Remaining 4, 500
Product Q (2, 250*2 hour) 4, 500
Product Q of 1, 750 shall be bought from outside.
Analysis of marginal cost for product Q in second shift operation
Direct Material 25
Direct Wages (8x1.25) 10
Direct Expenses 20
Total Marginal Cost 55
Bought out cost 59
Excess of bought out cost over second shift operation is Rs.4
Since bought out cost is higher than the marginal cost in second shift operation, it is
recommended to manufacture in second shift operations.
Question No.31
A company manufactures a product, currently utilizing 80% of the capacity with a turnover
of Rs.1,600,000 at Rs.50 per unit. The other relevant data are as follows.
Direct Material : Rs.15.00 per unit
Direct Labour : Rs.12.50 per unit
Semi Variable Cost (including variable cost of Rs.7.50 per unit ) Rs.360,000
Fixed Cost is Rs. 180,000
You are required to calculate :
i. Break- even point in terms of quantity, amount and operation level
ii. Number of units to be sold to earn a profit of 8% on sales
[June 2005 – 3(b), 8 Marks]
Answer
i. Break- even point in terms of quantity, amount and operation level
Break even points (units) = Fixed cost
Contribution per units
= 300, 000
15 (working notes 3 and 4)
= 20,000 units.

Break even point in amount = 20, 000*50

= 1,000,000
Break even point in level activity = 20,000

40,000
= 50%
ii. Number of units to be sold to earn a profit of 8% on sales :

Let ‘x’ be the number of units to be sold to fetch 8% profit on sales.
Then, sales revenue of x units = variable cost of x units + Fixed cost + Net income or
50x = 35x + 300, 000 + 0.05*50x
Or x = 27,273 units.
Working Notes :
1. Number of units sold at 80% capacity = Sales

Sales price per units
= 1, 600, 000
50
= 32,000 units
2. Production at 100% capacity = 32.000

0.8
= 40, 000 units.
3. Computation of fixed cost
Component of fixed cost in semi variable cost = Total semi – variable cost – variable
cost.
= 360, 000 – (32, 000*7.50)
= 120, 000
Total fixed cost = 120,000 + 180, 000
= 300, 000
4. Computation of contribution per unit

Sales price – Variable cost

= 50-15-12.50-7.50
= 15
Question No.32
You are provided with following information for the year 2004:
Sales: 9,000,000
Margin of safety: 25%
P/V ratio: 33.33%
For the year 2005, the company estimates that the sales value will go down due to
decrease in selling price. However, there will be no changes in variable costs. The
company proposes to reduce its fixed cost through an intensive cost reduction
programme. These changes will alter the result as for 2005 as following:
Margin of safety: 40%

PV ratio: 30%
You are required to prepare a comparative statement for the year 2004 and 2005
showing:
i. Sales;
ii. Variable cost;
iii. Contribution;
iv. Fixed cost;
v. Profit; [December 2005 – 1(c), 12 Marks]
Answer
Working Notes:
Year 2004
Break even sales = (1- Margin of safety)* Sales

= 75/100*9,000,000
= 6, 75,000
Computation of fixed cost:

Break even sales * PV ratio = Fixed cost
Fixed cost = 6, 75,000 * 33.33%

= 2, 25,000

PV ratio = Contribution
Sales
Or, 1/3 = Contribution
9, 00,000
Or, Contribution = 3, 00,000
Profit = Contribution – Fixed cost
= 3, 00,000- 2, 25000
= 75,000
Year 2005
Let x be the sales for the year 2005

Variable cost = 6, 00,000
Contribution = x – 6, 00,000
PV ratio = Contribution / Sales
Or, 30x/100 = x – 6, 00,000
Or, 30x = 100x – 6, 00, 000 * 100
Or, x = 8,57,143
i.e. Sales = 8, 57,143
Break even sales = 8, 57,143 * 60/100

= 5, 14,286
Fixed cost = Break even Sales * 30 /100

= 1, 54,286
Profit = Contribution – Fixed Cost

= 1, 02,857
Comparative statement indicating all required information
Particulars 2004 2005

Sales 9,00,000 8,57,143
Less : variable cost 6,00,000 60,000
Contribution 3,00,000 2,57,143
Less : fixed cost 2,25,000 1,54,286
Profit 75,000 1,02,857

Question No.33
A factory engaged in the manufacture of modern toys has ten year old equipment depreciated
on straight line method. The useful life of the equipment was estimated to be 20 years with a
residual value of Rs.3 lacs (original cost of the equipment being 23 lacs). The output of the
equipment is 1,200 units per hour.
The production manager now proposes to install new equipment worth Rs.50 lacs, which has
an estimated life of 15 years and a residual value of Rs. 5lacs. The payment terms for the new
equipment include a part exchange provision of Rs. 6 lacs in respect of the existing
equipment. The output of the new equipment is 3,000 units per hour.
Other comparative annual cost data relating to the two equipment are as under:
Existing Equipment New Equipment
(Rs) (Rs)
Wages 1,00,000 1,20,000
Repair and maintenance 10,000 42,000
Consumables 3,30,000 4,90,000
Power 1,20,000 1,50,000
Allocation of fixed cost 60,000 80,000
Total hours run per year 2,400 2,400
You are required to prepare a comparative schedule showing cost per 1,000 units after
considering interest @ 10% on net cash outflow for procuring the new equipment and also
for providing for the yearly recovery of the loss suffered in the transactions of exchange of
old equipment. [December 2005 – 3(b), 12 Marks]
Answer
Comparative Statement of Cost of 1000 units.
Old Equipment New Equipment
Annual Depreciation 1, 00,000 3, 00,000
Loss of recovery 70,000
Interest on Capital 4, 40,000
Wages 1, 00,000 1, 20,000
Repair and Maintenance 10,000 42,000
Consumables 3, 30,000 4, 90,000
Power 1, 20,000 1, 50,000
Allocation of fixed expenses 60,000 80,000

Total Cost 7, 20,000 16, 92,000

Total hours run per annum 2,400 2,400
Operating cost per hour 300 705
Output per hour (units) 1200 3000
Operating cost per 1000 units 250 235
The comparative statement shows that there is net saving of NPR 15 per 1000 units on
account of replacement by a new equipment.
Working Note 1:
1. Computation of Depreciation
Old Equipment:
Capital cost 23, 00,000
Less: Residual Value 3, 00,000
Net of residual value 20, 00,000
Life 20 years
Annual Depreciation 1, 00,000
New Equipment:
Capital cost 50, 00,000
Less: Residual Value 5, 00,000
Net of residual value 45, 00,000
Life 15 years
Annual Depreciation 3, 00,000
Working Note 2:
Beside this the old equipment will be exchanged for NPR 6, 00,000 towards payment of cost
of new equipment. Such sales will have to be written off over a period of 10 years (i.e.
remaining life of the old equipment). The amount of such loss will be as under:
Cost of old equipment 23, 00,000

Less: Depreciation written off over
10 years 10, 00,000
Net value 13, 00,000
Less: Exchanges 6, 00,000
Total Loss 7, 00,000
Loss per annum 70,000

Working Note 3:
Computation of interest on net cash outflow:

Cost of new equipment 50, 00,000
Less: Exchange value of old equipment 6, 00,000
Net cash Outflow 44, 00,000
Interest @ 10% 4, 40,000
Question No.34
The Board of Directors of Ray Brand Battery Company Ltd. is working for launching a new
re-chargeable battery. An expert team on preliminary study made breakdown of revenues and
costs for one year projecting Rs. 15,00,000 initial investment.
1st six months 2nd six months

(Rs) (Rs)
Sales : 15,000 batteries 12,00,000
25,000 batteries 20,00,000

Cost of goods sold 8,50,000 12,50,000
Gross profit 3,50,000 7,50,000
Administrative, selling and distribution overheads 3,77,000 5,37,000
Pre-tax-profit (27,000) 2,13,000
Tax at 40% - 85,200
(27,000) 1,27,800
Required :
a. Variable cost ratio
b. Annual fixed costs
c. BEP sales in number of batteries for a year
d. The sales volume in rupee to earn 15% return on investment.
e. Income statement showing annual sales revenue, variable costs, contribution
margin, fixed costs, pre-tax profit, tax on profit and after tax profit by incorporation
the recently conducted consumers opinion survey outcomes that indicated Rs.
60,000 outlay for advertisement with 3 percent reduction in sales with 20 percent
sales volume up.
f. Safety margin under the existing preliminary study outcomes and under the survey
outcomes.
g. Which option is desirable and why ? [June 2006 – 1, 2+2+2+2+6+4+2= 20
Marks]

Answer
a. Variable cost ratio
Calculation of variable costs.
Rs.12,50,000 − Rs.8,50,000 Rs.4,00,000

Variable manufacturing cost = = = 0.5
Rs.20,00,000 − Rs.12,00,000 Rs.8,00,000
Rs.5,37,000 − Rs.3,77,000 Rs.1,60,000
Variable adm. S and D. overheads = = =
Rs.20,00,000 − Rs.12,00,000 Rs.8,00,000
0.2
∴ Variable cost ratio = 0.5 + 0.2 = 0.7
b. Annual fixed costs
Calculation of annual fixed costs.
1st six months 2nd six months

(Rs) (Rs)
Sales revenue 12,00,000 20,00,000
Cost of goods sold 8,50,000 12,50,000
Administrative, selling and distribution overheads 3,77,000 5,37,000
Total costs Rs. 12,27,000 Rs. 17,87,000
Less variable cost at 0.7 of sales Rs. 8,40,000 Rs. 14,00,000
Fixed costs Rs. 3,87,000 Rs. 3,87,000
Annual fixed costs = Rs. 3, 87,000 + Rs. 3, 87,000 = Rs. 7, 74,000
c. BEP sales in number of batteries for a year
Calculation of BEP sales in No. of batteries for a year
Rs.12,00,000
Sales price per battery = = Rs. 80
Rs.15,000batteries
Contribution margin per battery = Rs. 80 – 0.7 of Rs. 80 = Rs. 80 - Rs. 56 = Rs. 24
Rs 7,74,000
BEP sales in no. of battery = = 32,250 batteries
Rs.24
d. The sales volume in rupee to earn 15% return on investment.
Sales volume in rupee to earn 15% return on investment

Desired profit = 15% of Rs. 15,00,000 = Rs. 2,25,000

Rs. 7,74,000 + Rs. 2,25,000

Desired sales volume in Rs. = Sales – V. Cost
Sales
Rs. 9,99,000
= Rs. 80 – Rs. 56
Rs. 80
Rs.9,99,000
= = Rs. 33,30,000
0.3
e. Income statement showing annual sales revenue, variable costs, contribution

margin, fixed costs, pre-tax profit, tax on profit and after tax profit by
incorporation the recently conducted consumers opinion survey outcomes that
indicated Rs. 60,000 outlay for advertisement with 3 percent reduction in sales
with 20 percent sales volume up.
New sales price per unit = Rs. 80 – 3% of Rs. 80 = Rs. 80-Rs. 2.4 = Rs. 77.6
Variable cost per unit = Rs. 56 remained the same
New fixed cost = Rs. 7,74,000 + Rs. 60,000 = Rs. 8,34,000
New sales volume = 40,000 units + 20% increase = 48,000 batteries.
Income Statement
Income Statement Rs.

Sales : 48,000 batteries at Rs. 77.6 each = 37,24,800
Less variable cost at Rs. 56 each = 26,88,000
Contribution margin = 10,36,800
Less : Annual fixed costs 8,34,000
Pre-tax profit 2,02,800
Tax at 40% 81,120
After tax profit 1,21,680
f. Safety margin under the existing preliminary study outcomes and under the
survey outcomes.
Calculation of Safety Margin.

Safety margin under the existing preliminary study outcomes

Actual Sales − BEP Sales 40,000 batteries − 32,250 batteries

= =
Actual Sales 40,000 batteries
= 0.19375 = 19.37%
Rs 8,34,000 Rs. 8,34,000

BEP New = = = 38,612 batteries
Rs 77.6 − Rs. 56 Rs. 21.6
Safety margin under the survey outcomes
48,000 batteries − 38,612 batteries

48,000 batteries
9,388 batteries
= = 0.1956 × 100 = 19.56%
48,000 batteries
g. Which option is desirable and why ?

Option second is desirable because the safety margin is high and after tax profit
increases by 20.71%
Question No.35
Nepal Stores has an option of buying Machine A or Machine B. The following data is
available:
Particulars Machine A Machine B

Actual output in units 10,000 10,000
Fixed costs Rs. 30,000 Rs. 16,000
Net profit ratio 30% 24%
The market price of the finished product is expected to be Rs. 10 per unit.
You have to calculate:

i. Break even point for each of the machine (in value and units)
ii. The level of sales at which both machines will earn equal profits.
iii. If the expected level of production is between 6,500 units to 10,000 units, as a cost
accountant, which machine would you suggest and why?

Answer
(i)
Particulars Machine A Machine B

Sales (at 10,000 units) 1,00,000 1,00,000
Profit 30,000 24,000
Contribution 60,000 40,000
Variable Cost 40,000 60,000
PV Ratio 60% 40%
Break Even Point (in value) 50,000 40,000
Break Even Point (in units) 5,000 4,000
Contribution per unit 6 4
Variable cost per unit 4 6
(ii)
The machines will earn equal profit when the total cost of operation of both the
machines are equal, as the selling price of products produced by Machine A and B is same.
Assuming output to be X
Total cost of machine A = 4X + 30,000
Total cost of machine B = 6X + 16,000
4X + 30,000 = 6X + 16,000
2X = 14,000 or X = 7,000
(iii)
Machine B is more profitable upto 7,000 units since Break even point is low. Machine A's
contribution per unit is high but the break even point is higher than Machine B.
Therefore, Machine A is more profitable at level higher than 7,000 units. Since, the
expected level of production is between 6,500 units to 10,000 units, machine A is
expected to be more profitable since coverage of the expected range of production is high.
Question No. 36
The sales turnover and profit of Annapurna Co. Ltd is given as follow:
Sales Profit
Year 2006 10 lacs 1 lacs
Year 2007 20 lacs 3 lacs
You are required to compute the P/V ratio and fixed cost of the company.
[June 2008 – 1(a), 4 Marks]

Answer
Computation of PV ratio
Sale Profit
Year 2007 2,000,000 300,000
Year 2006 1,000,000 100,000
Increment 1,000,000 200.000
PV ratio = Incremental profit x 100

Incremental sales
= 200,000 x 100 = 20%

1,000,000
Computation of fixed cost:
Contribution earned in the year 2007 = 2,000,000 x 20% = 400,000

Profit 300,000
Fixed Cost 100,000
Question No.37
ABC Company produces a single product which is sold by it presently in the domestic market
at Rs 75 per unit. The present production and sales is 20,000 units per month representing
50% of the capacity available. The cost data of the product are as under:
Variable cost per unit Rs. 50
Fixed Cost per unit Rs. 25 at present production level
To improve the profitability, the management has three proposals on hand as under:
i) to accept an export supply order for 15,000 units per month at a reduced price of Rs 60
per unit, incurring additional variable costs of Rs 5 per unit towards export packing,
duties etc.
ii) to increase the domestic market sales by selling to a domestic chain stores 15,000 units
at Rs 55 per unit, retaining the existing sales at the existing price;
iii) to reduce the selling price for the increased domestic sales as advised by the sales
department as under:
Reduced selling price Increase in sales (units)
unit by Rs.
5 5,000
8 15,000
11 17,500

Prepare a table to present the results of the above proposals and give your comments and
advise on the proposals. [June 2008 – 1(b),
16 Marks]
Answer
Statement showing profit for Proposal (i) and (ii)
Current Export Domestic

Particulars Sales Order Order Total
Proposal Proposal Proposal
(i) Proposal (ii) (i) (ii)
Selling price per
unit 75 60 55
Variable cost per
unit 50 55 50
Contribution per
unit 25 5 5
Number of units 20,000.00 15,000.00 15,000.00

Total
Contribution 500,000.00 75,000.00 75,000.00 575,000.00 575,000.00
Fixed Cost(Refer
Working Note) 500,000.00 500,000.00 500,000.00
Operating Profit NIL 75,000.00 75,000.00
Statement showing profit for Proposal (iii)
Number of Units 20000 25000 35000 37500

Selling price per
unit 75 70 67 64
Variable cost per
unit 50 50 50 50
Contribution per
unit 25 20 17 14
Total
Contribution 500,000.00 500,000.00 595,000.00 525,000.00
Fixed Cost 500,000.00 500,000.00 500,000.00 500,000.00
Operating Profit NIL NIL 95,000.00 25,000.00

Comments and Advise:

1. From financial point of view, reduce selling price by 8 per unit is most profitable
option generating profit of 95,000
2. Proposal (i) and (ii) generating same result. However, export order exposes the
firm to forex risks;
3. Proposal (iii) has a lot of uncertainty. Hence it is advisable to accept Proposal (ii)
despite it generates the profit 20,000 below the proposal (iii).
Working Notes:
Output at present capacity 20,000 units

Fixed cost per unit 25
Total Fixed Cost Output at present capacity X fixed cost per unit
Total Fixed cost 20,000 X 25 = 500,000
Question No.38
The budgeted income statement by product lines of Hulas Biscuit Factory Private Limited
for 2064/065 is as follows:
Particulars Glucose Coconut Cream Cracker

Amount in Rs.
Sales 2,000,000 5,000,000 3,000,000
Variable Costs
Cost of goods sold 900,000 2,700,000 1,500,000
Selling costs 300,000 900,000 450,000
Fixed Costs
Administrative
costs 360,000 900,000 540,000
Other costs 160,000 400,000 240,000
Profit before tax 280,000 100,000 270,000
Income tax @ 30% 84,000 30,000 81,000
Profit after tax 196,000 70,000 189,000
All products are manufactured in the same facilities under common administrative
control. Fixed costs are allocated among the products in proportion to their budgeted
sales volume:
(i) Compute the budgeted break-even point of the company from the information
provided above.

(ii) What would be the effect of budgeted income if half of the budgeted sales
volume of coconut is shifted to glucose and cream cracker in equal rupee amount
so that the total sales in rupee remains the same? What will be new Breakeven
Point?
[December 2008 – 3(a), 5+5=10 Marks]
Answer
Working Notes:
Budgeted Income Statement of Hulas Biscuit Factory Private Limited for
2064/065
Amount in Rs.
Particulars Glucose Coconut Cream Total
Cracker
Sales 2,000,000 5,000,000 3,000,000 10,000,000

Less: Variable Costs (1,200,000) (3,600,000) (1,950,000) (6,750,000)
Contribution 800,000 1,400,000 1,050,000 3,250,000
Less: Fixed costs (520,000) (1,300,000) (780,000) (2,600,000)
Profit before tax 280,000 100,000 270,000 650,000
Income tax @ 30% 84,000 30,000 81,000 195,000
Profit after tax 196,000 70,000 189,000 455,000
(i) Budgeted break-even point of the company
P/V ratio Total contribution x 100

Total sales
= 3,250,000 x 100
10,000,000
= 32.5%
Break-even point Fixed Costs
(Rs.)
P/V ratio
= 2,600,000
32.5%
= 8,000,000

(ii) Statement showing the effect of budgeted income when half of the
budgeted sales volume of coconut is shifted to glucose and cream cracker
Amount in Rs.
Particulars Glucose Coconut Cream Total
Cracker
Budgeted Sales 2,000,000 5,000,000 3,000,000 10,000,000

Shifting of sales volume 1,250,000 (2,500,000) 1,250,000 -
Sales volume 3,250,000 2,500,000 4,250,000 10,000,000
Less: Variable Costs (1,950,000) (1,800,000) (2,762,500) (6,512,500)
Contribution 1,300,000 700,000 1,487,500 3,487,500
Less: Fixed costs (2,600,000)
Profit before tax 887,500
Income tax @ 30% (266,250)
Profit after tax 621,250
Note: Computation of Variable cost
Budgeted Variable cost 1,200,000 3,600,000 1,950,000
Budgeted Sales 2,000,000 5,000,000 3,000,000
Variable cost ratio 60% 72% 65%
New sales 3,250,000 2,500,000 4,250,000
New Variable cost 1,950,000 1,800,000 2,762,500
( New sales x variable cost ratio)
(iii) New break-even point

P/V ratio Total contribution x 100
Total sales
= 3,487,500 x 100
10,000,000
= 34.875%
Break-even point (Rs.) Fixed Costs
New P/V ratio
= 2,600,000
34.875%
= 7,455,197

Question No.39
XYZ Company sells its product at NPR 15 per unit. In a period, if it produces and sells 8,000
units, it incurs a loss of NPR 5 per unit. If the volume is raised to 20,000 units, it earns a
profit of NPR 4 per unit. Calculate break even point both in terms of rupees as well as in
units. [December 2008 – 3(b), 5
Marks]
Answer
Average cost at 8,000 units
= Selling price per unit + Loss component per unit
= Rs 15 + Rs 5 = Rs 20
Average cost at 20,000 units volume:

= Selling price per unit – Profit component unit
= Rs 15 – Rs 4 = Rs 11
Total cost at 8,000 units volume = Rs 160,000

Total cost at 20,000 units volume = 220,000
Variable cost per unit = Change in total cost

Change in the volume of production
= Rs 220,000 – Rs 160,000
20,000 units- 8,000 units
= Rs 5
Fixed cost = Total cost - Variable cost = Rs 160,000 – Rs 40,000

= Rs 120,000
P/V ratio = S – V X 100 = Rs 15 - Rs 5 X 100 = 66.66%

S Rs 15
Break even point(rupees) = Fixed Cost/P/V ratio = Rs 120,000/66.66%

= Rs 180,000
Break even point (in units) = Fixed Cost

Selling price –cost price
= Fixed Cost
Contribution per unit
= Rs 120,000/Rs 15- Rs 5
= Rs 12,000 units

Question No. 40
Perfect Piston Ltd. produces 60,000 pistons per annum for its parent company Perfect Motor
Ltd. The pistons are sold to Perfect Motors at NRs. 200 per unit. The variable cost per piston
is NRs. 180. The annual fixed cost of Perfect Piston Ltd is NRs. 15 lakhs and it is currently
operating at 60% capacity.
The company desires to respond to an export enquiry for 30,000 pistons of the type of it is
currently manufacturing. The company's aim is to improve capacity utilization and avoid
loss.
You have to take note of the following benefits that will occur in the export transactions
while determining the F.O.B. price to be quoted.
a) Export incentive by way of cash assistance at 10% of F.O.B. value of exports.
b) Reimbursement of excise duty on manufacturing inputs by way of 5% drawback of duty
on F.O.B. value of exports.
c) Entitlement of import license to the extent of 10% on F.O.B. value of exports. The import
license can either be sold at a premium of 100% or it can be utilized to import certain
critical auto components that will yield a 30% profit on cost.
Recommend the bare minimum price that the company should quote, in order to breakeven,
assuming:
i) It sells the import license in the market.
ii) It imports components against the license and sells them for profit.
[June 2009 – 4, 15 Marks]
Answer
i) Determination of bare minimum price to break-even when import license is sold in the
market
Particulars NRs.
Variable cost per piston 180
Add: Amount per piston towards recovering the present loss
(NRs.300,000 / 30,000 piston) 10
Cost per piston 190
Less: Realization through export benefits:
Cash assistance: 10% on FOB
Drawback of duty: 5% on FOB
Premium on license: 10% on FOB
25% on FOB
i.e. 20% of the cost per piston of NRs. 190 38
Bare minimum FOB price to be quoted 152

ii) Determination of bare minimum price to break-even when import license is used to
import auto components and sell them for profit
Particulars NRs.
Cost per piston, as above 190
Less: export benefits:
Cash assistance: 10% on FOB
Drawback of duty: 5% on FOB
Profit on sale of import: 3% on FOB
18% on FOB
i.e. 15.25% of the cost per piston: NRs. 190 x15.25% 28.98
Bare minimum FOB price to be quoted 161.02
Working note:
Perfect Piston Ltd.'s present operating results:
Contribution per piston = Selling price – Variable cost
= NRs. 200 –NRs. 180
= NRs. 20
Hence,
Total contribution (60,000 piston x NRs. 20) = NRs. 12 lakhs
Less: Annual fixed costs = NRs. 15 lakhs
Loss = NRs. 3 lakhs
Therefore the increase in capacity utilization and the resultant export sales should be enable
to recover the above loss to arrive at a breakeven point.
Question No. 41
The following particulars are available from the records of a manufacturing company.
For 2,000 Units For 5,000 Units
Direct Material NRs. 10,000 NRs. 25,000
Direct Labor 20,000 50,000
Direct Expenses 8,000 20,000
Establishment of Expenses 8,000 8,000
The difference in maintenance costs between 2,000 and 5,000 units is NRs. 6,000.
The total cost of maintenance for 5,000 units is NRs. 18,000. Similarly, the
difference in selling and distribution expenses is NRs. 5 per unit and total cost at
2,000 units is NRs. 16,000. Unit selling price amounted to NRs. 33.75.
Required:
i) Segregate the mixed cost into variable and fixed by using high and low point
method.
ii) Find out the total cost for 4,000 and 6,000 units.

iii) Calculate the P/V Ratio, Break Even Point in units, Margin of safety in Rupees
for sale of 4,900 units and target profit at a sales volume of NRs. 162,000.
[June 2009 – 4, 4+3+8=15 Marks]
Answer
i) Maintenance costs and selling and distribution expenses are the items of mixed cost that
require segregation in this case. Accordingly,
Segregation of Maintenance casts:
Unit Variable cost = Δ Cost = 6,000 = NRs.. 2

Δ Output 3,000
Fixed cost = Total cost – Variable cost

18,000 – (5,000× 2)
= NRs. 8,000
Segregation of Selling and Distribution Expenses:
Unit Variable Rate = NRs. 5 (Given)

Fixed Cost = Total Cost – Variable Cost
= 16,000 – (5 × 2,000)
= NRs. 6,000
ii) Calculation of variable cost per unit (total) and fixed cost (total)
(Figures in NRs.)
Particulars VCPU Fixed Cost
Direct Material 5 -
Direct Labor 10 -
Direct Other Expenses 4 -
Depreciation - 5,000
Office and Adm. Expenses 8,000
Maintenance Costs 2 8,000
Selling and Distribution Expenses 5 6,000
Total 26 27,000
Based on the above,

Total cost for 4,000 units = 27,000 + (26×4,000) = NRs..131,000
Total cost for 6,000 units = 27,000 + (26×6,000) = NRs..183,000
iii) P/V Ratio = Unit S.P. – Unit V.C.

Unit S.P.

= 33.75-26
33.75
= 0.2296 or 22.96%
B.E.P in units = Fixed Cost

Unit S.P – unit V.C.
= 27,000
33.75-26
= 27,000
7.75
= 3,484 unit
Margin of safety in rupees = Unit selling price × margin of safety units

(for sales of 4,900 units)
= 33.75 × (4,900-3484)
= NRs. 47,790
Target Profit for sales of NRs.162,000 = (sales × P/V ratio) – Fixed cost
= (162,000 × .2296) – 27,000
= NRs. 10,195
Question No.42
Raman Ltd operating at 80% level of activities furnishes the following information for
2007-08.
Production
A B C
Selling price/unit Rs. 10 12 20
Profit as a percentage on % 25 331/3 20
selling price
Units produced and sold 10,000 15,000 5,000
Fixed costs Rs. 40,000 45,000 25,000
During the year 2008-09 the variable cost are expected to increase by 10%. There
will, however, be no change in fixed costs, the selling prices and the units to be
produced and sold. The sales potential for each of products is unlimited.
(i) You are required to prepare a statement showing the PV ratio, Break-even point
and Margin of safety for 2007-08 and 2008-09 for the company as whole.

(ii) The company intends to increase the production of only one of the three products
to reach the full capacity level by utilizing the spare capacity available. Assuming
that all the three products take the same machine time, advise with reasons as to
which of the three products should be produced so that the overall profitability is
maximized. [December 2009 – 3, 7+8=15
Marks]
Answer
i)
Cost Statement of M/s Raman Ltd
Year 2007-08
Per Unit A B C Total

Rs
Selling rice Rs. 10.00 12.00 20.00
Profit % 25 33.33 20
Profit Rs. 2.50 4.00 4.00
Fixed expenses Rs. 4.00 3.00 5.00
Contribution Rs. 6.50 7.00 9.00
PV/ratio % 65 58.3 45
Quantity Units 10.000 15,000 5,000
Total sales value Rs. 1,00,000 1,80,000 1,00,000 3,80,000
Total contribution 65,000 1,05,000 45,000 2,15,000
P/V Ratio Rs. 56.58
Total fixed expenses 1,10,000
Break Even Sales 1,94,415
Margin of safety 1,85585
Cost Statement of M/s Raman Ltd
Year 2008-9
A B C
Selling price Rs. 10.00 12.00 20.00
Variable cost/Unit Rs. 3.50 5.00 11.00
Variable Cost/Unit Rs. 3.85 5.50 12.10
(after effecting an
Increase of 10%)
Contribution Rs. 6.15 6.50 7.90
PV/ratio % 61.50 54.17 39.50

Total contribution 61,500 97,500 39,500 1,98,500

Revised PV/ratio % 52.24%
Fixed expenses Rs 1,10,00
Break-Even Sales 2,10,567
Margin of safety 1,69,433
ii) Product ‘C’ yields highest contribution per unit and hence it should be
produced to utilize spare capacity.
Question No.43
A company manufactures and sells three models of a product. The selling price and cost data
are collected and presented to you for analysis here in below:
Description Model X Model Y Model Z
Unit Selling Price (Rs.) 800 1,200 2,000
Unit Variable Costs:
Direct Materials (Rs.) 160 240 400
Direct Labor (Rs.) 160 320 480
Overhead (Rs.) 80 160 240
Selling (Rs.) 160 160 160
Product Percentage of Total Sales 10% 50% 40%
The following information is also relevant:
• The company incurs advertising cost Rs.8 million, fixed administrative cost Rs.8
million, and fixed manufacturing cost Rs.16 million in addition.
• The company has the capacity of producing 100,000 units of all models and is
currently utilizing its 80% capacity.
You are required to calculate/answer the following:
a) The profit from the given data.
b) The total BEP sales from the given data.
c) The company is considering increasing the advertising budget by Rs. 8 million to
increase the total unit sales to full capacity. The product mix would remain same.
Is the campaign desirable?
d) The company is considering of providing additional sales commission to sales
force of each product at the rate of 2% to increase the total unit sales to 90% of its
capacity. The product mix would remain same. Is the commission desirable?
e) The company is considering altering the production process by installing new
machine which will reduce the direct material, direct labor and variable overhead
to 75% of their current level and will increase the fixed manufacturing cost by
Rs.16 million. What is the minimum level of total sales (in units) for which this
change would be desirable? [December 2009 – 1, 3+3+4+5+5=20 Marks]

Answer
a. Profit (Rs.) = (Combined Unit CM*Total Sales)-Total Fixed Costs
= (472*80000)-32000000
= 5,760,000
b. Total BEP Sales (Rs.) = (Total Fixed Costs/ Combined PV Ratio)
= (32000000/31.892%)
= 100,338,642.92
say, 100,338,643
c. Desirability of Advertising Campaign
Additional Advertising Cost (Rs.) = Rs. 8,000,000
Total Fixed Costs after additional Advertising Cost = Rs. 40,000,000
Total Sales Unit after Advertising Campaign (Full
Capacity) = 100,000
Profit (Rs.) = (Combined Unit CM*Total Sales)-Total Fixed Costs
= (472*100000)-40000000
= 7,200,000
Since the advertising campaign causes initial profit to increase, the campaign is desirable.
d. Desirability of Sales Commission

Model X Model Y Model Z
Existing Contribution Margin/ Unit (Rs.) 240 320 720
Less: Additional Sales Commission @2% 16 24 40
New CM/ Unit (Rs.) 224 296 680
Sales Mix 10% 50% 40%
New Combined CM/ Unit (Rs.)= (224*10%+296*50%+680*40%)
= 442.40
New Total Sales Unit (90% of Capacity) 90000
Profit (Rs.) = (New Combined Unit CM*New Total Sales)-Total Fixed Costs
= (442.4*90000)-32000000
= 7,816,000
Since additional sales commission causes initial profit to increase, the commission is
desirable.
e. Minimum Level of Sales for which the alteration of production process as indicated is
desirable
Model X Model Y Model Z
Existing Contribution Margin/ Unit (Rs.) 240 320 720
Add: 25% of Unit VC excluding selling 100 180 280
New CM/ Unit (Rs.) 340 500 1000

Sales Mix 10% 50% 40%

New Combined CM/ Unit (Rs.)= (340*10%+500*50%+1000*40%)
= 684
New Total Fixed Cost after additional fixed manufacturing cost of Rs. 16 million
= 48,000,000
The required minimum level of sales
=(New Total Fixed Cost+Initial Profit Level)/ New Combined Unit CM
=(48000000+5760000)/684
= 78596 Units
Below the calculated level of minimum required sales, the change is not desirable.
Working Notes:
S. Description Model X Model Y Model Z Total
No.
A. Computation of Combined Contribution Margin Per Unit
I. Unit Selling Price (Rs.) 800 1200 2000
Unit Variable Costs:
Direct Materials (Rs.) 160 240 400
Direct Labor (Rs.) 160 320 480
Overhead (Rs.) 80 160 240
Selling (Rs.) 160 160 160
II. Total Variable Cost/
Unit (Rs.) 560 880 1280
III. Contribution Margin/
Unit (I-II) (Rs.) 240 320 720
IV. P/V Ratio(III/I*100) 30.00% 26.67% 36.00%
Product % of Total
V. Sales 10.00% 50.00% 40.00%
Combined CM/Unit
V. (Rs.) (240*10%+320*50%+720*40%) =472
B. Computation of Combined P/V Ratio
VI. Sales Units (V*80,000) 8,000 40,000 32,000 80,000
Contribution Margin
(III*VI and 472 *
VII. 80,000 in the case of 12,800,000 23,040,000 37,760,000
Total) 1,920,000
VIII. Sales Value (I*VI) 6,400,000 48,000,000 64,000,000 118,400,000
P/V Ratio (VII/VIII * 31.892%
IX. 100) 30.00% 26.67% 36.00%
X. Total Sales Units = 80% of 100,000 = 80,000

XI. Total Fixed Costs (Rs.):

Advertising 8,000,000
Administrative 8,000,000
Manufacturing 16,000,000
Grand Total: 32,000,000
Question No.44
Mr. X has Rs. 200,000 investment in his business firm. He wants a 15 percent return on his
money. From an analysis of recent cost figures, he finds that his variable cost of operating is
60% of sales, his fixed costs are Rs. 80,000 per year. Show computation to answer the
following question:
iv) What sales volume must be obtained to break even?
v) What sales volume must be obtained to get 15 percent return on investment?
vi) Mr. X estimates that even if he closed the doors of his business, he would incur
Rs. 25,000 as expenses per year. At what sales would he be better off by locking
his business up. [June 2010 – 2(a), 5 Marks]
Answer
Rs.
Suppose sales 100
Variable cost 60
-------------
Contribution 40
-------------
P\V Ratio 40%
Fixed cost Rs. 80,000
i) B.E Point = Fixed cost÷P/V Ratio=80,000÷40% = Rs.
200,000
ii) 15% return on Rs. 200,000 Rs.
30,000
Fixed cost
80,000
--------
-----
Contribution required
110,000
Sales volume required=Rs.110,000÷40% or Rs. 275,000
iii) Fixed cost even if business is locked up=Rs. 25,000
Minimum sales required to meet this cost : Rs. 25,000÷40%
or Rs 62,500
Mr X will be better off if the sale is more than Rs. 62,500

Question No.45
HB Ltd. is a small manufacturing company which produces a range of three special cashmere
sweaters under the brand-names of Alpine, Border and Island.
For the month of Shrawan, the management accountant has prepared the following forecast of
trading results:
Alpine Border Island Total
Rs. Rs. Rs. Rs.
Sales 1,000,000 960,000 320,000 2,280,000
Variable costs
Direct materials 350,000 300,000 100,000 750,000
Direct labour 50,000 80,000 30,000 160,000
Works overhead 200,000 180,000 110,000 490,000
Fixed overhead 300,000 270,000 100,000 670,000
(Apportioned)
Net profit/ (Loss) 100,000 130,000 (20,000) 210,000
The following information is also available:

• Although there are other materials which are required for the manufacture of sweaters, the
major material is cashmere, purchased directly from China. Unfortunately, due to delays
in shipment from China, production for the month of Shrawan will be limited by the
availability of cashmere supplies. The purchasing manager believes that he will be able to
increase the current stockholding of 61,000 kg by a delivery of 31,000 kg in mid-
Shrawan. There are no substitute suppliers in the short term.
• The production manager advises that the different products absorb different quantities of
cashmere: Alpine- 8 kg per unit, Border- 4 kg per unit and Island- 1 kg per unit.
• The sales manager confirms that the current unit prices of the products are: Alpine-
Rs.100, Border- Rs.120 and Island- Rs.80. He is convinced that sales of the Border
product could be substantially increased beyond the current forecast, although he is unable
to quantify the effect. Extra advertising of Rs. 80,000 would be required to achieve this
increase, together with a 10% reduction in the price of the Alpine product. The current
forecast of trading results does not include the view.
• The managing director has reviewed the forecast for Shrawan and believes that results can
be improved immediately through stopping the manufacture of the Island product. Neither
the sales manager nor the production manager agrees with his view, but they are not
certain why they disagree.
• Fixed overhead is apportioned over the product lines on the basis of an allocation by space
occupied on the factory floor.
The managing director is confused by the different proposals being put forward and he seeks
your services as the company’s external financial consultant to assist him in drawing up a
sensible plan of action.

You are required to do the following:

a) Assuming that the full sales forecast for Shrawan can be achieved, assess the impact of the
managing director’s proposal to drop the entire Island range and advise on its desirability.
b) In view of the shortage of cashmere, assist the company by preparing an optimal
production plan and a revised forecast of trading results for Shrawan.
c) In light of (b) above, assess the viability and effects of the sales manager’s plans to
increase sales of the Border range through extra advertising expenditure.
d) What other points of commercial interest would you wish to draw to the attention of the
managing director? [June 2010 – 1, 3+9+5+3=20 Marks]
Answer
(a) The managing director believes that the act of dropping the Island range of products
will increase profits by Rs.20,000; since it seems that the loss forecast would be
avoided.
Unfortunately, it is necessary to appraise him (as tactfully as possible) that his
thinking is being unduly influenced by the arbitrary allocation of Rs.100,000 of fixed
overheads to the Island range. If the Island range was stopped, then Rs.100,000 of
fixed overhead would not be saved, but merely reallocated to the other two lines.
The correct approach is to assess the contribution to fixed overheads arising from the
Island product, as follows:
Statement of contribution of Island

Particulars Rs. Rs.
Sales 320,000
Works overhead 110,000 240,000
Contribution 80,000
In fact, therefore, if this proposal had been adopted, the forecast trading profit of
Rs.210,000 would have fallen to Rs.130,000 (i.e. Rs.210,000-Rs.80,000) due to above
lost contribution. Hence, this proposal should be soundly rejected.
(b) Since the shortage of cashmere constitutes a limiting factor on Shrawan’s output, it is
necessary to deploy the available cashmere over the three products in a manner which
will optimize overall profit. In the first instance, it is necessary to identify the ranking
of the products, in terms of the contribution they generate from use of per kg of
cashmere:

Statement of contribution per kg of cashmere used

Particulars Alpine Border Island
Sales 1,000,000 960,000 320,000
Direct materials 350,000 300,000 100,000
Direct labour 50,000 80,000 30,000
Works overhead 200,000 600,000 180,000 560,000 110,000 240,000
Contribution 400,000 400,000 80,000
Unit Selling Price (Rs.) 100 120 80
Therefore, no. of units 10,000 8,000 4,000
Contribution per unit (Rs.) 40 50 20
Cashmere Used per unit (kg) 8 4 1
Contribution per kg of 5 12.50 20
cashmere (Rs.)
Ranking III II I
The ranking exercise indicates that the Island product (contrary to the managing
director’ belief) is the best product in the current situation of limited supplies of
cashmere.
As a result, the optimal production plan is:
Statement showing Revised optimal production plan for Shrawan

Product as Maximum Cashmere Cashmere Remaining Revised Contribution Total
per ranking forcasted required to to be used quantity of optimal per unit (Rs.)
sales unit meet (kgs) from cashmere production (Rs.)
maximum 92000 kgs (kgs) and sales
forcasted available unit
sales unit
(kgs)
Island 4000 4000 4000 88000 4000 20 80000
Border 8000 32000 32000 56000 8000 50 400000
Alpine 10000 80000 56000 0 7000 40 280000
Total revised contribution 760000
Total Fixed costs 670000
Total revised profit 90000
Note: As the third-ranked product, Alpine received only the residual balance of the
available cashmere, i.e.56,000 kgs. This means that only 7,000 units can be
manufactured, leaving an unsatisfied demand for 3000 units in Shrawan.
(c) Assessment of the effect of Sales Manager's Plan

The sales manager is not clear about the extent to which the sales of Border could be
increased. In any case, production/sales of Border can be increased at the expense of Alpine

which has the lowest contribution per kg. of cashmere of Rs. 5 keeping the sales units of
Island intact at the level of revised production plan as found out under (b) above. As per the
conditions given, the sales unit of Border will have to be accompanied by a 10% reduction in
the price of Alpine, the contribution per unit of Alpine will be reduced to Rs. 30 per unit.
Considering the additional advertisement cost of Rs. 80,000 to increase the sales of Border, a
total contribution of at least Rs. 840,000 (Contribution as per revised plan of Rs. 760,000 +
Advertisement cost of Rs. 80,000) is needed to make the sales manager's plan financially
justifiable.
Let x be the increase in the sales units of Border from the units of revised optimum level
derived in (b). Based on this, the total contribution generated by the respective products is
computed in the table given below.
Product Sales Units Cashmere Contribution
Required (kg.) Per Unit (Rs.) Total (Rs.)
Island 4,000 4,000 20 80,000
Border 8,000 + x 32,000 + 4x 50 400,000 + 50 x
Alpine 7,000 – ½ x** 56,000 – 4 x* 30 210,000 – 15 x
Total: 43,000 + ½ x 92,000 690,000 + 35 x
In order to ensure that the sales manager's plan is financially viable, the contribution derived
in the above table should be greater than Rs. 840,000.
Therefore, Rs. 690,000 + 35 x > 840,000, Or, 35 x > 840,000 – 690,000
Or, x > 150,000/35 Or, x > 4,285.71, say, 4,286 units.
Thus, the sales units of Border should be 12,286 (8,000 + 4,286) or 53.575% more than sales
units derived under option (b) for the sales manager's plan to yield at least the same level of
profit as obtained under that option. Any increase in the sales units of Border in excess of that
level by reducing the sales units of Alpine will make the sales manager's proposal financially
better as compared to the revised optimum production/sales plan.
(d) Other possible points of commercial interest are:
• What can be done to increase the sales of the Island range since it is the best performing
product?
• Is it possible to increase the selling prices of all the products as a means to restrict
demand to attainable levels?
• Is there any impact on sales caused by the restricted availability of any one range of
product?
• Would any customers be prepared to wait for deliveries until cashmere is in greater
supply?
Question No.46
Electronic Equipments Limited manufactures CD players. The management accountant of the
company has prepared the following provisional operating statement for a period:
Rs. Rs.
Sales (30,000 CD players) 375,000

Less: Other Costs (32,000 CD players)

Production overhead (64% variable and 36% fixed) 50,000
S & D overhead (75% variable with sales and 25% fixed) 20,000 294,000
Net profit for the year (prior to stock adjustment) 81,000
The following additional information was also available:

a. Fixed production overhead contained Rs. 2,500 of depreciation relating to plant &
equipment which is surplus to current requirements.
b. Over the period, 32,000 units were manufactured.
c. There was no opening stock for current period. In the preparation of the provisional
operating statement, no account has been taken of the closing stock at the end of
current period. For the purposes of internal management accounting, stocks of
finished goods are valued at variable manufacturing cost only.
The management is currently beginning to prepare the budget for the next period. There
are several factors to be considered:
(i) To make better use of the surplus plant & equipment, the company’s technical
manager has suggested commencing manufacture of disk drives and modems for
personal computers. Disk drives will absorb Rs. 1,500 of the depreciation charge
with modems allocated the remaining Rs. 1,000.
(ii) The manufacturing and sales managers have estimated that the surplus plant &
equipment will be sufficient to produce 5,000 disk drives and 10,000 modems; and
these quantities can be sold in the current market. However, the sales manager has
insisted that, by the end of the period, the company should be carrying minimum
buffer stocks of 10% of annual production for both disk drives and modems.
(iii) Stock levels of CD players should be unchanged, but production levels are expected
to remain at the same as in the current period. The sales manager believes that the
demand for CD players will continue to grow.
(iv) The purchasing manager has forecasted that the direct materials costs of CD players
will increase by Re.1 per unit. All other variable costs of CD players will remain at
the unit cost levels incurred in the current period.
(v) For the new products, the following estimates have been made and assembled at the
projected manufacturing volume levels:
Disk Drives (Rs.) Modems (Rs.)
Total variable costs:
Direct materials 15,000 10,000
Additional fixed overhead, excluding depreciation:
Selling & distribution overhead 2,250 6,750

(vi) The production manager has projected a 60% increase in the fixed element of
selling & distribution overheads (for CD players only) in the budget period.
Variable selling and distribution overheads will be incurred at 2% of sales value for
both disk drives and modems.
(vii) The market will sustain the following prices for the products for the next period:
CD Players: Rs. 15.00 /unit, Disk Drives: Rs. 12.00 /unit, and
Modems Rs. 10.00 /unit
(viii) The management accountant has estimated that the investment in fixed assets and
working capital for next period in the three product lines will be as follows:
CD Players: Rs. 325,000; Disk Drives: Rs. 80,000; and Modems: Rs. 60,000.
a) Compute the break-even number of CD players for the current period.
b) Prepare a budgeted Profit and Loss Account for the next period incorporating the
impact of the introduction of the new products and identifying product profitability.
c) Compute the return on investment for each product for the next period.
[December 2010 – 1, 7+10+3=20 Marks]
Answer
a. Computation of the break-even number of CD players for the current period
Particulars Rs.
Sales 375,000
Less: Variable Costs (Notes)
Direct materials (100% variable) (a) 120,000
Direct labour (100% variable) (a) 90,000
Production overhead (64% variable) (b) 30,000
S & D overhead (75% variable) (c) 15,000 255,000
Contribution margin 120,000
Less: Fixed Costs
Production overhead (36% fixed) (b) 18,000
S & D overhead (25% fixed) (c) 5,000 23,000
Net profit for the year 97,000
Breakeven point
Contribution margin per unit = Rs.120,000/ 30,000 units = Rs.4
BEP= Fixed Costs/ CM per unit= Rs.23,000/ Rs.4 = 5,750 units
Notes:
(a) Direct materials & Direct labour are both given as costs of production of
32,000 units. Therefore, they require both to be scaled downwards to 30,000
units sales for a variable costing format profit & loss account.
(b) Total factory overhead of Rs.50,000 splits into 64% variable (Rs.32,000) and
36% fixed (Rs.18,000). The variable element relates to the manufacture of
32,000 units. Again, it has to be scaled down for 30,000 units.

(c) Total selling & distribution overhead of Rs.20,000 splits into 75% variable
(Rs.15,000) and 25% fixed (Rs.5,000). The variable element is already in line
with sales and hence, there is no requirement to adjust.
b. Preparation of budgeted Profit and Loss Account for the next period
incorporating the impact of the introduction of the new products and
identifying product profitability
CD Disk
Players Drives Modems
Notes
Sales Volumes (unit) 32,000 4,500 9,000
Selling Price per unit (Rs.) 15 12 10
Sales Revenue (Rs.) 480,000 54,000 90,000
(a)
Variable costs (Rs.):
Direct materials 160,000 13,500 9,000
(b & c)
Direct labour 96,000 9,000 22,500
(b & c)
Variable production overhead 32,000 2,250 13,500
(b & c)
Variable selling & distribution 16,000 1,080 1,800
(d)
304,000 25,830 46,800
Fixed costs (Rs.):

Factory overhead 18,000 8,000 13,500
Depreciation adjustment -2,500 1,500 1,000
(e)
Selling & distribution (+60%) 8,000 2,250 6,750
Total costs (Rs.) 327,500 37,580 68,050
Net Profit (Rs.) 152,500 16,420 21,950
Notes:
(a) The quantity of CD players produced is identical to 2000 – namely 32 000
units. Production and stocks have not changed, and therefore, the number
of units sold is identical to the units produced – namely 32 000 units.
(b) The variable costs of direct materials, direct labour and factory overhead
are increased in the budget in proportion to increase in volume of CD
players (32 000/30 000).
(c) The variable costs for disk drives and modems have been scaled down to
the actual sales levels from the production cost data provided.
(d) Variable selling & distribution costs are computed as per the additional
notes.

(e) Depreciation adjustment represents a re-allocation of the depreciation on

the surplus equipment to the new product lines.
c. Computation of the Return on Investment for each product for the next
period.
CD Disk Modems
Players Drives
ROI= Net Profit/ Investment= 152,500 16,420 21,950
325,000 80,000 60,000
46.9% 20.5% 36.6%
Question No.47
In a certain factory, Type A and Type B machines have been designed to produce the same
product but Type A is less automatic than type B and requires somewhat more labour to
operate. Pertinent costs are as follows.
Type A Type B
Set up cost Rs. 400 Rs. 600
Variable cost per unit 4.90 4.40
You are required to suggest which type of machine should be used to process various sized
orders and verify your answer by calculating total costs for the chosen levels of production.
Answer
Difference in set up (fixed) cost = Rs. 600 – Rs. 400 = Rs. 200
Difference in variable cost per unit = Rs. 4.90 – Rs. 4.40 = Re 0.50
Break Even Point = Difference in set-up cost = Rs. 200/Re 0.50 = 400 units
Difference in variable cost
Type A Type B
Set-up (fixed) costs Rs. 400 Rs. 600
Variable costs Rs. 1,960 Rs. 1,760
Rs. 2,360 Rs. 2,360
Hence, machine A should be used for less than 400 units as its set-up cost is lower. Similarly,
Machine B should be used for order of more than 400 units as its variable cost per unit is
lower, which will offset the higher set-up costs.
These points are made clear by verification of total costs at production levels of 399 units and
401 units, as follows:
___________________________________________________________________________
______________________________________________________________________
Particulars 399 units 401 units
Type A Type B Type A Type B
Set-up costs Rs. 400.00 Rs. 600.00 Rs. 400.00 Rs. 600.00
Variable costs 1,955.10 1,755.60 1,964.90 1,764.40
2,355.10 2,355.60 2,364.90 2,364.40

Question No.48
Alpha Limited has prepared the following budget estimates for the coming
year:
Product A Product B
Sales (in units) 6,000 16,000
Rs./Unit Rs./Unit
Selling Price 400 640
Direct Materials 120 220
Direct Wages @ Rs. 10 per hour 80 120
Variable Overheads 40 60
Fixed Overhead 80 120
Total Cost 320 520
Profit 80 120
After finalization of the above budget estimates, it is observed that 1/3rd of the production
capacity are still idle. In order to improve the performance, the following proposals are under
consideration:
f) Product A will be discontinued and the capacity so released will be used for product B.
The selling price of product B will, however, have to be reduced by Rs. 20 per unit in
order to increase the volume of sales.
g) Product B will be discontinued and the capacity so released will be diverted to the
production of product C. The particulars relating to per unit of product C are as under:
Selling Price Rs. 520 Direct Wages Rs. 100
Direct Materials Rs. 150 Variable Overheads Rs. 50
h) The idle capacity will be utilised for meeting an export demand for product D. The
particulars relating to per unit of product D are as under:
Selling Price Rs. 720 Direct Wages Rs. 200
Direct Materials Rs. 400 Variable Overheads Rs. 100
i) The idle capacity will be hired out by fixing a price in such a way that the same rate of
profit per direct labour hour as obtained in the budget estimates is achieved.
Required:
i) Prepare a statement showing the profitability of the products A & B as
envisaged in the budget estimates.
ii) Evaluate each of the above four proposals separately showing the profitability
under each proposal.
iii) Recommend most profitable proposal for Alpha Limited.
[June 2011 – 1, 4+15+1=20 Marks]

Answer
Alpha Ltd.
(i) Budgeted Profitability Statement
Product Product B
A
Sales units 6,000 16,000
Rs./Unit Rs./Unit
Sales price per unit 400 640
Variable cost per unit:
Direct Material 120 220
Direct Wages 80 120
240 400
Total Contribution A = Rs. 160 ×
Rs. 960,000
6,000
B = Rs. 240 ×
Rs. 3,840,000
16,000
Rs. 4,800,000
Less: Fixed Cost Rs. 2,400,000
Profit Rs. 2,400,000
(ii) Evaluation of proposals

Proposal (a): Discontinue Product A and use the capacity for
Product B
Spare capacity because of discontinuing Product A (8 × 6000) 48,000 hours

Additional units of Product B produced = 48,000/12 4,000 units
Total production of Product B = (16,000 + 4,000) units 20,000 units
Statement of profitability
Sales unit 20,000
Rs./Unit
Selling Price per unit Rs. (640 – 20) 620
Variable cost: Direct Materials 220
Direct Wages 120
Variable Overheads 60
400

Rs.
Total Contribution (Rs. 220 × 20,000)
4,400,000
Rs.
Less: Fixed Cost
2,400,000
Rs.
Profit
2,000,000
Proposal (b): Discontinue Product B and use the capacity for new
Product C
Spare capacity because of discontinuing Product B (12 × 16,000) 192,000 hrs

Units of Product C produced = 192,000/(100/10) 19,200 units
Statement of Profitability
Product A Product C
Rs./Unit Rs./Unit
Sales price per unit 400 520
Direct Material 120 150
Direct Wages 80 100
240 300
Rs. 960,000
6,000
C = Rs. 220 ×
Rs. 4,224,000
19,200
Rs. 5,184,000
Proposal (c): Use idle capacity for export demand of Product D
Idle production capacity (labour hours) 120,000 hrs

Units of Product D produced = 120,000/(200/10) 6,000 units

Product A Product Product D
B
Sales units 6,000 16,000 6,000
Rs./Unit Rs./Unit Rs./Unit
Sales price per unit 400 640 720
Direct Material 120 220 400
Direct Wages 80 120 200
Variable Overheads 40 60 100
240 400 700
Contribution per unit 160 240 20
Rs. 960,000
6,000
B = Rs. 240 ×
Rs. 3,840,000
16,000
D = Rs. 20 ×
Rs. 120,000
6,000
Rs. 4,920,000
Proposal (d): Hire out idle capacity

Rs.
Profit as per Budget Estimates (I) 2,400,000
Budgeted Direct Labour Hours 240,000
Profit per Direct Labour Hour 10
Idle Capacity (Direct Labour Hour) 120,000
Additional profit by hiring out the idle capacity (II) 1,200,000
Total Profit [(I) + (II)] 3,600,000
(iii) Recommendation:
Since proposal (d) gives highest profit i.e. Rs. 3,600,000 compared to the all other proposals,
it is recommended to go for Proposal (d).
Working Notes:
(i) Idle Production Capacity (Labour Hour)
Product A Product B Total

Direct Labour Hour per unit 80/10 = 8 120/10 = 12

Number of units 6,000 16,000
Direct Labour Hours utilised 48,000 192,000 240,000
rd
The above utilised hours is only 2/3 . Hence Total Capacity
hours =240000/ 2/3rd
360,000
Idle Capacity
120,000
(ii) Fixed Cost

Rs.
Product A = Rs. 80 × 6,000 480,000
Product B = Rs. 120 × 16,000 1,920,000
Total 2,400,000
Question No.49
A telecom company in Nepal has total GSM prepaid active subscriber base of around 5
million. Its Average Revenue Per User (ARPU) is Rs.238.50 per month. Assuming that its
variable cost and profit are 35% and 40% respectively of total revenue in this segment of
operation, you are required to calculate the number of subscriber to be added to justify the
20% reduction in average call tariff which is currently Rs.1.50 per minute. Also assume that
the proposed reduction in tariff will increase call duration by 20%. [June 2011 – 2(c),
7 Marks]
Answer
Computation Table to find out additional number of subscriber to justify tariff reduction
SN Particulars Total Per User Working Remarks
a. No. of Active Prepaid GSM Subscribers 5,000,000
b. ARPU/ month (Rs.) 238.50
c. Total Revenue/ month (Rs.) 1,192,500,000 (a x b)
d. Variable Expenses/ month (Rs.) 417,375,000 35% of Total Revenue
e. Profit/ month (Rs.) 477,000,000 40% of Total Revenue
f. Fixed Costs/ month (Rs.) 298,125,000 (c-d-e)
g. Contribution/ month (Rs.) 775,125,000 155.03
h. Current call tariff/ minute (Rs.) 1.50
i. Average call duration per user/ month 159 (b/h)
j. New call tariff/ minute (Rs.) 1.2 20% less than current
k. New avg. call duration/ user/ month 191 20% more than current
l. New ARPU/ month (Rs.) 229 (j x k)
m. New contribution/ user/ month (Rs.) 149 65% of New ARPU(100-35)
n. Required profit/ month (Rs.) 477,000,000
o. Required no. of total active subscribers = (298125000+477000000)/ 149 (Fixed Cost+Reqd. Profit)/ CMPU
= 5,208,333
p. No. of additional subscribers required to
justify the 20% tariff reduction 208,333 (o-a)
Question No.50

Mega Company has just completed its first year of operations. The unit costs on a normal
costing basis are as under:
Rs.
Direct material 4 kg @ Rs.4 16.00
Direct labour 3 hrs @ Rs.18 54.00
Variable overhead 3 hrs @ Rs.4 12.00
Fixed overhead 3 hrs @ Rs.6 _18.00
100.00
Selling and administrative costs:
Variable Rs.20 per unit
Fixed Rs.7,60,000
During the year the company has the following activity:

Units produced 24,000
Units sold 21,500
Unit selling price Rs.168
Direct labour hours worked 72,000
Actual fixed overhead was Rs.48,000 less than the budgeted fixed overhead. Budgeted
variable overhead was Rs.20,000 less than the actual variable overhead. The company
used an expected actual activity level of 72,000 direct labour hours to compute the
predetermine overhead rates.
Required:
i) Calculate under or over absorption of overhead.
ii) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
iii) Reconcile the difference between the total income under absorption and
marginal costing.
[June 2011 – 3(a), 4+6+2=12 Marks]
Answer
i) Under or over absorption of overhead:
Rs.
Budgeted Fixed Overhead 72,000 Hrs. × Rs.6 4,32,000
Less: Actual Overhead less than Budgeted Fixed Overhead __ 48,000
Actual Fixed Overhead 3,84,000
Budgeted Variable Overhead (72,000 Hrs. × Rs.4) 2,88,000
Add: Actual Overhead higher than Budgeted 20,000
Actual Variable Overhead 3,08,000

Fixed & Variable Overhead applied 72,000 Hrs × Rs.10 7,20,000

Actual Overhead (3,84,000 + 3,08,000) 6,92,000
Over Absorption __28,000
ii) Computation of Unit Cost & Total Income

Unit Cost Absorption Costing Marginal Costing
(Rs.) (Rs.)
Direct Material 16.00 16.00

Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 ____-
Unit Cost 100.00 82.00
Income Statements
Absorption Costing
Sales (21500 × Rs.168) 36,12,000

Less: Cost of goods sold (21500 × 100) 21,50,000
Less: Over Absorption ___28,000 __21,22,000
14,90,000
Less: Selling & Distribution Expenses (2,500×20=760,000) 11,90,000
Profit 3,00,000
Marginal Costing
Sales 36,12,000
Less: Cost of goods sold (21500×82) 17,63,000
Add: Under Absorption 20,000 17,83,000
18,29,000
Less: Selling & Distribution Expenses (Variable only) 4,30,000
Less: Fixed Factory and Selling & Distribution
Overhead (3,84,000 + 7,60,000) 11,44,000
Profit 2,55,000
(iii) Reconciliation of Profit

Difference in Profit: = Rs.3,00,000 – 2,55,000
= Rs.45,000
Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing but
not in Marginal Costing such difference arises. Therefore, difference in Profit:
= Fixed Overhead Rate (Production – Sale)

= 18× (24,000 – 21,500)

= 45,000
Question No.51
In 2010, turnover of a company was Rs. 900,000 which operates at the margin of safety of
1
25% and profit volume ratio 33 3 %. During 2011, the company estimates that although the
same volume of sales as in 2010 would be maintained, the sales value would go down due to
decreases in selling price. There will be no change in the variable cost. The company
proposes to reduce fixed cost through intensive cost reduction programmes. These changes
will alter the profit volume ratio and margin of safety to 30% and 40% respectively in 2011.
Even if the company closes down its operations in 2011, it would incur minimum fixed costs
of Rs. 50,000.
Required:
i) Present a comparative statement indicating the sales, variable cost,
fixed cost and profit for 2010 and 2011.
ii) At what minimum sales will the company be better off by looking up the business
in 2011? [December 2011 – 1(b), 6 Marks]
Answer
i) Comparative Statement indicating Sales, Variable Costs, Fixed Costs and Profit

Sales 900,000 857,143
(600000/0.70)
Variable Costs 66.67% 600,000 600,000
Contribution 300,000 257,143
Profit 75,000 102,857
(900,000×25%×33 1/3%) (857,143×40%×30%)
Fixed Costs 225,000 154,286
ii) Calculation of Minimum Sales to be Made

Particular Amount
Fixed cost for 2011 : 154,286
Less: Unavoidable Fixed Cost : (50,000)
Relevant Fixed Cost : 104,286
Minimum Sales required to cover the : 347,620
Relevant fixed cost (104,286/0.30)
Question No.52
Z Ltd. makes a range of five products to which the following standard apply:

Per unit
Particulars A B C D E
Rs. Rs. Rs. Rs. Rs.
Selling Price 500 600 700 800 900
Direct Materials 90 100 170 120 210
Direct Wages 160 200 240 280 320
Variable Production Overheads 80 100 120 140 160
Variable Selling & Distribution Overheads 50 60 70 80 90
Fixed Overheads 40 50 60 70 80
Total Cost 420 510 660 690 860
The direct labour wage rate is Rs. 40 per hour. Fixed overheads have been allocated on the
basis of direct labour hours. The company has commitments to produce a minimum of 400
units of each product per month. Direct labour hours cannot exceed 13,000 hours per month
due to restriction of space.
The Board is now considering an offer of a new three year contract to produce an additional
400 units of product B per month at a selling price of Rs. 580 per unit. The contract would
involve an outlay of Rs. 1,000,000 on the lease of additional factory premises and purchase of
new plant and equipment. There would be no residual value at the end of the contract.
Variable production costs would be in accordance with existing standards and variable selling
& distribution costs would be one-half of the existing rate and cash outflows on fixed costs
would be Rs. 200,000 per annum. There would be no changes to existing production
arrangements.
An outside supplier has offered to supply 400 units of product B per month at a price of Rs.
480 per unit. If purchased externally cash outflows on additional fixed costs will be Rs.
250,000 per annum.
Required:
a) Give recommendations, supported by calculations, to show how direct labour hours in the
existing factory should be utilised in order to maximise profits.
b) Calculate budgeted trading results on the basis of your recommendation in (a).
c) Determine whether or not the proposed contract for product B should be accepted and, if so,
whether it should be purchased externally or manufactured in the new premises. The
company's cost of capital is 10%. You may take the present value of an annuity of Rs. 1 for
three years at 10% as Rs. 2.49. Ignore taxation and inflation. [December 2011 – 1,
7+5+8=20 Marks]
Answer
a) Since availability of direct labour hours is a constraint, 13,000 direct labour hours
per month should be utilised as shown by the following statement to maximise
contribution per labour hour:

Statement showing contribution per labour hour

Rs. per unit
Particulars
A B C D E
Selling Price 500 600 700 800 900
Variable Costs:
Direct Materials 90 100 170 120 210
Direct Wages 160 200 240 280 320
Production
80 100 120 140 160
Overheads
Selling &
50 60 70 80 90
Distribution OHs.
Total Variable Costs 380 460 600 620 780
Contribution per unit 120 140 100 180 120
Labour hours per unit 60/40)=4 (200/40)=5 (240/40)=6 (280/40)=7 (320/40)=8
Contribution per labour
30.00 28.00 16.67 25. 71 15.00
hour
Ranking I II IV III V
Since the company has commitments to produce minimum of 400 units of each product,
production should be planned in such a way that product B, C, D & E each are produced
to the extent of 400 units only and balance labour hours should be utilised to produce
product A. Therefore, production should be in the following pattern:
Labour hour Total labour Balance labour
Product Units produced
per unit hours used hours
B 400 5 2,000 11,000
C 400 6 2,400 8,600
D 400 7 2,800 5,800
E 400 8 3,200 2,600
A 650* 4 2,600 -
(b) *2600/4=650
Budgeted trading result as per recommendation in (a) above
Products
Particulars
A B C D E Total
Units 650 400 400 400 400 2,250
Selling Price/unit 500 600 700 800 900 -
Sales 325,000 240,000 280,000 320,000 360,000 1,525,000
Direct Materials 58,500 40,000 68,000 48,000 84,000 298,500
Direct Wages 104,000 80,000 96,000 112,000 128,000 520,000
Variable Production Ohs. 52,000 40,000 48,000 56,000 64,000 260,000

Variable Selling Ohs. 32,500 24,000 28,000 32,000 36,000 152,500

Variable Costs 247,000 184,000 240,000 248,000 312,000 1,231,000
Contribution 78,000 56,000 40,000 72,000 48,000 294,000
Fixed Overheads* 26,000 20,000 24,000 28,000 32,000 130,000
Net Profit 52,000 36,000 16,000 44,000 16,000 164,000
* Allocated on the basis of direct labour hour – given in the question.
[c] (i)
Statement showing additional contribution if contract is accepted and product B is
manufactured in new premises
Per unit 4,800 units**
Particulars
(Rs.) (Rs.)
Selling Price 580 2,784,000
Direct Materials 100 480,000
Direct Wages 200 960,000
Variable Production Overheads 100 480,000
Variable Selling Overheads – 50% of Rs. 60 30 144,000
Variable Cost 430 2,064,000
Contribution 150 720,000
Additional Fixed Overheads 200,000
Increase in Annual Cash Flow 520,000
** Unit for one year.
The present value of cash inflows for 3 years at 10% = Rs. 520,000 × 2.49 = Rs. 1,294,800
Initial capital outlay being Rs. 1,000,000, NPV of the proposal = Rs. 294,800. Hence
the proposal should be accepted.
[c] (ii)
Statement showing additional contribution if contract is accepted and
product B is purchased externally
Per unit 4,800 units**
Particulars
(Rs.) (Rs.)
Selling Price 580 2,784,000
Purchase Price 480 2,304,000
Contribution 100 480,000
Additional Fixed Overheads 250,000
Increase in Annual Cash Flow 230,000
** Units for one year.
The present value of cash inflows for 3 years at 10% = Rs. 230,000 × 2.49 = Rs. 572,700
Initial capital outlay being zero, NPV of the proposal = Rs. 572,700
Conclusion / Recommendation:

Both 'Make Internally' and 'Purchase Externally' options give a

positive NPV. Hence, the contract should be accepted. However, the
'Purchase' option gives a greater NPV hence product B should
therefore be purchased externally. This option has added advantages of
minimising risk, since in the circumstances, it appears unnecessary to
make any capital investment to cope with the contract.
Question No.53
Central Services Department of Bisan Company Limited is evaluating new copying machines
to replace the firm’s current copier, which is worn out. The analysis of alternative machines has
been narrowed to three and the estimated costs of operating them are shown below:
(Cost/100 copies)
Machine A Machine B Machine C
(Rs.) (Rs.) (Rs.)
Material cost: 60 40 20
Labour cost: 80 30 20
Annual lease
cost: 30,000 58,000 1,00,000
Required:
i) Compute the cost indifference point for the three alternatives.
ii) Suggest course of action on the basis of indifference points.
iii) If the management expects to need 87,000 copies next year, which copier would be
the most economical? [June 2012 – 3(a), 6
Marks]
Answer
a)
I) Statement of Computation of the indifference points
II)
Particulars Machine A & B Machine B & C Machine C&A
Difference in fixed cost 28,000 42,000 70,000

Difference in variable
cost per unit 0.70 0.30 1.00
Indifference points= 28,000/0.70 42,000/0.30 70,000/1.00
difference in fixed cost =40,000 units =1,40,000 =70,000
Difference in v.c. per unit
Working note: computation of variable cost per unit

Amounts
Particulars Machine A Machine B Machine C
material cost 0.60 0.40 0.20
labour cost 0.80 0.30 0.20
total variable cost 1.40 0.70 0.40
III) Possible course of action
Requirements of copies Best alternative
Up to 40,000 Machine A
40,000 to 1,40,000 Machine B
1,40,000 and above Machine C
IV) If the requirements of copies is 87,000 the company should procure

machine B as this requirement falls under range 40,000-1,40,000
and in this range machine B is most economical.
Question No.54
Machapuchhre Ltd. is operating its factory in an urban area and has a plan to shift its
manufacturing operation in nearby rural areas. The variable cost of producing one unit of its
product ‘Safa’ is Rs. 10 for the company and total fixed cost for the period is Rs. 6,00,000.
Out of total fixed cost 25% purely relates to rates and taxes levied specifically for conducting
manufacturing operations in the urban area. Demand of ‘Safa’ is expected to be as given
below according to management estimation:
Sales Price 20 22 23 24 25
per unit
Sales in Rs. 15,12,000 15,84,000 15,87,000 15,36,000 14,04,000
Following is the cost related to manufacturing and transportation, if the

product is manufactured outside the city:
Site I Site II Site III Site IV Site V
Manufacturing Manufactured 9 8 7 6
cost (Rs. per at factory
unit) variable cost
Transportation
cost(lumsum) 30,000 84,000 2,00,000 2,52,000 3,00,000
You are required to evaluate the alternative proposals and suggest the best option.
[June 2012 – 4, 10 Marks]

Answer
Calculation of Contribution and profit if manufactured in Existing Factory
Premises
Sales Price per unit 20 22 23 24 25
Sales in Rs. 1512000 1584000 1587000 1536000 1404000
Units of Sales 75600 72000 69000 64000 56160

Variable Cost 10 10 10 10 10
Contribution 10 12 13 14 15
Total Contribution 756000 864000 897000 896000 842400
Fixed Cost 600000 600000 600000 600000 600000

Profit 156000 264000 297000 296000 242400
Hence the company has to produce and sale 69000 Units(1587000/23) of “Safa”
in order to maximize profit
Calculation of Contribution and profit if manufactured in Rural Factory

Premises
Sales Price per unit 23
Units of Sales 69000
Site I Site 2 Site 3 Site 4 Site 5
Variable cost 10 9 8 7 6
Contribution 13 14 15 16 17
Total Contribution 897000 966000 1035000 1104000 1173000
Transportation Cost 30,000 84,000 200,000 252,000 300,000
Net Contribution 867,000 882,000 835,000 852,000 873,000
Fixed Cost 450000 450000 450000 450000 450000
Profit 417,000 432,000 385,000 402,000 423,000
So It is recommended to Produce in Rural factory (Site 2) as it gives maximum profit of

Rs.432000
Question No.55
Cello Pen Company established a separate ball pen unit in year 2010 with normal capacity of
240,000 units per year. The company is selling ball pen for Rs. 35 per unit. Following data
and information are available for the year 2011:

Opening stock 52,000 unit

Unit produced 234,000 unit
Units sold 240,000 unit
Direct material cost Rs.6 per unit
Direct Labour cost Rs.6 per unit
Variable manufacturing overhead Rs.3 per unit
Fixed manufacturing overhead Rs.1,200,000
Variable Administrative overhead Rs. 0.80 per unit
Fixed Administrative overhead Rs.120,000
Variable selling and administrative overhead Rs.2 per unit
Fixed selling and administrative overhead Rs.240,000
Required:
i) Prepare profitability statement under marginal costing and absorption costing

method.
ii) Prepare reconciliation statement of profitability under marginal costing and
absorption costing method.
iii) Suggest the level of sales volume and sales unit where company will make neither
profit nor loss from the ball pen unit.
iv) How many units are to be sold to earn a profit of 25% on cost?
[June 2012 – 2(a), 8+2+3+2=15 Marks]
Answer
a)
i) Statement of Profitability under Marginal costing
Particulars Rs.
A. Total Sales (240,000 units × Rs. 35 p. u.) 84,00,000
Less: Variable Cost

Direct Material(234,000 units × Rs. 6 p. u.) 14,04,000
Direct Labour(234,000 units × Rs. 6 p. u.) 14,04,000
Variable manufacturing cost (234,000 units × Rs. 3 p. u.) 702,000
Add : Opening Stock ( 52,000 × Rs. 15) 7,80,000
Less: Closing Stock (46,000× Rs. 15) (6,90,000)
Variable cost of goods sold 36,00,000
Add : Variable Administrative Overhead ( 0.8×2,40,000) 1,92,000
Variable selling and distribution overhead (2×240000) 4,80,000
B. Total Variable Cost 42,72,000
C. Contribution 41,28,000
D. Less: Fixed Cost:

Manufacturing (12,00,000)
Administrative (1,20,000)
Selling and Distribution (2,40,000)
Profit under marginal costing 25,68,000
Statement of Profitability under absorption costing

Particulars Rs.
A. Total Sales 84,00,000
Less: Manufacturing cost of Goods Sold

Variable manufacturing cost 702,000
Fixed Production Overhead (12,00,000/2,40,000×234,000) 11,70,000
B. Manufacturing cost of Goods Produced (46,80,000)
Add : Opening Stock ( 52,000 units × Rs. 20) (W.N. 1) 10,40,000
Less: Closing Stock ( 46,000 × Rs. 20) (9,20,000)
Adjusted cost of Goods Sold 48,00,000
Add: Under-absorption of overhead ( 5×6,000) 30,000
a. Cost of goods Sold 48,30,000
D. Gross Profit (A-C) 35,70,000
Less: Variable Administrative Overhead ( 0.8×2,40,000) (192,000)
Fixed Administrative Overhead (120,000)
Variable selling and distribution overhead (2×240000) (4,80,000)
Fixed Selling and distribution overhead (2,40,000)
Profit under absorption costing 25,38,000
W.N. 1:
Total Manufacturing cost of goods produced Rs. 46,80,000
No. of units manufactured 234,000
∴ Cost per unit Rs. 20
ii) Reconciliation of profit under Marginal costing and absorption costing

Particulars Rs.
Profit under marginal costing 25,68,000
Add: Fixed Manufacturing overhead in closing stock ( 46,000×5) 230,000

Less: Fixed Manufacturing overhead in Opening stock ( 52,000×5) (2,60,000)
Profit under absorption costing 25,38,000

iii) Calculation of break-even-point

P/V ratio = contribution/sales ×100
= 41,28,000/84,00,000×100 =49.142%
Contribution per unit = Sales price per unit – Variable cost per unit
=Rs.35-Rs.17.80
= Rs.17.20
Break-even point =Fixed cost/ P/V ratio
= 15,60,000/49.142%
= Rs.31,74,474
Break-even-point ( units) = Fixed cost/contribution per unit
=15,60,000/17.20
= 90,698 unit
iv) Sales unit to earn 25% profit on cost; i.e. 20% on sales
Sales = (Fixed cost + Desired Profit)/ P/V Ratio
Let sales be X
Than X = (15,60,000 +20% of X)/49.142%
Or, 49.142% X = 15,60,000 +0.2X
X = Rs.1,560,000/0.29142
= Rs. 5,353,099
∴ Sales in unit = 5,353,099/35 = 152,946 units
Question No.56
The following are the details of a company for the year 2010 and 2011:
2010 (Rs.) 2011(Rs.)
Total sales 2,50,000 3,75,000
Total cost 1,75,000 2,62,500
Total profit 25,000 62,500
Required:
i) P/V Ratio
ii) Fixed costs
iii) Break-even point
iv) Margin of safety for both the years [December 2012 – 2(b), 6
Marks]

Answer
1. P V Ratio = Change in Profit / Change in Sales
= Rs 37,500 / 125,000 = 30%
2. Fixed Costs:
Contribution in 2011= P V Ratio × Sales
30 / 100 × Rs. 375,000
= Rs. 112,500
Now, Fixed costs = Contribution – Profit
= Rs. 112,500 – Rs. 62,500
= Rs. 50,000
3. Break-even sales in Rs. = Fixed Costs / P V Ratio
= Rs. 50,000 / 30%
= Rs. 166,667
4. Margin of Safety for 2010 = Actual Sales – Break-even Sales
= Rs. 250,000 – Rs. 166,667
= Rs. 83,333
Margin of Safety for 2011 = Actual Sales – Break-even Sales
= Rs. 375,000 – Rs. 166,667
= Rs. 208,333
Question No.57
Metalica Trading Ltd. makes and sells a single product. The company’s trading results for the
year 2010 are as follows :
Rs. ’000
Sales 3,000
Direct materials 900
Direct labour 600
Overheads 900
Total cost 2,400
Profit 600
For the year 2011, the following are expected:

xii) Reduction in the selling price by 10%
xiii) Increasing in the quantity sold by 50%
xiv) Inflation of direct material cost by 8%
xv) Price inflation in variable overhead by 6%
xvi) Reduction of fixed overhead expenses by 25%.
It is also known that;

i) In 2009, overhead expenditure totaled to Rs. 800,000.
ii) Total overhead cost inflation for 2010 has been 5% more than in 2009.
iii) Production and sales volumes have been 25% higher in 2010 than in 2009.

Required:
i) Prepare a statement showing the estimated trading results for 2011.
ii) Calculate the break-even point for 2010 and 2011.
iii) Comment on the BEP and profits of the 2010 and 2011.
[December 2012 – 4(a), 5+3+3=11 Marks]
Answer:
a) (i)
Statement showing trading results

A. Sales: 3,000 4,050 (3,000 × 150% × 90%)
B. Less: Variable Costs: Direct material 900 1,458 (900 × 150% ×
108%)
Direct labour 600 900 (600 × 150%)
Variable overhead (W.N.1) 300 477 (300 × 150% × 106%)
Total variable cost 1,800 2,835
C. Contribution [A – B] 1,200 1,215
D. Less: Fixed overheads 600 450 (600 × 0.75)
E. Profit [C – D] 600 765
(ii)
P/V Ratio = Contribution /Sales *100 = 1200/3000*100 1215/4050*100
= 40% = 30%
BEP = Fixed Cost / P/V Ratio = 600/40% = 450/30%
= Rs.1500 = Rs. 1500
(iii)
Particulars 2010 2011 % change
BEP 1500 1500 No Change
Fixed overheads 600 450 150/650*100 = 25%
P/V Ratio 40% 30% 10%/40%*100= 25%
Profit 600 765 -165/600*100=- 27.5%
Both fixed cost and P/V ratio have declined by 25% equally. So, BEP sales remain the same.
The contribution is only Rs. 1,215 in 2011 though quantity is increased by 50%. This is due
to increase in production cost and decrease in selling price. This is more than made up by
decrease in fixed cost so that overall profit has increased by 27.5%.
Working notes:
1. Calculation of variable overheads and fixed overheads
Total overheads for same production in 2010 = 800 × 105% = 840

Variable overheads for 2010 = (900-840)/ (125-100) *125 = 300

Fixed overheads for 2010 = 900 – 300 = 600
Question No.58
A company having its head office in Centown has three factories situated at Uptown,
Middletown and Downtown. The operations of Middletown have been unprofitable for a
number of years. The leasehold of Middletown will also expire by the end of current year. In
view of continued losses the management has decided to close down the said factory rather
than renew the lease. The factory's plant and machinery can be sold at a price higher than the
written down value and the surplus funds will be sufficient to cover all termination costs.
Projected profitability of the factories for the next year is as under:
(Rs. in lakhs)
Uptown Middletown Downtown Total
Particulars
Rs. Rs. Rs. Rs.
Sales 400 100 300 800
Variable costs 220 75 195 490
Fixed costs:
Factory 80 30 40 150
Selling & administration 30 5 15 50
Head office expenses apportioned 25 15 25 65
Profit 45 (25) 25 45
The company however would like to continue to serve the customers now being served by
the Middletown factory if it could do so economically. Accordingly following proposals
were put forward for consideration based on a selling price of Rs. 250 per unit.
j) Close down Middletown factory and expand the operations of Downtown factory for
which surplus capacity exists. This proposal will involve the following changes:
i) Sales revenue of Downtown factory will increase by 25%.
ii) Factory fixed costs of Downtown factory will increase by 10%.
iii) Fixed selling and administration cost of Downtown factory will increase by 5%.
iv) Variable distribution costs of additional output will increase by Rs. 4 per unit.
k) Close down Middletown factory and expand the operations of Uptown factory subject
to the following changes in case of later:
i) Sales revenue will increase by Rs. 80 lakhs.
ii) Factory fixed costs will increase by 20%.
iii) Fixed selling and administration cost will increase by 10%.
iv) Variable distribution costs in respect of the additional units will increase by Rs. 5
per unit.
l) Close down Middletown factory and enter into a long term contract with an
independent manufacturer to serve the customers of Middletown factory. The
manufacturer will pay a royalty of Rs. 5 per unit to the company. In that event the sales
of the area served by the Middletown factory will fall by 25%.

m) Close down Middletown factory and discontinue serving the present customers of that
area.
You are required to evaluate each of these proposals and advise the management of the
action to be taken in the interest of improving profitability of the company.
Answer
Evaluation of Proposal (i)
Closing of Middletown factory and expanding Downtown factory
Statement of Profit
(Rs. in lakhs)
Uptown Downtown Total
Particulars
Rs. Rs. Rs.
Sales 400.00 375.00 775.00
Variable costs:
Factory [WN 1] 220.00 243.75 463.75
Additional distribution [WN 2] - 1.20 1.20
Total variable costs 220.00 244.95 464.95
Contribution 180.00 130.05 310.05
Fixed costs:
Factory 80.00 44.00 124.00
Selling & administration [WN 3] 30.00 15.75 45.75
Total fixed costs 110.00 59.75 169.75
Factory contribution 70.00 70.30 140.30
Head office expenses apportioned 65.00
Profit 75.30
Working Notes:
1. Variable factory cost of Downtown factory = (Rs. 195 lakhs × 1.25) = Rs. 243.75
lakhs.
2. Present sales at Downtown Rs. 300.00 lakhs.
Selling price per unit = Rs. 250.00
Number of units sold = Rs. 300.00 lakhs / Rs. 250.00 = 120,000 units.
Additional sales as per proposal (i) = 120,000 × 25% = 30,000 units.
Additional variable distribution costs = 30,000 × Rs. 4 = Rs. 120,000
3. Fixed selling and administration costs in Downtown = Rs. 15.00 lakhs ×
1.05 = Rs. 15.75 lakhs.
Evaluation of Proposal (ii)

Closing of Middletown factory and expanding Uptown factory
Statement of Profit
(Rs. in lakhs)


Particulars
Rs. Rs. Rs.
Sales 480.00 300.00 780.00
Variable costs:
Factory [WN 1] 264.00 195.00 459.00
Additional distribution [WN 2] 1.60 - 1.60
Total variable costs 265.60 195.00 460.60
Contribution 214.40 105.00 319.40
Fixed costs:
Factory 96.00 40.00 136.00
Selling & administration 33.00 15.00 48.00
Profit 70.40
Working Notes:
1. Variable costs at Uptown = Rs. (220 × 480 / 400) = Rs. 264.00 lakhs.
2. Additional sales in units at Uptown = Rs. 80.00 lakhs / Rs. 250.00 = 32,000 units.
Variable distribution costs = Rs. 5 × 32,000 = Rs. 160,000
Evaluation of Proposal (iii)

Closing of Middletown factory and subcontracting production
Statement of Profit
(Rs. in lakhs)
Particulars
Rs. Rs. Rs.
Sales 400.00 300.00 700.00
Variable costs 220.00 195.00 415.00
Contribution 180.00 105.00 285.00
Fixed costs:
Factory 80.00 40.00 120.00
Selling & administration 30.00 15.00 45.00
Add: Royalty for Middletown factory 1.50
121.50
Profit 56.50

Working Notes:
Present sales of Middletown factory = Rs. 100.00 lakhs.
Sales under new arrangement = Rs. 100 lakhs × 75% = Rs. 75 lakhs.
Number of units = Rs. 75 lakhs / Rs. 250 = 30,000 units.
Royalty = Rs. 5.00 × 30,000 = Rs. 150,000
Evaluation of Proposal (iv)

Closing of Middletown factory
Statement of Profit
(Rs. in
lakhs)
Particulars
Rs. Rs. Rs.
Factory contribution [See (iii) above] 70.00 50.00 120.00
Profit 55.00
Conclusion / Recommendation:
The above calculations show that the company will make the highest profit
under proposal (i) i.e. "Closing of Middletown factory and expanding the
operations of Downtown factory". Hence, this proposal should be preferred
over other proposals.
Question No.59
A company is at present working at 90% of its capacity and producing 13,500 units per
annum. It operates a Flexible Budgetary Control System. The following figures are obtained
from its budget:
Capacity utilization 90% 100%
Sales Rs. 1,500,000 Rs. 1,600,000
Fixed expenses 300,500 300,600
Semi fixed expenses 97,500 100,500
Variable expenses 145,000 149,500
Units manufactured 13,500 15,000
Material and labour costs per unit are constant under the present conditions. Current
profit margin is 10% on sales.
Required:
i) Determine the differential cost of producing 1,500 units by increasing capacity
utilization to 100 percent.
ii) What would you recommend as an export price per unit for these 1,500 units after
considering that overseas prices are much lower than inland prices?

Answer
(i) Differential cost of producing 1,500 units:
Existing Proposed Differences
Capacity levels 90% 100% 10%
Output (in units) 13,500 15,000 1,500
Costs: Rs. Rs. Rs.
Materials and Labour (WN:1) 807,000 896,667 89,667
Variable expenses 145,000 149,500 4,500
Semi-fixed expenses 97,500 100,500 3,000
Fixed expenses 300,500 300,600 100
1,350,000 1,447,267 97,267
Hence, differential cost for producing 1,500 units is Rs. 97,267
(ii) Minimum price for export = Rs. 97,267/1,500 = Rs. 64.84

At the minimum price of Rs. 64.84 per unit, there will be no additional profit to the
company. A price below this may be considered if there is a possibility of getting
some benefits because of export e.g. exports incentives or subsidy from the
government.
It has been presumed in the above case that utilization of full capacity would not
require any additional capital investment.
Working notes:
1. Computation of cost of Material and Labour:
Rs. Rs.
Sales at 90% Capacity 1,500,000
Less: Profit @ 10% 150,000
Total cost 1,350,000
Less other expenses:
Fixed 300,500
Semi-fixed 97,500
Variable 145,000 543,000
Material & Labour cost: At 90% capacity 807,000
Material & Labour cost: At 100% capacity (Rs. 807,000 ×
896,667
100/90)
Question No.60
A company wants to buy a new machine to replace one, which is having frequent breakdown.
It received offers for two models, M1 and M2. Further details regarding these two models are
given below.

Particulars M1 M2
Installed Capacity [Units] 10,000 10,000
Fixed overheads per annum Rs. 240,000 Rs. 100,000
Estimated profit at the above Rs. 160,000 Rs. 100,000
capacity
The product manufactured using this type of machine, M1 or M2, is

sold at Rs. 100 per unit.
Required:
i) Determine the break-even level of sales for each model.
ii) Calculate the level of sales at which both the models will earn the same profit.
Answer
i. Computation of break-even level for both the machines
 Machine M1: Fixed cost Rs.2, 40,000; The variable cost and contribution per unit will
be:
Particulars Amount Rs.

Installed capacity – 10000 units
Estimated profits 1,60,000
Total contribution [Fixed overheads + Estimated profits] 4,00,000
Sales value: 10000 units X Rs.100 10,00,000
Variable cost [Sales – Contribution 6,00,000
Variable cost per unit 60
Profit/Volume ratio: Contribution/Sales X 100 40%
Break Even Sales = Fixed Cost / P/V Ratio = Rs.2, 40, 000 / 40%
= Rs.6, 00,000
Break Even Sales = 6,000 units
 Break Even Sales: M2

c)
Installed capacity – 10000 units
Estimated profits 1,00,000
Total contribution [Fixed overheads + Estimated profits] 2,00,000

Sales value: 10000 units X Rs.100 10,00,000

Variable cost [Sales – Contribution] 8,00,000
Profit/Volume ratio: Contribution/Sales X 100 20%
Break Even Sales: Fixed Cost/Profit/Volume Ratio = Rs.1, 00,000 /20% = Rs.5,
00,000
Break Even Units = 5, 000
ii. The level of sales at which both the machines will earn the same profit
Level of sales at which both machines will earn the same profit will be the difference
in fixed cost/difference in variable cost
= (Rs.2, 40,000 – Rs.1, 00,000) / (Rs.80 – Rs.60)
= Rs.1, 40,000 /Rs.20
= 7000 units
Thus, at 7000 units, the total costs of both the machines will be same and hence
they will earn the same amount of profits.
Question No.61
Citizen Ltd. manufactures three products X, Y and Z. Standard selling prices and costs per
unit have been established for the year 2071 as follows:
(Amount in Rs.)
X Y Z
Selling price 280 600 1,250
Direct materials 80 150 200
Variable overheads 50 100 250
Direct wages are paid at the rate of Rs. 20 per hour in each case. Fixed overheads are
budgeted at Rs. 250,000 for the coming year. In short run, the company cannot increase
its direct labour strength and as a result, only 35,000 direct labour hours will be available
in the coming year. The company has commitments to produce 500 units of each
product. It has been suggested that after meeting the minimum requirements for X, Y and
Z, the balance of available direct labour hours should be used to produce product Z.
Required:
a) Prepare an income statement showing the expected results if the proposal is
adopted.

b) Comment on the statement you have produced in (a) above and prepare an income
statement for any alternative policy which you consider would be more profitable.
c) Based on your calculations in (b) above, show the company's break-even points in
terms of units and sales value.
d) Show the sales value which is required to produce an after tax return of 10% on
capital employed of Rs. 900,000 assuming tax rate of 50%.
[June 2014 – 1, 6+6+3+5=20 Marks]
Answer:
a) Statement showing the Income of Citizen Limited for the year
2071
X Y Z
Selling price per unit (Rs.) 280 600 1,250
Variable cost per unit: (Rs.)
Direct materials 80 150 200
Variable overheads 50 100 250
Total variable costs (Rs.) 230 450 950
Contribution margin per unit (Rs.) 50 150 300
Units produced 500 500 1,100
Total contribution (Rs.) 25,000 75,000 330,000
Total contribution (Rs.) 430,000

Less: Fixed costs (Rs.) 250,000
Net Profit (Rs.) 180,000
Working Notes:
Total direct labour hours available 35,000
Labour hours used for 500 units of X [Rs. 100 / Rs. 20 × 500] 2,500
Labour hours used for 500 units of Y [Rs. 200 / Rs. 20 × 500] 5,000
Labour hours used for 500 units of Z [Rs. 500 / Rs. 20 × 500] 12,500 20,000
Remaining direct labour hours 15,000
As given in the question, the remaining 15,000 direct labour hours as
calculated above will be used to produce product Z. Therefore, the units of
product Z produced will be as follows:
Minimum committed units 500
Units produced from remaining labour hours [15,000 / 25] 600
Total units 1,100
b) In the given question the limiting factor is direct labour hours. So, the
remaining 15,000 direct labour hours should be used for the product which

gives maximum contribution per direct labour hour. The contribution per
direct labour hour is calculated as follows:
X Y Z
Contribution margin per unit as above (Rs.) 50 150 300
Direct labour hours per unit (Wages / Rs. 20) 5 10 25
Contribution margin per direct labour hour (Rs.) 10 15 12
Ranking III I II
As product Y gives the maximum contribution per direct labour hour, the remaining 15,000 direct labour h
Minimum committed units 500

Units produced from remaining labour hours [15,000 / 10] 1,500
Total units 2,000
Statement of income of Citizen Limited under alternative policy for the year 2071
X Y Z
Contribution margin per unit as per (a) above (Rs.) 50 150 300
Units produced 500 2,000 500
Total contribution (Rs.) 475,000

Less: Fixed costs (Rs.) 250,000
Net Profit (Rs.) 225,000
c) Citizen Ltd's break-even point in terms of sales units and value:

It is given in the question that the company has to produce 500 units of each
product. At break-even point, the contribution is just sufficient to meet the fixed
costs. The contribution from the minimum committed units of three products is as
follows:
X Y Z
Contribution margin per unit as per (a) above (Rs.) 50 150 300
Units produced 500 500 500
Total contribution from minimum committed units is Rs. 250,000 and fixed costs
of the company is also Rs. 250,000. Therefore, the break-even point in terms of
sales unit is 500 units of each product. Similarly break-even point in terms of
sales value is [(Rs. 280 × 500) + (Rs. 600 × 500) + (Rs. 1,250 × 500)] = Rs.
1,065,000
OR,
Can be calculated through overall PV ratio as below

50+150+300
PVR= 280+600+1250
=0.234742
250,000
Overall BEP sales = 0.234742
BEP unit product of each product
=
d) Computation of sales value to produce an after tax return of 10% on capital

employed:
Rs.
Capital employed 900,000
Required return after tax @10% 90,000
Tax @ 50% 90,000
Total required return 180,000
As per (c) above, the company has to produce 500 units of each product to break-
even. The remaining 15,000 direct labour hours must be utilized to produce
product Y, which gives highest contribution per labour hour. Therefore, for
finding the sales value to produce a 10% return on capital employed, the gross
return should be divided by contribution per unit of product Y as follows:
Desired gross return (Rs.) 180,000
Contribution margin per unit of Y (Rs.) 150
Number of additional units to be produced 1,200
Now, total sales value will be:
Rs.
Product X : 500 units @ Rs. 280 140,000
Product Y : 1,700 units @ Rs. 600 1,020,000
Product Z : 500 units @ Rs. 1,250 625,000
Total 1,785,000
Question No.62
Dokomo makes and sells a single product, Product "X". It is currently producing 112,000
units per month, and is operating at 80% of full capacity. Total monthly costs at the current
level of capacity are Rs. 611,000. At 100% capacity, total monthly costs would be Rs.
695,000. Fixed costs would be the same per month at all levels of capacity between 80% and
100%. At the normal selling price for Product X, the contribution/sales ratio is 60%. A new
customer has offered to buy 25,000 units of Product X each month, at 20% below the normal
selling price. Dokomo estimates that for every five units that it sells to this customer, it will
lose one unit of its current monthly sales to other customers.
Required:
iv) Calculate the variable cost per unit of Product X and total fixed costs per month.

v) Calculate the current normal sales price per unit, and the contribution per unit at
this price.
vi) Calculate the effect on total profit each month of accepting the new customer’s
offer, and selling 25,000 units per month to this customer. Recommend whether
the customer’s offer should be accepted.
[June 2014 – 2(b), 2+2+4=8 Marks]
Answer:
i) Units that can be produced per month at 100% capacity level are 112,000 /
0.80 = 140,000 units.
High Low Difference
Units produced 140,000 112,000 28,000
Total costs (Rs.) 695,000 611,000 84,000
Variable cost per unit = Rs. 84,000 / 28,000 units = Rs. 3.00
Computation of Fixed Cost:
112,000 units 140,000 units
Total costs (Rs.) 611,000 695,000
Variable costs @ Rs. 3 per unit 336,000 420,000
Fixed costs per month (Rs.) 275,000 275,000
Note: Calculation of fixed cost for any one activity level is good enough to
award full marks.
ii) Contribution/sales ratio = 60%

Therefore, variable cost/sales ratio = 40%
The normal sales price per unit = Rs. 3 / 0.40 = Rs. 7.50
The contribution per unit at the normal selling price is Rs. 7.50 – Rs. 3.00
= Rs. 4.50
iii) If the customer’s offer is accepted, the sales price for the 25,000 units will
be Rs. 7.50 × 80% = Rs. 6 per unit.
The contribution per unit for these units will be Rs. 6 – Rs. 3 = Rs.
3
The reduction in monthly sales at the normal price will be 1/5 × 25,000 =
5,000 units.
Therefore,
Increase in contribution from 25,000 units sold (25,000 × Rs. 3) Rs. 75,000
Loss of contribution from fall in other sales (5,000 × Rs. 4.50) Rs. 22,500
Net increase in profit each month Rs. 52,500
By accepting the new customer’s offer, the profit would increase by Rs.
52,500 each month. The offer should therefore, be accepted.
Question No.63
A company markets products X and Y which it makes by using its capacity to the extent of
50% on X and 30% on Y. Budget for 2014 is as given below:

X Y
Production units 5,000 4,500
Direct materials/unit Rs. 300 Rs. 200
Conversion cost/unit
Variable Rs. 100 Rs. 80
Fixed Rs. 50 Rs. 40
Selling price per unit Rs. 500 Rs. 350

Profit per unit Rs. 50 Rs. 30
For the next year's budget, the following factors are relevant:
 Direct Material cost will go up by 6%
 Variable conversion cost will increase by 10%
 Selling price of: X will be increased by 4% and Y will be increased by 6%
To utilize the idle capacity of 20%, three proposals as under were put forth:
n) Produce X and sell the output at the revised price. Production of X from the idle
however will be less by 10%
o) Produce Y but the increased production will be sold at the existing price
p) Utilize the idle capacity to produce a new product Z whose details are as under:
 Production form idle capacity: 2,000 units

 Direct Materials: Rs. 400 per unit
 Variable conversion cost: Rs. 200 per unit
 Selling price: Rs. 700 per unit
 Special publicity Expense: Rs. 20,000
 The present allocation of 50% and 30% respectively on products X and Y cannot
be changed.
You are required to prepare Statements of Profitability for 2014 and
2015.
Answer:
Statement showing the profitability of the products for 2014 as

per budget production (units) X= 5,000 and Y=4,500
Details Per unit Total Total
X Y X Y
1.Selling Price 500 350 2,500,000 1,575,000 4,075,000
2.Costs:

Direct Material 300 200 1,500,000 900,000 2,400,000

Conversion Cost:
Variable 100 80 500,000 360,000 860,000
Fixed 50 40 250,000 180,000 430,000
3.Total of 2 450 320 2,250,000 1,440,000 3,690,000
4.Profit (1-3) 50 30 250,000 135,000 385,000
a) Total contribution if Product X is produced
Production of X at 50% Capacity 5,000 units

Production of X at 20% Capacity 2,000 units
Less: 10% of this production 2,00 units
Net production of X if idle capacity is utilized 1800 units
Existing Increase Revised

(%) (Per unit)
Selling price 500 4% 520
Direct Materials 300 6% 318
Conversion Costs –variable 100 10% 110
Total Variable Cost 428
Total Contribution (1,800* Rs.92) Rs.165,600
b) Total contribution if Product Y is produced
Production of Y at 30% Capacity 4,500 units

Production of Y at 20% Capacity 3,000 units
Existing Increase Revised

(%) (Per unit)
Selling price 350 350
Direct Materials 200 6% 212
Conversion Costs –variable 80 10% 88
Total Variable Cost 300
Total Contribution (3,000* Rs.50) Rs.150,000
b) Total contribution if a new product Z is produced

c)

( Per unit)
Selling price Rs.700
Direct Materials Rs.400
Variable conversion cost Rs.200
Total Variable Cost Rs.600
Contribution per unit Rs.100
Total contribution ( 2,000 units * Rs.100) Rs.200,000

Less: Special publicity expense Rs.20,000
Net Total Contribution Rs.180,000
This proposal should be accepted as the total contribution is highest when

product Z is produced.
It is given in the proposal ( b) above that if product Y is produced in the idle

time, then additional production will be sold at the existing prices. Since
proposal (c) is recommended, the revised selling price of product Y will be :
Existing selling price per unit Rs. 350

Add: 6% increase in price Rs. 21
Revised price of product Y Rs. 371
Statement showing the profitability of three products for 2015 as per revised
budget
production (units) X= 5,000, Y=4,500 and Z=2,000
Details Per unit Total Total
X Y Z X Y Z
1.Selling Price 520 371 700 2,600,00 1,669,500 1,400,00 5,669,500
0 0
Direct Material 318 212 400 1,590,00 954,000 800,000 3,344,000
0
Conversion Cost- 110 88 200 550,000 396,000 400,000 1,346,000
variable
Total V. costs 428 300 600 2,140,00 1,350,000 1,200,00 4,690,000
0 0
Contribution 92 71 100 460,000 319,500 200,000
Total Contribution 979,500


Publicity for Z 20,000
Net Profit 529,500
Question No.64
Mr X has Rs. 200,000 investment in his business firm. He wants a 15 percent return on his
money. From an analysis of recent cost figures, he finds that his variable cost of operating is
60% of sales; his fixed costs are Rs. 80,000 per year. Show computation to answer the
following question:
i) What sales volume must be obtained to break even?
ii) What sales volume must be obtained to get 15 percent return on investment?
iii) Mr. X estimates that even if the closed the doors of his business, he would incur
Rs. 25,000 as expenses per year. At what sales would he be better off by locking
his business up. [July 2015 – 2(c), 4 Marks]
Answer:
Suppose sales Rs.100
Variable cost 60
-------------
Contribution 40
-------------
P\V Ratio 40%
Fixed cost Rs. 80,000
iv) B.E Point = Fixed cost÷P/V Ratio=80,000÷40% = Rs. 2,00,000
v) 15% return on Rs. 200,000 Rs. 30,000
Fixed cost 80,000
----------
---
Contribution required 1,10,000
Sales volume required=Rs.110,000÷40% or Rs. 275,000
vi) Fixed cost even if business is locked up=Rs. 25,000
Minimum sales required to meet this cost: Rs. 25,000÷40% or
Rs 62,500
Mr X will be better off if the sale is more than Rs. 62,500
Question No.65
A Pharmaceuticals company produces formulations having a shelf life of one year The
company has an opening stock of 15,000 boxes on 1st January , 2015 and expects to produce
65,000 boxes as was in the just ended year of 2014 .Expected sale would be 75,000 boxes.
Costing department has worked out escalation in cost by 25% on variable cost and 10% on
fixed cost for the year 2015. Fixed costs are estimated at Rs. 1,430,000. New price announced

for 2015 is Rs. 50 per box. Variable cost of the opening stock is Rs. 20 per box.
Required:
i) To find out break -even volume for the year 2015, and
ii) To estimate the profits that would be realised on the sale during
2015.
Sales Managers of two companies compare notes and find that their sales turnover for last
year was the same viz, Rs. 10 lakhs and the profits they made also were the same being 10%
of turnover. In one company the fixed cost were double the variable costs while in the other,
it was quite opposite -the variable costs were double the fixed costs. As an accountant, do you
think that they are equally profitable? If not, discuss their relative vulnerability to market
conditions.
Answer
(i) This product has a shelf life of one year hence the company will first dispose of the
opening stock as on 1st January 2015. This would give a contribution of Rs 4.50 lakhs {i,e
15,000×(Rs.50-Rs 20)}.
The fixed cost for the year is estimated to Rs. 14.30 lakhs. Hence, the balance fixed cost to be
recovered amount to Rs 9.80 lakhs (i,e , Rs 14,30,000-Rs 4,50,000).
Variable cost would go up by 25% in 2015. The variable cost for the year 2015 would
therefore be Rs 20×1.25=Rs.25. Thus , new contribution from selling price of Rs.50 would
amount to Rs. 25 per box.
The sales volume(in units) required to recover the balance of fixed costs would therefore be :
9,80,000÷25=39,200 boxes
The Break- even point for the year would therefore be at a production of:
15,000+39,200=54,200 Boxes.
(ii) Total fixed Cost =Rs 14.30 lakhs

Production =65,000 boxes
Fixed Cost per Box =Rs. 22
This is higher by 10% compared to 2014.The element of fixed cost per box included in
opening stock on Jan 1, 2015 would therefore be Rs 20.
The price break -up per box is as follows:
Opening stock Current
production
Variable Cost 20 25
Fixed Cost 20 22
Profit Margin 10 3
Selling Price 50 50
Profit on sale of 75,000 boxes during 2015 would be as follows :-

For 15,000 boxes @Rs 10 Rs 1,50,000

For 60,000 boxes @Rs 3 Rs 1,80,000
For 75,000 boxes Rs 3,30,000
STATEMENT OF PROFITABILITY
(Rs in lakhs)
Company x Company
y
Sales 10 10
Less: Variable Costs 3 6
Contribution 7 4
Less: Fixed Costs 6 3
Profits 1 1
P/V Ratio 70% 40%

Break -even point 8.57 7.5
Margin of Safety 14.3% 25%
It is clear from the above analysis that the Company X and Company Y are not equally
profitable. Company X has a higher P/V Ratio as compared to company Y. But at the same
time ,its fixed costs are also high .As a result company X is more vulnerable to market
fluctuations as compared to company Y. For example if the sales fall by 20% the company X
will suffer a loss of Rs 40,000 while company Y will still make a profit of Rs 20,000. This
shows that a company with a low fixed cost and high variable cost is less vulnerable to
market fluctuations as compared to a company with low variable costs and high fixed costs.
Working Notes:
(i) Computation of Variable Cost for Company X
Let the variable costs for company X be 'X'
Fixed costs for company X will be 2X
Total costs=9 lakhs
Hence X+2X=9 lakhs
or X=3 lakhs.
The Fixed costs in company X will therefore be Rs. 6 lakhs.
(ii) Computation of Variable Costs for company Y
Let the variable costs of Y be 'Y'
The fixed Cost will be 0.5 Y
Total Costs= 9 lakhs.
Hence, Y+0.5Y= 9lakhs.
or Y=6 lakhs.
In Company Y, the Variable Costs are therefore Rs. 6 lakhs and Fixed Costs are Rs. 3 lakhs.

Question No.66
Calcutta Company Ltd. manufactures and sells four types ofproducts under the brand name
ACE,UTILITY,LUXURY and SUPREME.The sales mix in value comprises:
Brand Percentage
ACE 33-1/3%
UTILITY 41-2/3%
LUXURY 16-2/3%
SUPREME 8-1/3%
100%
The total budgeted sales(100%) are Rs. 6,00,000 per month .The operating cost are:
ACE60% of the selling priceLUXURY 80 % of the selling price.
UTILITY 68%of the selling priceSUPREME 40 % of the selling price.
The fixed costs are Rs.1,59,000 per month. Calculate the break even point for the
products on an overall basis.
It has been proposed to change the sales mix as follows, the total sales per month
remaining Rs. 600,000:
Brand Percentage
ACE 25%
UTILITY 40%
LUXURY 30%
SUPREME 5%
100%
Assuming that this proposal is implemented, calculate the new break- even point.
[June 2016 – 3(a), 8 Marks]
Answer
Computation of the overall break even point
Particulars ACE UTILITY LUXURY SUPREME TOTAL
Sales Mix 33-1/3% 41-2/3% 16-2/3% 8-1/3% 100%
Rs Rs Rs Rs Rs
Sales 200,000 2,50,000 1,00,000 50,000 6,00,000
Less:VariableCosts 1,20,000 1,70,000 80,000 20,000 3,90,000
Contribution 80,000 80,000 20,000 30,000 2,10,000
Composite P/V Ratio =Total Contribution/Total Sales×100
=Rs 2,10,000/Rs 6,00,000×100=35%
Break -even Point(sales value)=Total Fixed Costs/Composite P/V Ratio
=Rs 1,59,000/35%=Rs4,54,286
COMPUTATION OF NEW BREAK EVEN POINT(after change in sales mix)

Particulars ACE UTILITY LUXURY SUPREME TOTAL
Revised Sales Mix 25% 40 % 30% 5% 100%
Rs.RsRsRsRs

Sales Mix 1,50,000 2,40,000 1,80,000 30,000 6,00,000

Less: Variable Costs 90,000 1,63,200 1,44,000 12,000 4,09,200
Revised Contribution 60,000 76,800 36,000 18,000 1,90,800
New Composite P/V ratio =Rs 1,90,800/Rs 6,00,000×100 =31.8%

New Break -even Point (Sales value) =Rs 1,59,000/31.8% = Rs 5,00,000
Question No.67
Trilochan Industries is manufacturing several consumer durables which have good demand in
the market. The firm has been established only very recently and currently it is in the stage of
introduction. It has ambitious plans to expand production after earning a name in the market.
However, the company is having problems to get adequate power supply. Moreover most of
its labourers are casual workers and labour–absenteeism is also affecting production. In view
of these unstable conditions the firm has adopted the practice of preparing quarterly flexible
budgets. For the quarter ending 31st December, 2015 flexible budgets for three possible levels
of production were prepared as follows. The company wanted to achieve 90% capacity
utilization as its products had good demand.
Flexible Budget (Rs. in Lakhs)
Capacity utilization 60% 80% 90%
Budgeted sales 50.00 66.00 75.00
Budgeted costs:
Direct labour 15.00 20.00 22.50
Production overheads 11.80 14.00 15.10
Administration overheads 2.00 2.00 2.00
Selling overheads 7.80 9.80 10.20
Soon after the decision to attain 90% capacity utilization, available power was reduced by
the Nepal Electricity Authority and the reduced supply was sufficient to meet 50%
capacity production. The position has been immediately reviewed and the firm is
considering the following possible options to meet the situation:
a) Stop production for the quarter. As regular employees are only few, lay off
compensation payable will be only Rs. 1.20 lakhs. Further, Fixed Overheads can be
reduced by as much as 60%.
b) Continue production at 50% level. Estimated sales income at this level will be Rs. 40
lakhs.
c) A private agency in the area has offered surplus captive power available with it. With
this additional power supply production can be maintained at 90% level. However.
The overall variable production overhead will increase by 40%.

d) Sub-contract the balance 40% which cannot be made by the firm to two small
industrial units in the area, which have the necessary facilities, equally at a cost of Rs.
15 lakhs each.
Required:
i) Calculate the profit/loss at 50% and 90% capacity utilization.
ii) Evaluate each of the above options and recommend the best plan.
[December 2016 – 1, 12+8=20 Marks]
Answer
Working Notes:
1. Variable Cost
Direct Materials: At 90% capacity = Rs. 18.00 Lakhs
At 50% capacity = Rs. 18.00 Lakhs/0.9 x 0.5 = Rs 10.00 Lakhs
Direct Labour : At 90% capacity = Rs. 22.50 Lakhs

At 50% capacity = Rs. 22.50 Lakhs/0.9 x 0.5 = Rs 12.50 Lakhs
2. Fixed cost
Administration Overheads = Rs. 2.00 Lakhs
3. Segregation of semi-variable Production Overheads into variable and fixed

components. (i) Variable Component = Change in cost / Change in capacity
= (Rs. 15.10 lakhs – Rs. 11.80 lakhs) /(90% - 60% )
= Rs. 3.30 lakhs /30%
= Rs. 0.11 lakhs for each 1% capacity
Variable production overhead

At 50% capacity = Rs. 0.11 lakhs x 50 = Rs. 5.5 lakhs
At 90% capacity = Rs. 0.11 lakhs x 90 = Rs 9.90 lakhs
(ii) Fixed production overhead = Rs. 11.80 lakhs – (Rs. 0.11 lakhs x 60) = Rs. 5.20
lakhs
4. Segregation of semi-variable Selling Overheads into variable and fixed components.

(i) Variable Component = Change in cost / Change in capacity
= (Rs. 10.20 lakhs – Rs. 7.80 lakhs) /(90% - 60% )
= Rs. 2.40 lakhs /30%
= Rs. 0.08 lakhs for each 1% capacity
Variable selling overhead

(ii) Fixed selling overhead = Rs. 7.80 lakhs – (Rs. 0.08 lakhs x 60) = Rs. 3.00 lakhs

(i) Flexible Budget ( Rs. in

lakh)
Capacity
50% 90%
Sales (A) 40.00 75.00
Direct material 10.00 18.00
Direct labour 12.50 22.50
Variable overheads
- Production 5.50 9.90
- Selling 4.00 7.20
Total Variable Cost 32.00 57.6
Fixed overheads
- Production 5.20 5.20
- Administration 2.00 2.00
- Selling 3.00 3.00
Total Fixed Cost 10.20 10.20
Total cost (B) 42.20 67.80
Net profit / (loss) (A) – (B) (2.20) 7.20
(ii)
(a) Loss to be incurred if stoppage of operations (Rs.
Lakhs)
Lay off compensation 1.20
Fixed overheads (Rs. 10.20 lakhs x 40/100) 4.08
Loss if operations are closed 5.28
(b) Loss if continue production at 50% level
Loss would be Rs. 2.20 lakhs (Calculation given above)
(c) Profitability if production is at 90% capacity (Rs.

Lakhs)
Profit (as calculated above) 7.20
Less: Additional cost due to purchase of Power from Private agency
(Rs. 9.90 x 40/100) 3.96
Net profit 3.24
(d) Profitability of operation at 50% capacity and sub-contracting the balance

40%
(Rs.
Lakhs)

Total cost - at 50% capacity

42.20
Sub-contract charges (Rs. 15.00 lakhs x 2) - for balance 40% capacity 30.00
Variable selling overhead (Rs. 7.20 lakhs – Rs. 4 lakhs) – for 40% capacity 3.20
Total cost 75.40
Loss (balancing figure) 0.40
Sales 75.00
Recommendations: From analysis of above alternative C is most profitable

with which the company can earn a profit of Rs. 3.24 lakhs. Hence, operation
at 90% capacity with the purchase of power from private agency is the
suggested mode of action.
Question No.68
Maxim Ltd. manufacture a product “N-joy”. In the month of August 2016, 14,000 units of the
product “N-joy” were sold, the details are as under:
(Rs.)
Sales Revenue 2,52,000
Variable Overheads 35,000
Fixed Overheads 28,000
A forecast for the month of September 2016 has been carried out by the General
Manager of Maxim Ltd. As per the forecast, price of direct material and variable
overhead will be increased by 10% and 5% respectively.
Required:
i) Number of units to be sold to maintain the same quantum of profit that made in
August 2016.
ii) Margin of safety in the month of August 2016 and September 2016.
Answer
Calculation of Profit made in the month of August 2016 by selling 14000 units.
Amount per unit (Rs.) Amount (Rs.)
Sales Revenue 18.00 2,52,000
Less: Variable Costs:
- Direct Material 8.00 1,12,000
- Direct Labour 3.50 49,000
- Variable Overhead 2.50 35,000
Contribution 4.00 56,000
Less: Fixed Overhead 2.00 28,000
Profit 2.00 28,000

(i) To maintain the same amount of profit i.e. Rs. 28,000 in September 2016
also, the company needs to maintain a contribution of Rs. 56,000.
Let, number of units to be sold in September 2016 is ‘x’, then the contribution will
be
Rs. 18x – [(Rs. 8*1.10) + Rs. 3.5 + (Rs. 2.5*1.05)] x = Rs. 56,000
Rs. 18x – ( Rs. 8.8 + Rs. 3.5 + Rs. 2.625) x = Rs. 56,000
Rs.56,000
Or, x = Rs.3.075
= 18,211.38 units or 18,212 units.
(ii) Margin of Safety

August 2016 September 2016
Profit Rs. 28,000 Rs. 28,000
P/V Ratio 𝑅𝑠 4 𝑅𝑠 3.075
∗ 100 ∗ 100
𝑅𝑠 18 𝑅𝑠 18
Rs. 1,26,000 Rs.1,63,902.44

28,000 28,000
( ∗ 18 ∗ 100) ( ∗ 18 ∗ 100)
Margin of safety 4 3.075
𝑃𝑟𝑜𝑓𝑖𝑡
( ∗ 100)
𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
Question No.69
The XYZ Company owns and operates a chain of 50 stores. Budgeted data for the stores no.
25 and store no. 50 are as follows:
Stores no. 25 Store no. 50
Annual sales Rs. 4,50,000 Rs. 5,00,000
Annual cost of sale and other operating cost Rs. 3,82,000 Rs. 4,25,000
Annual building ownership cost not included above) Rs. 20,000 Rs. 40,000
The company lease the building to a large flower shop for Rs. 4000 and Rs. 5000 the stores
no. 25 and store no. 50 per month respectively. Decide whether to continue operations of these
stores or lease out. [December 2016 – 4(c), 5
Marks]
Answer
Particulars Continue Operation Lease out
Store no 25 Store no 50 Store no 25 Store no 50
1,Sale Revenue/Lease 4,50,000 5,0,0000 48,000 60,000
rent

Annual cost of sale and 3,82,000 4,25,000 - -

Other operating cost
Ownership cost 20,000 40,000 20,000 40,000
2.Total cost 4,02,000 4,65,000 20,000 40,000
3. Profit/saving(1-2) 48,000 35,000 28,000 20,000
Decision
The above analysis shows that store no 25 and store no 50 continue.
Question No.70
Saubhagya Ltd is operating at 70 percent capacity and presents the following information:
Break-even point Rs. 200 crores
P/V ratio 40 per cent
Margin of safety Rs.50 crores
Saubhagya’s management has decided to increase the production to 95 percent capacity level
with the following modifications:
7) The selling price will be reduced by 8 per cent.
8) The variable cost will be reduced by 5 percent on sales.
9) The fixed cost will increase by Rs. 20 crores, including depreciation on additions,
but excluding interest on additional capital.
10) Additional capital of Rs. 50 crores will be needed for capital expenditure and
working capital.
Required:
iii) Indicate the sales figures, with the working, that will be needed to earn Rs. 10
crores over and above the present profit and also meet 20 % interest on additional
capital.
iv) What will be the revised?
i) P/V Ratio.
ii) Break-even point.
iii) Margin of safety. [June 2017 – 5(a), 7 Marks]
Answer:
Working notes:
1. Total sales = Break-even sales + Margin of safety
= Rs. 200 crores + Rs. 50 crores
= Rs. 250 crores.
2. P/V Ratio = 40%
Variable cost = 60% of sales
= Rs. 250 crores x 60%
= Rs. 150 crores
3. Fixed Cost = Break-even sales x P/V Ratio

= Rs. 200 crores x 40%

=Rs. 80 crores
4. Total Cost = Rs. 150 crores + 80 Crores
= Rs. 230 crores
5. Profit = Rs. 250 crores – 230 crores
= Rs. 20 crores
6. Revised P/V Ratio

Let the present selling price is Rs. 100.00
Revised selling price (Rs. 100 – Rs.8) Rs. 92.00
Revised variable cost (Reduced from 60% to 55%)
(Rs. 100 x 0.55) Rs. 55.00
Contribution Rs. 37.00
New P/V Ratio = (Contribution/Sales) x 100

= (Rs. 37.00/Rs. 92.00) x 100
= 40.217%
A. Revised sales
(Rs. in crores)
Present fixed cost 80
Increase in fixed cost 20
Interest @ 20% on additional capital of Rs. 50 crore 10
Total revised fixed cost 110
Required contribution = Rs. 110 crores + Rs. 30 crores

= Rs. 140 crores
Required Sales = Required contribution/ New P/V Ratio

= Rs. 140 crores/40.217%
= Rs. 348.11 crores
B. (i) Revised P/V Ratio = 40.217% (working note 6)

(ii) Revised BEP = Revised Fixed cost/ New P/V Ratio
= Rs. 110 crores/40.217%
= Rs. 273.516 crores
(iii) Revised Margin of safety = Revised sales – Revised BE sales

= Rs. 348.11 crores – 273.516 crores
= Rs. 74.594 crores

Question No.71
The Nepal Sofa Company (NS Co.) makes sofas. It has recently received a request from a
customer to provide a one-off order of sofas, in excess of normal budgeted production. The
order would need to be completed within two weeks. The following cost estimate has already
been prepared:
Additional Rs.
Information
Direct materials: (Notes)
Fabric 200 m² at Rs. 17 per m² 1 3,400
Wood 50 m2 at Rs. 8.20 per m² 2 410
Direct labour:
Skilled 200 hours at Rs. 16 per hour 3 3,200
Semi-skilled 300 hours at Rs. 12 per hour 4 3,600
Factory overheads 500 hours at Rs. 3 per hour 5 1,500
–––––
Total production cost 12,110
Administration overheads at 10% of total production cost 6 1,211
–––––
Total cost 13,321
–––––
Additional Information (Notes):
a. The fabric is regularly used by NS Co. There are currently 300 m² in inventory,
which cost Rs. 17 per m². The current purchase price of the fabric is Rs. 17·50 per
m².
b. This type of wood is regularly used by NS Co. and usually costs Rs. 8·20 per m².
However, the company’s current supplier’s earliest delivery time for the wood is
in three weeks’ time. An alternative supplier could deliver immediately but they
would charge Rs. 8·50 per m². NS Co. already has 500 m² in inventory but 480 m²
of this is needed to complete other existing orders in the next two weeks. The
remaining 20 m² is not going to be needed until four weeks’ time.
c. The skilled labour force is employed under permanent contracts of employment
under which they must be paid for 40 hours’ per week’s labour, even if their time
is idle due to absence of orders. Their rate of pay is Rs. 16 per hour, although any
overtime is paid at time and a half. In the next two weeks, there is spare capacity
of 150 labour hours.
d. There is no spare capacity for semi-skilled workers. They are currently paid Rs.
12 per hour or time and a half for overtime. However, a local agency can provide
additional semi-skilled workers for Rs. 14 per hour.
e. The Rs. 3 absorption rate is NS Co.’s standard factory overhead absorption rate;
Rs. 1·50 per hour reflects the cost of the factory supervisor’s salary and the other
Rs. 1·50 per hour reflects general factory costs. The supervisor is paid an annual
salary and is also paid Rs. 15 per hour for any overtime he works. He will need to
work 20 hours’ overtime if this order is accepted.
f. This is an apportionment of the general administration overheads incurred by NS
Co.
Required:
i) Prepare, on a relevant cost basis, the lowest cost estimate which could be used as
the basis for the quotation.
ii) Explain briefly your reasons for including or excluding each of the costs in your
estimate. [December 2017 – 2(a), 4+6=10 Marks]
Answer
a)
Nepal Sofa Company
Cost Estimate for the quotation
Direct materials: Note Rs.
Fabric 200 m² at Rs. 17·50 per m² 1 3,500
Wood 20 m2 at Rs. 8·20 per m2 2 164
30 m2 at Rs. 8·50 per m2 2 255
Direct labour:
Skilled 50 hours at Rs. 24 per hour 3 1,200
Semi-skilled 300 hours at Rs. 14 per hour 4 4,200
Factory overheads 20 hours at Rs. 15 per hour 5 300
Administration overheads 6 –
––––––
Total cost 9,619
––––––
Reasons for the costs as included above:

1 Since the material is in regular use by NS Co, it is replacement cost
which is the relevant cost for the contract.
2 30 m will have to be ordered from the alternative supplier for
immediate delivery but the remaining 20 m can be used from inventory
and replaced by an order from the usual supplier at a cost of Rs. 8·20
per m.
3 There is no cost for the first 150 hours of labour because there is spare
capacity. The remaining 50 hours will be paid at time and a half, which
is Rs. 16 x 1·5, i.e. Rs. 24 per hour.
4 NS Co will choose to use the agency workers, who will cost Rs. 14 per
hour, since this is cheaper than paying existing semi-skilled workers at
Rs. 18 per hour (Rs.12 x 1·5) to work overtime.

5 None of the general factory costs are incremental, so they have all been
excluded. However, the supervisor’s overtime pay is incremental, so
has been included. The supervisor’s normal salary, on the other hand,
has been excluded because it is not incremental.
6 These are general overheads and are not incremental, so no value
should be included for them.
Question No.72
XYZ Company produces three products A, B and C. Selling price of product A Rs. 100,
Product B Rs. 80 and Product C Rs. 50.Variable cost per unit of A, B and C product are Rs.
50, Rs. 40 and Rs. 20 respectively. The product and sale mixed of A, B and C product are
20%, 30% and 50% respectively. The total fixed costs are Rs. 14,80,000.
Considering the above information, you are required to find out overall break-even quantity
and product wise break-up of such quantity.
Answer
Product A B C
Selling price per Unit 100 80 50
Variable cost per Unit 50 40 20
Contribution per Unit 50 40 30
Manufacture and sold unit in % 20 30 50
Composite contribution
= (50×0.20+40×0.30+30×0.5)
=10+12+15
= Rs 37 per unit
Overall Break even quantity= Fixed cost
Contribution
=14,80,000
37
= 40,000 Units
The product wise break-up of this quantity is as follows:
A 40,000 20% 8,000 Units
B 40,000 30% 12,000 Units
C 40,000 50% 20,000 Units
Question No.73
Xion Ltd. sold 3,00,000 units of its product at Rs. 40 per unit. Variable costs are Rs. 20 per
unit (manufacturing costs of Rs. 14 and selling cost Rs. 6 per unit). Fixed costs are incurred
uniformly throughout the year and amount to Rs. 35,00,000 (including depreciation of Rs.
15,00,000). There are no beginning or ending inventories.


i) Break-even sales level quantity and cash break-even sales level quantity.
ii) P/V ratio.
iii) Number of units that must be sold to earn an income (EBIT) of Rs. 2,50,000.
iv) Sales level required to achieve an after-tax income (PAT) of Rs. 2,50,000.
Assume 40% corporate Income Tax rate. [June 2018 – 4(a), 5 Marks]
Answer:
(i) Break-even Sales Quantity = (Fixed Cost /Contribution per unit)
= 35,00,000 / 20
= 1,75,000 units
Cash break even Sales Quantity = (Cash Fixed Cost/Contribution per unit)
= 20,00,000 /20
= 1,00,000 units
Where cash fixed cost = Fixed cost - Depreciation
= 35,00,000 - 15,00,000
= 20,00,000
(ii) PV Ratio = (Contribution/selling price per unit) x 100

= (20/40)*100
= 50%
(iii) No. of units that must be sold to earn an Income (EBIT) of Rs. 2,50,000
= ( Fixed Cost + Desired EBIT Level)/ Ccontribution per unit
= (35,00,000+2,50,000)/20
= 1,87,500 units
(iv) After Tax Income(PAT) = Rs. 2,50,000

Tax rate = 40%
Desired level of Profit before tax = (2,50,000/60)x100 = Rs. 4,16,667
Estimate Sales Level = (Fixed Cost + Desired Profit)/ PV ratio
= (35,00,000 + 4,16,667) / 50%
= Rs. 78,33,334
Question No.74
A company which works at a capacity utilization of 60% expects its turnover for the year
2017/18 at Rs. 86.40 lakhs. If the company works at 100% capacity, the sales-cost
relationship will be as follows:
Factory cost: Two-third of sales value
Prime cost: 75% of factory cost
Selling and administrative expenses (75% variable): 20% of sales value.
The factory overheads will vary according to the operating capacity in the following
manners:

Operating Capacity 60% 80% 100% 120%

Factory Overheads (Rs. in lakhs) 19.80 21.60 24.00 30.00
The company receives an offer from abroad for a value of Rs. 19.80 lakhs. The prime
cost of this order is estimated at Rs. 12 lakhs and the selling and administration
expenses applicable to this order are Rs. 90,000. This order will occupy 40% of the
capacity of the plant.
The Marketing Director estimates that by the time the new order materializes, the
company’s own sales will increase to 80% of the capacity.
Required:
Prepare statements to show:
a) Profitability at the present capacity utilization of 60%.
b) Profitability based on Marketing Director’s estimate of increases in the company’s
own sale to 80% capacity.
c) Evaluation of the export order with advice as to whether the company should
accept the export order or not. [December 2018 – 2(a),
10 Marks]
Answer
a)
Statement of Profitability (Rs. In lakhs)

Capacity
100% 60% 80% 40%(Export order)
Sales (a) 144 86.4 115.2 19.8
Prime Cost 72 43.2 57.6 12
Factory Overheads 24 19.8 21.6 8.4
Factory Cost 96 63 79.2 20.4
Selling and Admin. Costs 28.8 20.16 24.48 0.9
Cost of Sales (b) 124.8 83.16 103.68 21.3
Profit(Loss) (a-b) 19.2 3.24 11.52 -1.5
The above analysis shows that export order instead of increasing the profit is
giving a loss. Hence, it should not be accepted.
WORKING NOTES:
a) Computation of Cost and Sales at 100% Capacity

(Rs. In lakhs)
Sales at 60% 86.4
Sales at 100% = 86.40 / 0.6 144

Factory Cost 2/3 of Sales = 144*2/3 96

Factory Overheads (Given) 24
Prime Cost 72
Selling and Administrative expenses = 144*20/100 28.8
b) Computation of Cost and Sales at 60% Capacity

(Rs. In lakhs)
Sales 86.4
Prime Cost = 72 * 60/100 43.2
Variable : 28.8 *0.75 * 0.6 12.96
Fixed: 28.8 * 0.25 7.2
c) Computation of Cost and Sales at 80% Capacity

(Rs. In lakhs)
Sales (144 * 0.8) 115.2
Prime Cost = 72 * 80/100 57.6
Variable : 28.8 *0.75 * 0.8 17.28
Fixed: 28.8 * 0.25 7.2
d) Computation of Factory Overheads for additional 40% capacity

(Rs. In lakhs)
Factory Overheads : at 120% 30
Less: Factory Over Head at 80% Capacity 21.6
Factory Over Head at 40% Capacity 8.4
Question No.75
The following figures are related to Dabur Limited for the year ending 31st Ashadh, 2074:
Sales - 24,000 units @ Rs. 200 per unit;
P/V Ratio 25% and Break-even Point 50% of sales
i) Fixed cost for the year
ii) Profit earned for the year
iii) Units to be sold to earn a target net profit of Rs. 1,100,000 for a year.
iv) Number of units to be sold to earn a net income of 25% on cost.
v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

Answer:
Break- even point (in units) is 50% of sales i.e. 12,000 units.
Hence, Break- even point (in sales value) is 12,000 units x Rs. 200 = Rs. 24,00,000
i) We know that Break even sales = Fixed Cost / PV ratio
or Rs. 24,00,000 = Fixed Cost / 25%
or Fixed Cost = Rs. 24,00,000 x 25%= Rs. 6,00,000
So Fixed Cost for the year is Rs. 6,00,000
ii) Contribution for the year = (24,000 units x Rs. 200) x 25% = Rs. 12,00,000
Profit for the year = Contribution - Fixed Cost
= Rs. 12,00,000 – Rs. 6,00,000 = Rs. 6,00,000
iii) Target net profit is Rs. 11,00,000
Hence, Target contribution =Target Profit + Fixed Cost
= Rs. 11,00,000 + Rs. 6,00,000 = Rs. 17,00,000
Contribution per unit = 25% of Rs. 200 = Rs. 50 per unit
No. of units = Rs. 17,00,000/Rs. 50 per unit = 34,000 units
So, 34,000 units to be sold to earn a target net profit of Rs. 11,00,000 for a year.
iv) Net desired total Sales (Number of unit x Selling price) be X, then desired profit
is 25%
on Cost or 20% on Sales i.e. 0.2 X
Desired Sales = (Fixed Cost + Desired Profit) / PV ratio
X = (6,00,000 + 0.2 X) / 25%
or, 0.25 X = 6,00,000 + 0.2 X
or, 0.05 X = 6,00,000
or, X = Rs. 1,20,00,000
No. of units to be sold = 1,20,00,000 / 200
= 60,000 units
v) If Break- even point is to be brought down by 4,000 units then Break-even point
will be
12000 units - 4000 units = 8000 units
Fixed Cost = Rs. 6,00,000
Required Contribution per unit = 6,00,000 / 8,000 units
= Rs. 75
Selling Price = Contribution per unit / PV Ratio
=Rs. 75 / 25%
= Rs. 300 per unit
Hence, selling price per unit shall be Rs. 300 if Breakeven point is to be
brought down by
4,000 units.

Question No.76
From the cost record of the APEX Company for the year 2075 of product A, the information
given is extracted.
This period actual

Sales (unit) 10,000
Profit (loss) Rs. 10,000
Fixed Cost Rs. 30,000
Variable cost per unit Rs. 8
On the basis of the information determine:

a) What is present cost structure and break event unit?
b) What increased sales volume is required to cover an extra attractive packaging cost of
Rs. 0.5 per unit, to increase the sales at the existing sales price, to yield zero profit?
c) What increase in sales volume is required, at the present sale price, to cover additional
publicity expenses of Rs. 5,000 for that period, while yielding a profit of Rs. 5,000?
d) What increased sales volume is required to reach a profit of Rs. 12,500 while reducing
the selling price by 3% per unit?
e) What impact in profit and loss and BEP if selling price increase to Rs. 12 and fixed
cost Rs. 50,000 [June 2019 – 1, 3+4+4+4+5=20
Marks]
Answer:
a) Present cost structure
Variable Cost Rs.80,000
Fixed Cost 30,000
Loss -10,000
Sales 100,000
Selling Price per unit 10
Break event sale unit = fixed cost/contribution

=30,000/2
=15,000 units
b) Break-even point if extra packing cost is incurred
Fixed costs Rs. 30,000
Sale Price per unit 10
Variable cost per unit including Re. 0.5 for extra packing 8.5
Contribution 1.5
Break-even Point 30,000/1.5 20,000

or, Rs.
200,000
Rs.
Additional sales required 100,000
c) Total Contribution required:

Fixed cost at present Rs. 30,000
Add: additional publicity expenses 5,000
Total 35,000
Profit required 5,000
Total contribution required 40,000
Volume of sales 40,000/2 to be achieved. 20,000 units
(for contribution of Rs. 40,000) or Rs. 200,000
Additional sales required Rs. 100,000
d) Volume of sales to have a profit of Rs. 12,500 with reduced sale price
by 3%
Reduced sale price Rs. 9.7
Variable Cost 8
Contribution (per Unit) 1.7
Total Contribution Required:
Fixed Cost 30,000

Profit 12,500
Total Contribution Required: 42,500
Sales Volume required : Rs. 42500/1.7 25,000
Sales 25,000 × 9.7 242,500
Additional Volume of Sales required 142,500
e) Impact in Profit and loss and BEP if selling price increase to Rs12 and fixed
cost 50,000.
BEP=Fixed cost/ (selling price -variable cost)
=Rs. 50,000/(12-8)
= 12,500 units
Sales 120,000
Fixed Cost 50,000
Variable cost (Rs.10000*8) 80,000
Loss 10,000
No impact in loss Rs 10,000 but reduced BEP 2500 unit (15000-12500)

Question No.77
Sales Managers of two companies (say company X and company Y) compare notes and find
that their sales turnover for last year was the same viz, Rs. 10 lakhs and the profits they made
also were the same being 10% of turnover. In one company the fixed cost were double the
variable costs while in the other, it was quite opposite, the variable costs were double the
fixed costs. As an accountant, do you think that they are equally profitable? If not, explain
their relative vulnerability to market conditions. [June 2019 – 2(b),
10 Marks]
Answer
STATEMENT OF PROFITABILITY
(Rs in
lakhs)
Company X Company
Y
Sales 10 10
Less: Variable Costs 3 6
Contribution 7 4
Less: Fixed Costs 6 3
Profits 1 1
P/V Ratio 70%

40%
Break -even point [Fixed cost/PV Ratio (Rs.)] 8.57 7.5
Margin of Safety
(Actual Sales – BE sales) / Actual sales *100%
14.3%
25%
It is clear from the above analysis that the Company X and Company Y are not
equally profitable. Company X has a higher P/V Ratio as compared to company Y.
But at the same time, its fixed costs are also high .As a result company X is more
vulnerable to market fluctuations as compared to company Y. For example if the sales
fall by 20% the company X will suffer a loss of Rs 40,000 while company Y will still
make a profit of Rs 20,000. This shows that a company with a low fixed cost and high
variable cost is less vulnerable to market fluctuations as compared to a company with
low variable costs and high fixed costs.
Working Notes:
(i) Computation of Variable Cost for Company X
Let the variable costs for company X be 'X'
Fixed costs for company X will be 2X
Total costs=9 lakhs

Hence X+2X=9 lakhs

or X=3 lakhs.
The Fixed costs in company X will therefore be Rs. 6 lakhs.
(ii) Computation of Variable Costs for company Y
Let the variable costs of Y be 'Y'
The fixed Cost will be 0.5 Y
Total Costs= 9 lakhs.
Hence, Y+0.5Y= 9lakhs.
or Y=6 lakhs.
In Company Y, the Variable Costs are therefore Rs. 6 lakhs and Fixed Costs are Rs. 3
lakhs.

CHAPTER 13:
BUDGETARY CONTROL

Question No. 1
(a) Fixed and Flexible Budgeting [December 2010 – 5(b), 2.5 Marks]
Answer
A fixed budget is one which is designed for a specific planned level of output and is not
adjusted to the level of activity attained at the time of comparison between the budgeted
and actual costs.
Thus, fixed budgets are established only for a small period of time when the actual output
is not anticipated to differ much from the budgeted output. Although not adjusted to the
actual volume attained, a fixed budget is liable to revision in case actual operations differ
significantly from those planned.
A fixed budget is ineffective as a tool for cost control. It is because the difference can not
be explained while comparing the actual cost with a fixed budget.
Flexible budget is a budget which is designed to change based on the fluctuations in
output or turnover. Thus, the flexible budget provides budgeted costs for any level of
activity actually attained.
Flexible budgets may also be used for adjusting budgets to suit current conditions which
may arise due to seasonal variations or changes in the length of the working period.
Flexible budget is useful for the purpose of control since it takes into consideration the
changes in the actual circumstances than previously anticipated.
(b) Forecast and Budget [June 2013 – 5(c), 2.5 Marks]

Answer
Difference between Forecast and Budget
Forecast Budget
i. Forecast is merely an estimate of what i. Budget shows the policy and
is likely to happen. It is a statement of programme to be followed in a period
probable events which are likely to under planned conditions.
happen under anticipated conditions ii. A budget is a tool of control since it
during a specified period of time. represents actions which can be
ii. Forecasts, being statements of future shaped according to will so that it can
events, do not connote any sense of be suited to the conditions which may
control. or may not happen.
iii. Forecasting is a preliminary step for iii. It begins when forecasting ends.
budgeting. It ends with the forecast of Forecasts are converted into budget.
likely events. iv. Budgets have limited scope. It can be
iv. Forecasts are wider in scope and it can made of phenomenon capable of
be made in those spheres, also where being expressed quantitatively.
budgets cannot interfere.

Question No. 2
(a) Master Budget [December 2010 – 6(a), 5 Marks]
Answer
When all the necessary functional budgets have been prepared, the budget officer will
prepare the master budget which may consist of budgeted profit and loss account and
budgeted balance sheet along with cash flows. These are in fact the budget summaries.
When the master budget is approved by board of directors, it represents a standard for the
achievements of which all the departments will work.
(b) Cash Budget [June 2011 – 6(d), 4 Marks]

Answer
Cash Budget reflects the cash receipts and payments during the budgeting period. Cash
budget is prepared after preparing other components of the budget and adjusting the
expected noncash items thereon. It is very useful in preparing budgeted balance sheet
from various operating budgets such as sales budget, direct labour budget, direct material
purchase budget etc.. In absence of cash budget, planning and budgeting may have no
path to travel as there will be no tool to take decision on under or over utilization of
resources. It shows cash forecasts for the future period and helps in planning different
activities.
Such budgets can be further broken down according to the requirement such as quarterly,
monthly or weekly cash budgets. Besides operating budgets, capital expenditure budgets,
dividend policies, long term financing decisions also affect the cash budgets and vice
versa.
(c) Flexible Budget [December 2011 – 6(d), 4 Marks]

Answer
A flexible budget is defined as a “a budget which, by recognising the difference between
fixed, semi-variable and variable costs is designed to change in relation to the level of
activity attained.” A fixed budget, on the other hand is a budget which is designed to
remain unchanged irrespective of the level of activity actually attained. In fixed
budgetary control system, a series of budgets are prepared one for each of a number of
alternative production levels or volumes. Flexible budgets represent the amount of
expenses that is reasonably necessary to achieve each level of output specified. In other
words, the allowances given under flexible budgetary control system serve as standards
of what costs should be at each level of output.
Need : The need for the preparation of the flexible budgets arise in the following
circumstances:
i) Seasonal fluctuations in sales and/or production, for example in soft drinks industry;
ii) A company which keeps on introducing new products or makes changes in the design
of its products frequently;
iii) Industries engaged in make-to-order business like ship building;

iv) An industry which is influenced by changes in fashion; and

v) General changes in sales.
(d) Control Ratios [June 2012 – 6(b)(iii), 2.5 Marks]

Answer
Control ratios are the tools used to monitor and control performance of the organization.
This is determined by comparing the planned values (budgets) with the actual values as
they occur/achieved during a period. Under budgetary control system certain ratios are
used to determine the effective use of the resources. Such ratios are used by the
management to know whether the deviations of the actual performance from the budgeted
performance are favourable or not. There are three major control ratios, activity ratio,
capacity ratio and efficiency ratio.
1. Activity Ratio
Activity Ratio: It is a measure of the level of activity attained over a period of time.
It is obtained by expressing the number of standard hours equivalent to the work
produced as a percentage of the budgeted hours. Higher the ratio better is the
performance. Mathematically it is expressed as follows:
Activity Ratio = Standard hours of actual production x 100
Budgeted hours
Level of activity is arrived by comparing the actual production with the
anticipated production as shown in the budget.
Calendar Ratio: Actual activity gets affected if the budgeted number of days could
not be worked. Hence, calendar ratio is calculated to control the number of days
actually available for work. This ratio indicates whether all budgeted working days
have been actually available for working in the budgeted period.
Calendar Ratio = Actual working days x 100
Budgeted working days
2. Capacity Ratio
Capacity Usage Ratio: It indicates the relationship between the budgeted number of
working hours and the maximum possible number of working hours in a budgeted
period.
Capacity Usage Ratio = Budgeted number of working hours x 100
Maximum number of working hours
Standard Capacity Employed Ratio: It indicates the extent to which facilities were
actually utilized during the budgeted period. Higher ratio indicate that higher capacity
were used in actual compare to budget.
Standard Capacity Employed Ratio = Actual hours worked x 100

Budgeted hours
3. Efficiency Ratio: This indicates the efficiency attained in production during the
budgeted period. It is calculated as follows:

Efficiency Ratio = Standard hours of actual production x 100

Actual hours worked
(e) Budget Manual [June 2019 – 6(c), 2.5 Marks]

Answer
A budget manual is defined by ICMA as ‘a document or manual which sets out the
responsibilities of the person engaged in budgeting that contains details regarding
budgeting organization and procedures including the routine of and the forms and records
required for budgetary control.
The budget manual thus is a schedule, document or booklet, which contains different
forms to be used, procedures to be followed, budgeting organization details, and set of
instructions to be followed in the budgeting system. It also lists out details of the
responsibilities of different persons and the managers involved in the process. A typical
budget manual contains the following:
e. Objectives and managerial policies of the business concern.
f. Internal lines of authorities and responsibilities.
g. Functions of the budget committee including the role of budget officer.
(f) Types of budget commonly used [December 2017 – 5(b), 4 Marks]

Answer
The Institute of Cost and Management Accountants (CIMA) defined budget as 'A
quantitative expression of a plan for a defined period of time. It may include planned
sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and
cash flows.' The types of budget commonly used are:
Master Budget
A master budget is an aggregate of a company's individual budgets designed to present a
complete picture of its financial activity and health. The master budget combines factors
like sales, operating expenses, assets, and income streams to allow companies to establish
goals and evaluate their overall performance, as well as that of individual cost centers
within the organization
Operating Budget
An operating budget is a forecast and analysis of projected income and expenses over the
course of a specified time period. To create an accurate picture, operating budgets must
account for factors such as sales, production, labor costs, materials costs, overhead,
manufacturing costs, and administrative expenses. Operating budgets are generally
created on a weekly, monthly, or yearly basis.
Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out
of a business within a specified time period. It can be useful in helping a company
determine whether it's managing its cash wisely. Cash flow budgets consider factors such
as accounts payable and accounts receivable to assess whether a company has ample cash

on hand to continue operating, the extent to which it is using its cash productively, and its
likelihood of generating cash in the near future
Financial Budget
A financial budget presents a company's strategy for managing its assets, cash flow,
income, and expenses. A financial budget is used to establish a picture of a company's
financial health and present a comprehensive overview of its spending relative to
revenues from core operations.
Question No. 3
What is 'Zero-Base-Budgeting'? State its important steps.
[June 2001 – 5(a), 6 Marks] [December 2016 – 5(c), 4 Marks]
Answer
Zero-Base-Budgeting is a method of budgeting whereby all activities are revaluated each
time a budget is set discrete levels of each activity are valued and a combination chose to
match funds available important steps involved are:
i) Organisation is divided according to functions, activities and operations.
ii) Decision units are identified and linked to organisation objective.
iii) Each decision units is subsequently split into decision packages and then ranked in order
of priority.
iv) All budgeted activities are re-evaluated.
Alternative Answer:
Zero Base Budgeting is a method of budgeting starting from scratch or zero level. Proposals
for the coming period should be based on merit and not related to past performance.
Budgets prepared by conventional methods are the incremental type of budget based on
actual performance in the past periods. In the zero base budget, the results of the past year is
not accepted as a basis, since the past may conceal inefficiencies.
Zero Base Budget is mainly prepared by taking the following steps.
i) Identification of decision units
ii) Preparation of decision packages.
iii) Ranking of decision packages using cost benefit analysis.
iv) Allotment of available funds according to the priority determined by ranking each
decision package is a self contained module explaining the need for a certain activity, its
costs, its benefits consequences if the packages is not accepted etc. The ranking of
package based on cost benefit analysis by the difficult levels of management starring
from the bottom upward ensures allotment of funds to relatively more important and
essential activities.
Question No. 4
What are the objectives of Budgetary Control System? Also write about the components of
functional budget. [June 2003 – 6(b), 3+3=6 Marks]
Answer
Objectives:

1. Target setting thus demonstrates overall aims of an enterprise

2. Assign responsibilities
3. Basis for comparison
4. Best use of available resources
5. Coordinates overall activities
6. Judgement about cost effectiveness
7. Revision of policies
8. Frame long term plan
9. Actual result can be compared.
Components.
1. Physical budgets - sales, production etc.
2. Cost budgets research & development, adm. cost of sales budget
3. Profit budgets - sales, profit & loss budget
4. Financial budgets - cash, capital expenditure, budgeted balance sheet
Question No. 5
What is budgetary control system? What are the silent features of budgetary control system?
[December 2003 – 6(b), 2+2=4 Marks] [June 2013 – 6(a), 2.5 Marks]
Answer
Budgetary control system: The system that follows with the establishment of budgets
relating the responsibilities of executives to the requirements of a policy and the continuous
comparisons of actual with budgeted results.
Salient features of budgetary control system:
1. Determination of objective, setting of policy
2. Determination of activities to achieve objective
3. Draw plan and scheme operations
4. Lay system of comparison of actual performance by person, section, and ensure correct
action.
Question No. 6
Define Budgetary control system and discuss the objective of introducing budgetary control
system in an organization ?
[June 2005 – 4(a), 2+4=6 Marks] [December 2005 – 3(a), 4Marks]
Answer
Budgetary control is defined as the establishment of budgets relation the responsibilities of
executives to the requirement of a policy, and the continuous comparison of actual with
budgeted results either to secure by individual action the objective of that policy or to provide
a base of the revision. In other words, it is a system of achieving the firm’s objectives with
minimum possible cost.
Objectives of Budgetary Control System :

• It depicts the overall aims of the business and determining targets of performance for
each section or department of business;
• It lays down the responsibilities of each of the executives and other personnel so that
every one knows what is expected of him and how he will be judged;
• It provides a basis for the comparison of actual performance with the predetermined
targets and investigation of deviation if any;
• It ensures the best use of all available resource to maximize profits or production;
• It coordinates the various activities of the business and centralize the control system.
At the same time it decentralizes the responsibilities and delegate authority in the
overall interest of the business;
• Provide basis for revision of current and future policies;
• Provide yardsticks against which actual results can be compared;
Question No. 7
What is flexible budget? Briefly explain how it is prepared.
Answer
Flexible budget is a budget which is designed to change appropriately with fluctuations in
factors like output, turnover or other variable factors and provide budgeted costs for different
level of activity.
As compared to fixed budget, flexible budget is more flexible and practical in the sense that it
takes into account the changes in the actual circumstance and is therefore more useful for the
purpose of control.
Flexible budgeting is more useful in the following situations:
• When the level of activity during a particular year varies from one period to another
either due to the seasonal nature of the industry or due to variation in the demand.
• When the business started is a new one and it is difficult to forecast the demand with
reasonable accuracy.
• Where an industrial undertaking is suffering from shortage of one or another factor of
production such as materials, labor, plant capacity and level of activity which is likely to
be attained is dependent upon the availability or otherwise of these factors.
• When a business keep on introducing new products or effect frequent changes in the
design of existing products which makes the forecast of activity level very difficult.
Preparation of Flexible Budget:
Flexible budget is prepared after making an intelligent classification of all expenses into
fixed, variable semi-variable. The usefulness of a flexible budget depends entirely on the
accuracy with which the expenses can be so classified.
In order to prepare a flexible budget, the following steps are required to be sequentially
accomplished.
(i) Items of anticipated expenditure are classified into fixed, variable and semi-variable.
(ii) The amount of overhead cost which a budget centre is expected to incur during a period,
normally called the budget allowance, is set for each item of expenditure. This is done in
relation to the level of activity attained by such budget centre.

(iii)In respect of the fixed items of expenditure, the allowance will be the same for all levels
of activity.
(iv) In the case of variable overhead, a rate per unit is ascertained and budget allowances are
fixed for a number of anticipated levels of activity.
(v) Each item of variable overhead is examined and segregated into fixed and variable
elements of expenditure. The budget allowance is fixed for each item for different levels
on justified grounds depending upon the nature and behavior of each item.
When the flexible budget is prepared following the steps described above, it will become a
series of fixed budgets: one fixed budget for each level of activity. As and when the actual
level of activity does not actually correspond to any level of flexible budget thus prepared,
the flexible budget may be computed by interpolation ignoring small differences in the
activity levels.
Question No. 8
Briefly describe the methods of constructing flexible budget.
Answer
Methods of Constructing Flexible Budget
Following methods are generally followed in preparing a flexible budget.
(i) Segregating the items of cost into fixed, variable and semi-variable components and
presenting the figures for different levels in a tabular form
At the start of preparing flexible budget, the unit in terms of which different levels of
activities are to be expressed is first selected. It is necessary to set the budget cost
allowance for the budget centres.
(ii) Express the budget cost allowance under the heading fixed, variable and semi-variable.
Fixed cost remains the same for all levels of operations. The fixed cost per unit will
change depending upon the actual level of activity. Variable cost per unit remains the
same. Semi-variable cost is segregated into fixed and variable component and is then
shown under the respective categories.
(iii) One budget for normal production
One budget is prepared for normal level of activity by making estimates of cost at that
level. Each type of fixed and variable cost is then indicated as a ratio or a rate per unit of
output. The rate per unit of output may be expressed in terms of units, labour hours or
machine hours.
(iv) Flexible Budget for Other Level of Activities
Flexible budget for other level of activities is then determined by applying the rate per
unit of output to different output levels for which the flexible budgets are desired.
Method of graphic presentation: Flexible budget is also prepared by graphic method. Under
this method, an estimate is made of the fixed and variable expenses at various levels of
activity. The figures are then plotted on a graph to get the curves for these levels. The budget
cost allowance for a particular levels of activities can be found through this method.

Question No. 9
Briefly explain your understanding of the term 'rolling budget'.
[December 2010 – 6(b), 2.5 Marks]
Answer
It is the budget continuously updated by adding a further period, say a month, quarter or year
and deducting the earliest period. This type of budget is beneficial where future costs and
activities can not be forecast on a reliable manner.
In the preparation of rolling budget, the budgeting is a continuous process. As the month,
quarter or year passes, forecast for that period is dropped and a forecast for a further month,
quarter or year is added in such a way that there is always a forecast of a fixed period say, a
year or 2-year, or 3-year is available.
The preparation of a rolling budget is always a costly affair. However, the use of such a
budget always reduces the operational variances.
Question No. 10
Explain the reasons why some companies normally prepare the sales budget first among all
functional budgets while the other companies start with the labour or other budget first in the
budgetary planning process. [December 2010 – 6(d), 2.5 Marks]
Answer
Reasons for preparing the sales budget or labour or other budget first among all
functional budgets
The budgetary planning process usually starts with sales budget because a company is usually
restricted from making and selling more of its products. Under this assumption, sales demand
is the principal budget factor, in which it restricts the performance or level of activity of a
company.
The other limiting factors could be machine capacity, distribution and selling resources, the
availability of key raw materials or labour. However, if the principal budget factor is the
availability of labour, the first functional budget to prepare is the labour budget, in which a
company needs to consider how the limited labour hours are assigned to the optimal mix of
products to maximise its profit.
Question No. 11
Briefly explain the circumstances that warrant the need for preparation of Flexible budget.
Answer
A 'Flexible Budget' is defined as 'a budget which, by recognizing the difference between
fixed, semi-variable and variable costs is designed to change in relation to the level of activity
attained'. In a fixed budgetary control, budgets are prepared for one level of activity whereas
in a flexible budgetary control system, a series of budgets are prepared for a number of
alternative production levels or volumes. Flexible budgets represent the amount of expenses
that is reasonably necessary to achieve each level of output specified. In other words, the
allowances given under flexible budgetary control system serve as standards of what costs
should be at each level of output.

The need for the preparation of the flexible budgets arises in the following circumstances:
(i) Seasonal fluctuations in sales and/or production, for example in soft drink industry;
(ii) A company which keeps on introducing new products or makes changes in the design of
its products frequently;
(iii)Industries engaged in make-to- order business like ship building;
(iv) An industry which is influenced by changes in fashion; and
(v) General changes in sales
Question No. 12
How flexible budget can help in management decision making?
[June 2016 – 6(a), 2.5 Marks]
Answer
Flexible budget is a budget which, by recognizing the difference in behavior between fixed
and variable costs in relation to fluctuations in output, turnover, or other variable factors, etc.
is designed to change in relation to the level of activity actually attained. A flexible budget is
one that takes account of a range of possible volumes. It is sometimes referred to as a multi-
volume budget. The range of possible outputs may be known as the relevant range. Flexing a
budget takes place when the original budget is deliberately amended to take account of
change in activity levels. Flexible budget enable an organization to predict its performance
and income levels at a given range of sales levels and activity levels. It can be seen the
impact of changes in sales and production levels on revenue, expenses and ultimately
income. It enables more accurate assessment of managerial and organizational performance.
So, Flexible budget is an important aid to management to decision making.
Numerical Questions
Question No. 13
A company produces a standard product. Estimate cost per unit are as follows:
Raw Material - Rs. 2

Wages - Rs. 1
Variable overhead - Rs. 2.50
The semi variable costs are:
Indirect Materials - Rs. 117.50
Indirect Labour - Rs. 78
Repairs - Rs. 285
The variable costs per unit included in semi-variable costs are:
Indirect Material - Rs. 0.025
Labour - Rs. 0.04
Repair - Rs. 0.05
The fixed costs are:
Factory - Rs. 2,000
Administration - Rs. 3,000
Selling & Distribution - Rs. 2,500

At present company is operating at 70% of normal capacity and producing 700

units of the products. The selling price is Rs. 5 per unit. Prepare flexible budget
for 80%, 100% and 110% of normal capacities from the above information.
[June 2004 – 5(a), 8 Marks]
Answer
Flexible Budget
Prod. Level
Per 70% 80% 100% 110%

unit
Prod. Units 700 800 1000 1100
Selling Price 5 5 5 5
Sales 3500 4000 5000 5500
Raw Material 2 1400 1600 2000 2200
Wages 1 700 800 1000 1100
Variable 2.50 1750 2000 2500 2750
Overheads
Indirect Material 0.025 17.50 20 25 27.50
Indirect Labour 0.04 28.00 32 40 44
Repair 0.05 35 40 50 55
Total Variable cost 5.615 3930.50 4492 5615 6176.50
Contribution (0.615) (430.50) (492) (615) (676.50)
Less: Fixed Costs
Indirect Material 100 100 100 100
Labour 50 50 50 50
Repair 250 250 250 250
Factory 2000 2000 2000 2000
Admin. 3000 3000 3000 3000
Selling 2500 2500 2500 2500
Total Fixed Cost 7900 7900 7900 7900
Profit / (Loss) (8330.50) (8392) (8515) (8576.50)
Question No. 14
With the following data for a 60% activity, prepare a budget at 80% and 100% activity.
Production at 60% capacity – 600 units

Materials Rs. 100 per unit
Labour Rs. 40 per unit
Expenses Rs. 10 per unit.
Factory Expenses Rs.40,000 (40% fixed)
Administrative expenses of Rs.30,000 (60%) fixed

Answer
Flexible Budget
Variable cost Per unit 60% 80% 100%

Direct Material 100 60,000 80,000 1,00,000
Labour 40 24,000 32,000 40,000
Expenses 10 6,000 8,000 10,000
Factory Exp. 40 24,000 32,000 40,000
Admin Exp. 20 12,000 16,000 20,000
Total Variable cost (A) 1,26,000 1,68,000 2,10,000
Fixed Cost
Factory Exp. 16,000 16,000 16,000
Admin Exp. 18,000 18,000 18,000
Total Fixed Cost (B) 34,000 34,000 34,000
Total cost (A+B) 1,60,000 2,02,000 2,44,000
Question No. 15
The monthly budget for manufacturing overhead of Pashupati Limited for two levels of
activity were as follows:
Capacity 60% 100%
Total manufacturing overhead (Rs.) 9,800 12,000
Wages (Rs.) 1,200 2,000
Consumable stores (Rs.) 900 1,500
Maintenance (Rs.) 1,100 1,500
Power and fuel (Rs.) 1,600 2,000
Depreciation (Rs.) 4,000 4,000
Insurance (Rs.) 1,000 1,000
Budgeted yearly production at 60% capacity level is 7,200 units and at 100% level 12,000
units.

i. Indicate which of the items are fixed, variable and semi-variable;
ii. Prepare a budget for 80% capacity; and
iii. Find the total manufacturing overhead, both fixed and variable, per unit of output at
60%, 80% and 100% capacity. [June 2007 – 4, 10 Marks]
Answer
i. Note: Monthly budgeted production at 60% capacity level is 600 units (7,200 units
per annum) and at 100% level is 1,000 units (12,000 units per annum).
Fixed cost
Depreciation since it remains constant at both the given levels.
Insurance cost also same as above.

Variable cost
Wages is Rs. 2 per unit at both the given levels.
Consumables stores are Rs. 1.5 per unit at both the given levels.
Semi-variable:
Maintenance cost is neither fixed nor is the quantum of increase proportionate to the
increase in volume.
Power and Fuel also same as above.
ii. Finding the variable portion of semi-variable overhead.

Maintenance:
Variable portion = change in overhead/ change in activities = Rs. 400/ 400
= Re. 1 per unit.
Fixed portion = Rs. 1,100 – (600 units × Re. 1) = Rs. 500.
At 80% capacity level = (800 units × Re. 1) + Rs. 500 = Rs. 1,300
Power and Fuel:

Variable portion = Rs. 400/ 400 = Rs. 1 per unit
Fixed portion = Rs. 1,600 – (600 units × Re. 1) = Rs. 1,000
At 80% capacity level = (800 units × Re. 1) + Rs. 1,000 = Rs. 1,800
Monthly budget for 80% capacity level:

Budgeted production (80% capacity) 800 Units
Wages @ Rs. 2 per unit 1,600
Consumable stores @ Rs. 1.5 per unit 1,200
Maintenance (as per above working) 1,300
Power and fuel (as per above working) 1,800
Depreciation 4,000
Insurance 1,000
Total 10,900
To sum up, the variable cost per unit works out to Rs. 5.50. It consists of wages Rs. 2,
consumable stores Rs. 1.50, maintenance Re. 1 and power and fuel Re. 1. The total
fixed cost comes to Rs. 6,500, i.e., maintenance Rs. 500 + power and fuel Rs. 1,000 +
depreciation Rs. 4,000 + insurance of Rs. 1,000.
iii. Total cost per unit:

Capacity 60% 80% 100%
Production Unit (per month) 600 800 1,000
Rs. per unit
Variable cost 5.5 5.5 5.5
Fixed cost (Rs. 6,500/ production unit) 10.83 8.13 6.5
Total 16.33 13.63 12.00

Student should note that total-manufacturing overheads, both fixed and variable per
unit is required and not the total cost at different capacity levels.
Question No. 16
Kathmandu Manufactures normally produce 8,000 units of their product in a month in their
machine shop. For the month of January, they had planned for a production of 10,000 units.
Owing to sudden cancellation of contract in the middle of January, they could only produce
6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the machine shop and
the foreman of the shop is paid a 10% of the savings as bonus when in any month the indirect
manufacturing cost incurred is less than the budgeted provision.
The foreman has put in a claim that he should be paid a bonus of Rs. 88.50 for the month of
January. The works manager wonders how anyone can claim a bonus when the company has
lost a sizeable contract. The relevant figures are as under:
Indirect manufacturing costs Expenses for a Planned for Actual in
normal month January January
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600
Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
Total 5,290 5,875 4,990
Do you agree with the works manager? Is the foreman entitled to any bonus for the
performance in January? Substantiate yours answers with the facts and figures.
Answer
Flexible Budget of “Kathmandu Manufacturing”:
(For the month of January)
(Amount in Rs.)
Indirect Nature Expenses Planned Expenses Actual Difference
manufacturing of Costs for a expenses as per Expenses increase/(decrease)
Costs (i) normal for flexible for the (v)-(iv)=(vi)
month January budget of month of
(ii) (iii) January January
(iv) (v)
Salary of the Fixed 1,000 1,000 1,000 1,000 Nil
foreman
Indirect Labor Variable 720 900 540 600 60
(Note i)

Indirect Variable 800 1,000 600 700 100

material
( Note ii)
Repairs and Semi- 600 650 550 600 50
maintenance Variable
(iii)
Power Semi- 800 875 725 740 15
(iv) Variable
Tools Variable 320 400 240 300 60
consumed
(Note v)
Rates and Fixed 150 150 150 150 Nil
Taxes
Depreciation Fixed 800 800 800 800 Nil
Insurance Fixed 100 100 100 100 Nil
Total 5,290 5,875 4,705 4990 285
Conclusion:
The analysis in flexible budget makes it very clear that the expenditure of M/s “Kathmandu
Manufacturers” has increased from Rs 4,705 to 4,990. Under these circumstances, the
foreman of the company is not entitled for any performance bonus.
Working Notes:
i. Indirect labor:
Indirect labor for 8,000 units= Rs 720
Indirect labor for 10,000 units =(720 / 8,000) x 10,000 or Rs 900
Indirect labor which is variable, per unit = Re. 0.09
Indirect labor for 6,000 units= 6,000x 0.09 or Rs 540
ii. Indirect Material:

Indirect Material for 8,000 units = Rs 800
Indirect Material for 10,000 units =(800/ 8,000) x 10,000 or Rs 1000
It is variable and Indirect Material for 6,000 units = (800/ 8,000) x 6,000 or Rs. 600
iii. Repair and Maintenance:

Repair and Maintenance of 8,000 units = Rs. 600
Repair and Maintenance of 10,000 units =( 600/ 8,000) x 10,000 or Rs. 750
But as per budget; repair and maintenance for 10,000 is Rs. 650
So, Repair and Maintenance is semi-variable
Variable R and M per unit = Change in exp. Level = Rs. (50/ 2,000)
Change in output
= Rs. 0.025
Variable element of R and M at level of 8,000 units = 8,000x 0.025 or Rs. 200

Fixed element of R and M at levels of 8,000 units = Rs 600-Rs. 200 = Rs 400

R and M cost a level of 6,000 units = Rs. 400+ (6,000x0.025) or Rs. 550
iv. Power:
Power for 8,000 units = Rs. 800
Power for 10,000 units = Rs. (800/ 8,000) x 10,000 or Rs. 1,000
But it is given that power for 10,000 units is Rs. 875.
So, power is semi-variable overhead.
Variable power per unit = Change in exp. Level
Change in output
= (75/ 2,000) = Re. 0.0375
Variable element of power at the level of 8,000 x Re. 0.0375 = Rs. 300
Fixed element of power at level of 8,000 units = Rs 800 –Rs 300 = Rs. 500
Power at the level of 6,000 units = 500+ (6,000x Re.0.0375) =Rs. 725
v. Tools Consumed:
Tools Consumed at the level of 8,000 units = 320
Tools Consumed at the level of 10,000 units= (320/ 8,000) x 10, 000 = Rs. 400
It is variable and Tools consumed at the level of 6,000 units= (320/8,000) x 6,000
=Rs. 240
Since the expenses incurred for rates and taxes, depreciation and insurance at
different levels of activities are same, they are fixed costs.
Question No. 17
Hey Ram Limited produces and sells a single product. Sales budget for the calendar year
2008 by quarter is as follows:-
Quarter Number of units to be sold
I 12,000
II 15,000
III 16,500
IV 18,000
The year 2008 is expected to open with an inventory of 4,000 units of finished product and
close with an inventory of 6,500 units.
Production is customarily scheduled to provide for two-third of the current quarter's sales
demand plus one-third of the following quarter's demand. Thus production anticipates sales
volume by about one month.
The standard cost details for one unit of the product is as follows:-
Rate
Direct materials 10 lbs NRs.50 paisa per lb
Direct labor 1 hour 30 minutes NRs.4 per hour
Variable overheads 1 hour 30 minutes NRs 1 per hour

Fixed overheads 1 hour 30 minutes NRs.2 per hour based on a budgeted

production volume of 90,000 direct labor
hours for the year.
a) Prepare a production budget for 2008, by quarters, showing the number of units to be
produced, and total cost of direct material, direct labor, variable overheads and fixed
overheads.
b) If the budgeted selling price per unit is NRs.17, what would be the budgeted profit for
the year as a whole?
c) In which quarter of the year, is the company expected to break even?
[June 2009 – 3, 9+3+3=15 Marks]
Answer
(a) Hey Ram Ltd.
Production Budget in Units
For the year 2008 by Quarters
Quarters
Particulars I II III IV Total
2/3 rd of the current quarter's sale demand 8,000 10,000 11,000 12,000 41,000
Add: 1/3 of the following quarter's sales 5,000 5,500 6,000 6,500 23,000
demand in first three quarter's sales demand
in first three quarters and closing inventory in
the fourth quarter
No. of units to be produced 13,000 15,500 17,000 18,500 64,000
Hey Ram Ltd.

Production Cost Budget in NRs.
For the year 2008 by Quarters
Quarters
I II III IV Total
Units to be produced 13,000 15,500 17,000 18,500 64,000
Direct material cost (NRs.) (W.N. 1) 65,000 77,500 85,000 92,500 320,000
Direct labor cost )(NRs) (W.N. 2) 78,000 93,000 102,000 111,000 384,000
Variable overhead cost )(NRs) (W.N.3) 19,500 23,250 25,500 27,750 96,000
Fixed overhead cost )(NRs) (W.N. 4 ) 45,000 45,000 45,000 45,000 180,000
Total 207,500 238,750 257,500 276,250 980,000
Working notes:
Quarters
Particulars I II III IV Total
1 Units to be produced in each quarter 13,000 15,500 17,000 18,500 64,000
Dir Mat in lbs @ 10 lbs / unit 130,000 155,000 170,000 185,000 640,000
Dir Mat cost @ NRs.0.50 lb (NRs) 65,000 77,500 85,000 92,500 320,000
2 Dir Labor hours @ 1.5 hours per unit 19,500 23,250 25,500 27,750 96,000

Dir labor cost @ NRs 4 /hour in NRs 78,000 93,000 102,000 111,000 384,000
3 Variable overhead cost (NRs) 19,500 23,250 25,500 27,750 96,000
4 Fixed overhead cost has been calculated by taking into account 90,000 budgeted hours @ NRs.2
per hour and is divided equally over the four quarters.
(b) Budgeted Profit Statement NRs.

Total sales revenue (61,500 units x NRs.17) 10,45,500
Less: Total variable cost (61,500 x 12.50) (see note) 7,68,750
Contribution 276,750
Profit for the year as a whole 96,750
Working Note: Variable cost per unit NRs.

Direct material cost 10 lbs x 0.50 paisa 5.00
Direct labor cost 1.5 hrs x NRs.4.00 6.00
Variable overhead cost 1.5 hrs x Re. 1.00 1.50
12.50
(c) Break Even Point = Fixed cost/ Contribution per unit

= fixed cost/ (selling price – Variable cost)
= NRs.180,000/(NRs.17 – NRs.12.50)
= NRs.180,000/NRs.4.50
= 40,000 units.
The total sales units by the end of 3rd Quarter will be 43,500 (12,000 + 15,000 + 16,500).
Therefore, the company will break even in the later part of the III quarter.
Question No. 18
The following are the details of the Budget and the actual cost in a factory for six months
from January to June 2008. From the figures given below you are required to prepare the
production cost budget for the period from January to June 2009:
January to June 2008
Particulars Budgeted Actual
Production (units) 20,000 18,000
Material cost NRs.4,000,000 NRs.3,990,000
( 2,000 MT @ NRs.2,000) ( 1,900 MT @ NRs.2,100)
Labor cost NRs.800,000 NRs.799,920
(@ NRs.20 per hour) (@ NRs.22 per hour)
Variable overheads NRs.240,000 NRs.216,000
Fixed overheads NRs.400,000 NRs.420,000

In the first half of 2009, production is budgeted for 25,000 units. Material cost per ton will
increase from last year's actual by NRs.100 but is proposed to maintain the consumption
efficiency of 2008 as budgeted.
Labor efficiency will be lower by another 1% and labor rates will be NRs.22 per hour.
Variable and Fixed overheads will go by 20% over 2008 actual.
You are required to prepare the production cost budget for the period January – June 2009
furnishing all the workings. [June 2009 – 5, 10 Marks]
Answer
Production Cost Budget
(For the 6 months ending 30th June, 2008)
Production 25,000 units
Total cost (NRs.) Unit cost (NRs.)
Material cost (Note 1) 55,00,000 220.00
Labor cost (Note 2) 11,22,000 44.88
Variable overheads ( Note 3) 3,60,000 14.40
Fixed overheads ( Note 4) 5,04,000 20.16
Total 74,86,000 299.44
Working Notes:
(i) Material cost:
Consumption per unit 2,000/20,000 = 0.10 MT
Consumption for 25,000 units = 2,500 MT
Cost of 2,500 MT @ NRs.2,200 per MT = NRs.55,00,000
(ii) Labor cost:

2008: total budgeted labor hours 800,000/20 = 40,000 hrs.
Labor hour budget for each unit = 40,000/20,000 = 2 hrs.
Actual time paid for 799,920/22 = 36,360 hrs.
Less: Standard labor hours for 18,000 units = 36,000 hrs
Extra time taken = 360 hrs. or 1% of standard labor
hours.
2009: Time required for 25,000 units = 50,000 hrs

Add: 2% for lower efficiency = 1,000 hrs
= 51,000 hrs.
51,000 hrs.@ NRs.22 per hour = NRs.11,22,000
(iii)Variable Overhead:
Rate per unit in 2008 = 240,000/20,000 = NRs.12
Cost for 25,000 @ 2008 rates = NRs.300,000
Add: 20 % = NRs. 60,000
NRs.360,000

(iv) Fixed overhead:

Actual in 2008 = NRs. 420,000
Add:20% = NRs. 84,000
NRs. 504,000
Question No. 19
A factory currently producing 10,000 units working at a 50% capacity level desires to
estimate the profit if operated at 60% and 80% capacity also. The details of present operation
per unit reveal the following:
Selling Price NRs. 200
Material 100
Labor 30
Factory overheads (40% Fixed) 30
Administration Overhead (50% Variable) 20
At 60% working, raw material cost increase by 2% and selling price falls by 2%.
At 80% capacity, raw materials cost increase by 5% and selling price falls by 5%.
Required:
Prepare Flexible budget for all the three capacity level of operation.
[June 2009 – 5, 10 Marks]
Answer
Flexible Budget
Capacity in % 50 60 80
Production Units 10,000 12,000 16,000
(Figures in NRs.)
Particulars Rate Total (in'000) Rate Total (in'000) Rate Total (in'000)
A. Sales Revenue 200 2,000 196 2,352 190 3,040
B. Variable cost:
• Materials 100 1,000 102 1,224 105 1,680
• Labor 30 300 30 360 30 480
• Factory Ovh 18 180 18 216 18 288
• Admin Ovh 10 100 10 120 10 160
Sub Total 1,580 1,920 2,608
C. Fixed cost
• Factory 120 120 120
• Administrative 100 100 100
Sub Total 220 220 220
D. Total Cost (B+C) 1,800 2,140 2,828
Net Income (A-D) 200 212 212
Question No. 20
Kathmandu Limited having a capacity of 6 lakhs units has prepared the following cost sheet:
Per unit
Direct Materials Rs. 2.50

Direct Wages Rs. 1.00

Factory Overheads Rs. 2.00 (50% fixed)
Selling and Administration Overheads Rs. 1.50 (one-third variable)
Selling Price Rs. 9.00
During the year 2008, the sales volume achieved by the company was 5 lakh units. The
company has launched an expansion programme, the details of which are as under:
v) The capacity will be increased to 10 lakhs units.
vi) The additional fixed overheads will amount to Rs. 4 lakhs up to 8 lakhs units and
will increase by Rs. 2 lakhs more beyond 8 lakhs units.
vii) The cost of investment on expansion is Rs. 8 lakhs which is proposed to be
financed through bank borrowings carrying interest at 15% per annum.
viii) The average depreciation rate on the new investment is 10% based on straight line
method.
After the expansion is put through, the company has two alternatives for operating the
expanded plant as under:
i) Sales can be increased up to 8 lakhs units by spending Rs. 1 lakhs on special
advertisement campaign to explore new market, or
ii) Sales can be increased to 10 lakhs units subject to the following:
a. By an overall price reduction of Rs. 1 per unit on all the units sold.
b. By increasing the variable selling and administration expenses by 5%.
c. The direct material costs would go down by 1% due to discount on bulk
buying.
i) Construct a flexible budget at the level of 5 lakhs, 8 lakhs and 10 lakhs units of
production and advise which level of output should be chosen for operation.
ii) Calculate the break-even point both before and after expansion.
[December 2009 – 2(a), 7+3=10 Marks]
Answer
i) Flexible budget:
Rs. in lakh
Output levels (units) 5 lakhs 8 lakhs 10 lakhs
Sales 45.00 72.00 80.00
Direct Materials (@ 2.50 per unit, but at level of 12.50 20.00 24.75
10 lakhs discount of 1% is to be allowed)
Direct wages 5.00 8.00 10.00
Factory Overheads 5.00 8.00 10.00
Selling and Administration Overheads (at the 2.50 4.00 5.25
level of 10 lakh variable Selling and Administra-
tion Overhead Increases by 5%)
Total Variable Costs 25.00 40.00 50.00
Contribution 20.00 32.00 30.00

Fixed Costs:
Fixed factory overhead 6.00 6.00 6.00
Selling and Adm. Expenses 6.00 6.00 6.00
Additional fixed cost due to expansion - 4.00 6.00
Interest @ 15% on 8 lakh - 1.20 1.20
Depreciation @ 10% on 8 lakhs - 0.80 0.80
Special advertisement - 1.00 -
Total Fixed Costs 12.00 19.00 20.00
Profit 8.00 13.00 10.00
Therefore, activity to be chosen is 8 lakhs units since it provides the highest profit of
Rs. 13 lakh.
ii) Break-even points:

Output levels (units) 5 lakhs 8 lakhs 10 lakhs
P/V Ratio (Contribution Margin per Unit/Price 4/9 4/9 3/8
per Unit)
Break-even points (Rs. in lakh) 27.00 42.75 53.33
Working [BEP = Fixed Cost/PV Ratio] 12 X 9/4 19 X 9/4 20 X 8/3
BE) ( in lakh of units) 3 lakh 4.75 lakh 6.67 lakh
Working [BEP = Fixed Cost/CM per Unit] 12/4 19/4 20/3
Question No. 21
The boilerhouse is one of the service departments of a company. Steam is raised and then
transferred to production departments and other service departments as required.
The basic monthly budget figures for 2009 are as follows:
Boiler operating hours: 480
Steam raised: 8,000,000 kg
Costs:
Fuel (V) Rs.19,200
Chemicals (V) Rs. 960
Wages (F) Rs. 2400
Sundry overheads (F) Rs. 3000
The actual figures for February 2009 are as follows:

Steam raised: 6,750,000 kg
Costs:
Fuel (V) Rs. 18,000
Chemicals (V) Rs . 990
Wages (F) Rs. 2,200
Sundry overhead (F) Rs. 3,000

It is expected that the price of chemicals for all output will fall by 2% where the boiler
operates in excess of 480 hours per month. Sundry fixed (F) costs are expected to fall by Rs.
200 where the boiler is operated for less than 425 hours and to increase from the normal level
by Rs. 250 where the boiler is operated for more than 480 hours.
Variable (V) costs vary in proportion to boiler hours.
Required:
i) Prepare a budget summary which shows the cost of the boilerhouse in total and
per ‘000 kg steam for boiler operating levels of 400,432, 480, and 540 hours.
ii) Prepare a control statement which compares budget with actual cost of the
boilerhouse for February where a flexible budgeting system is in operation.
Comment on the variances in the statement.
[June 2010 – 2(b), 5+5=10 Marks]
Answer
(i) Flexible Budget Summary
Boiler operating hours: 400 432 480 540
Steam raised(‘000kg) 6667 7200 8000 9000
Costs
Fuel Rs. 16,000 Rs. 17,280 Rs. 19,200 Rs. 21,600
Chemicals(v) 800 864 960 1,058.4
Wages(F) 2400 2400 2400 2,400.0
Sundry overheads 2800 3000 3000 3,250.0
Total 22,000 23,544 25,560 28,308.4
Cost/’000 kg 3.30 3.27 3.195 3.145
(ii) Control statement for the month

Budget Actual Variances Comments on
the variance
Boiler operating hours 432 432
Steam raised (‘000kg) 7,200 6,750 450 (Adverse)
Costs: Rs Rs Rs.
Fuel(V) 17,280 18,000 720 (Adverse)
Chemical(V) 864 990 126 (Adverse)
Wages(F) 2,400 2,200 200 (Favourable)
Sundry overhead(F) 3,000 3,000 nil
_____ _____ ____
23,544 24,190 646 (Adverse)
______` _____ _____
Question No. 22
SV Limited which has established its product K furnishes the following forecast of sales in
units for 2009.

I Quarter II Quarter III Quarter IV Quarter

Units 12,000 15,000 13,500 9,000
The opening stock on 1.1.2009 is expected to be 10,000 units and the company proposes to
maintain a closing stock of 4,500 units on 31.12.2009. The rejection in the process of
manufacture of product K is 12% and the production will be spread out uniformly throughout
the year.
Two raw materials C and D are used for the manufacture of product K. At present the
company orders inventory of the two raw materials in quantities equivalent to 13 weeks’
consumption. The management of the company has been advised that considerable economies
in provisioning of raw materials can be effected by changing over to the ordering system
based on economic order quantities. The Materials Manager has complied the following data:
C D
Raw material quantity required per unit of output of K (kg) 2.4 4.2
Raw material usage rate/week (kg) 2,300 4,000
Price per kg (Rs.) 2.00 4.00
Lead time to obtain deliveries (weeks) 5 3
Order costs per order (Rs.) 10.00 10.00
Carrying Costs 20% 25%
i) Prepare a Production and Raw Material Requirement Budget for the year 2009.
ii) Calculate the Economic Order Quantity for raw materials C & D using Tabular
Method assuming order sizes of 1,200, 1,800, 2,400 and 3,000.
iii) The company feels that a safety stock should be built up to cover a lead time of 8
weeks and 5 weeks respectively for C and D and increase in the usage of raw
materials up to 3,000 kg and 5,000 kg respectively for C and D per week.
Calculate the ordering level to meet the above requirement.
iv) Based on the ordering level calculate at (iii) above, find the saving arising from
switching over to the new ordering system.
[June 2010 – 3(a), 4+4+4+3=15 Marks]
Answer
i (a) Annual Production budget (quantitative)
Units
Total annual sales (12,000 +15,000 + 13,000 + 9,000) 49,500
Add: desired closing Stock 4,500
54,000
Less: Expected Opening Stock 10,000
Production of good units 44,000
Rejection 12%
Units to be produced 44,000 x (100/88) 50,000

(b) Material Budget (Quantitative)

C D
Quantity per unit 2.4 kg 4.2 kg
Material requirement per annum (kg) 120,000 210,000
ii) Computation of Economic Order Quantity (EOQ)

EOQ for C
Lot Size No of Average Ordering Inventory Total
Orders Inventory Costs Carrying Costs
Rs. Cost Rs.
Rs.
1,200 100 600 1,000 240 1,240
1,800 67 900 670 360 1,030
2,400 50 1,200 500 480 980
3,000 40 1,500 400 600 1,000
EOQ for D
1,200 175 600 1,750 600 2,350
1,800 117 900 1,170 900 2,070
2,400 88 1,200 880 1,200 2,080
3,000 70 1,500 700 1,500 2,200
Thus, EOQ for Material C is 2,400 units while for Material D it is 1,800 units.
iii) Computation of Revised Ordering Level

C D
Kg kg
Normal Ordering Level = Lead Time x Inventory Usage (2,300 x 5) (4,000 x 3)
= 11,500 = 12,000
Usage over increased lead time
C : 2,300 x 3 6,900
D : 4,000 x 2 8,000
Usage increase per week
C : (3,000 – 2,300) x 8 5,600
D : (5,000 – 4,000) x 5 5,000
Revised ordering level 24,000 25,000
iv) Computation of Savings due to change in system

Rs. Rs.
(a) Present : No. of orders p.a. 4 4
Average Inventory (once in 13 weeks) (120,000/4 x ½) (210,000/4 x ½)
= 15,000 = 26,250
Ordering cost 40 40
Carrying cost (15,000 x 2 x 20%) (26,250 x 4 x 25%)
= 6,000 = 26,250

Total cost 6,040 26,290

(b) Proposed : Total cost (See (ii) 980 2,070
above)
(c) Saving : (a) – (b) 5,060 24,220
Question No. 23
Sirshika Pvt. Ltd. has given the sales forecast for January to July 2010 and actual sales for
November and December 2009. With the other particulars given, prepare cash budget for five
months January to May 2010:
Sales: November 2009 Rs. 80,000 April Rs. 1,00,000

December 70,000 May 90,000
January, 2010 80,000 June 1,20,000
February 1,00,000 July 1,00,000
March 80,000
Sales: 20% Cash, 80% credit payable in the third month (January sales in March)
Variable expenses 5% on turnover, time-lag half month.
Commission 5% on credit sales payable in the third month.
Purchase 60% of the sales of the third month.
Payment 3rd month of purchases.
Rent and other expenses Rs. 3,000 paid every month.
Other payments : Fixed Assets purchased in March Rs. 50,000.
Taxes paid in April Rs. 20,000.
Opening Cash Balance Rs. 25,000. [June 2011 – 1(b), 12 Marks]
Answer
Sirshika Pvt. Ltd.
Cash Flow Statement from January to May 2010
Particulars January February March April May Total
Opening 25,000 47,050 52,750 24,050 32,550 25,000*
Balance
Cash sales 16,000 20,000 16,000 20,000 18,000 90,000
Collection 64,000 56,000 64,000 80,000 64,000 3,28,000
from
Debtors
Total Cash 1,05,000 1,23,050 1,32,750 1,24,050 1,14,550 4,43,000
inflow(i)
Payment to 48,000 60,000 48,000 60,000 54,000 2,70,000
Sundry
Creditors
Expenses- 3,750 4,500 4,500 4,500 4,750 22,000
Variable

Exp.
Commision 3,200 2,800 3,200 4,000 3,200 16,400
Rent 3,000 3,000 3,000 3,000 3,000 15,000
Other:Fixed - - 50,000 - - 50,000
Assets
Taxes - - - 20,000 - 20,000
Total Cash 0 70,300 1,08,700 91,500 64,950 3,93,400
Outflow(ii)
Balance(i)- 47,050 52,750 24,050 32,550 49,600 49,600
(ii)
`1,05,000 1,23,050 1,32,750 1,24,050 1,14,550 4,43,000
*opening balance in January 2010
Working Notes:
i) Cash Sales and Realisation from Debtors
Particulars Nov Dec Jan.2010 Feb March April May
2009
Rs Rs Rs Rs Rs Rs Rs
Total Sales 80,000 70,000 80,000 1,00,000 80,000 1,00,000 90,000
Cash Sales 16,000 14,000 16,000 20,000 16,000 20,000 18,000
20%
Credit Sales 64,000 56,000 64,000 80,000 64,000 80,000 72,000
80%
Realisation 64,000 56,000 64,000 80,000 64,000
from Debtors
ii) Payment for Purchases: Purchases made for the third month requirement i.e., November
purchases will be for January sales. Moreover , payment is made in the third month from
the purchase i.e. the payment for November purchases will be made in January. In effect
this means payment for purchases will be 60% of each month’s sales, goods having been
purchased two months earlier.
Payment for purchases

Jan Feb March April May
Rs Rs Rs Rs Rs
Equal to 60% 48,000 60,000 48,000 60,000 54,000
of sales of
current
month
iii) Commision@5% on Credit Sales paid in the third month i.e, for Nov. 2009 Sales paid in
Jan 2010:
Particulars Nov Dec Jan Feb March April May

Rs Rs Rs Rs Rs Rs Rs
Credit Sales 64,000 56,000 64,000 80,000 64,000 80,000 72,000
Commission@5% 3,200 2,800 3,200 4,000 3,200 4,000 3,600
iv) Variable expense 4,000 3,500 4,000 5,000 4,000 5,000 4,500
5% Of Sales
Payment: ½ of 1,750 2,000 2,500 2,000 2,500
previous
month and
½ 0f current 2,000 2,500 2,000 2,500 2,250
month
3,750 4,500 4,500 4,500 4,750
Question No. 24
A company is engaged in manufacturing two products A and B. Product A uses one unit of
component X and two units of component Y. product B uses two units of component X and
one unit of component Y and two units of component Z. component Z which is assembled in
the factory uses one unit of component Y.
Components X and Y are purchased from the market. The company has prepared the
following forecast of sales and inventory for the next year:
Product A B
(units) (units)
Sales 80,000 1,50,000
Stock at the end of the year 10,000 20,000
Stock at the beginning of the year 30,000 50,000
The production of both the products and the assembling of the component Z will be spread
out uniformly throughout the year. The company at present orders its inventory of X and Y in
quantities equivalent to 3 months production. The company has complied the following data
related with the two components:
X Y
Price per unit (Rs.) 20 8
Order placing cost per order (Rs.) 1,500 1,500
Carrying cost per annum 20% 20%
Prepare production budget, component budget and calculate EOQ of components X & Y.
[June 2011 – 3(b), 8 Marks]
Answer
Production Budget
Product “A” Product “B”
Sales 80,000 1,50,000
Add: Closing stock 10,000 20,000
Less: Opening stock 30,000 50,000
Production Budget 60,000 1,20,000

Budget of Component
Component X Y Z
Product A: Production 60,000 units 60,000 1,20,000
Product B: Production 1,20,000 units 2,40,000 1,20,000 2,40,000
Component Z: 2,40,000 units 2,40,000
Total 3,00,000 4,80,000 2,40,000
Optimal order quantity of components X & Y

Component X Y
Order placing costs Rs. 1,500 1,500
Price of the component Rs. 20 8
Carrying cost @ 20% Rs. 4 1.60
X Y
(2 × 3,00,000 × 1,500) (2 × 4,80,000 × 1,500)
EOQ =
4 1.60
= 15,000 = 30,000
Question No. 25
Shine Pvt. Ltd. manufactures a single product. The price of the product is Rs. 95 per unit.
The following are the result obtained by the company during the two quarters.
Particulars Qtr 1 Qtr 2

Production units 5,500 4,500
Direct material
A 66,000 54,000
B 55,000 45,000
Manufacturing wages 156,750 138,000
Factory OH 86,000 83,000
Selling OH 79,000 73,000
a) The company estimates its sales for the next quarter to range between 5,500 units to
6,500 units, the most likely volume being 6,000 units. The manufacturing programme
will match with the sales quantity such that no increase in inventory of finished goods
is expected in next quarter.
b) The price of direct material B will increase by 10%. There will be no change in the
price of direct material A.
c) The wage rates will go up by 8%.
d) The fixed factory overhead and selling expenses will increase by 20% and 25%
respectively.

e) A discount in the selling price of 2% is allowed on all sales made at 6,500 unit level
of output. The selling price however will remain unaltered if the volume of output is
below 6,500 units.
Prepare a flexible budget for the next quarter at 5,500, 6,000, and 6,500 unit levels and
determine the profit at the respective volume. [December 2011 – 4, 10 Marks]
Answer
Flexible Budget at 5500, 6000 and 6500 units
Particulars At 5500 At 6000 At 6500
Sales units 5,500 6,000 6,500
Rate 95 95 93.1
Sales Revenue 522,500 570,000 605,150
Costs
Direct material
A @12 66,000 72,000 78,000
B@10*1.1=11 60,500 66,000 71,500
Variable Costs
Manufacturing wages @ 20.25 111,375 121,500 131,625
Factory OH @ 3 16,500 18,000 19,500
Selling OH @ 7.50 41,250 45,000 48,750
Fixed Costs
Manufacturing wages 57,915 57,915 57,915
Factory OH 83,400 83,400 83,400
Selling OH 46,250 46,250 46,250
Total Cost 483,190 510,065 536,940
Profit 39,310 59,935 68,210
Working Notes
1. Sales Price Per unit at 6,500 units
(Selling price-2%)= ( 95-2%)= 93.1
2. Calculation of Variable and Fixed Costs-Mfg wages
156750 − 138000
Variable Mfg wages =
5,500 − 4500
18750
Variable Mfg wages = = 18.75
1000
Fixed Mfg wages = 156750-(5500×18.75)=53,625
Increased Rate
Variable: 18.75 × 1.08 = 20.25
Fixed Wages: 53,625 × 1.08 = 57,915
3. Calculation of Variable and Fixed Costs-Factory
86000 − 83000
Variable Factory Costs =
5,500 − 4500

3000
Variable Factory Costs = =3
1000
Fixed Factory Costs= 86000-(5500×3) =69,500
New Fixed Factory Costs= 69500×1.20 =83,400
4. Calculation of Variable and Fixed Costs-Selling
79000 − 73000
Variable Selling Costs =
5,600 − 4800
6000
Variable Selling Costs = = 7.50
800
Fixed Selling Costs= 79000-(5600×7.50) = 37,000
New Fixed Selling Costs= 37000 ×1.25 = 46,250
Question No. 26
The direct labor hour requirements of three of the product manufactured in a factory, each
involving more than one labor operation is estimated as follows:
Direct labor hours per unit (in minutes)
Operation Product
1 2 3
A 18 42 30
B - 12 24
C 9 6 -
The factory works 8 hours per day, 6 days in a week. The budget quarter is taken as 13 weeks
and during a quarter, lost hours due to leave and holidays and other causes is estimated to be
124 hours.
The hourly budgeted rates for the workers manning the operation A, B and C are Rs. 2.00;
Rs. 2.50 and Rs. 3.00 respectively.
The sales of the products during the quarter are:
Product 1 9,000 units
2 15,000 units
3 12,000 units
There is a carryover of 5,000 units of product 2 and 4,000 units of product 3 and it is
proposed to build up a stock at the end of the budget quarter as follows:
Product 1 1,000 units
3 2,000 units
Prepare a man-power budget for the quarter showing for each operation (i) direct labor hours
(ii) direct labor cost, and (iii) the number of workers. [December 2011 – 2(a), 10 Marks]
Answer
Quarterly man-power
Operation Hourly Product 1 Product 2 Product 3 Total No. of
rate workers
Rs. DL Cost DL Cost DL Cost DL Cost
Hrs Rs. Hrs Rs. Hrs Rs. Hrs Rs.

A 2.00 3,000 6,000 7,000 14,000 5,000 10,000 15,000 30,000 30

B 2.50 - - 2,000 5,000 4,000 10,000 6,000 15,000 12
C 3.00 1,500 4,500 1,000 3,000 - - 2,500 7,500 5
Total 4,500 10,500 10,000 22,000 9,000 20,000 23,500 52,500 47
Working Notes
1. Production budget
Product 1 2 3
Units Units Units
Sales 9,000 15,000 12,000
Add: Closing Stock 1,000 - 2,000
Less: Opening - 5,000 4,000
Stock
Production Budget 10,000 10,000 10,000
2. Total available hours in a quarter per worker

Total hours = 8 * 6 * 13 = 624
Less: hours lost due to leave etc. = 124
Total available hours per man = 500
3. The calculation of direct labor hours, direct labor cost and number of men has been
made as follows (illustrated for product 1):
Direct labor hours = (18*10,000)/60 = 3,000 Hours

Direct labor cost = 3,000 hours * Rs. 2 = Rs. 6,000
Number of men required = (Direct labor hours required/Total available hours per
man)
= 15,000/500
= 30 men.
Similarly, calculations have been made for the other products.
Question No. 27
Prepare a budget for year 2012 for direct labour costs and overhead expenses of a production
department at the activity levels of 80%, 90% and 100%, using the information listed below:
i) Direct labour hourly rate is expected to be Rs.3.75
ii) 100% activity represents 60,000 direct labour hours.
iii) Variable cost:
Indirect labour Rs.0.75 per direct labour hour
Consumable supplies Rs.0.375 per direct labour hour
Canteen and other expenses 6% of direct and indirect labour cost
iv) Semi-variable costs are expected to relate to the direct labour hours in the same
manner as for the last five years
Years Direct labour hrs. Semi variable costs (Rs.)

2007 64,000 20,800

2008 59,000 19,800
2009 53,000 18,600
2010 49,000 17,800
2011 40,000 16,000
v) Fixed overhead per labour hour at 100% activity are:
Overheads Rs.
Depreciation 0.30
Maintenance 0.20
Insurance 0.10
Fee and Taxes 0.25
Management salaries 0.40
vi) Inflation is to be ignored. [June 2012 – 3(b), 10 Marks]
Answer
Flexible Budget for the year 2012
( Rs. in ‘000)
Particulars 80% level 90% level 100% level
48,000 hrs 54,000 hrs 60,000 hrs
Direct Labour 180.00 202.5 225.00

Other variable costs:
Indirect labour 36.00 40.50 45.00
Consumable supplies 18.00 20.25 22.50
Canteen etc. 12.96 14.58 16.20
Total Variable Cost 246.96 277.83 308.70
Semi Variable cost (W.N.1) 17.60 18.80 20.00
Fixed cost
Depreciation (60×0.3) 18.00 18.00 18.00
Maintenance (60×0.2) 12.00 12.00 12.00
Insurance (60×0.1) 6.00 6.00 6.00
Fee and Taxes (60×0.25) 15.00 15.00 15.00
Management salaries ( 60×0.4) 24.00 24.00 24.00
Budgeted cost 339.56 371.63 403.70
Working Note 1:
Segregation of semi variable cost using high/low method:
Rs.
Total cost of 64,000 hours 20,800
Variable cost of 24,000 hours 4,800
Variable cost per hour ( 4,800/24,000) 0.20


Variable cost of 64,000 hours × 0.2 12,800
Fixed costs 8,000
Semi-variable costs are calculated as follows:

60,000 hours (60,000×0.20)+8,000 = 20,000
54,000 hours (54,000×0.20)+8,000 = 18,800
48,000 hours (48,000×0.20)+8,000 = 17,600
Question No. 28
Production costs of a company are as follows:
Capacity utilization 70% 80%
Output (in units) 1,400 1,600
Costs (in Rs.):
Direct materials 2,80,000 3,20,000
Power 24,000 26,000
Repairs & depreciation 48,000 52,000
Fixed factory overheads 50,000 50,000
Variable factory overheads 56,000 64,000
Selling expenses (Rs. 6,000 fixed) 20,000 22,000
Administrative costs 80,000 80,000
Selling price (Rs.) 500 500
A proposal to increase production to 100% and 125% level of activity is under the
consideration of management. The 100% capacity is considered to be the practical capacity
and 125% to be the theoretical capacity. The proposal are not expected to involve any
increase in variable costs but the fixed costs cross their relevant range after 100% of
operation and they need to be doubled except in case of administrative expenses, which
increase by 25% only beyond the relevant range. The supplier has a policy of allowing 10%
discount on purchases if the total purchase exceeds Rs. 4,80,000 per year.
Required:
a) Prepare a flexible budget to calculate the profitability of the company for the capacity
utilization level of 80%, 100% and 125%.
b) Select the viable proposal with comments. [December 2012 – 3, 15 Marks]
Answer
Flexible Budget (Amount in Rs.)
Activity Level (%) 80% 100% 125%
Activity Level (Units) 1,600 2,000 2,500
A Variable Expenses:
Direct material 320,000 400,000 450,000
Direct labour 96,000 120,000 150,000

Power @ Rs. 10 per unit 16,000 20,000 25,000

Repairs & depreciation @ Rs. 20 per unit 32,000 40,000 50,000
Factory overheads @ Rs. 40 per unit 64,000 80,000 100,000
Selling expenses @ Rs. 10 per unit 16,000 20,000 25,000
544,000 680,000 800,000
B Fixed Expenses:
Power 10,000 10,000 20,000
Repairs & depreciation 20,000 20,000 40,000
Factory overheads 50,000 50,000 100,000
Selling expenses 6,000 6,000 12,000
Administrative expenses 80,000 80,000 100,000
166,000 166,000 272,000
C Total Costs (A+B) 710,000 846,000 1,072,000
D Profit (E-C) 90,000 154,000 178,000
E Sales 800,000 1,000,000 1,250,000
The above flexible budget shows that it is profitable to operate at 125% given that the
conditions at operating 125% are satisfied mainly the discount of Rs 50,000 on materials,
savings in administrative expenses of Rs. 60,000 by increasing only 25% instead of 100%
and the extra output can be sold without any trade off.
Working Notes:
1. Direct material cost at 125% capacity level:
Total cost (Rs. 200 × 2,500) = Rs. 500,000
Cost after 10% discount = Rs. 500,000 × 90% = Rs. 450,000
2. Segregation of Semi-variable costs:
(a) Power:
Variable cost per unit = Difference in costs / Difference in output
= Rs. (26,000 – 24,000) / (1,600 – 1,400)
= Rs. 2,000 / 200
= Rs. 10
Fixed cost = Rs. 26,000 – Rs. 10 × 1,600
= Rs. 26,000 – Rs. 16,000
= Rs. 10,000
Fixed power cost at 125% capacity level = Rs. 10,000 × 2 = Rs. 20,000
(b) Repair and Depreciation:
Variable cost per unit = Difference in costs / Difference in output
= Rs. (52,000 – 48,000) / (1,600 – 1,400)
= Rs. 4,000 / 200
= Rs. 20
Fixed cost = Rs. 52,000 – Rs. 20 × 1,600
= Rs. 52,000 – Rs. 32,000
= Rs. 20,000

Fixed repair and depreciation cost at 125% capacity level = Rs. 20,000 × 2 =
Rs. 40,000
(c) Selling expenses:
Variable cost per unit = Rs. (22,000 – 6,000) / 1,600
= Rs. 16,000 / 1,600
= Rs. 10
Fixed selling expenses at 125% capacity level = Rs. 6,000 × 2 = Rs. 12,000
(d) Fixed administrative expenses at 125% capacity level = Rs. 80,000 × 1.25 =
Rs. 100,000
Question No. 29
Bridgewater Tyre Company’s budgeted unit sales for the year 2013 were:
Bike tyres 60,000
Bus tyres 12,500
The budgeted selling price for Bus tyres was Rs. 15,000 per tyre and for Bike tyres was Rs.
4,500 per tyre. The beginning finished goods inventories were expected to be 2,500 Bus tyres
and 6,000 Bike tyres, for a total cost of Rs. 2,00,25,500, with desired ending inventories at
2,000 and 5,000, respectively, with a total cost of Rs. 1,63,23,900. There was no anticipated
beginning or ending work-in-process inventory for either type of tyres. The standard material
quantities for each type of tyre were as follows:
Bus Bike
Rubber 35 Kgs 15 Kgs
Steel Belts 4.5 Kgs 2.0 Kgs
The purchase prices of rubber and steel were Rs. 150 and Rs. 100 per Kg, respectively. The
desired ending inventories for rubber and steel were 60,000 and 6,000 Kgs, respectively. The
estimated beginning inventories for rubber and steel were 75,000 and 7,500 Kgs respectively.
The direct labor hours required for each type of tyre were as follows:
Molding Department Finishing Department
Bus tyre 0.20 0.10
Bike tyre 0.10 0.05
The direct labor rate for each department is as follows:

Molding Department Rs. 650 per hour
Finishing Department Rs. 750 per hour
Budgeted factory overhead costs for 2013 were as follows:
Particulars Rs.
Indirect Material 85,28,000
Indirect Labour 79,40,000
Depreciation of Building and Equipment 49,16,000
Power and Light 63,00,000
Total 2,76,84,000

Required:
Prepare each of the following budgets for the year ended 2013:
q) Sales budget
r) Production budget
s) Direct material budget
t) Direct labor budget
u) Cost of goods sold budget. [June 2013 – 1, 3+3+5+3+6=20 Marks]
Answer
a) Bridgewater Tyre Company
Sales Budget
For the year ended December 31, 2013
Product Unit Sales Unit Selling Price Total Sales

Volume Rs. Rs.
Bike Tyres 60,000 4,500 27,00,00,000
Bus Tyres 12,500 15,000 18,75,00,000
Total 72,500 45,75,00,000
b) Production Budget
Units
Bike tyres Bus tyres
Sales (from sales budget) 60,000 12,500
Add: Desired ending inventory, Dec. 31 5,000 2,000
Total 65,000 14,500
Less estimated beginning inventory, Jan. 1 6,000 2,500
Total production 59,000 12,000
c) Direct Materials Budget

Direct Materials
Total
Rubber (Kgs.) Steel Belts (Kgs.)
Quantities required for production:
Bike tyres:
59,000 × 15 Kgs. 8,85,000
59,000 × 2.0 Kgs. 1,18,000
Bus tyres:
12,000 × 35 Kgs. 4,20,000
12,000 × 4.5 Kgs. 54,000
Add: Desired ending inventory, Dec. 31 60,000 6,000
Total 13,65,000 1,78,000
Less: Estimated beginning inventory, Jan. 1 (75,000) (7,500)

Total quantity to be purchased 12,90,000 1,70,500

Unit price Rs. 150 Rs. 100
Total direct materials purchased Rs. 19,35,00,000 Rs. 1,70,50,000 Rs.

21,05,50,000
d) Direct Labor Budget

Department
Total
Molding Finishing
Hours required for production:
Bike tyres:
59,000 × .10 5,900
59,000 × .05 2,950
Bus tyres:
12,000 × .20 2,400
12,000 × .10 1,200
Total 8,300 4,150
Hourly rate Rs. 650 Rs. 750

Total direct labor cost Rs. 53,95,000 Rs. 31,12,500 Rs.
85,07,500
e) Cost of Goods Sold Budget

Rs.
Direct materials inventory Jan. 1(W. N. 1) 1,20,00,000
Direct materials purchases 21,05,50,000
Total direct materials available 22,25,50,000
Less: Direct materials inventory, Dec. 31 (W. N. 1) 96,00,000
Cost of direct materials used 21,29,50,000
Direct labor 85,07,500
Factory overhead 2,76,84,000
Cost of goods manufactured 24,91,41,500
Add: Finished goods inventory, Jan.1 2,00,25,500
Cost of goods available for sale 26,91,67,000
Less: Finished goods inventory, Dec. 31 1,63,23,900
Cost of goods sold 25,28,43,100
Working notes
W.N.: Direct material inventory (beginning)
Rubber 75,000 Kgs. × 150 Rs. 1,12,50,000
Steel belts 7,500 Kgs. × 100 7,50,000

Rs. 1,20,00,000
W.N.2 Direct material inventory (ending)

Rubber 60,000 Kgs. × 150 Rs. 90,00,000
Steel belts 6,000 Kgs. × 100 6,00,000
Rs. 96,00,000
Question No. 30
Nits Ltd. specializes in seasonal novelty products and is considering the manufacture of a
new range of items to coincide with a major sporting event of Cricket in the city. The range
will initially comprise of 2 products, Flags and Bunting. To assist with budgeting, Nits Ltd
has collected the following projected information for the month of July 2014:
Projected sales: Quantity Sales revenue per item (Rs.)
Flags 4,000 18
Bunting 2,000 50
Production requirements: Cost per meter Flags Bunting

Material A Rs. 4.00 0.5 m 4m
Material B Rs. 2.00 1.0 m 3m
Finished goods inventory: Flags Bunting
1st July 200 -
31st July 950 1,325
There is no opening or closing work in progress, however due to inefficiencies in the

production process, management expect that 5% of output will not pass quality control and
therefore cannot be sold.
Materials inventory: A B
st
1 July 6,000 m 20,000 m
st
31 July 10,200 m 14,000 m
(m denotes the measurement of cloths in meter)
Labour & Overhead:
The standard direct labour required to produce each Flag unit is 30 minutes and a Bunting
unit takes 1 hour to produce. Labour is paid at Rs. 10 per hour. Variable overheads (which
will be incurred evenly over the year) are projected at Rs. 360,000 per annum and these are
to be absorbed into production on the basis of direct labour hours.
Prepare the following Budget Statements:
i) Sales Budget
ii) Production Budget
iii) Material Purchasing Budget
iv) Labour Budget
v) Overhead Absorption Budget
[June 2014 – 2(a), 2+3+3+2+2=12 Marks]

Answer
a)
i) Sales Budget:
Particulars Flags Bunting Total
Sales units 4,000 2,000 -
Sales price per unit (Rs.) 18 50 -
Sales value (Rs.) 72,000 100,000 172,000
ii) Production Budget (units):

Particulars Flags Bunting
Sales 4,000 2,000
Add: Closing stock 950 1,325
4,950 3,325
Less: Opening stock 200 -
Net production 4,750 3,325
Normal loss (%) 5 5
Total production (Net production / 95%) 5,000 3,500
iii) Materials Purchasing Budget:

Particulars Materials Total
A (in meters) B (in meters)
Flag (5,000 units) 2,500 5,000 -
Bunting (3,500 units) 14,000 10,500 -
16,500 15,500 -
Add: Closing stock 10,200 14,000 -
26,700 29,500 -
Less: Opening stock 6,000 20,000 -
Purchases 20,700 9,500 -
Price per meter Rs. 4.00 Rs. 2.00 -
Total purchases Rs. 82,800 Rs. 19,000 Rs. 101,800
iv) Labor Budget:

Particulars Flags Bunting Total
Production units 5,000 3,500 -
Labor hour per unit 0.5 1.0 -
Total labor hour 2,500 3,500 -
Rate per hour Rs. 10 Rs. 10 -
Total labor cost Rs. 25,000 Rs. 35,000 Rs. 60,000
v) Variable Overhead Absorption Budget:

Particulars Amt. in Rs.
Variable overheads for the year 360,000
Variable overheads for the month 30,000

Direct labor hour (2,500 + 3,500) 6,000 hour

Overhead rate per hour 5
Overhead absorption:
Flags (2,500 × Rs. 5) 12,500
Bunting (3,500 × Rs. 5) 17,500
Question No. 31
Action Plan Manufacturers normally produce 8,000 units of their product in a month, in their
Machine Shop. For the month of January, they had planned for a production of 10,000 units.
Owing to a sudden cancellation of a contract in the middle of January, they could only
produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and
the Foreman of the shop is paid a 10% of the savings as bonus when in any month the
indirect manufacturing cost incurred is less than the budgeted provision.
Expenses for Planned for Actual in

Indirect Manufacturing January January costs
Normal month (Rs.) (Rs.) (Rs.)
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600
Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
5,290 5,875 4,990

Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the
performance in January? Substantiate your answer with facts and figures.
[July 2015 – 3(a), 10 Marks]
Answer
Flexible Budget of “Action Plan Manufactures”
(for the month of January)
Indirect manufacturing Nature of Expenses for Planned Expenses as Actual Difference

Cost cost a normal expenses for per flexibleexpenses for Increased
month January budget forthe month of (decreased)
January January
Rs. Rs. Rs. Rs.
(1) (2) (3) (4) (5) (6) = (5) – (4)
Salary of foreman Fixed 1,000 1,000 1,000 1,000 Nil

Indirect labour Variable 720 900 540 600 60

(Refer to Working note 1)
Indirect material Variable 800 1,000 600 700 100
Repair and maintenance Semi-variable 600 650 550 600 50
Power Semi-variable 800 875 725 740 15
Tools consumed Variable 320 400 240 300 60
Rates and taxes Fixed 150 150 150 150 Nil
Depreciation Fixed 800 800 800 800 Nil
Insurance Fixed 100 100 100 100 Nil
5,290 5,875 4,705 4,990 285
Conclusion : The above statement of flexible budget clearly shows that the
concern’sexpenses in the month of January have increased from Rs. 4,705 to Rs. 4,990.
Under such circumstances the Foreman of the company is not at all entitled for any
performance bonus in January.
Working Notes:
Working notes :
1. Indirect labour cost per unit Rs 720 =0.09P.
8,000
= 6,000 × 0.09P = Rs.
Indirect labour for 6,000 units 540.
2. Indirect material cost per unit Rs 800 = 0.10P
8,000
Indirect material for 6,000 units = 6,000 × 0.10P = Rs. 600
3. According to high and low point method of segregating semi-variable cost into fixed and
variable components, following formulae may be used.
Variable cost of repair and maintenance per unit
= Change in expense level= Rs 650 - Rs 600 = 0.025 P.

Change in output level 2,000
For 8,000 units

Total Variable cost of repair and maintenance = Rs. 200
Fixed repair & maintenance cost = Rs. 400
Hence at 6,000 units output level, total cost of repair and maintenance should
be = Rs. 400 + Rs. 0.025 × 6,000 units
= Rs. 400 + Rs. 150 = Rs. 550

Rs 875 - Rs 800
4. Variable cost of power per unit = = 2,000
0.0375 unit
For 8,000 units

Total variable cost of power = Rs. 300
Fixed cost = Rs. 500
Hence, at 6,000 units output level, total cost of power should be
= Rs. 500 + Rs. 0.0375 × 6,000 units

= Rs. 500 + Rs. 225 = Rs. 725
5. Tools consumed cost for 8,000 units = Rs. 320

Hence, tools consumed cost for 6,000 = (Rs. 320/8,000 units) × 6,000
units units
= Rs. 240
Question No. 32
Caltech Co. is experiencing a shortage of the highly skilled labour that it uses to produce its
only product, the “Olsen”. It wishes to prepare budgets for the year ending 31st December
2015. The standard cost card for the Olsen for 2015 and other relevant information are given
below.
Cost per unit
(Rs.)
Direct material A (6 kg Rs. 2 per kg) 12.00
Skilled labour (2 hours Rs. 25 per hour) 50.00
Unskilled labour (4 hours Rs. 15 per hour) 60.00
Prime cost 122.00
Variable production overhead (6 hours Rs. 5 per hour) 30.00
Fixed production overhead (6 hours Rs. 4 per hour) 24.00
Standard full cost of production 176.00
Notes relevant to budget preparation:
• Direct material A is freely available.
• 20 skilled workers are employed. Each is contracted to work for 40 hours per week
for 48 weeks per year and in addition will work overtime, up to a maximum of 8
hours per week, for a premium of 50% per hour.
• There is no shortage of unskilled labour and all of their hours will be paid at basic
rate.
• The standard fixed overhead absorption rate was set based upon 150,000 standard
labour hours per year.
• The Olsen will be sold at Rs. 250 per unit, and demand at this price is estimated to be
30,000 units per annum.
• Caltech Co. carries no inventory of raw materials or finished goods at any time.

Required:
b) Construct a budget for skilled labour for the year ending 31st December 2015,
assuming that the maximum amount of overtime is worked. Your budget should show
basic hours, overtime hours, basic pay and overtime premium paid.
c) Assuming that the principal budget factor for Caltech Co. is 46,080 skilled labour
hours, and that the company wishes to maximize its profits, calculate the following
budgeted figures for the year ending 31st December 2015:
i) Production in units;
ii) Unskilled labour (in hours and Rs.);
iii) Direct material usage (in kg and Rs.);
iv) Sales (in units and Rs.).
d) Prepare a budgeted income statement for the year ending 31st December 2015.
e) Suggest four ways by which a company could overcome shortages of skilled labour.
Answer
(a) Skilled labour budget:
Basic hours (20 workers x 40 hours per week x 48 weeks per year) 38,400 hours
Overtime hours (20 workers x 48 weeks per year x 8 hours) 7,680 hours
Total hours 46,080 hours
Rs.
Basic pay (46,080 hours x Rs.25 per hour) 1,152,000
Overtime premium (7,680 hours x Rs.25 per hour x 50%) 96,000
Total Rs.1,248,000
(b) Budgets for the year ending 31st December 2015
(i) Production budget

Production (46,080 hours ÷ 2 skilled hours per unit) 23,040 units
(ii) Unskilled labour budget

Basic hours (23,040 units x 4 hours per unit) 92,160 hours
Basic pay (92,160 hours x Rs.15 per hour) Rs.1,382,400
(iii) Direct material

Material usage (23,040 units x 6 kg per unit) 138,240 kg
Material cost (138,240 kg x Rs.2 per unit) Rs.276,480
(iv) Sales budget

Units (from above) 23,040 units
Revenue (23,040 units x Rs.250 per unit) Rs.5,760,000

(c) Income statement

Rs.
Sales revenue (from (iv) above) 5,760,000
Direct labour
Skilled (from (a) above) (1,248,000)
Unskilled (from (ii) above) (1,382,400)
Direct material (from (iii) above) (276,480)
Variable overhead (w1) (691,200)
Fixed overhead absorbed (w2) (552,960)
Under absorbed fixed overhead (w3) (47,040)
Profit Rs.1,561,920
Working 1 46,080 skilled hours ÷ 2 hours x 6 hours x Rs.5 per hour

Working 2 46,080 skilled hours ÷ 2 hours x 6 hours x Rs.4 per hour
Working 3 (150,000 hours – 138,240 hours) x Rs.4 per hour = Rs.47,040
(d) Overcoming labour shortages:

Labour shortages could be overcome by
– Recruiting more skilled labour, possibly by offering higher wages
– Training more skilled workers
– Investing in equipment to improve the productivity of skilled employees
– Using unskilled labour to perform the simpler elements of the skilled labour’s work
– Subcontracting (outsourcing) some of the work to other manufacturers.
Question No. 33
The boilerhouse is one of the service departments of a company. Steam is raised and then
Steam raised: 80,00,000 kg.
Costs:
Fuel (V) Rs.19,200
Wages(F) Rs. 2,400
Sundry overheads(F) Rs. 3,000

Steam raised: 67,50,000kg.
Costs:
Fuel (V) Rs. 18,000
Wages(F) Rs. 2,200


operates in excess of 480 hours per month. Sundry fixed(F) costs are expected to fall by Rs.
Variable(V) costs vary in proportion to boiler hours.
Required:
i) Prepare a budget summary which shows the cost of the boilerhouse in total and per ‘000
kg steam for boiler operating levels of 400, 432, 480,and 540 hours.
ii) Prepare a control statement which compares budget with actual cost of the boilerhouse
for February where a flexible budgeting system is in operation. Comment on the
variances in the statement. [June 2016 – 3(b), 4+4=8 Marks]
Answer
(a) Flexible Budget Summary
Boiler operating hours: 400 432 480 540
Steam raised(‘000kg) 6667 7200 8000 9000
Costs
Fuel Rs. 16,000 Rs. 17,280 Rs. 19,200 Rs. 21,600
Chemicals(v) 800 864 960 1,058.4
Wages(F) 2400 2400 2400 2,400.0
Sundry overheads 2800 3000 3000 3,250.0
Total 22,000 23,544 25,560 28,308.4
Cost/’000 kg 3.30 3.27 3.195 3.145
(b) Control statement for the month
Budget Actual Variances
Costs: Rs Rs Rs.
Fuel(V) 17,280 18,000 720 (Adverse)
Wages(F) 2,400 2,200 200
(Favourable)
Sundry overhead(F) 3,000 3,000 nil nil
_____ _____ ____
23,544 24,190 646 (Adverse)
Question No. 34
Adarsh Mahila Udhyog which has been regularly producing and marketing a very popular
washing powder named ‘Ujyalo’ intends to present its budget for the fourth quarter of
2073/74.
The following information are made available for this purpose.
1) It expects to sell 50,000 bags of Ujyalo during the fourth quarter of 2073/74 at
the selling price of Rs.90 per bag.

2) Each bag of Ujyalo requires 2.5 kgs. of raw-material ‘A’ and 7.5 kgs. of raw-
material ‘B’
3) Stock levels are planned as follows:
Beginning of quarter End of quarter
Finished bags of 15,000 11,000
‘Ujyalo’ (Nos.)
Raw-material A 32,000 26,000
(Kgs.)
Raw-material B 57,000 47,000
(Kgs.)
Empty bags 37,000 28,000
(Nos.)
4) Raw-materials A costs Rs.12 per kg., B costs Rs.2 per kg. and empty bag costs
Rs. 8 each.
5) It requires 9 minutes of direct labour time to produce and fill one bag of ‘Ujyalo’.
Labour cost is Rs. 50 per hour.
6) Variable manufacturing costs are Rs. 4.50 per bag and fixed manufacturing costs
Rs. 3,00,000 per quarter.
7) Variable selling and administration expenses are 5% of sales and fixed
administration and selling expenses are Rs. 2,50,000 per quarter.
Required:
iv) Prepare a production budget for the fourth quarter.
v) Prepare a raw-materials purchase budget for A, B and empty bags for the fourth
quarter in terms of quantity as well as rupees.
vi) Compute the budgeted variable cost to produce one bag of ‘Ujyalo’.
vii) Prepare a statement of budgeted net income for the fourth quarter in terms of both
per unit and total cost data. [June 2017 – 2(a), 1+4+2+3=10 Marks]
Answer
(i) Production Budget of ‘Ujyalo’ for the fourth quarter
Bags (Nos.)
Budgeted sales 50,000
Add: Desired closing stock 11,000
Total requirements 61,000
Less: Opening stock 15,000
Required production 46,000
(ii) Raw-materials purchase budget in quantity as well as in rupees for 46,000 bags of
‘Ujyalo’
A B Empty Bags
Kgs. Kgs. Nos.
Production requirement per
Bag of ‘Ujyalo’ 2.5 7.5 1

Requirement for 46,000 bags 1,15,000 3,45,000 46,000

Add: desired closing stock 26,000 47,000 28,000
Total requirements 1,41,000 3,92,000 74,000
Less: Opening stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs. 12 Rs. 2 Rs. 8
Cost of purchase (Rs.) 13,08,000 6,70,000 2,96,000
(iii) Computation of budgeted variable cost of production of one bag of ‘Ujyalo’.

Rs. Rs.
Raw-material A: (2.5 Kg. × Rs. 12) 30.00
Raw-material B: (7.5 Kg. × Rs. 2) 15.00 45.00
Empty Bag 8.00
Direct Labour (Rs. 50 × 9/60) 7.50
Variable manufacturing overhead 4.50
Variable cost of production per bag 65.00
(iv) Statement of budgeted net income for the fourth quarter

Per Bag Total
Rs. Rs.
Sale value (50,000 bags) 90.00 45,00,000
Less: variable costs
Production cost 65.00 32,50,000
Selling & administration expenses
(5% of Sale price) 4.50 2,25,000
69.50 34,75,000
Budgeted contribution 20.50 10,25,000
Less: Fixed costs
Manufacturing Rs.300,000
Admn & selling Rs.250,000 5,50,000
Budgeted net income 4,75,000
Question No. 35
The boiler house is one of the service departments of a company. Steam is raised and then
Costs:
Fuel (V) Rs.19,200
Wages (F) Rs. 2,400
Sundry overheads (F) Rs. 3,000


Costs:
Fuel (V) Rs. 18,000
Wages (F) Rs. 2,200
operates in excess of 480 hours per month. Sundry fixed (F) costs are expected to fall by Rs.
Variable (V) costs vary in proportion to boiler hours.
Required:
i) Prepare a budget summary which shows the cost of the boiler house in total and per ‘000
kg. steam for boiler operating levels of 400, 432, 480 and 540 hours.
ii) Prepare a control statement which compares budget with actual cost of the boiler house
for February where a flexible budgeting system is in operation.
[June 2019 – 3(b), 6+2=8 Marks]
Answer
i) Flexible Budget Summary
Boiler operating 400 432 480 540
hours:
Steam 6667 7200 8000 9000
raised(‘000kg)
Costs
Fuel (V) Rs. 16,000 Rs. 17,280 Rs. 19,200 Rs. 21,600
Chemicals(V) 800 864 960 1,058.4
Wages(F) 2400 2400 2400 2,400.0
Sundry 2800 3000 3000 3,250.0
overheads (F)
Total 22,000 23,544 25,560 28,308.4
Cost/’000 kg 3.30 3.27 3.195 3.145
ii) Control statement for the month
Budget Actual Variances
Costs: Rs Rs Rs.
Fuel(V) 17,280 18,000 720 (Adverse)
Wages(F) 2,400 2,200 200 (Favourable)
Sundry overhead(F) 3,000 3,000 nil
23,544 24,190 646 (Adverse)

CHAPTER 14:
STANDARD COSTING

Question No. 1
(a) Standard Cost and Estimate Cost. [December 2005 – 6(d), 4 Marks]
Answer
• Standard cost are computed on the basis of scientific specification, past experience
and experiments. However, estimated costs are based upon historical cost which lacks
any scientific basis;
• Standard costs remain unchanged for fairly long period until external environmental
changed. However, estimated cot is one time estimated cost;
• Standard costs are carefully determined to locate unnecessary wastages, losses etc.
this will eventually improve efficiency;
• Standard costs required to be fixed for every element of cost. However, estimated cost
can be used for a part of business or for a particular purpose.
(b) Standard Costing and Uniform Costing [June 2007 – 6(e), 4 Marks]
Answer
Standard Costing:
It is the name given to the technique whereby standard costs are predetermined and
subsequently compared with the recorded actual costs. It is thus a technique of cost
ascertained and cost control. This technique may be used in conjunction with any method
of costing. However, it is especially suitable where the manufacturing method involves
production of standardized goods of repetitive nature.
Uniform Costing:
When a number of firms in an industry agree among themselves to follow the same
system of costing in detail, adopting common technology for various items and processes
they are said to follow a system of uniform costing. In such a case, a comparison of the
performance of each of the firms can be made with that of another, or 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.
Question No. 2
(a) Direct Material Yield Variance [June 2007 – 5(c), 4 Marks]
Answer
It is that portion of direct material usage variance, which is due to the difference between
the standard yield specified and the actual yield obtained.
This variance may be due to abnormal contingencies like spoilage, chemical reactions etc.
The term standard yield here means the production, which shall result in by putting in the
standard quantity of materials. This variance is a measure of the loss or waste in
production and hence it can also be designated as ‘material loss or waste’ variance. The
formula for calculating the variance can be expressed, thus:
Direct Material Yield Variance = Standard cost per unit × (Standard

production for actual mix – Actual

Production)
Standard Production for actual mix = Standard production/ Total standard

quantity of material × Total actual
quantity of material
If the actual production is more than the standard production, the variance would be
favorable and vice versa. (It is to be noted here that the figures would be negative if actual
production is more, but the variance would be favorable; in case of other cost variances, a
negative figure denotes an adverse variance).
(b) Standard Costing [June 2018 – 6(c), 2.5 Marks]

Answer
Standard costing is defined as the presentation and use of standard costs, their
comparison with actual costs and the analysis of variances to their causes and points of
incidence.
Standard costing, thus is a system of costing which can be used in conjuction with any
method of costing, like job costing, process costing etc. Standard costs are pre-
determined by using a careful analysis of production methods, physical conditions and
price factors. They represent achievable targets and help to build up budgets gauge
performance and obtain product costs. The actual costs will vary from month to month or
even from day to day.
The basic objective, therefore, of standard costing system is to assists the departmental
head by identifying and describing the variances over which he has control.
Question No. 3
State the difference between standard costing and budgetary control.
[June 2002 – 6(a), 4 Marks] [June 2005 – 6(b), 4 Marks]
Answer
Difference between Standard Costing and Budgetary Control
• Budgets are prepared for different functions like sales, productions etc. Standard costs are
compiled and cost determined per unit and control is exercised by comparision.
• Budget is more wide range in scope than standard costing.
• Budgetary control is concerned with the functional levels whereas standard costing is
concerned with each element of cost.
• Budget is a projection of financial accounts and standard cost is a projection of cost
accounting.
• Budgetary control is possible even in non manufacturing activities. e.g. Advertising
Standard Costing is possible in standardise activities.
Alternative Answer:

• Budgetary control is concerned with the operation of the business as a whole and hence is
more, extensive where costing is related with the control of expenses and hence more
intensive.
• Budget is projection of financial accounts whereas standard cost is the projection of cost
accounts.
• Budgetary control does not necessarily requires standardization of products whereas
standard costing requires standardization of products.
• Budgetary control can be adopted in part also whereas standard costing is not possible to
operate in part.
Question No. 4
State the objectives of standard costing technique? [June 2016 – 2(c), 2 Marks]
Answer
The objectives of standard costing technique are as follows:
(i) To provide a formal basis for assessing performance and efficiency.
(ii) To control costs by establishing standards and analysis of variances.
(iii) To enable the principle of ‘Management by exception’ to be practiced at the
operational level.
(iv) To assist in setting budgets.
(v) The standard costs are readily available substitutes for actual average unit costs and
can be used for stock and work-in-progress valuations, profit planning and decision
making and as a basis of pricing where ‘cost-plus’ systems are used.
(vi) To assist in assigning responsibility for non-standard performance in order to correct
deficiencies or to capitalize on benefits.
(vii) To motivate staff and management.
(viii)To provide a basis for estimating.
(ix) To provide guidance on possible ways of improving performance.
Numerical Questions
Question No. 5
The following details are available:
A B
Standard Mixture 70% 30%
Standard Price per ton (Rs.) 2,400 650
Standard Loss 10% of Input
For the month of January 2001, the actual are as follows:

A B
Opening Stock in tons 100 60
Closing stock in tons 130 70
Purchases in tons 350 150
Amount paid for purchases (Rs.) 7,00,000 75,000

Actual production 460 tons

Calculate material price variance, material mix variance and material yield variance.
[June 2001 – 5(b),10 Marks]
Answer
Actual price per ton of both the inputs:
A (Rs.) Tons B (Rs.) Tons
Opening Stock (at standard price) 2,40,000 100 39,000 60
Add: Purchases 7,00,000 350 75,000 150
------------- ------- ------------- -------
9,40,000 450 1,14,000 210
Less: Closing Stock (at standard price) 3,12,000 130 45,500 70
------------- ------- ------------- -------
6,28,000 320 68,500 140
========= ==== ========= ====
Actual price per ton Rs. 1,962.50 Rs. 489.29
Material Price Variance = Actual Quantity (Standard Price - Actual Price)

Rs.
A 320 (2,400 - 1,962.50) = 1,40,000 (F)
B 140 (650 - 489.29) = 22,499 (F)
---------------
Total = 1,62,499 (F)
==========
Material Mixture Variance:
Standard Price (Standard Proportion of Actual Input - Actual Proportion)
A (70% of 460 - 320) × 2,400 = Rs. 4,800 (F)
B (30% of 460 - 140) × 650 = Rs. 1,300 (A)
-----------------
Rs. 3,500 (F)
==========
Material Yield Variance:

Standard Cost per unit (Actual Yield - Standard Yield)
Rs. 2,083.33 (460 - 414) = Rs. 95,833 (F)
Question No. 6
The details of a single product manufacturing company for the last oe month are as follows:
Actual data:
Production 10,000 units
Direct materials (1,10,000 kg) Rs. 5,50,000
Direct wages (19,800 hours) Rs. 3,12,500
Variable overheads Rs. 4,10,000

Analysis of variances:
Direct Materials
Price Rs. 5,000 (F)
Usage Rs. 25,000 (A)
Direct wages (Labour)

Rate Rs. 15,500 (A)
Efficiency Rs. 3,000 (F)
Variable overheads Rs. 10,000 (A)
You are required to calculate

i. Standard price/kg of material
ii. Standard quantity of material per unit
iii. Standard wage rate per labour hour
iv. Standard hours of labour per unit
v. Standard variable overhead per unit [December 2001 – 6(c), 10 Marks]
Answer
i. Direct materials:
Price variance: (SP - AP) x AQ = SP x AQ - AP x AQ
5000 = X x 110000 kg. - 550000
X = 555000 / 110000 - 5.045
ii. Materials usage variance - (S.Q. reqd. for actual production - AQ) x SP/kg
25000 = (X x 10000 - 110000) x 5.045
25000 = 50450x - 554950
x = 554950 - 25000/50450
x = 10.5
Std. Quantity of material / kg. = 10.5
iii. Direct labour rate variance = (SR - AR) x AH = SR.AH - AR.AH
15500 = X x 19800 - 312500
x = 312500 - 15500 / 19800 = Rs. 15
Std. Wage rate / labour hour = Rs. 15
iv. Efficiency variance = (SH reqd. for actual production - AH) x SR

3000 = (X x 10000 - 19800) x 15
3000 = 150000x - 297000
x = 297000 + 3000 / 150000 = 2
Std. Hours of labour per unit = 2
v. Variable o/h variance = Std. V. o/h for actual production - Actual v.o/h
10000 = X x 1000 - 410000
x = 410000 - 10000/10000 = Rs. 40 / unit
Std. Variable o/h per unit = Rs. 40 / unit

Question No. 7
The details of budget prepared by a single product manufacturing company for April 2002 are
as under: [June 2002 – 2(c), 10 Marks]
No. of units of the product to be manufactured 45,000
Budgeted consumption of direct materials 1,80,000 kg
Planned purchase of direct materials 2,00,000 kg
Budgeted value of purchase of direct materials Rs. 16,00,000
Direct labour hours required per unit of finished output 2 hours
Direct Wages budget Rs. 4,95,000
Standard Variable overhead rate per hour Rs. 6
The actual data for April 2002 are as under:

No. of units actually produced 48,000
Cost of direct materials issued at actual price Rs. 15,67,500
Actual Cost of direct materials actually purchased Rs. 18,48,000
Average actual price per kg of direct material Rs. 8.25
Actual direct labour cost for the month Rs. 5,40,600
Actual variable overheads incurred during the month Rs. 6,88,500
Actual variable overhead rate per hour Rs. 6.75
Compute the following variances:
(i) Direct material usage variance.
(ii) Direct materials price variance at the point of purchase and consumption.
(iii) Direct labour efficiency and rate variances.
(iv) Variable overheads efficiency and expense variances.
Answer
Direct Materials:
180000
Standard Requirement 45000 x 48000 = 192000 kg
1567500
Actual Quantity (AQ) 8.25 = 190000 kg
1600000
Standard Price (SP) = 200000 = Rs. 8
SQ AQ SP SQxSP AQxSP AP AQxAP

192000 190000 8 1536000 1520000 8.25 1567500
Material usage Material Price

variance Rs. 16000F variance Rs. 47500A
at consumption point
Price variance at purchase point

Actual Quantity (AQ)

1848000
Purchased = = 224000 kg
8.25
AQ SP AP AQxSP AQxAP
224000 8.00 8.25 1792000 1848000
Price variance Rs. 5600A
Direct wages
Standard Hours produced 48000 x 2 = 96000 Hrs.
Standard Hrs. budgeted 45000 x 2 = 90000 Hrs
495000
Standard Rate 90000 = Rs. 5.50
Actual variable overheads 688500

Actual variable OH Rate Rs. 6.75
Actual Hours 102000
SH AH SR SHxSR AHxSR AHxAR

96000 102000 5.50 Rs. 528000 Rs. 561000 540600
Efficiency Rate variance

variance 33000A 20400F
Variable Overhead
A. Charged to production 96000 Hrs x 6 = Rs. 576000→ Efficiency Variance

B. Std. Cost of Actual Hours 102000 x 6 = Rs.612000 → Rs. 36000A
C. Actual overheads= Rs. 688500→
Expense Variance
Rs. 76500A
Question No. 8
The input material mix for 8 units of output along with the cost of input material are reported
below:
Material "x" – 6 kg at Rs. 10 per kg
Material "y" – 4 kg at Rs. 12 per kg
The standard time for one unit of output is 2 DLH.
Standard wage rate is Rs. 15 per DLH.
The actual input materials consumptions for realizing 1,600 units and procurement costs of
the input materials of that month are mentioned below:

Material "x" – 1,300 kg at Rs. 9 per kg

Material "y" – 900 kg at Rs. 13 per kg
3,000 DLH was used for which wage payment was made at the rate of Rs. 16 per DLH.
Required: 1. Material Price Variance
2. Material Mix Variance
3. Material Usage Variance
4. Labour Efficiency Variance
5. Labour Rate of Pay Variance [June 2003 – 6(b), 2x5=10 Marks]
Answer
Material:
Batch × Qt. × Rate
1600 x - 6kg × Rs. 10 = Rs. 60
8 y - 4kg × Rs. 12 = Rs. 48
Rs. 108 = Rs. 21,600 M. usage V
2200 x - 6kg × Rs. 10 = Rs. 60
10 y - 4kg × Rs. 12 = Rs. 48 Rs. 2,160
(u)
Rs. 108 = Rs. 23,760 M Usage
V
2200 x - 1300kg × Rs. = Rs. 13,000 M. Mix V Rs. 2,200

10 u
10 y - 900kg × Rs. = Rs. 10,800 Rs. 40
12
23,800 = Rs. 23,800
10
× 2200
2200 x - 1300kg × Rs. = Rs. 11,700 N Price V

9
10 y - 900kg × Rs. = Rs. 11,700 Rs. 400 (F)
13
23,400 = Rs. 23,400
10
× 2200
Labour:
1,600 Units × 2DLH L efficiency V
= 3,200 DLH (st) × Rs. 15 = Rs. 48,000
Rs. 3,000 (F)
L. Rate of pay

3,000 DLH (Actual) × Rs 15 = Rs. V

45,000
3,000 DLH (Actual) × Rs. 16 = Rs. Rs. 3,000 (u)
48,000
Question No. 9
The following information is recovered from the books of ABC Manufacturing Co.:
Normal Overhead Rates 1.50
Actual hours operated 10,000.00
Allowed hours for actual Production 10,500.00
Allowed overheads for budgeted hours 35,000.00
Actual Overheads 36,000.00
Calculate:
(i) Overheads Budget Variance
(ii) Volume Variance
(iii) Efficiency Variance
(iv) Capacity Variance
(v) Total overhead cost variance.
Assume overheads given are fixed overheads. [December 2003 – 2(b), 10 Marks]
Answer
Standard Overhead Rate – Rs. 1.5
Budgeted Overheads – Rs. 35,000
Actual Hours – Rs. 10,000
Standard Overheads = SR × 10,000 = Rs. 15,000
Actual Overheads = Rs. 36,000
i. Overheads Budget Variance = Budgeted Overheads – Actual Overheads

= Rs. 35,000 – Rs. 36,000
= Rs. 1,000 (A)
ii. Volume Variance = Recovered Overheads – Actual Overhead

= Rs. 1.50 × 10,500 Hrs – 36,000
= Rs. 19,250 (A)
iii. Efficiency Variance = Recovered Overheads – Standard Overheads

= Rs. 15,750 – 15,000
= 750 (F)
iv. Capacity Variance = Standard Overheads – Budgeted Overheads

= Rs. 15,000 – 35,000
= Rs. 20,000 (A)

v. Total Overhead Cost Variance = Recovered Overheads – Actual Overheads

= Rs. 15,750 – 36,000
= Rs. 20,250 (A)
Question No. 10
The standard time fixed for one unit of output is 5 DLH. The standard wage rate per DLH is
Rs. 15. The workshop recorded output of 4,000 units with a total wage payment of Rs.
3,12,600 for 19,600 DLH attended in the workshop by 50 workers. The work of productive
workers were hampered for 2 hours on account of electricity interruption.
Required:
i. Labour rate of pay variance
ii. Labour sub-efficiency variance
iii. Labour idle time variance
iv. Labour cost variance [June 2004 – 6(a), 6 Marks]
Answer
Standard DLH for 4,000 units = 5 DLH × 4,000 units = 20,000 DLH
Actual hours worked = 19,600 DLH - 100 DLH = 19,500 DLH
20,000 DLH × Rs. 15 = Rs. 3,00,000 Labour Sub-Eff V
19,500 DLH × Rs. 15 = Rs. 2,92,500 Rs. 7,500 (F)
19,600 DLH × Rs. 15 = Rs. 2,94,000 Idle time
19,600 DLH = Rs. 3,12,600 Rs. 1,500 (u)
Labour Rate of pay v Labour cost v
Rs. 18,600 (u) Rs. 12,600 (u)
Question No. 11
From the following information, calculate overhead variances.
Budget Actual
No. of working days 20 22
Man-hour per day 80 840
Output per man hour (unit) 1.0 0.9
Overhead cost 16,000 16,800
[June 2004 – 6(c), 6 Marks]
Answer
Budget overheads - Rs. 16,000
Actual overheads - 16,800
Budgeted Overheads
Standard Overheads Rate = Budgeted Output
16000
= = 10
20 × 80 × 1
Recovered Overhead = St. Overhead Rate × Actual Output
= 10 × (22 × 84 × 0.9)
= 16,632

Standard Overhead = St. Overhead Rate × St. Output

From Actual Time
= 10 × (84 × 22 × 1)
= 18,480
Possible Hrs. = St. Working hrs. Per day × Actual

No. of days
= 80 × 22 = 1760 hrs.
16000
St. Overhead Rate Per Hour = = 10
1600
Possible OH = 1760 × 10 = 17,600
1. Overhead Cost Variance = Recovered Overheads - Actual

Overheads
= 16632 - 16800 = 168 (A)
2. Expenditure Variance = Budgeted OH - Actual OH

= 16000 - 16800 = 800 (A)
3. Volume Variance = Recovered Oh - Budgeted Oh

= 16632 - 16000 = 632 (F)
4. Efficiency variance = Recovered Oh - Standard Oh

= 16632 - 18480 = 1848 (A)
5. Capacity Variance = Standard - Budgeted

= 18480 - 16000 = 2480 (F)
6. Calendar Variance = Possible Oh - Budgeted

= 17600 - 16000 = 1600 (F)
Question No. 12
From the data given below, calculate
a. Individual material price variances for the two materials X and Y assuming that price
variances are calculated at the time of purchase:
b. Individual material usage variances for materials X and Y assuming that there was no
work in progress either at the commencement or at the end of the period
. Material " X" Material "Y"
Qty Value Qty. Value

Raw material purchase 2,000 4,000 5,000 6,250

Issue to works 2150 - 3,950 -
Works stock of
material
Opening 300 - 1,000 -
Closing 200 - 1,200 -
Standard Price – Material X - Rs. 1.90 per kg.
Material Y – Rs. 1.30 per kg.
Standard Usage
Product Material X Material Y
A 1 kg. 1 kg.
B 0.5 kg. 1 kg.
Output during the period-

Product A – 1,130 units
Product B – 2,250 units [December 2004 – 4, 16 Marks]
Answer
a. Actual Price: X = 4000/2000 = Rs. 2 per kg.
Y = 6250/5000 = Rs. 1.25 per kg.
Material Price Variance at the time of Purchase:
Formula: Actual Price is higher and here it is adverse variance)
X =2000 (1.90 – 2.00) = Rs. 200 A
(Actual Price is higher and hence it is adverse variance)
Y = 5000 (1.30 – 1.25) = Rs. 250 F
(Actual price is lower and hence it is favorable variance)
b. Material usage variances :

X Y
Opening Stock at works 300 1,000
Add : Issues to works 2150 3950
2450 4950
Less : Closing Stock 200 1250
Actual Usage (kg.) 2250 3700
X Y
Output :Product A : 1130 Units
B :2550 Units
Standard Usage : 1,130 * 1.0 = 1,130 1,130 * 1 = 1,130
2,250 * 0.5 = 1,275 1,550 * 1 = 2,550
2,405 3,680
Material Usage variance = SR (SQ – AQ)

X =1.90 (2405 -2250) = Rs. 294.50F
(Less used and hence it is favorable variable)
Y =1.30 (3680-3700) = Rs. 26 A
(More used and hence it is Adverse variance)

Question No. 13
You are provided with the following data of the company.
Budgeted Sales
Product Price per unit Quantity
A 20 1, 280
B 12 3, 200
C 16 1, 920
Actual Sales
Units Amount
A 650 12, 350
B 3, 900 50, 700
C 1, 950 29, 250
The other relevant data are :

Standard Cost Actual Cost
A 16 18
B 10 12
C 13 13
You are required to compute following variances :
i. Total Sales Margin Variance
ii. Sales Margin Quantity Variance
iii. Sales Margin Mix Variance
iv. Total Cost Variance [June 2005 – 4(b), 2.5x4=10 Marks]
Answer
Computation of variance
i. Total sales margin variance
Total sales margin variance = Actual quantity( standard margin – actual margin)
Product A : 650 (4-3) = 650 (A)
Product B : 3, 900 ( 2-3 ) = 3, 900 (F)
Product C : 1, 950 (3-2 ) = 1,950 (A)
Total sales margin variance = 1, 300 (F)
ii. Sales margin quantity variance

Sales margin quantity variance = Standard margin (budgeted sales – actual sales)
Product A : 4(1280-650) = 2520 (A)
Product B : 2 (3200-3900 ) = 1, 400 (F)
Product C : 3 (1920-1950 ) = 90 (F)
Gross sales margin volume variance = 1, 030 (A)
iii. Sales margin mix variance

Sales margin mix variance = Standard margin (Standard mix in actual sales –
Actual sales)

Product A : 4(1280/6400*6500-650) = 2600 (A)

Product B : 2 (3200/6400*6500-3900 ) = 1, 400 (F)
Product C : 3 (1920/6400*6500-1950 ) = 0
Sales margin mix variance = 1, 300 (A)
iv. Total cost variance

Total cost variance = Actual sales (Standard cost – actual cost )
Product A : 650 (16-18) = 1300 (A)
Product B : 3, 900 ( 10-12 ) = 7, 800 (A)
Product C : 1, 950 (13-13 ) = 0
Total Cost variance = 9,100 (A)
Working Notes :
1. Standard margin :
A: 20-16 = 4
B: 12-10 = 2
C: 16-13 = 3
2. Actual margin :
A: 12,350/650-16 =19-16 = 3
B: 50,700/3,900-10 = 13-10 = 3
C: 29,250/1,920-13 = 15-13 = 2
Question No. 14
You are provided with following information of Company Z :
Budgeted Actual
Sales quantity:
Product A 2,000 1,800
Product B 3,000 3,500
Sales price:
Product A Rs. 12 Rs.14
Product B Rs. 8 Rs.7
Cost per unit:

Product A Rs.9 Rs.10
Product B Rs.6 Rs.5
You are required to calculate the following variances :

i. Sales Volume Variance
ii. Sales price Variance
iii. Sales mix Variance
iv. Sales quantity Variance
v. Total Sales value Variance
vi. Sales volume margin variance

vii. Sales price margin variance
viii. Sales mix margin variance
ix. Sales quantity margin Variance
x. Total Sales margin Variance [December 2005 – 2(b), 12 Marks]
Answer
Computation of relevant Sales volume variances :
• Sales Volume Variances = Budgeted price (Budgeted Qty – Actual Qty)
Product A = 12(2000 – 1800) = 2400A
Product B = 8(3000 -3500) = 4000F
Total sales volume variance = 1600F
• Sales Price Variances = Actual Qty (Budgeted Price – Actual Price )

Product A = 1800(12-14) = 3600F
Product B = 3500(8 – 7) = 3500A
Total Sales Volume Variance = 100F
• Sales Mix Variance = Budgeted price (Standard mix – Actual mix)

Product A = 12(2/5 * 5300 – 1800) = 3840 A
Product B = 8(3/5 * 5300 -3500) = 25600 F
Total sales volume variance = 1280 A
• Sales Qty. Variance = Average price (Budgeted Qty – Actual Qty)

= (2000 * 12 + 3000 * 8 )/ 5000(5000 -5300)
= 2880F
Total Sales Value Variance = 1700 F
Computation of relevant Sales Volume Margin Variances :

• Sales Volume Margin Variances = Budgeted margin( Budgeted Qty – Actual Qty)
Product A = 3(2000 – 1800) = 600 A
Product B = 2(3000 – 3500) = 1000 F
Total sales volume margin variance = 400 F
• Sales Price Margin Variancs = Actual Qty(Budgeted Margin – Actual Margin)

Product A = 1800(3 – 4) = 1800 F
Product B = 3500(2 – 2) = NIL
Total sales price margin variance = 1800 F
• Sales Mix Margin Variance = Budgeted Margin (Standard mix of Actual sales –
Actual Mix)
Product A = 3(2/5 *5300 -1800) = 960 A
Product B = 2(3/5 * 5300 – 3500) =640 F
Total sales margin mix variance = 320 A

• Sales Qty Margin Variance = Average Budgeted Margin (Budgeted Qty – Actual Qty)
= (2000 * 3 + 3000 * 2) / 5000 (5000 – 5300)
= 720 F
Total Sales Margin Variance = 2200 F
Question No 15
Lotus co. Ltd. made available the budgeted and actual sales of the last year.
Products Budgeted Sales Actual Sales
Quantity (units) Amounts (Rs) Quantity (units) Amounts (Rs)
X 3,000 12,000 4,000 18,000
Y 5,000 18,000 6,000 24,000
Required : a. Sale volume variance
b. Sales price variance
c. Sales mix variance
d. Sale quantity variance [June 2006 – 3(a), 6 Marks]
Answer
a. Sales volume variance
Sales volume variance = (SQ- AQ) SP
Product X = (3,000 units – 4,000 units) × Rs. 4 = Rs. 4,000 (F)
Rs. 3,600 ( F )
Product Y = (5,000 units – 6,000 units) × Rs. 3.60 =
Rs 7,600 ( F )
b. Sales Price variance

Sales price variance = (SP- AP) AQ sold
Product X = (Rs. 4 – Rs. 4.5) 4,000 units = Rs. 2,000 (F)
Rs. 2,400 ( F )
Product Y = (Rs. 3.6 – Rs. 4) 6,000 units =
Rs. 4,400 ( F )
c. Sales mix variance

Sales mix variance = (Standard mix of AQ sold - Actual mix) SP
3,000
Product X = ( × 10,000 − 4,000 units ) Rs. 4 = Rs. 1,000 ( F )
8,000
5,000 Rs. 900 (U )

Product Y = ( × 10,000 − 6,000 units ) Rs. 3.60 =
8,000 Rs. 100 ( F )
d. Sales quantity variance

Sales quantity variance = (Actual Quantity sold – Budgeted Qt. Sold) Weighted SP
= ( 10,000 units – 8,000 units) Rs. 3.75 = Rs. 7,500 (F)

Question No. 16
The following information is available relating to a job :
Standard time per output – 2.5 hours
Actual hours worked – 2,000 hours
Standard rate of pay – Rs. 2 per hour
Actual output – 1,000 units
Actual wages – Rs. 4,500
Idle Time – 25% of actual hours
Calculate:
i. Labour cost variance
ii. Labour rate variance
iii. Labour Efficiency variance
iv. Labour idle time variance [December 2006 – 2(a), 4x2=8 Marks]
Answer
(i) Labour cost variance
= Standard cost – Actual cost
= (1,000 units × 2.5 hrs × 2 per hour) – Rs. 4,500
= Rs. 5,000 – Rs. 4,500
= Rs. 500 (Favorable)
(ii) Labour rate variance

= Actual hours × (Standard rate – Actual rate)
= 2000× (2 – 2.25)
= Rs. 500 (Adverse)
(iii) Labour efficiency variance

= Std reate (Std time – Actual rate)
= Rs. 2 (2,500 – 1,500)
= Rs. 2,000 (Favorable)
(iv) Labour idle time variance

= Idle time × Std rate
= 500 hrs × Rs. 2
= Rs. 1,000 (Adverse)
Question No. 17
ZED Ltd. uses standard costing system in manufacturing of its single product M. The
standard cost per unit of M is as follows:
Direct materials: 2 units @ 6 per unit 12.00
Direct labour; 1 hour @ 4.40 per hour 4.40
Variable overhead: 1 hour @ Rs 3 per hour 3.00
Total 19.40
During August 2007, 6,000 units of M were produced and the related data are as under:

Direct Material acquired 19,000 units @ 5.70 per unit

Direct Labour: ? hours @ Rs ? per hour Rs 27,950
Variable overhead incurred Rs 20,475
The variable overhead efficiency variance is Rs 1,500 adverse. Variances overhead are based
on direct labour hours. There were no stocks of raw material in the beginning.
You are required to compute the missing figures and work out all the relevant variances.
[June 2008 – 3, 10 Marks]
Answer
Computation of missing figures
• Actual labour hours
Variable overhead efficiency variance = Std. Variable overhead rate per hour X (
Std hour – Actual hours )
Or Rs 1500 (A) = Rs 3 X (6000 X 1 – Actual hours)

Or Actual hours = 6,500
• Actual rate per hour = 27950/6500 = 4.30
Material Variances
o Material cost variance = Standard cost – Actual cost = 72,000 – 108,300 = 36,300
(A)
o Material price variance = Actual quantity of material consumed X (Std price –
Actual price) = 19,000 X ( 6 -5.70) = 5,700(F)
o Material Usage Variance = Standard price X (Standard Quantity – Actual
Quantity ) = 6X ( 12,000 – 19,000) = 42,000 (A)
Labour Variances
• Labour cost variance = Standard cost – Actual cost = 26,400 – 27950 = 1,550 (A)
• Labour rate variance = Actual hours X (Std. Wage rate per hour – Actual wage
rate per hour ) = 6500 X ( 4.40 -4.30 ) =650 (F)
• Labour efficiency variance = Standard rate per hour X ( Std. hours – Actual hours
) = 4.40 X ( 6000 – 6500) = 2,200 (A)
Variable Overhead Variances

• Total variable overhead variances = Std. variable overhead – Actual variable
overhead = 18,000 – 20,475 = 2,475 (A)
• Variable overhead efficiency variance = Std. variable overhead per hour X (
Std. hours for actual output – Actual hours) = 3 X ( 6,000-6,500) = 1,500 (A)
• Variable overhead budget variance = Budgeted variable overhead – Actual
variable overhead = (Actual hours worked X Std. variable overhead per hour)-
Actual variable overhead = (6500 X 3 ) – 20,475 = 975 ( A)
Note: Actual acquired material is assumed as consumed.

Question No. 18
SitaramToys Limited had drawn up the following sales budget for Ashad 2068.
Bravo Toys 5,000 units at Rs. 100 each
Champion Toys 4,000 units at Rs. 200 each
Super Toys 6,000 units at Rs. 180 each
The actual sales for the period were,
Bravo Toys 5,750 units at Rs. 120 each
Champion Toys 4,850 units at Rs. 180 each
Super Toys 5,000 units at Rs. 165 each
The standard cost per unit Bravo Toys, Champion Toys, and Super Toys were Rs. 90, Rs.
170 and Rs. 130 respectively and actual cost per unit for Bravo Toys, Champion Toys and
Super Toys were Rs. 92, Rs. 168 and Rs. 135 respectively.
You are required to calculate the sale value variance, sale price variance and sale volume
variance. [June 2012 – 3(b), 9 Marks]
Answer
b) Statement of sales performance (turn over effect)
Particulars Standard Actual
Quantity Price Amount Quantity Price Amount
Bravo Toys 5000 100 5750 120
Champion Toys 500000 690000
Super Toys 4000 200 4850 180
800000 873000
6000 180 5000 165
1080000 825000
Total 23,80,000 23,88,000
• Sales Value Variance=(S.Q.×S.P.-A.Q.×A.P.)

BT: (5000×100-5750×120)=1,90,000-favourable
CT: (4000×200-4850×180)=73,000-favourable
ST: (6000×180-5000×165)=2,55,000-Adverse
Total: 8,000-favourable
• Sales Price Variance=(S.P.-A.P.)×A.Q.

BT: (100-120)×5750=1,15,000-favourable
CT: (200-180)×4850=97,000-adverse
ST: (180-165)×5000=75,000-Adverse
Total: =57,000-Adverse
• Sales Volume Variance=(S.Q.-A.Q.) ×S.P.

BT: (5000-5750)×100=75,000-favourable
CT: (4000-4850)×200=1,70,000-favourable
ST: (6000-5000)×180=1,80,000-Adverse
Total: =65,000-favourable

Question No. 19
The following standards have been set to manufacture a product:
Rs.
Direct material
2 units of A @ Rs.4 per unit 8.00
3 units of B @ Rs.3 per unit 9.00
15 units of C @ Re. 1 per unit 15.00
32.00
Direct labour 3 hrs. @ Rs.8 per hour 24.00
Total standard prime cost 56.00
The company manufactured and sold 6,000 units of the product
during the year. Direct material costs were as follows:
12,500 units of A at Rs.4.40 per unit
18,000 units of B at Rs.2.80 per unit
88,500 units of C atRs.1.20 per unit
The company worked 17,500 direct labour hours during the year. For
2,500 of these hours the company paid at Rs.12 per hour while for the
remaining the wages were paid at standard rate.
Calculate materials price variances and usage variances and labour rate and efficiency
variances. [June 2016 – 2(b), 8 Marks]
Answer
For material cost variances
Actual cost of material used
A 12,500 units x Rs. 4.40 = Rs.55,000
B 18,000 units x Rs. 2.80 = Rs.50,400
C 88,500 units x Rs. 1.20 = Rs 1,06,200
Rs. 2,11,600
Standard cost of material used
A 12,500 units x Rs. 4.00 = Rs. 50,000
B 18,000 units x Rs. 3.00 = Rs.54,000
C 88,500 units x Rs. 1.00 = Rs. 88,500
Rs. 1,92,500
Standard material cost of production 6,000 units x Rs. 32 = Rs. 1,92,000
Variances:
Material price variance = Actual cost of material used – Standard cost of material used
= Rs. 2,11,600 – Rs. 1,92,500
= Rs. 19,100 (A)
Material usage variance = Standard cost of material – Standard material cost of
production = Rs. 1,92,500 – Rs. 1,92,000
= Rs. 500 (A)
For labour cost variance
Actual wages paid to workers
2,500 hrs.xRs. 12 = Rs.30,000

15,000 hrs.xRs. 8 = Rs. 1,20,000

Rs. 1,50,000
Payment involved, if workers had been paid at standard rate = 17,500 hrs. xRs. 8
= Rs. 1,40,000
Standard labour cost of output achieved = 6,000 units x Rs 24 = Rs. 1,44,000
Variances:
Labour rate variance = Rs.1,50,000 – Rs.1,40,000 = Rs.10,000 (A)
Labour efficiency variance = Rs. 1,40,000 – Rs. 1,44,000 = Rs. 4,000 (F)
Question No. 20
The standard set for a chemical mixture of a firm is as under;
Material Standard mix % Standard price per Kg. (Rs.)
A 40 20
B 60 30
The standard loss in production is 10%. During a period, the actual consumption and price
paid for a good output of 182 kg are as under:
Material Quantity in Kg. Actual price per Kg. (Rs.)

A 90 18
B 110 34
Calculate the variance. [December 2016 – 2(b), 10 Marks]
Answer
Take the good output of 182 kgs. The standard quantity of material required for 182 kg of
output is =182/90×100=202.22kgs.
Statement showing the standard and actual costs and standard cost of actual mix
Qty Kg. Rate Amt Rs. Qty Rate Amt Rs Qty Rate Amt
Rs Kg. Rs kg. Rs. Rs.
A(40% of 80.89 20 1,617.80 90 18 1,620 90 20 1800
202.22 kg)
B(60%of 121.33 30 3,639.90 110 34 3,740 110 30 3,300
202.22 kg)
Total input 202.22 26 5,257.70 200 26.80 5,360 200 25.50 5,100
(-)Loss 20.22 -- 18 --
Total output 182.00 28.89 5,257.70 182 29.45 5,360 -- --
Standard yield in actual input is 90 % of 200 kg i.e 180 kg.

Variances:
i. Price Variance=Actual qty.(Std price-actual price)
=Rs 5,100-Rs 5,360=Rs 260(A)
ii. Mix Variance=Total actual qty.of input (Std .cost per unit of Std.mix-Std.cost per unit of
actual mix)
= 200 Kgs (Rs.26-Rs.25.50) = Rs.100 (F)

iii. Total usage variance=Std. price (Std qty-Actual qty.)

=Standard cost-Standard cost of actual quantity
=Rs 5,257.70-Rs 5,100=Rs157.70(F)
iv. Yield variance=Standard price of yield .(Actual yield-Std yield)
=Rs 28.89 (182-180)=Rs 57.70(F)
v. Total variance=Std cost-Actual cost=Rs 5257.70-Rs 5,360
=Rs 102.30(A)
Question No. 21
XYZ Ltd. produces washing detergent powder "Diyalo" in a batch of 10 Kgs. Standard
material inputs required for 10 Kg. of "Diyalo" are as follows:
Material Quantity (in Kg.) Rate per Kg. (Rs.)

A 5 110
B 3 320
C 3 460
During the month of June 2016, actual production was 5,000 Kgs. of "Diyalo" for
which the actual quantities of material used for a batch and the prices paid thereof are
as under:
Y
Material Quantity (in kgs.) Rate per kg. (Rs.)
o
A 6 115
u
B 2.5 330
C 2 405
a
You are required to calculate the following variances based on the above given
information for the month of June 2016.
i) Material Cost Variance
ii) Material Price Variance
iii) Material Usage Variance
iv) Material Mix Variance
v) Material Yield Variance [June 2017 – 3(a), 10 Marks]
Answer
a)
SQ – Standard Quantity of Materials for Actual Output:
A 5 kgs. × 5,000 kgs = 2,500 kgs.
10 kgs.
B 3 kgs × 5,000 kgs = 1,500 kgs.
10 kgs
C 3 kgs × 5,000 kgs = 1,500 kgs.
10 kgs

AQ – Actual Quantity of Materials used for Actual Output:

A 6 kgs. × 5,000 kgs = 3,000 kgs.
10 kgs.
B 2.5 kgs × 5,000 kgs = 1,250 kgs.
10 kgs
C 2 kgs × 5,000 kgs = 1,000 kgs.
10 kgs
RSQ – Revised Standrad Quantity of Materials:

A 5 kgs. × 5,250 kgs = 2,386 kgs.
11 kgs.
B 3 kgs × 5,250 kgs = 1,432 kgs.
11 kgs
C 3 kgs × 5,250 kgs = 1,432 kgs.
11 kgs
Material SQ × SP AQ × SP AQ × AP RSQ × SP
A 2,500 kgs × Rs. 110 3,000 kgs ×Rs. 110 3,000 kgs ×Rs. 115 2,386 kgs ×Rs. 110
= Rs. 2,75,000 = Rs. 3,30,000 = Rs. 3,45,000 = Rs. 2,62,460
B 1,500 kgs × Rs. 320 1,250 kgs × Rs. 320 1,250 kgs × Rs. 330 1,432 kgs × Rs. 320
= Rs. 4,80,000 = Rs. 4,00,000 = Rs. 4,12,500 = Rs. 4,58,240
C 1,500 kgs × Rs. 460 1,000 kgs × Rs. 460 1,000 kgs × Rs. 405 1,432 kgs × Rs. 460
= Rs. 6,90,000 = Rs. 4,60,000 = Rs. 4,05,000 = Rs. 6,58,720
Total Rs. 14,45,000 Rs. 11,90,000 Rs. 11,62,500 Rs. 13,79,420
(i) Material Cost Variance = Std. Cost – Actual Cost

(SQ × SP) – (AQ × AP)
A = Rs. 2,75,000 – Rs. 3,45,000 = Rs. 70,000 (A)
B = Rs. 4,80,000 – Rs. 4,12,500 = Rs. 67,500 (F)
C = Rs. 6,90,000 – Rs. 4,05,000 = Rs. 2,85,000 (F)
Rs. 2,82,500 (F)
(ii) Material Price Variance = Actual Qty. (Std. Price – Actual Price)
(AQ × SP) – (AQ × AP)
A = Rs. 3,30,000 – Rs. 3,45,000 = Rs. 15,000 (A)
B = Rs. 4,00,000 – Rs. 4,12,500 = Rs. 12,500 (A)
C = Rs. 4,60,000 – Rs. 4,05,000 = Rs. 55,000 (F)
Rs. 27,500 (F)
(iii)Material Usage Variance = Std. Price (Std. Qty. – Actual Qty.)
(SQ × SP) – (AQ × SP)
A = Rs. 2,75,000 – Rs. 3,30,000 = Rs. 55,000 (A)
B = Rs. 4,80,000 – Rs. 4,00,000 = Rs. 80,000 (F)
C = Rs. 6,90,000 – Rs. 4,60,000 = Rs. 2,30,000 (F)
Rs. 2,55,000 (F)

(iv) Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
(RSQ × SP) – (AQ × SP)
A = Rs. 2,62,460 – Rs. 3,30,000 = Rs. 67,540 (A)
B = Rs. 4,58,240 – Rs. 4,00,000 = Rs. 58,240 (F)
C = Rs. 6,58,720 – Rs. 4,60,000 = Rs. 1,98,720 (F)
Rs. 1,89,420 (F)
(v) Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
(SQ × SP) – (RSQ × SP)
A = Rs. 2,75,000 – Rs. 2,62,460 = Rs. 12,540 (F)
B = Rs. 4,80,000 – Rs. 4,58,240 = Rs. 21,760 (F)
C = Rs. 6,90,000 – Rs. 6,58,720 = Rs. 31,280 (F)
Rs. 65,580 (F)
Question No. 22
The standard material cost for a mix of one tonne of final product is based on the following:
Material Usage (kg.) Price per kg. (Rs.)
A 250 12
B 450 15
C 600 20
During the month of July, 2017, 12 tonnes of final product were produced
from the following:
Material Usage (tonnes) Cost (Rs.)
A 3.50 45,500
B 6.10 85,400
C 6.50 1,43,000
You are required to calculate the material variances and verify them.
Answer
b)
Working Notes
1. Total standard cost (TSC)= (SQ x SP)
Rs.
Material A: 250 x12 = 3000
Material B: 450 x 15 = 6750
Material C: 600 x 20 = 12000
TSC for one tonne of final output 21750
TSC for actual output of 12 tonnes = 21750 x 12= Rs.261000
2. Total Actual Cost (TAC) and Actual Price (AP):
Material AQ (kg) Cost (Rs.) AP=(Cost/AQ)

(tonnes x1000 kg) (per kg Rs.)

A 3500 45500 13
B 6100 85400 14
C 6500 143000 22
TAC 16100 273900
Rs.
3. AQ x SP : Material A: 3500 x 12 = 42000
Material B: 6100 x 15 = 91500
Material C: 6500 x 20 = 130000
= 263500
4. Revised Standard Quantity (RSQ) = Total Actual Quantity divide into standard mix
ratio.
RSQ : for A= 16100 kg x 250/1300 = 3096 kg.
: for B= 16100 kg x 450/ 1300= 5573 kg.
: for C= 16100 kg x 600/ 1300= 7431 kg.
5. (RSQ x SP) : Material A = 3096 x 12 = 37152

: Material B = 5573 x 15 = 83595
: Material C = 7431 x 20 = 148620
269367
6. Standard yield (SY) by using actual Quantity one tonne SY from

250+450+600=1300 kg
SY from Actual Quantity = 16100/1300=12.3846 tonnes.
Calculation of Material Variances:

1. MCV = TSC –TAC or (SQ x SP) - (AQ x AP)
= Rs.261000 – Rs.273900 = Rs.12900 (A)
2. MPV = AQ (SP-AP) or (AQ x SP)-(AQ x AP)
=Rs.263500 – Rs.273900 = Rs.10400 (A)
3. MUV = SP (SQ - AQ) or (SP x SQ) - (SP x AQ)
= Rs.261000 – Rs.263500 = Rs.2500 (A)
4. Material Mix Variance (MMV)

= SP (RSQ-AQ) or (SP x RSQ) - (SP x AQ)
= Rs.269367 – Rs.263500 = Rs.5867 (F)

5. Material Sub Usage Variance (MSUV)(Yield)

= SP (SQ – RSQ) or (SP x SQ) – (SP x RSQ)
= Rs.261000 – Rs.269367 =Rs.8367 (A)
Verification:
(i) MCV = MPV + MUV

Rs.12900 (A) = Rs.10400 (A) + Rs.2500 (A)
OR
Rs.12900 (A) = Rs.12900 (A)
(ii) MUV = MMV + MSUV
Rs.2500 (A) = Rs.5867 (F) + Rs.8367 (A)
OR
Rs.2500 (A) = Rs.2500 (A)
Question No. 23
From the following data of A and Co. Ltd. relating to budgeted and actual performance for
the month of March 2017, compute the Direct Material and Direct Labour Cost variances.
Budgeted data for March:
Units to be manufactured 1,50,000
Units of direct material requires ( based on std. Rates) 4,95,000
Planned purchase of Raw Materials ( units) 5,40,000
Average unit cost of direct materials Rs. 8
Direct Labour hours per unit of finished goods 3/4 hr
Direct Labour Cost (total) Rs. 29,92,500
Actual data at the end of March:
Units actually manufactured 1,60,000
Direct Material Cost ( purchase cost based on units actually
issued) Rs. 43,41,900
Direct Material Cost ( purchase cost based on units actually
purchased) Rs. 45,10,000
Average unit cost of direct materials Rs. 8.20
Total Direct Labour hours for March 1,25,000
Total Direct Labour cost for March Rs. 33,75,000
[June 2018 – 5(a), 7 Marks]
Answer
a)
Direct
Material
Variance:
DMCV = Std. Cost of Actual Output - Actual Cost

= 1,60,000*3.3*8-43,41,900
= 42,24,000-43,41,900 = 1,17,900 (Adverse)
= Actual Qty.*( Std. Rates- Actual Rates)
DMPV = 5,29,500*(8-8.20) =Rs.1,05,900( Adverse)
= Std. Rate* (Std. Qty. for Actual Output- Actual Qty.)
= 8*(1,60,000*3.30-5,29,500)
DMUV =Rs. 12,000 (Adverse)
Direct
Labour
Variances
= Std. Cost for Actual Output- Actual Cost
= 1,60,000*3/4*26.60-33,75,000
DLCV = Rs. 1,83,000(Adverse)
DLRV =Actual time * (Std. Rate-Actual Rate)
=1,25,000*(26.60-27)
=Rs.50,000 (Adverse)
=Std. Rate* (Std. Time for Actual Output- Actual Time)
=26.60*( 1,60,000*3/4-1,25,000)
DLEV =Rs. 1,33,000 (Adverse)
Working Notes:
i) Standard Units of Direct Material required per unit of output:
= 4,95,000/1,50,000 = 3.30Units
ii) Total Actual Quantity of Direct Materials Used:
= 43,41,900/8.20 = 5,29,500 Units
iii) Standard Direct Labour Cost 29,92,500/ (1,50,000*3/4) =
per hour: Rs. 26.60
iv) Actual Direct Labour cost per hour:
=33,75,000/1,25,000 = Rs. 27
OR
Direct Material variance
Standard cost
Actual cost
SQ×SP SP×AQ
AQ×AP
(495000/150000×160000)×8 8×(4341900/8.2)
4224000 4236000
4341900
Material usage variance = 12000(A) Material Price variance =

105900(A)
Material Cost variance = 117900(A)

Where Actual quantity of material = 4341900/8.2 = 529500

Labor Variance
Standard cost
Actual cost SHr×SR SR×AHr
AHr×AR
(3/4×160000)×26.6 26.6×125000
3192000 3325000
3375000
Labor efficiency variance = 133000(A) Labor Rate variance = 50000(A)
Labour cost variance = 183000(A)

Where
Standard Rate hour = Standard Labour cost/Standard Labour Hour
= 2992500
150000×3/4
= Rs. 26.6
Question No. 24
Muktishree Limited operates a system of standard costing in respect of one of its products
which is manufactured within a single cost centre. The Standard Cost Card of a product is as
under:
Standard Unit cost (Rs.)
Direct material 5 kgs @ Rs. 4.20 21.00
Direct labour 3 hours @ Rs. 3.00 9.00
Factory overhead Rs. 1.20 per labour hour 3.60
Total manufacturing cost 33.60
The production schedule for the month of March, 2018 required completion of 40,000 units.
However, 40,960 units were completed during the month without opening and closing work-
in process inventories.
Purchases during the month of March, 2018, 225,000 kgs of material at the rate of Rs. 4.50
per kg. Production and Sales records for the month showed the following actual results.
Material used 205,600 kgs.
Direct labour 121,200 hours; cost incurred Rs. 387,840
Total factory overhead cost incurred Rs. 100,000
Sales 40,000 units
Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price.
Required:
i) Calculate material variances based on consumption of material.
ii) Calculate labour variances and the total variance for factory
overhead.
iii) An incentive scheme is in operation in the company whereby employees are paid
a bonus of 50% of direct labour hour saved at standard direct labour hour rate.
Calculate the Bonus amount.

Answer
b)
i) Material variances:
(a) Direct material cost variance = Standard cost - Actual cost
= 40,960 x 21 - 2,05,600 x 4.50
= 8,60,160 - 9,25,200 = Rs. 65,040 (A)
(b) Material price variance = AQ (SP - AP)
= 2,05,600 (4.20 - 4.50) = Rs. 61,680 (A)
(c) Material usages variance = SP (SQ - AQ)
= 4.20 (40,960 x 5 - 2,05,600) = Rs. 3,360 (A)
ii) Labour variances and overhead variances:
(a) Labour cost variance = Standard cost -Actual cost
= 40,960 x 9 - 3,87,840 = Rs. 19,200 (A)
(b) Labour rate variance = AH (SR - AR)
=1,21,200 (3 - 3.20) = Rs. 24,240 (A)
(c) Labour efficiency variance = SR (SH -AH)
= 3 (40,960 x 3 - 1,21,200) = Rs. 5,040 (F)
(d) Total factory overhead variance
= Factory overhead absorbed - factory
overhead incurred
= 40,960 x 3 x 1.20 – 1,00,000 = Rs. 47,456 (F)
iii) Bonus Amount:
Labour hour saved Hours

Standard labour hours 40,960 x 3 1,22,880
Actual labour hour worked 1,21,200
Labour hour saved 1,680
Bonus for saved labour = 0.50 (1,680 x 3) = Rs. 2,520.
Question No. 25
The following standards have been set to manufacture a product:
Direct Materials Amount(Rs.)
2 Units of X at Rs. 40 per Unit 80
3 Units of Y at Rs. 30 per Unit 90
15 Units of Z at Rs. 10 per Unit 150
320
Direct Labour 3 hours @ Rs. 55 per Unit 165
Total Standard Prime Cost 485
The company manufactured and sold 6,000 units of the product
during the year 2018.
Direct Material costs were as follows:
12,500 units of X at Rs. 44 per unit.
18,000 units of Y at Rs. 28 per unit.

88,500 units of Z at Rs. 12 per unit.

The company worked 17,500 direct labour hours during the year 2018. For 2,500 of
these hours the company paid Rs. 58 per hour while for the remaining hours the
wages were paid at the standard rate.
Required:
Compute the following Variances:
iv) Material Price,
v) Material Usage,
vi) Material Mix,
vii) Material Yield,
viii) Labour Rate and
ix) Labour Efficiency.
[June 2019 – 2(a), 10 Marks]
Answer
a) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
X = 12,500 Units (Rs. 40 – Rs. 44) = 50,000 (A)
Y = 18,000 Units (Rs. 30 – Rs. 28) = 36,000 (F)
Z = 88,500 Units (Rs. 10 – Rs. 12) = 1,77,000 (A)
1,91,000 (A)
Material Usage Variance = Std. Price (Std. Qty – Actual Qty.)
X = Rs.40 (6,000 × 2 – 12,500) = 20,000 (A)
Y = Rs.30 (6,000 × 3 – 18,000) = Nil
Z = Rs.10 (6,000 × 15 – 88,500) = 15,000 (F)
5,000 (A)
Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
1,19,000 × 2
X = Rs.40 ( - 12,500) = 24,000 (A)
20
1,19,000 × 3
Y = Rs.30 ( - 18,000) = 4,500 (A)
20
1,19,000 × 15
Z = Rs.10 ( - 88,500) = 7,500 (F)
20
21,000 (A)
Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
1,19,000 × 2
X = Rs.40 (6,000 x 2 - ) = 4,000 (F)
20
1,19,000 × 3
Y = Rs.30 (6,000 x 3 - ) = 4,500 (F)
20
1,19,000 × 15
Z = Rs.10 (6,000 x 15 - ) = 7,500 (F)
20
16,000 (F)
Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 2,500 hours (Rs.55 – Rs.58) =7,500 (A)
Labor Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= Rs.55 (6,000 x 3 – 17,500) = 27,500 (F)

CHAPTER 15:
COST CONTROL AND COST REDUCTION

Question No. 1
(a) Cost control and Cost reduction
[December 2001 – 7(ii), 4 Marks] [June 2008 – 5(a), 5 Marks] [June 2004 – 6(b), 4
Marks] [December 2005 – 6(c), 4 Marks] [December 2006 – 5(ii),5 Marks] [June 2009 – 6(c), 5 Marks]
– 5(c), 2.5 Marks] [June 2012 – 5(b), 5 Marks] [December 2012 – 5(b), 2.5 Marks] [June
2014 – 5(d), 2.5 Marks]
Answer
Cost Control:
It is operated through setting standards of targets and comparing actual performance
therewith with a view to identifying deviations from standards or norms and taking
corrective action in order to ensure that future performance conforms to standards or
norms. It lacks the dynamic approach, which cost reduction demands. Budgetary control
and standard costing are tools and techniques of cost control.
Cost Reduction:
It is the achievement of real and permanent reduction in the unit cost of goods
manufactured or services rendered without impairing their suitability for the use intended
or diminution in the quality of the product.
Alternative Answer
Cost Control Cost Reduction
1. It represents efforts made towards achieving It represents achievements in
a target or goal. reduction at cost.
2. The process of cost control is to set up a Cost reduction is not contended
target, investigate the variances/variations merely with maintenance of
and taking remedial measures to correct performance according to the
them. standards.
3. It assumes existence of standards or norms It assumes the existence of concealed
which are not challenged. potential savings in the standards or
norms which are therefore subject to
constant challenge or improvement.
4. It is preventive function costs are optimised It is corrective function. It operates
before they are incurred. even when efficient cost control
system exists. There is room for
reduction in the achieved costs.

Question No2
(a) Cost reduction [June 2006 – 5(e), 4 Marks]
Answer
Cost reduction may be defined as the achievement of real permanent reduction in the unit
cost of goods manufactured or services rendered without impairing their suitability for the
use intended or diminution in the quality of the product.
a. There is a saving in unit cost.
b.Such saving is of permanent nature.
c. The utility and quality of goods and services remain unaffected, if not improved.
(b) Synergetic effect in cost reduction [December 2011 – 6(d), 2.5 Marks]
Answer
Synergy is the interaction of two or more agents or forces so that their combined effect is
greater than the sum of their individual effects. Business interaction among groups,
especially among the acquired subsidiaries or merged parts of a corporation that creates
an enhanced combined effect is known as synergy effect. When the presence of one unit
enhances the effects of the second it is call synergistic effect. The word synergy means
that the sum of parts is greater than the total value of each part. The result of two or more
people, groups, processes or organizations working together enhanced the combined
effect of individual people, process or organization. In other words, one and one equals
three! The word is used quite often to mean that combining forces produces a better
product.
In the field of costing, synergy is the result of combined process or unit or organization
that result in cost reduction due to minimization of waste, shortening processes, division
of labour and enhancing productivity, sharing common cost etc. Synergy affects cost
control and ultimately reduction. Synergy is usually accomplished by combining
functions (such as production or customer service) or facilities (such as warehousing)
eliminating some duplication. Synergetic effect normally helps cost reduction as follows:
• It increases business volume, so the fixed cost per unit gets reduced.
• It eliminates duplication process or function.
• Labour productivity increases and the cost of labour per unit get reduced.
• Minimizes material waste due to process combination.
• Indirect cost e.g. administration, selling and distribution expenses minimizes due
combination of function
(c) Value Analysis [December 2013 – 6(a), 2.5 Marks] [July 2015 – 6(c), 2.5
Marks] [December 2016 – 6(d), 2.5 Marks]
Answer

Value analysis is a technique applied to analyze all aspect of an existing product or

component to determine in minimum cost necessary for specific function requirement. It
is also known as value engineering. The primary advantage of value analysis is reduction
in product cost. It improves sale and customer satisfaction as it determines the exact
requirements of customer and product designing is done accordingly. Steps involved in
value analysis are:
• Collecting relevant information
• Deciding alternatives
• Approval of the accepted alternative
• Execution
• Follow-up
(d) Scope of Cost Reduction [December 2013 – 6(b), 2.5 Marks]

Answer
Cost reduction is attainable in almost all areas of business activities. There is perhaps no
situation which cannot be improved. It covers a wide range like new layout, product
design, production methods, material substitution, improved tool design, better utilization
of men, materials and machines in factories as well as in offices, innovation in marketing
etc. It also extends to specified activities like purchasing, handling, packaging, shipping,
warehousing, marketing, use of administrative facilities and even utilization of financial
resources. Excessive cost may result in every organization from:
(i) Lack of information about raw materials, processes, products, components etc.
(ii) Lack of utilization of ideas generated from performance and economic analysis.
(iii)Honest but wrong beliefs that certain things are impossible of achievement.
(iv) Temporary circumstances like features developed under pressure or modifications
made to meet certain circumstances.
(v) Habits and attitudes confining one to conventional methods.
It is not necessary for management to proceed in any specific sequence in considering the
various aspects of cost reduction and it may be necessary to start the campaign in more
than one direction at the same time.
Question No.3
Briefly describe the critical areas where cost reduction methods can be
employed.
Answer
Cost reduction method may be applied in the following areas:
a. Product design: Cost reduction begins with the improvements in the design of the
product. Product design is the first step in the manufacture of a product and the impact of

cost reduction effected at this stage is felt throughout the manufacturing life of the product.
An investigation into the possibilities of cost reduction should be made, both when
introducing new designs and when making improvements in the existing designs.
b. Factory organization and production method: All efforts should be constantly
made to reduce the costs by the adoption of new methods of organization and new
production methods.
c. Factory layout: A cost reduction program should make a study of the factory layout
to determine whether there is any scope of cost reduction by elimination of wastage of time,
unnecessary efforts and loss of money due to useless movements and travel of work-in-
progress.
d. Administration: There is ample scope of cost reduction in this area because cost
reduction is a top management problem. Office should be reorganized if there is scope for
improvement in the efficiency of persons engaged in the office. Use of unnecessary forms
should be avoided to save the cost of stationery and labor cost involved for compiling them.
Efforts should make to reduce the expenses on telephone, lighting and travelling but not at
the cost of efficiency.
e. Marketing: The various activities which can be brought under the cost reduction
program include market research, advertisement, packing, warehouse, distribution, after
sales service, etc.
f. Finance: With the increasing difficulty in procuring finance, management should
eliminate useless investment. To be able to do so, it must critically examine the amount of
working capital and fixed capital needed and the financial conveniences of reducing them.
Wasteful use of capital is as bad as inadequate capital. Over and under capitalization are
both danger signals; what is needed is fare capitalization. Capital should be procured at
economical cost and it should be economically used so as to give the maximum return. Fixed
assets and inventories which cannot be economically used should be sold; the money realize
from their sale should be reinvested in more profitable channels.
Question No.4
What are the assumptions involved in the definition of cost reduction?
[June 2010 – 6(b), 2 Marks]
Answer
The threefold assumption involved in the definition of cost reduction may be summarized as
under:
(i) There is a saving in unit cost.
(ii) Such saving is of permanent nature.
(iii) The utility and quality of goods and services remain unaffected, if not improved.

Question No.5
You joined a manufacturing company with very good profitability record. Staff and
owners were happy with the profit margin. Do you think there may be still some room
for cost reduction to increase profit margin? Justify your answer.
[June 2012 – 6(a), 2.5 Marks]
Answer
Even though industry is making good profit margin and running at good profit; there should
be cost reduction attainable in almost areas of business activities. There is perhaps no
situation which cannot be improved for cost reduction. We can review new layout, product
design, production methods, material used, labour efficiency, machines used, office layout,
innovation in marketing, packaging, warehousing, handling, purchasing, use of
administrative facilities and even utilization of financial resources.
Cost may be additionally incurred because of:
a. Lack of information about raw materials, processes, products and
components etc.
b. Lack of utilization of ideas generated from performance and economic
analysis
c. Hones but wrong beliefs that certain things are impossible for achievement
d. Temporary circumstances like features developed under pressure or
modifications made to meet certain circumstances.
e. Habits and attitudes of confining to one conventional method
Considering all factors we can review all of the cost factors and analyze the probability of
cost reduction in all areas at a same time or one by one considering the size of operation and
cost involved.
After making such detailed study, cost reduction areas could be identify in one or more areas
of operation.
Question No.6
What role does a management accountant have in cost control and cost reduction?
[June 2016 – 6(b), 4 Marks]
Answer
Management Accountants role in cost control and cost reduction is perhaps central to his role
as a member of the management team. Indeed, for effective cost control, it may be necessary
to spend more on the items which will reduce waste and scrap, improve quality, increase
productivity or conserve energy. Inany large organization the points at which costs are
incurred are usually numerous and relatively fewline managers have the mechanism of
collating and analyzing all the costs they incur, with a view to implementing cost control
measures. The Management Accountant is uniquely placed in this respect andit usually falls
on him to play a catalytic role in getting the management team to work together to achieve
specific cost control objectives. It is also upto the Management Accountant to channelize the
cost control and cost reduction efforts into areas which will give the greater results. Without

this direction, cost control and cost reduction can too often degenerate into symbolic actions
like reusing envelopes or downgrading the class of air travel, which generally have little
impact on the overall cost structure but can substantially harm morale and motivation. It is
important for the Management Accountant to guide the company’s cost control and cost
reduction programme into productive lines and not let it degenerate into a morale damaging
axing of petty expenditure.

CHAPTER 16:
UNIFORM COSTING AND INTERFIRM COMPARISON

Question No. 1
(a) Integrated accounting system and Uniform costing [June 2012 – 5(a), 2.5 Marks]
Answer
Integrated accounting system is the one which contains both financial and cost accounts
in a single book-keeping system. Thus, it discards the concept of requirement of separate
profit and loss account for financial and costing purpose. For implementation of
integrated accounting system, factors such as degree of integration of records,
preparation of control accounts for various elements of costs, details of cost data to be
provided to cost accounting department, and need for creation of suspense accounts
should be considered.
Uniform costing is defined as the use by several undertakings of the same costing
principles and/ or practices. It is not a separate method of cost accounting; it only points
to a situation where a number of business firms are applying similar costing principles
and practices. The designing and applications of uniform costing require that a uniform
cost manual containing instructions, clarifications, rules and guidelines about cost
determination, cost analysis and cost control, should be developed and circulated among
the undertakings deciding to use uniform costing.
Question No. 2
(a) Prerequisite for installation of Uniform Costing System [December 2006 – 6(ii), 4
Marks] [June 2009 – 7(c), 5 Marks]
Answer
a. The firms in the industry must be willing to share/furnish relevant data/
information.
b. A spirit of cooperation and mutual trust should prevail among the participating
firms.
c. Mutual exchange of ideas, methods used, special achievements made, research
and know-how etc. should be frequent.
d. Bigger firms should take the lead towards sharing their experience and know how
with the smaller firms to enable the latter to improve their performance.
e. Uniformity must be established with regard to several points before the induction
of uniform costing in an industry. In fact uniformity should be with regard to the
following points:
i. Size of the various units covered by uniform costing
ii. Production methods
iii. Accounting methods, principle and procedures used.
(b) Limitations of uniform costing.

[December 2008 – 6(c), 5 Marks] [December 2013 – 6(c), 2.5 Marks]

Answer
Various limitations of Uniform Costing are:
f. The adoption of uniform costing becomes difficult if firms operate in different
circumstances due to which it is not possible to adopt uniform standards, methods and
procedures of cost accounting.
g. Disclosure of cost information and other data is essential requirement of a uniform
costing system. But many firms hesitate to share information with their competitors in
same industry.
h. Small firms in an industry may believe that uniform costing system is only meant for
big and medium size firms.
Alternative Answer
Limitations of uniform costing.
• Sometimes it is not possible to adopt uniform standards, methods, and
procedures of costing in different firms due to differing circumstances in
which they operate.
• Many firms do not wish to share cost information and other data with their
competitors.
• Small firms believe that uniform costing is beneficial only in case of large
firms.
• It induces monopolistic trend in the business, due to which prices may be
increased artificially and supplies withheld.
• High initial installation cost:- Small firms in an industry think that the
uniform costing system is meant only for big and medium sized firms esits
installation involves high initial cost which they cannot afford. Moreover
smaller firms may not derive sufficient benefit as compared to the cost of
installation and operation of the system.
• Costing inflexibility:- Since the size and types of firms and the
circumstances in which they operate differ, it is not possible to lay down
standard methods and procedures of costing. The requirement for uniform
casting is inflexible which renders the adaptation of uniform costing difficult
in such firms.
• Non-disclosure of data:- Disclosure of cost and other data are an essential
criterion of uniform costing system. Many efficient firms are unwilling to
disclose their business secrets to the trade association as they think these will
be misused by their competitors in the same industry. Such non-disclosure of
data weakens the uniform costing system and reduces its utility.
• Unrealistic price fixation:- Uniform costing may lead to monopolistic
tendencies and price may be artificially raised by curtailing the supplies.
• Degree of control:- Uniform costing eliminates divergences in costs up-to a
certain degree beyond which it makes comparisons of costs more difficult.

An attempt to attain complete uniformity in all directions produces absurd

results.
(c) Define inter firm comparison. What are its limitations?

Answer:
Inter firm comparison is a technique of evaluating the performance, efficiency, costs and
profits of firms in an industry. It consists of voluntary exchange of information /data
concerning costs, prices, profits, productivity and overall efficiency among firms engaged
in similar type of operations for the purpose of bringing improvement in efficiency and
indicating the weaknesses. Such a comparison will be possible where uniform costing is
in operation. Inter firm comparison indicates the efficiency of production and selling
adequacy, profits, weaknesses within an organisation and demands from the management
for an immediate and suitable corrective measures.
The following are the limitations in the implementation of a scheme of inter firm comparison.
• Top management feels that secrecy will be lost.
• Middle management is usually not convinced with the utility of such a comparison
• In the absence of a suitable cost accounting system, the figures supplied may not be
reliable for the purpose of comparison.
• Suitable basis of comparison may not be available
(d) Uniform Costing

[December 2010 – 6(d), 5 Marks] [June 2011 – 6(b), 2.5 Marks] [June 2018 – 6(b),
2.5 Marks]
Answer
• For comparing the achievements, costs, targets, profitability etc. within the firms it
is essential that same set of principles and practices are adopted by all the firms
with in an industry. The use by several undertaking of the same costing principles
and / or practices is called as uniform costing.
• Uniform costing is neither a costing or marginal costing method likes job or process
costing nor it is a costing technique like standard costing or marginal costing but a
particular system which may combine any of the costing methods and any or more
techniques of costing.
(e) Requisites of inter-firm comparison scheme [June 2012 – 6(a), 5 Marks]

Answer
Requisites of Inter-firm comparison scheme:
The following requisites should be considered while installing a system of inter-firm
comparison:

1. Centre for Inter-firm Comparison:

For collection and analysing data received from member units for doing a
comparative study and for dissemination of the results of study a Central body is
necessary. The functions of such a body may be:
(a) Collection of data and information from its members:
(b) Dissemination of results to its members:
(c) Undertaking research and development for common and individual benefit
of its members;
(d) (d) Organising training programmes and publishing magazines.
2. Membership:
Another requirement for the success of inter-firm comparison is that firms of
different sizes should become members of the Centre entrusted with the task of
carrying out inter-firm comparison.
3. Nature of information to be collected

Although there is no limit to information, yet the following information, useful to
the management is in general collected by the center for inter firm comparison.
(e) Information regarding costs and cost structures.
(f) Raw material consumption
(g) Stock of raw material, wastage of materials etc.
(h) Labour efficiency and labour utilisation.
(i) Machine utilisation and machine efficiency.
(j) Capital employed and return on capital
(k) Liquidity of the organisation.
(l) Reserve and appropriation of profit.
(m) Creditors and debtors.
(n) Methods of production and technical aspects.
4. Method of Collection and presentation of information:

The centre collects information at fixed intervals in a prescribed form from its
members. Sometimes a questionnaire is sent to each member, the replies of the
questionnaire received by the Centre constitute the information/data. The
information is generally collected at the end of the year as it is mostly related
with final accounts and Balance Sheet. The information supplied by firms is
generally in the form of ratios and not in absolute figures. The information
collected as above is stored and presented to its members in the form of a report.
Such reports are not made available to non-members.
Question No. 3
What are the limitations of an Inter-firm Comparison system?
[December 2001 – 6(a), 3 Marks] [June 2009 – 6(e), 4 Marks]

Answer
a. Top management feels that secrecy will be lost.
b. Middle management is usually not convinced with the utility of such a
comparison.
c. In the absence of a suitable Cost Accounting system, the figures supplied
may not be reliable for the purpose of comparison.
d. Suitable basis for comparison may not be available.
Question No. 4
What is uniform costing system? Write about the objective of uniform costing system.
[June 2002 – 4(b), 4 Marks] [June 2003 – 3(a), 3+3=6 Marks] [June 2004 –
7(c), 4 Marks] [June 2013 – 6(d), 2.5 Marks]
Answer
Common method of costing & technique adopted, similar principles & practices are followed,
controlling cost and cost reduction become possible.
Objective:
1. Facilitates comparison of costs and performance.
2. Avoids unhealthy competition.
3. Improves production and level of efficiency.
4. Provides relevant cost information.
5. Standardisation and uniformity may be maintained.
6. Helps to control fixed cost and reduces cost.
Question No.5
What do you understand by Inter-firm comparison? Why it is essential?
[June 2005 – 1(b), 2+3=5 Marks] [June 2007 – 5(b), 4 Marks]
Answer
It is a technique of evaluating the performance, efficiency, costs and profits of firms in an
industry. It consists of voluntary exchange of information/data concerning costs, prices,
profits, productivity and overall efficiency among firms engaged in similar type of profits,
productivity and overall efficiency among firms engaged in similar type of operations for the
purpose of bringing improvement in efficiency and indicating the weakness. Such a
comparisons will be possible where uniform costing is in operation.
An inter-firm comparison indicates the efficiency of production and selling, adequacy of

profits, weak spots in the organization etc. and this demand from the firm’s management an
immediate suitable action. Inter-firm comparison may enable the management to challenge
the standards, which it has set for itself, and to improve upon them in the light of the current
information gathered from more efficient units. For these reasons inter firm comparison is
essential for the organization.
Advantages of Inter firm comparison:

• Such comparison gives an overall view of the industry as a whole to its members- the
present position of the industry, progress made during the past and future of the
industry;
• It helps a concern in knowing its strength or weakness in relation to other so that
remedial measures may be taken;
• It ensures an unbiased specialized reporting on particular problems of the concern;
• It develops cost consciousness among members of the industry;
• It helps government in effecting price regulation;
• It helps to improve the equality of products manufactured and to reduce the cost of
production, it is thus advantageous to the industry as well as to the society.
Question No.6
Write down the advantages of Interfirm comparisons.
[June 2006 – 6(a), 4 Marks] [June 2009 – 7(b), 5 Marks]
Answer
Advantage of Inter-Firm comparison : The main advantages of inter-firm comparison are :
a. Such a comparison gives an overall view of the industry as a whole to its members-
the present position of the industry, progress made during the past and the future of
the industry.
b. It helps a concern in knowing its strengths or weaknesses in relation to others so that
remedial measures may be taken.
c. It ensures an unbiased specialized reporting on particular problems of the concern.
d. It develops cost consciousness among member of the industry.
e. It helps Government in effecting price regulation.
f. vi. It helps to improve the quality of products manufactured and to reduce the cost
of production. It is thus advantageous to the industry as well as to the society.
Question No.7
Briefly explain the objectives of introducing uniform costing.
[December 2009 – 5(b), 5 Marks] [June 2017 – 5(c), 4 Marks]
Answer
The techniques of uniform costing may be introduced with one or more of the following
objectives:
i. To avoid competition: It eliminates cut-throat competition by fixing common prices on
the basis of uniform costing procedures. It thus also aims at bringing stability in prices
of the products.
ii. Cost comparison: It enables different firms to compare the costs because the costs are
based on same principle. Thus their profitability can also be compared.
iii. Measurement of efficiency: Comparison of costs and profitability helps in
measurement of efficiency. Uniform costing enables the member participants to use this
system as yardstick of their achievements and performances.

iv. Reliable prices: The confidence is reposed in the public whether prices fixed are based
on sound and uniform costing principles. This will result in better and cordial relations
between members adopting this system and their customers.
v. Cost control: One of the objectives of uniform costing is an effective control over
costs. This facilitates location of unprofitable ventures. Uneconomies and inefficiencies
are revealed at every stage. The uniform cost serves as the standard cost and helps in
controlling the off-standard performances.
vi. Better exchange of information: Members having technical knowledge provide the
benefit of their experience to others. Free exchange of information leads to reduction in
costs and improvement in the quality of the product.
Question No.8
Briefly discuss the requirements for the establishment of a scheme for inter-firm
comparison.
Answer
For the establishment of a scheme of inter-firm comparison, following requirements have to
be met:
i) Nature and extent of information to be collected from the participating firms: It all will
depend upon the needs of the management, comparative importance of information and
efficiency of the central organization responsible for the collection of data. It is difficult
to give a standard list of data which needs to be collected that would be appropriate for
all the industries. A representative list of information which could be applicable for all
the industries are given below:
• Information regarding costs and cost structure,
• Labour efficiency and labour utilization
• Efficiency of machines and machine utilization
• Raw material consumption
• Wastage
• Return on capital employed
• Liquidity
• Creditors and debtors
• Methods of production, and so on.
ii) Organization responsible for the collection, coordination and presentation of
information: A central organizational set up should be established to look after every
aspects of the inter-firm comparison. This unit should be made responsible to carry out
research and organizing seminar and workshop on inter-firm comparison. This
organization is also entrusted with the responsibility of compiling comparative
statements and information and providing information for the benefit of different
industries.
iii) Method of collection and presentation of information: In a scheme of inter-firm
comparison, information is provided by the participating firms to the central

organization overseeing the implementation of the scheme at regular intervals. This

organizes generally standardize the required information and circulates standard form to
supply the information.
Information may also be collected on the spot by field workers but this will be expensive.
Since compilation of information involves time and expenditure of the participating firms, the
frequency of collection and nature of information to be furnished at each time interval is
decided before hand. Information is usually collected once a year because many of the figures
to be supplied are obtained from the profit and loss account and balance sheet of the
respective firms.
After the central organization receives the information, it is first properly sorted out to
generate relevant data in the form of a consolidated report. Once such report is produced, this
is issued to the participating firms.
Secret information are only supplied to the participating firms and not to any other
unauthorized person. Usually, the firms supply ratios and not the absolute figures to the
central organization. In order to provide further safeguard, each type of ratio is provided a
code number. Similarly, each firm is known by a number and the identity of the form is not
revealed in the reports.
The design of the presentation of figures to participating member firms is done in such a way
that it shows variances from the norms. In this connection, variances may be of two types.
The first type of variances are those which arise due to basic differences in the nature of the
particular firms whereas the second type are those which results due to efficiency or
inefficiency in the performance level. The participating firms need to investigate and explain
only the second type of variances.
Question No.9
What items are generally included in good uniform costing manual?
[June 2010 – 6(e), 2 Marks]
Answer
Uniform costing manual includes essential information and instructions to implement
accounting procedures.
(i) Introduction: It includes objects and scope of the planning.
(ii) Accounting procedure and planning includes rules, and general principle to be followed.
(iii) Cost accounting planning includes methods of costing, relation between cost and
financial accounts and methods of integration.
Question No.10
Briefly discuss the main purpose of inter-firm comparison.
Answer
The main purpose of inter-firm comparison is to motivate the management to improve the
efficiency by showing the present level of achievements and possible weakness areas. Such a
comparison can be instrumental in overcoming following types of problems/weaknesses
facing a business entity.
i) Profit adequacy:
Profit is the principal factor to motivate any commercial venture or organization. The relation
of profit to capital employed is the general norm employed to assess the efficiency or return
of commercial firms. If the return on capital employed is less than that of other efficient firms
within the industry, it is an indicator to show that some factors are not operating efficiently
within the firm in question. These can be isolated by means of the various ratios computed
for the firm and other competitors. Suitable corrective and follow up actions is then initiated
to improve the profitability situation of the concerned firm.
ii) Efficiency in selling:
The operating profit to total sales and to capital employed are vital ratios to indicate the
profit-earning capacity of a firm. The first ratio indicates the total margin earned by the sales
expressed as a percentage. On the other hand, the sales to capital employed indicates how
much is sold per rupee invested. A comparison of these ratios with efficient firms and
subsequent analysis of the reasons could throw out areas where the firm needs improvement
for improving the efficiency.
iii) Production efficiency:
In order that the firm earns reasonable return, it is necessary that the production
departments produce required volume of output at reasonable costs. For this purpose, the
factory cost of sales is broken down into direct material, direct wages and production
overhead costs. A comparison of these figures with other firms of the industry may point
out the sources of inefficiencies. For instances, production efficiency of a firm as
compared to efficient firms within an industry may have been affected by lower labour
untilization or lower labour utilization.
Question No.11
Explain the role of uniform costing in inter-firm comparison.
[December 2012 – 6(c), 2.5 Marks]
Answer
When several undertakings in an industry, group and association use same costing principles
and practices, it is known as uniform costing. The application of uniform costing in an
industry provides the means whereby relevant information can be obtained and it helps in
comparing the production efficiency of two firms at the time of merger.
Inter-firm comparison is the technique of evaluating the performance efficiencies, costs and
profits of firms in an industry. The application of uniform costing greatly facilitates inter-firm
comparison by providing information relating to costs, profits, prices, efficiency etc. Inter-
firm comparison will not be possible if uniform costing is not in existence.

CHAPTER 17:
COST AUDIT

Question No.1
Distinguish Between
(a) Cost audit and statutory audit [June 2008 – 5(d), 5 Marks] [June 2014 – 5(a), 2.5
Marks]
Answer
Cost audit offers valuable assistance to the management in its decision-making process
by examining the reliability of cost accounting data and information. Due to the
assistance provided by cost audit, management is in a position to know what price is to be
fixed for a product, whether the wastages are avoidable, whether to reorganise sales or
inventory system to make work more efficient and effective. Cost audit, apart from all the
normal ingredients of audits. i.e. vouching, verification etc has within its domain elements
of efficiency audit and proprietary audit.
Statutory audit of accounts is to examine whether P/L a/c and Balance Sheet of a
company provides a true and fair view of profits (in the relevant financial period) and
financial position on a particular date.
(b) Protective purpose and constructive purpose of cost audit

Answer
Protective purpose of Cost Audit: Under this, cost audit aims at examining that there is no
undue wastage or losses and the costing system brings out the correct and realistic cost of
production or processing. The benefit of this protective function is derived by the
organization, its owners and consumers.
Constructive purpose of Cost Audit: Cost audit has a constructive purpose as well. Cost
auditor plays a constructive role by providing management of the company with
information useful in regulating production; choosing economical methods of operation,
reducing operations costs and re-formulating plans etc. on the basis of his findings during
the course of cost audit.
(c) Efficiency Audit and Propriety Audit

[December 2012 – 5(a), 2.5 Marks] [December 2013 – 5(a), 2.5 Marks]
Answer
Cost audit, apart from having all the normal ingredients of audit, i.e. vouching,
verification etc., has within its domain elements of efficiency audit and propriety audit.
Efficiency audit is directed towards the measurement of whether corporate plans have
been effectively executed. It is concerned with the utilisation of the resources in
economical and most remunerative manner to achieve the objectives of the concerns. It
comprises of studying the plans of the organization, comparing actual performance with
plans and investigating the reasons for variances to take remedial action. For example,
the effective utilization of capital in an organization can be gauged by determining the
return on capital employed.
On the other hand propriety audit is concerned with the executive actions and plans
bearing on the finances and expenditure of the company. The cost auditor has to judge:

a. Whether the planned expenditure is designed to give optimum results;

b. Whether the size and channels of expenditure were designed to produce the
best results; and
c. Whether the return from expenditure on capital as well as current operations could be
bettered by some other alternative plan of action.
Qustion No. 2
Write short notes on:
(a) Efficiency Audit and Propriety Audit [December 2001 – 6(b), 3 Marks]
Answer
Efficiency audit
It is directed towards the measurement of whether corporate plans have been effectively
executed. It is concerned with the utilisation of the resources in economic manner to
achieve the objectives of the concern.
Propriety audit
It is concerned with the executive actions and plans bearing on the finances and
expenditure of the company.
(b) Propriety audit [June 2011 – 6(a), 4 Marks]

Answer
This refers to audit of executive action or plan which has impact on profitability of a firm.
Such audit not only looks into whether the expenditure is actually incurred or not but also
reviews whether the planned expenditure gives optimum result or not. In other words, it is
an audit of management decisions which has favorable or adverse impact on performance
and profitability of the firm. It should evaluate the decision and ultimate outcome with the
possible alternatives.
It gives feedback on the management actions, decisions and policies so that corrective
measure can be taken in future in order to ensure optimum utilization of resources.
(c) Circumstances under which cost audit is ordered and purpose of cost audit.
[December 2007 – 6(a), 4 Marks] [December 2008 – 6(a), 5 Marks] [December 2012 –
6(b), 5 Marks] [June 2013 – 6(b), 2.5 Marks] [December 2015 – 6(c), Marks]
Answer
a. Price Fixation: The need for fixation of retention price in case of materials of
national importance like steel, cement etc., may cause a necessity for cost audit.
b. Cost variation within an industry: Cost audit may be necessary to find reasons for
such differences.
c. Inefficient Management: Where a factory is run inefficiently and uneconomically,
institution of cost audit may be necessary.

d. Tax assessment: Where a duty or tax is levied on products based on cost of

production, the levying authorities may ask for cost audit to determine the correct
cost of production.
e. Trade disputes:Cost audit may be useful in settling trade disputes about claim for
higher wages, bonus etc.
Purposes of Cost Audit

Protective purpose:
To examine that there is no undue wastage or losses and the costing system brings out
correct cost of production or processing.
Constructive purpose:
Cost Audit provides information to management useful in regulating production,
choosing economical methods of operation and reducing Operations cost.
(d) Information required for preparation of cost audit [June 2011 – 6(c), 2.5 Marks]
Answer
Preparation for cost audit of an organization requires the knowledge and gathering of
following information and data:
• Cost accounting system used in the organization,
• Production methods and manufacturing processes,
• Raw materials and components used in production,
• Cost records and documents,
• Cost accounting rules or cost accounting manual used in the
organization,
• Important information mentioned about the costing requirement in Memorandum and
Articles of Association, etc.
(e) Efficiency audit [December 2011 – 6(a), 2.5 Marks]

Answer
Efficiency audit is directed towards the measurement of whether corporate plans have
been effectively executed. It is concerned with the utilisation of the resources in
economic and most remunerative manner to achieve the objective of the concern. It
comprises of studying the plans of organisation, comparing actual performance with
plans and investigating the reasons for variances to take remedial action. For example,
the effective utilisation of capital in an organisation can be gauged by determining the
return on capital employed.
Question No. 3
State the purposes of cost audit. [June 2002 – 7(a), 3 Marks]
Answer
Purposes of cost audit:

The purpose of cost audit is to examine whether the methods laid down for ascertaining cost
and other decisions are properly implemented and whether cost accounting plan is adhered to
or not.
Brand classification of purposes is:

Protective purpose to ensure that there is no undue wastage or loss and correct and realistic
cost has been worked out.
Constructive purpose - it provides management with information useful for regulating
production.
Question No.4
Advantages of Cost Audit to Government and Management;
[June 2009 – 7(a), 5 Marks]
Answer:
Benefit to Government:
• Cost audit facilitates the determination of cost claims submitted to the Government
under the cost plus contracts.
• Price fixation body utilizes the Cost Audit report for fixing the fair selling price of the
commodities.
• Cost Audit may help for granting protection to various industries by giving them
incentives exports, duty drawback etc.
• Audited cost accounts enable government to fix ceiling prices of commodities to
prevent undue profiteering.
• Cost Audit of weak, inefficient or mismanaged units in the industry enable
government to take important decisions, viz., and merger of sick units with other
company.
Benefits to Management:
• Cost Audit helps in detection of errors, defalcations and frauds. thus, the staff will
have to be more careful in their day to day work.
• The management can rely on cost data and cost statements prepared after getting
their cost account audited.
• It helps the management to improve upon the cost accounting methods. It also
facilitates cost control.
• Cost audit help the management in inter firm comparison.
• It enables management to compare actual with estimates and take remedial measures
for adverse variances.
Question No.5
Briefly explain the scope of cost audit. [December 2009 – 6(d), 5
Marks]
Answer

There are two important aspects which come within the purview of cost audit. They are:
i. Propriety audit: It is an audit concerned with such action and plans of management
which have a bearing on the finance and expenditure of the company. The cost
auditor has not only to see that an item of expenditure is properly sanctioned and
supported by vouchers but also is justifiable on grounds of propriety. He has
therefore to report:
• Whether or not the planned expenditure could give optimum results.
• Whether or not the size or channels of investment was/ were designed to
produce the best results.
• Whether the return from investment in certain channels could be bettered by
some alternative plan of action.
ii. Efficiency audit: It is an audit concerned with the appraisal of performance to
determine not only that the expenditure has been incurred according to the plan but
also to see that the results have been obtained as planned. It starts with examination
of plan (such as financial or other functional budgets) and extends to the comparison
of actual performance with the budgeted performance and finding out reasons for
variances. It thus ensures that:
• Every rupee invested in capital or in other fields gives that optimum return, and
• Investment in different spheres of the business has been so balanced that it gives
maximum results.
The cost auditor thus combines in himself the role of the consultant and financial
advisor. He helps the chief executive of the organization in working out a sound
overall judgment on the financial plans and performances of the company by
coordinating the results of actions of the various departments.
Question No.6
Briefly explain the benefits of cost audit to the management. [June 2010 – 6(c), 2
Marks] [December 2010 – 6(e), 2.5 Marks]
Answer
Benefits of Cost Audit to the management
a. Cost audit assists in the detection of errors and frauds. Continuous cost audit
prevents manipulation and frauds.
b. Cost data becomes more reliable. Inventory valuation certified by the cost auditor
ensures the correctness and integrity.
c. Cost audit facilitates improved cost accounting methods and better internal control.
d. Disclosures made in the cost audit reports create cost consciousness in the
management.
e. Cost audit helps to improve the effectiveness of cost control and cost presentation.
This is achieved when the cost auditor points out avoidable wasteful routines and
procedures and recommends the introduction of cost efficient routines and
procedures.

f. Cost audit assists the management to take action for economic and efficient use of
labour material and other resources. This will contribute towards achieving higher
productivity and higher utilization of capacity.
g. Cost audited data could be helpful in comparing inter-firm performance.
h. Cost audit could be instrumental in identifying the symptoms of sickness in a unit.
This will help the management to initiate timely remedial actions to prevent the
sickness.
Question No.7
One of your friends established a vehicle-repairing workshop and was worried about
the increasing cost of operation and decreasing margin. He was from engineering
background so have little knowledge of accounting. He wishes to appoint a cost auditor
for review of his existing system but he is confused about the purpose of cost audit.
Describe the purpose of cost audit and suggest your friend.
[June 2012 – 2(b), 5 Marks]
Answer
The purpose of cost audit is to examine whether the methods used for ascertaining cost and
other decisions are being properly implemented and whether cost accounting plan has been
adhered to or not. Mainly we could classify purpose of cost auditing as; i) Protective and ii)
constructive
Protective purpose of cost audit: Cost audit aims at examining that there is no undue wastage
or loss and costing system brings out the correct and realistic cost of production or
processing.
Constructive purpose of cost audit: cost audit can provide information useful in regulating
production; choosing economical methods of operation, reducing operating cost and
reformulating plans etc. on the basis of findings during the course of cost audit.
So I will suggest my friend to hire cost auditor having knowledge of vehicle repairing
workshop, who can help him using protective and constructive module of cost audit

***Thank You***

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CHARTERED ACCOUNTANCY PROFESSIONAL II

Compilation of Suggested Answers

Paper 5: Cost and Management Accounting

© The Institute of Chartered Accountants of Nepal

This compilation of suggested answers is prepared by the Institute of Chartered Accountants of

© The Institute of Chartered Accountants of Nepal 1

© The Institute of Chartered Accountants of Nepal 2

kinds of organizations, whether manufacturing, commercial or public utility

© The Institute of Chartered Accountants of Nepal 3

© The Institute of Chartered Accountants of Nepal 4

(j) Cost Accounting and Management Accounting

© The Institute of Chartered Accountants of Nepal 6

Cost classification based on controllability:

Techniques of costing refer to the manner of ascertaining costs of a product, job or

© The Institute of Chartered Accountants of Nepal 7

(a) Define 'Investment Centre' and 'Profit Centre'.

(b) Direct cost [June 2006 – 5(d), 4 Marks]

(c) Discretionary Costs [December 2006 – 6(v), 4 Marks]

(d) Direct Product Profitability (DPP) [June 2007 – 5(a), 4 Marks]

© The Institute of Chartered Accountants of Nepal 8

(e) Multiple costing [December 2011 – 6(c), 2.5 Marks]

(f) Essential of an effective costing system [June 2012 – 6(b), 5 Marks]

(g) Continuous costing [December 2017 – 6(a), 2.5 Marks]

© The Institute of Chartered Accountants of Nepal 9

(i) Period costs [July 2015 – 6(d), 2.5 Marks]

© The Institute of Chartered Accountants of Nepal 10

(l) Responsibility Centre [December 2010 – 6(b), 5 Marks]

© The Institute of Chartered Accountants of Nepal 11

Volume-based cost drivers assume that a product’s consumption of overhead resources is

© The Institute of Chartered Accountants of Nepal 12

Types of information: Management needs cost information for discharging management

© The Institute of Chartered Accountants of Nepal 13

Methods of costing are :

© The Institute of Chartered Accountants of Nepal 14

© The Institute of Chartered Accountants of Nepal 15

© The Institute of Chartered Accountants of Nepal 16

© The Institute of Chartered Accountants of Nepal 17

© The Institute of Chartered Accountants of Nepal 18

© The Institute of Chartered Accountants of Nepal 19

© The Institute of Chartered Accountants of Nepal 20

Labour Turnover Ratio in an organization is the rate of changes in the composition of

(i) Replacement method = Number of employees replaced x 100

(ii)Separation method = Number of employees separated during the year x

(iii)Flux method = Number of employees separated +number of employees

© The Institute of Chartered Accountants of Nepal 21

(f) Normal loss and abnormal loss [June 2009 – 5(b), 4

(g) Periodic and Perpetual Inventory System [December 2009 – 5(a), 5

Value of closing Cost of Cost of purchase Cost of issue during the

© The Institute of Chartered Accountants of Nepal 22

Advantages/Disadvantages of Periodic Inventory System

© The Institute of Chartered Accountants of Nepal 23

6 Compilation of This does not facilitate or It provides stock figures on

(j) Just in Time manufacturing and Traditional manufacturing

© The Institute of Chartered Accountants of Nepal 24

(b) Treatment of shortages in stock taking [December 2006 – 6(iii), 4 Marks]

© The Institute of Chartered Accountants of Nepal 25

(d) Scrap [December 2007 – 5(e), 4 Marks]