COST ACCOUNTING

Suggested Answers
Intermediate Examination - Spring 2012

A.1 PRESENT SCENARIO

Carrying cost per unit: Rupees
Storage costs 80
Insurance cost 60
Store keepers salary -
Cost relating to final quality check -
Opportunity cost of capital (per pair) [ Rs. 1,000 – 100 x 0.15] 135
275
COSTS ASSOCIATED WITH EACH ORDER
Ordering cost per order 8,000
Delivery cost per order 3,000
11,000

2( F )( S )
EOQ =
(C )
2 × 11,000 × 200,000 4,400,000,000
EOQ = =
275 275
16,000,000
EOQ = 4,000
Number of orders = 50

Total relevant costs under present scenario

 Purchase price 180,000,000
 Total ordering cost (50 × 11,000) 550,000
 Total carrying cost (4,000/2 × 275) 550,000
181,100,000

IF DISCOUNT IS AVAILED
Carrying cost per unit
Storage costs 80.00
Insurance cost 60.00
Opportunity cost of capital [ Rs. 900 x (1- 0.03) x 0.15] 130.95
270.95
Number of orders would be (200,000 / 5,000) 40

Total relevant costs:

 Purchase price [Rs. 900 x (1-.03) x 200,000] 174,600,000
 Total ordering cost [ Rs. 11,000 x 40] 440,000
 Total carrying cost [ Rs. 270.95 x 5,000 /2] 677,375
175,717,375

Conclusion:
Yes. Quantity discount should be availed.

A.2 Let X represent total overheads of department X

And Y total overheads of department Y
Since X received 20% of Y’s services
Thus X = 16,500 + 0.2 Y
Likewise Y = 10,600 + 0.1X

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 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

Using substitution method of simultaneous equation

X = 16,500 + 0.2 (10,600 + 0.1X)
X = 16,500 + 2,120 + 0.02X
X – 0.02X = 18,620
0.98X = 18620
X = 19,000
Y = 10,600 + (0.1 × 19,000)
Y = 12,500

Overheads charged to production:

A B C
Allocated overheads 56,000 50,000 38,000
Share of X’s service (Rs. 19,000 × % served) 3,800 7,600 5,700
Share of Y’s service (Rs. 12,500 × % served) 5,000 2,500 2,500
64,800 60,100 46,200

A.3 Comparative statement showing actual profit and potential profit in absence of labour turnover:
Actual Potential
Rupees
Sales 63,400,000 65,600,000
Less: Costs
Direct material (15,216,000) (15,744,000)
Direct labour (26,400,000) (27,060,000)
Variable overhead (9,600,000) (9,840,000)
Fixed overheads (6,000,000) (6,000,000)
Cost incurred on Appointments (200,000) -
(57,416,000) (58,644,000)
Net Profit 5,984,000 6,956,000

Loss of profit due to labour turnover is Rs. 972,000

Working Notes:
W-1 Hours lost due to labour turnover:
Hours lost due to delayed replacement 12,000
Unproductive time due to training and replacement (9,000 × 50%) 4,500
Total hours lost 16,500

W-2 Productive labour hours:

Direct labour hours paid 480,000
Less: unproductive time of new workers (9,000 × 50%) (4,500)
Total productive hours 475,500
No. of units sold/produced (475,500/1.5) 317,000
Actual sales: [Total productive hours / hours per unit of product × Rs 200] 63,400,000
Add: sales foregone due to 16,500 unproductive hours [16,500 / 1.5 × 200] 2,200,000
Potential sales 65,600,000
No. of units that could have been sold (65,600,000 / 200) OR (317,000+11,000) 328,000
Direct material:
Actual [(475,500 /1.5) × 0.5 × 96] 15,216,000
Add: Material cost foregone [ 16,500 / 1.5 × 0.5 × 96] 528,000
15,744,000
Direct labour:
Actual [480,000 × 55] 26,400,000
Add: Labour cost foregone [ 12,000 × 55] 660,000
27,060,000
Variable overheads:
Actual [480,000 × 20] 9,600,000
Add: Variable cost foregone [ 12,000 × 20] 240,000
9,840,000
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 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

A.4 (a) CALCULATION OF BREAK-EVEN POINT OF SALES IN UNITS:

Small pack of product-B
Required Contribution Margin
Rupees
Annual fixed cost (Rs. 7.6 million x 12) 91,200,000
Less: Estimated contribution margin
Product-A Large pack [250,000 units x Rs. 120] (30,000,000)
Product-A Small pack [150,000 units x Rs. 45] (6,750,000)
Product-B Large pack [225,000 units x Rs. 150] (33,750,000)
(70,500,000)
Required contribution from small pack of Product-B 20,700,000

Units
Break-even sales in units [Rs. 20,700,000 / Rs. 90) 230,000

Working Notes
Product-A
Rs. per unit
Large Pack
Sales price [120 / (1-0.75)] 480
Less: Variable cost [Rs. 480 × 75%] (360)
Contribution Margin 120
Small Pack
Sales price [Rs. 480 × 3/5] 288
Less: Variable cost [Rs. 360 × 67.5%] (243)
Contribution margin 45
Product-B
Large Pack
Sales price [Rs. 150/0.4] OR [225 + 150] 375
Less: Variable cost [ Rs. 375 – Rs. 150] OR [150 x 3/2] (225)
Contribution Margin 150
Small Pack
Sales price [Rs. 375 x 0.64] 240
Less: Variable cost [ Rs. 225 x 2/3] (150)
Contribution margin 90
(b) Sales in units of small pack of product-B to produce net income of Rs. 10,530,000.

Rupees
Desired net income 10,530,000
Applicable tax rate 25%
Income before tax [ Rs. 10,530,000 / (1- 0.25)] 14,040,000
Add: fixed cost [ 7,600,000 x 12] 91,200,000
Required total contribution margin from all packs of A and B 105,240,000
Less: Contribution margin of both packs of Product-A and large pack of B (70,500,000)
Contribution margin from Product-B 34,740,000
Contribution margin per unit of the small pack of product-B 90
Required number of units of small pack of product-B to earn desired income 386,000

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 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(c) Product-wise Income Statement

For the period ended December 31, 2012

Per unit Rupees

Sales
Product Variable Contribution
Price volume Sales Variable cost
cost margin
A-Large 480 360 250,000 120,000,000 90,000,000 30,000,000
A-Small 288 243 150,000 43,200,000 36,450,000 6,750,000
B-Large 375 225 225,000 84,375,000 50,625,000 33,750,000
B- Small 240 150 386,000 92,640,000 57,900,000 34,740,000
340,215,000 234,975,000 105,240,000

Consolidated Income Statement Rupees

Sales 340,215,000
Less: Variable Cost (234,975,000)
Contribution Margin 105,240,000
Less: Fixed Cost (91,200,000)
Budgeted profit before tax 14,040,000
Less: Tax @ 25% (3,510,000)
Budgeted profit after tax 10,530,000

A.5 Computation of net profit on the basis of optimum product mix:

Pentagon Hexagon Octagon

Selling price 2,300 1,550 2,000
Less: Variable Costs
Direct Material
(250 × 6 /0.9) 1,666.67
(250 × 4 /0.95) 1,052.63
(250 × 5 /0.92) 1,358.70
Direct Labour
[15,000 /200 × (20/60)] 25
[15,000 /200 × (30/60)] 37.5
[15,000 /200 × (45/60)] 56.25
Variable Overheads
[1666.66 × 20% - (Rs. 50 × 4 hrs)] 133.33
[1052.63 × 20% - (Rs. 50 × 2.5 hrs)] 85.53
[1358.70 × 20% - (Rs. 50 × 3 hrs)] 121.74
Total Variable Cost 1,825.00 1,175.66 1,536.69
Contribution per unit 475.00 374.34 463.31
Machine Hours required per unit 4.0 2.5 3.0
Contribution per Machine Hour 118.75 149.74 154.44
Ranking 3 2 1

Now, the scarce Hours will be allocated as per ranking.

Product Volume Hours required Hours used Balance unused

100,000
Octagon 9,000 3.0 27,000 73,000
Hexagon 20,000 2.5 50,000 23,000
Pentagon (Bal.) 5,750 4.0 23,000 -

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 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(i) Profit arising from above production plan

Product Units Contribution per unit Contribution margin
Octagon 9,000 463.31 4,169,790
Hexagon 20,000 374.34 7,486,800
Pentagon 5,750 475.00 2,731,250
Total Contribution 14,387,840
Less: Fixed costs (5,000,000)
Net Profit 9,387,840

A.6 Month-wise Cash Budget

Rs. in ‘000
Mar Apr May
Opening balance 100,000 109,204 104,828
Collections 83,800 68,800 59,400
Payments:
Purchases (47,250) (44,250) (48,000)
Selling expenses (13,200 ) (14,400) (15,600)
Administrative expenses (8,800) (9,600 ) (10,400 )
Packing machinery (3,000 ) (3,000) -
Tax withheld by 80% of customers @ 3.5% (2,346) (1,926 ) (1,663 )
(74,596 ) (73,176) (75,663)
Closing balance 109,204 104,828 88,565

Working notes:
W-1: Collections - Jan Sales 85,000
Feb Sales 95,000
Mar Apr May
Sales Gross 55,000 60,000 65,000
Collections:
Cash sales 11,000 12,000 13,000
1st month after sale 45,600 26,400 28,800
2nd month after sale 27,200 30,400 17,600
83,800 68,800 59,400

W-2 Purchases:
Sales Gross (June) 75,000

Feb Mar Apr May

Sales Gross 95,000 55,000 60,000 65,000
Cost of sales [75% of sales] A 71,250 41,250 45,000 48,750
Less: Opening stock [80% of cost of sale] B (57,000) (33,000) (36,000) (39,000)
Add: Closing stock [80% of next cost of
sales] C 33,000 36,000 39,000 45,000
Purchases (A+C–B) 47,250 44,250 48,000 54,750
Payment to creditors 47,250 44,250 48,000

A.7 (a) (i) Total cost of output:

Kg. Rupees
Direct material [25,000 x Rs. 25] 25,000 625,000
Direct Labour 432,000
Overheads [ 432,000 / Rs. 15 x Rs. 10] 288,000
1,345,000
Less: Sale of scrap [ 25,000 x 20% x Rs. 8] (5,000) (40,000)
Total cost of products 20,000 1,305,000
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 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(ii) Profit per kg of Alpha and Beta:

Rupees
Joint costs of products 1,305,000
Less: Sale of Zeta [20,000 x 10% x Rs. 52.5] (105,000)
1,200,000

NRV at Joint cost Total Profit

Product Kg. Output % Total NRV
split-off allocation profit per Kg.
Alpha 15,000 75% 95-30=65 975,000 780,000 195,000 13
Beta 3,000 15% 175 525,000 420,000 105,000 35
18,000 1,500,000 1,200,000

(b) Absorption costing: Rupees

Sales [100,000 x Rs. 180 ] 18,000,000
Less: Cost of sales:
Opening stock -
Add: Direct materials [ 0.8 x 120,000 x 60] 5,760,000
Direct labour [27/60 x 120,000 x 80] 4,320,000
Variable overheads [ 27/60 x 120,000 x 40] 2,160,000
Fixed overheads [ 2,100,000 / 105,000 x 120,000] 2,400,000
14,640,000
Less: Closing stock [14,640,000 / 120,000 x 20,000] (2,440,000)
Cost of sales (12,200,000)
Less: Over-absorbed overheads [ 2,100,000 / 105,000 x 15,000] (300,000)
Gross profit 6,100,000
Less: Selling expenses:
Variable [ 100,000 x 15] (1,500,000)
Fixed (800,000)
(2,300,000)
Net profit 3,800,000

A.8 Inventory control:

Inventory control can be defined as the system used in an organization to control its investment in
inventory/stocks. i.e. the overall objective of inventory control is to minimize, in total, the costs
associated with stock.

This includes; the recording and monitoring of stock levels, forecasting future demands and deciding
when and how many to order.

The method of stock valuation which should be used in times of fluctuating prices:
Weighted Average stock valuation method should be used in times of fluctuating prices because this
method is rational, systematic and not subject to manipulation. It is representative of the prices that
prevailed during the entire period rather than the price at any particular point in time. It is because of
this smoothening effect that this method should be used for stock valuation in times of fluctuating prices.

(THE END)

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