ASSIGNMNET – COST AND MANAGEMENT ACCOUNTING

ANS.1

INTRODUCTION

Meaning of Variance: Variance is the difference between the actual and the expected value. To put it
another way, it is the difference between the real cost and the standard cost or the difference
between the actual sales and the standard sales. Cost variance is the variation or difference between
the actual cost and the standard cost. Cost variance is described as the difference between a
standard cost and the similar actual costs incurred during a period in the nomenclature of the
I.C.M.A., London.

Mere ascertainment of the variances is not of much use. The variances must be analyzed to find out
the causes for the variances, to fix the responsibility for the variance and to control the variances,
and thereby, the costs. Thus, variance analysis or analysis of variances is quite essential for control of
costs.

CONCEPT AND ANALYSIS

DIRECT MATERIAL PRICE VARIANCE

Meaning of direct material price variance : The direct material price variation is the fraction of the
direct material cost variance caused by the difference between the standard price provided and the
actual price paid for the direct materials utilised. In a nutshell, it is the difference between the
standard price provided and the actual price paid for the direct materials utilised.

Calculation of the direct material price variance :

The direct material price variance can be calculated as follows :

Direct Material Price Variance = (Standard price per unit of direct materials - Actual price per unit of
direct materials) x Actual quantity of direct materials used.

Reasons for direct material price variance :

There are many reasons for the direct material price variance.

They are :
a) Fluctuations (i.e., changes) in the market prices of material used.
b) Uneconomic size of purchase order and the consequent failure to secure discount on bulk
purchase.
c) Loss in transit.
d) Changes in ordering costs.
e) Changes in duties and taxes.
f) Failure to take advantage of cash discount which was provided for while setting standards.
g) Non-availability of standard quality of materials.
h) Off-season purchase.
i) Inefficiency in buying materials.
j) Scarcity of materials.
k) Emergency purchase leading to higher price (i.e.,rush purchases from uneconomic market).
l) Purchasing from suppliers other than those offering the most favorable terms.
m) Change in buying policy.
n) Buying substitute materials at different prices.
o) Government interference leading to higher prices.
p) Incorrect setting of standards.
q) Changes in store-keeping cost or carrying costs.
r) Failure to enter into forward contracts.
s) General change in prices.

Persons responsible for material price variance :

The procurement manager is often in charge of handling material price variations. However, there
are other instances when the purchase manager is not accountable, especially when the material
price fluctuation is controllable. For instance, a general price rise would certainly lead to an increase
in material costs; in this situation, the purchase manager is not responsible for the difference in
material pricing. In a similar vein, forward contracts cannot be entered into since the prices for
particular resources are prone to severe market fluctuations. In such cases, the purchase manager is
not responsible for the material price differential. Additionally, the buy manager cannot be held
accountable for material price variations when purchases are made in unprofitable lots due to a
shortage of operating capital. Once more, the storekeeper, sales manager, or production manager,
not the purchasing manager, is in charge of the material price variation in the case of an emergency
buy.

DIRECT MATERIAL QUANTITY VARIANCE

Meaning of direct material usage variance : The difference between the standard amount of
materials supplied for the actual output and the actual quantity of materials utilised accounts for a
component of the material cost variation known as the material usage variance. To put it another
way, it is the difference, stated in dollars, between the standard quantity of materials provided for
the actual output and the actual quantity of materials consumed.

Calculation of the material usage variance :

The material usage variance can be calculated as follows :

Material Usage Variance = (Standard quantity of materials specified for the actual output-Actual
quantity of materials used) x Standard price per unit of materials.

Reasons for material usage variance :

There are several reasons for material usage variance. They are :

a) Use of substandard or defective materials resulting in more spoilage.

b) Carelessness in the use of materials.
c) Pilferage or theft of materials.
d) Defective production necessitating additional materials for rectification.
e) Excessive wastage, scrap or spoilage due to inefficient production methods or unskilled
employees.
f) Faulty material processing.
g) Failure to return the excess materials to the stores.
h) Change in the specification or design of the product.
i) Defective materials, equipments and tools.
j) Greater or lesser storage losses.
k) Greater or lesser handling losses.
l) Use of material mix other than the standard mix (i.e., use of wrong mix).
m) Improper instructions by foreman causing more wastage.
n) Setting up of improper or inaccurate standards.
o) Improper instructions by foreman causing more wastage.
p) Setting up of improper or inaccurate standards.
q) More or less yield than the standard yield.
r) Rigid inspection resulting in more rejections requiring additional materials for rectification.

Persons responsible for material usage variance :

Material usage variance is mainly the responsibility of the production department personnel. Other
persons, such as the purchase manager, planning engineer, etc. may also be held responsible for
material usage variance. To be specific :

 The purchase manager is responsible for the material usage variance resulting from the use of
sub-standard or defective materials.
 The foreman is responsible for material usage variance arising from wastage and scrap due to
the inefficiency of workers, improper instructions given by him to the workers, carelessness in
the use of materials, inefficient production methods, etc.
 The planning engineer is responsible for wrong specifications or product design.
 The production manager is responsible for wrong mix.
 The foreman or the maintenance engineer is responsible for the defect in machinery and
equipment.

CONCLUSION

Given,

Standard quantity required of materials item 0009 = 1 kg

Standard price per kg = ₹ 10

Product in a month appliances = 100 kgs

Actual quantity of materials used = 98 kgs

Actual price paid = ₹ 11/kg

Material Usage Variance = (100-98) x 10 = 20

Material usage variance is favorable as the actual quantity of materials used was less than the
standard quantity.

Direct Material Price Variance = (10 - 11) x 98 = -98

Direct material price variance is unfavorable as the actual price paid per unit of material is greater
than the standard price per unit.

ANS. 2

INTRODUCTION
A cost sheet is a statement that details the many charges that contribute to the overall cost of a
product and gives historical data for comparison. You can establish a product's ideal selling price
using the cost sheet.

A cost sheet document can be generated using either historical spending or expected costs. A
historical cost sheet is generated based on the actual expenditures incurred for a product. An
estimated cost sheet, on the other hand, is generated shortly before manufacturing begins based on
predicted expenses.

CONCEPT AND ANALYSIS

ABC Ltd.

Cost Sheet for the year ended 31st March, 2012

Particulars Units Total Cost per

Unit

Raw Material Consumed 40,000 2,80,000 7

Direct Wages:

Skilled Workers Wages 3,60,000 9

Unskilled Workers Wages 2,40,000 6

Total Direct Wages 6,00,000 15

Direct Expenses :

Royalty On Raw Material Consumed 1,20,000 3

Prime Cost 10,00,000 25

Add: Works/ Factory Overheads

Works Overheads 8 X 25,000 2,00,000 5

Works Factory Cost 12,00,000 30

Add: Office And Administrative Overheads:

Office Overheads 4,00,000 10

Cost Of Production 40,000 16,00,000 40

Less : Closing Stock 4,000 1,60,000 40

Cost Of Goods Sold 36,000 14,40,000 40

Add : Selling And Distribution Overheads

Sales Commission 36,000 1,44,000 4

Total Cost Of Sales 36,000 15,84,000 44

Add : Profit 36,000 5,76,000 16

 Sales Value 36,000 21,60,000 60

ANS.3 (a)

INTRODUCTION

The term "economic order quantity" (EOQ) refers to the ideal amount that a business should
purchase in order to save inventory costs like shortfall or carrying charges. The ultimate goal of
economic order quantity is to decrease spending; its formula is used to calculate the maximum
number of units needed (per order) to decrease purchasing. According to economies of scale, the
ordering cost per unit decreases as the number of items in a single order increases. However, your
carrying costs will increase the more products you have in your warehouse at any given time. The
economic order quantity will reveal when both of these costs are at their lowest levels.

CONCEPT AND APPLICATIONS

A lot of inventory planners think that figuring out the optimal EOQ for each item they store will
enable them to save money on inventory. And this may be the situation. However, this too simplistic
worldview has a number of negative effects.
1. Reduce the cost of inventory as much as possible - Extra products in the inventory can
quickly drive up storage expenses. Depending on how you order, what gets damaged, and
what goods never sell, inventory expenses may also increase. EOQ can assist you decide how
much to purchase over a specific length of time if you often reorder low velocity items.
2. Reduce stockouts as much as possible - We can better grasp how much and how frequently
we need to reorder with the aid of EOQ. We can prevent stockouts without keeping too
much goods on hand for too long by estimating how much we need depending on how much
we sell in a specific amount of time.
3. Increase Overall Efficiency - In general, calculating EOQ may assist us in making better
choices about the management and storage of inventory. The fact is that many e-commerce
businesses actually purchase more stuff than is actually required because they have a "gut
sense" about how much to order. Making EOQ calculations is a clever technique to more
accurately measure how much you require depending on significant cost factors.
4. Accurate forecast Demand not possible - Economic order quantity has a number of
drawbacks, but one of the biggest is that it is based on the false premise that demand for a
company's goods can be accurately forecasted, which is impossible because demand for a
company's goods is never constant but constantly fluctuates. If demand for the goods
produced by the company rises or falls significantly, an EOQ system is useless.
5. Urgent product availability with suppliers - Another risk with EOQ is that the supplier may
not have raw materials on hand. This might present problems if the company need an
instant supply of raw materials to meet an unexpected demand. However, if the company
has strong relationships with a number of suppliers, the scenario is not too dire. However, if
the company only gets its raw materials from one or two sources, applying the EOQ
technique may be difficult.
6. Requires Continuous Monitoring - In the situation of Economic Order Quantity, businesses
are required to routinely review reorder levels. The company must place supplier orders
once the raw material level reaches the reorder threshold. Here, the business needs hire
staff to keep an eye on stock levels, which is still another time-consuming and expensive
operation.
CONCLUSION

When aiming to optimise revenues, having an appropriately managed inventory and an effective
inventory management is vitally critical, especially in small organisations. Using EOQ in company can
help to enhance the whole inventory management process.

By buying the correct quantity of goods rather than winging it, you may cut expenses, avoid stock
outs, and keep your supply chain running smoothly.

ANS.3 (b)

INTRODUCTION

The ideal number of goods to order should be determined using the Economic Order Quantity
(EOQ). Costs associated with ordering and processing are reduced as a whole.

CONCEPT AND APPLICATIONS

When it comes to controlling cash flow, EOQ is also a valuable tool. Businesses can use it to manage
the resources associated with the inventory balance. Because inventory is one of many firms' most
valuable assets. As a result, such businesses must lower their inventory levels to the point where
they can still meet client demand without incurring unnecessary costs. Businesses may reinvest the
money saved by optimising inventory levels in other initiatives or assets.

The Economic Order Quantity model makes a number of assumptions on inventory practises and
conventions.

The EOQ model first and foremost assumes that demand for that particular product is
unquestionable. Therefore, it ignores any seasonal variations and alterations in behaviour that can
modify the yearly market demand.

The cost of ordering and keeping items is the second presumption. The strategy makes an inaccurate
assumption that costs like transportation and warehouse rent do not change or have no impact on
ordering and processing prices.

The final assumption is the absence of anticipated discounts. The Economic Order Quantity model
does not account for a corporation receiving discounts, such as when purchasing additional things.

CONCLUSION

The answer provided below has been developed in a clear step by step manner.

Given information:

Annual demand i.e. D= 48000 units

order cost per unit i.e. O =₹9

Price per unit = ₹4

carrying cost per unit = price per unit x % of carrying cost

=4x15%

=0.60

Part (a)
Economic order quantity:

=√(2x D x O)/C

=√2x48000x9)/0.6

=√864000/0.60

=√1440000

=1200

Hence economic order quantity should be 1200 units

Part (b)

Number of orders = total demand/Economic order quantity

=48000/1200

=40

Hence there will be 40 orders in a year

Part (c)

Difference of period between 2 orders = 360/ number of orders in a year

=360/40

=9 days

Hence order will be made every 9 days.

Economic order quantity = 1200 units

Number of orders = 40

order will be made after every 9 days.