Answer -1

Introduction
Standard costing is a cost-budgeting and cost-tracking tool used in managerial accounting.
Variance analysis is a technique used to compare actual results to budgeted amounts, usually
with the goal of identifying cost-cutting opportunities. Standard cost variances can be either
positive or negative. A positive variance indicates that the actual results were better than
expected, whereas an unfavourable variance indicates that the actual results were worse than
expected. In either case, understanding the reasons for the variation is critical in order to take
appropriate action. Variations in standard costs are frequently caused by changes in activity
level, input prices, or efficiency.

Material Usage (Quantity) Variance

A standard costing system is associated with the materials usage or materials quantity variance.
This variance occurs when the actual quantity of materials used differs from the quantity of
materials that should have been used to produce the desired output.
In simple terms, the materials usage variance (in a standard costing system) results from using
more or less than the standard quantity of direct materials that should have been used for the
actual goods produced.
Formula for Material Usage Variance

Material Usage Variance = Standard Price * (Standard Quantity – Actual Quantity)

Material usage variations can occur for the following reasons:

1. Greater or lesser wastage in storage due to leakages, evaporation, and other factors as
compared to expected quantity losses.

2. Distinction between the actual quality of materials purchased and the planned quality
of materials It could be of superior or inferior quality.

3. Greater or lesser wastage due to scrap, normal wastage, spoilage, or other factors than
the standard amount of wastage.

4. Material pilferage as a result of improper material upkeep.

5. Material theft and leakage as a result of inadequate storage security.

6. The standard set may be incorrect.

 7. Technological reasons for increased or decreased material consumption.

8. Inefficient material handling during the manufacturing process.

Material Price Variance

The materials price variance is calculated by multiplying the actual and budgeted cost of
materials by the total number of units purchased. The variance is used to identify instances
where a company may be paying too much for raw materials and components. The formula is:

Material Price Variance = Actual Quantity used * (Standard Price – Actual Price)

Material Price variations can occur for the following reasons:

1. Variations in market price from the standard price.

2. Change in the quantity actually purchased in comparison to the standard quantity period.

3. Purchase of non-standard materials as needed.

4. Carrying costs that are higher or lower than those budgeted.

5. The company's purchasing policy is inefficient.

6. Actual purchase discounts differ from what was expected.

7. Other external factors include inflation and a scarcity of raw materials.

* The analysis provided in question in is not correct,

Given information are:

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 = 2 kgs. @ ₹11 = ₹22

Material price variance = 100 kgs. x ₹1 = ₹100
Here is correct analysis for the equation:

For Material Usage Variance:

Material Price Variance = Standard Price * (Standard Quantity – Actual Quantity)

Where,
Standard Price: ₹10, Standard Quantity: 100kg, Actual Price: 98kg
= 10 * (100 – 98)
= 20 (Favourable variance)

For Material Price Variance:

Material Price Variance = Actual Quantity used * (Standard Price – Actual Price)
Where,
Actual Quantity used: 98kgs, Standard Price: ₹10, Actual Price: ₹11
= 98 * (11 – 10)
= 98 (unfavourable)

Conclusion
Not all variances must be examined. The circumstances that led to the variances, as well as the
importance of the amounts involved, must be considered. It is also important to understand that
not all unfavourable variations are bad. Purchasing superior quality raw materials (at higher
than anticipated prices, for example) may be offset by reduced waste and spoilage. Similarly,
favourable variances are not always desirable. Blue Rail's extremely favourable labour rate
variance resulted from the use of inexperienced, lower-cost labour. Was this the cause of the
poor efficiency and volume results? Perhaps! A good manager's challenge is to take variance
information, investigate the root causes, and implement necessary corrective measures to fine-
tune business operations.
To conclude this discussion of standards and variances, keep in mind that variances should be
examined with caution. If the original standards are not accurate and fair, the resulting variance
signals will be deceptive.
Answer – 2
Introduction to Cost sheet
A cost sheet is a statement that shows the various components of a product's total cost as well
as previous data for comparison. Based on the cost sheet, you can calculate the ideal selling
price of a product.
A cost sheet document can be created using either historical costs or estimated costs. A
historical cost sheet is created using the actual cost of a product. An estimated cost sheet, on
the other hand, is prepared just before production begins based on estimated costs.
Components of Cost sheet
Components of cost sheet are as follows:
1. Prime Cost
It is the sum of direct costs and includes the cost of material consumed for a product during
a specific time period. Direct labour costs include the amount payable as well as other direct
expenses incurred during the period. Therefore,
Direct material consumed + Direct labour cost + Direct Expenses = Prime Cost
2. Factory Cost or works cost
When we include factory overheads in the prime cost, we get the total factory cost. It
denotes the cost of a product up to the manufacturing process. This is also referred to as
factory cost gross. If we add the value of opening stock of work-in-progress (WIP) to this
gross factory cost and subtract the value of closing stock of WIP, we get the value of net
factory cost. Thus,
Prime Cost + Factory overheads + Value of opening WIP – Value of closing WIP
= Factory Cost (net)
3. Cost of production
Administrative expenses are also associated with a product and are thus taken into account
when calculating the cost of production. As a result, we add all administrative costs to the
factory cost. Thus,
Cost of production = Factory cost + Administrative cost
This gives the total number of units produced during the period as well as the total cost of
those units. These items are also known as "finished goods." Every company keeps some
finished goods as opening stock and some as closing stock from total production. As a
result, to calculate the net value of finished goods that can be sold or are available for sale
for a given period, we add the number of units and the value of opening finished stock and
subtract the number of units and the value of closing stock. Thus,
Cost of goods sold = Cost of production + Value of opening finished stock - value of
closing finishing stock
 4. Cost of sale
The cost of goods sold (COGS) is attached to the value of finished stock available for sale,
and we have not yet considered the selling and distribution expenses that must be incurred
in order to sell the available units for sale. To calculate the cost of sale, add all associated
selling and distribution expenses to the value of COGS. Thus,
Cost of sale = COGS + Selling and distribution expenses
5. Selling price
Once we have the final cost of goods per unit, we add the profit margin to determine the
selling price. Therefore,
Selling price = Cost of sale per unit X Profit margin
Here is the cost sheet for the ABC Ltd. For the financial year ending as on 31.03.2022
from the details furnished about its activities during the year.

COST SHEET OF ABC LTD. FROM 01.04.2021 – 31.03.2022

ELEMENTS UNITS TOTAL COST COST PER UNIT

1. PRIME COST

RAW MATERIALS USED 40,000 2,80,000 7

DIRECT WAGES:
SKILLED WORKER 3,60,000 9
UNSKILLED WORKER 2,40,000 6
TOTAL DIRECT 6,00,000 15
WAGES:
DIRECT EXPESES:
ROYALTY 1,20,000 3
PRIME COST 40,000 10,00,000 25

2. FACTORY COST

PRIME COST 40,000 10,00,000 25

ADD: WORKS/FACTORY 2,00,000 5
OVERHEADS (8*25000)
FACTORY COST 40,000 12,00,000 30

3. COST OF
PRODUCTION
FACTORY COST 40,000 12,00,000 30
ADD: OFFICE
OVERHEADS:
OFFICE OVERHEADS 4,00,000 10
COST OF PRODUCTION 40,000 16,00,000 40
 4. TOTAL COST OF
SALES AND SALE
VALUE
COST OF PRODUCTION 40,000 16,00,000 40
LESS: CLOSING STOCK (4,000) 1,60,000
COST OF SELL GOODS 36,000 14,40,000 40
ADD: SELLING AND
DISTRIBUTION
OVERHEADS:
SALES COMMISSION 1,44,000 4
COST OF SALES 36,000 15,84,000 44

ADD: PROFIT 5,76,000 16

SALES VALUE 36,000 21,60,000 60

Conclusion
A cost sheet examines the cost components to determine the per-unit cost of a given product.
Cost sheets are used by business managers as reference documents to help manage purchasing
and production costs, as well as to determine the best-selling prices for products and services.
While there are other ways to manage costs, most businesses prefer to use cost sheets because
they are an efficient way to track and control various types of costs.
Answer – 3 (a)

Introduction to Economic order quantity

The term "economic order quantity" (EOQ) refers to an order quantity that is deemed ideal for
a company. This is a good definition of economic order quantity. When an organisation
purchases it, inventory costs are reduced. Order costs, shortage costs, and holding costs are all
examples of inventory costs. In 1913, Ford W. Harris is credited with developing the EOQ
model. This model has been refined over time by experts.
Formula for economic order quality:
The EOQ formula works best when demand, ordering, and holding costs remain constant over
time.

Q = √2DS/H
Where, Q = EOQ Units
D = Demand in units (typically on an annual basis)
S = Order cost (per purchase order)
H = Holding Cost (per unit, per year)

EOQ and Inventory Management

The Economic Order Quantity Formula can help businesses save money by lowering the total
cost of annual ordering. A simple Excel spreadsheet can handle this for small businesses with
a consistent customer demand and ordering schedule. There are many software solutions for
all aspects of inventory management, including EOQ calculators, for larger businesses.
Knowing how much inventory to order and how much to keep on hand can boost your
company's profit margins and result in happy customers without overstocking or understocking
warehouses.

Implication of EOQ in Inventory management

Many inventory planners believe that determining the best EOQ for each item they stock will
help them reduce inventory costs. On paper, this appears to be the case. However, this overly
simplistic framework has numerous limitations. Here are some major issues:
Firstly, using the EOQ model would be relatively easy for a company that has consistent
demand for each inventory item throughout the year, but this is not always the case. For starters,
as items progress through their product lifecycle, their demand will shift. Products in the
growth stage, for example, will see demand increase over time, whereas those nearing maturity
and facing decline will see demand become lumpier and more inconsistent before dropping off.
Second, many products experience seasonal demand, with sales increasing and decreasing
throughout the year. Because reordering does not account for seasonal peaks and troughs,
simply calculating and sticking to your EOQ at the start of the year may result in stockouts
when demand is high or excess inventory building up in the warehouse when demand drops.

Finally, the selling price and promotional activity of an item will influence demand.
To keep up with fluctuating demand, you'd have to recalculate your EOQ on a regular basis,
which could become time-consuming and inefficient if you have a large number of SKUs to
manage.

Conclusion
Using EOQ for your ecommerce business can help you improve your overall inventory
management process. You can reduce costs, avoid stockouts, and keep your supply chain
running smoothly by ordering the right amount of inventory rather than guessing what to order.
ANSWER – 3 (b)

Introduction to Economic Order Quantity

Economic order quantity (EOQ) refers to the ideal quantity that a company should purchase in
order to minimise inventory costs such as shortages or carrying costs. The overall goal of
economic order quantity is to reduce spending; its formula is used to determine the greatest
number of units required (per order) to reduce buying.
One of the primary benefits of the EOQ model is customised recommendations for your
specific company. EOQ may recommend investing in a larger order to take advantage of bulk
buying discounts and to reduce total costs associated with multiple shipments.
Given information are

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.

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