CA - INTERMEDIATE

GROUP 1 - Paper 3

COST & MANAGEMENT

ACCOUNTING

BY: CA NITIN GURU

PREFACE TO THIS EDITION

Through the medium of this book, we present to you the cost and management accounting concepts in a

refined and simplified manner. Each chapter has been covered through detailed questions to help in learning

by practicing. Effort has been done to write this book in a way which makes it easy to understand and

remember.

I am grateful to my parents Shri. P. D. Guru and Smt. Suman Guru, for their support, guidance and

encouragement. They have always been a source of inspiration for me.

I am thankful to God for endowing HIS blessings always upon me.

Also, the sincere effort, persistence and determination of our associated teachers, staff members, well

wishers and students is highly appreciated.

Every effort has been taken to avoid any errors / omissions, but errors are inevitable. Any mistake may kindly

be brought to our notice and it shall be dealt with suitably.

We welcome your valuable suggestions and feedback in developing this book further.

Thank You !!
 INDEX

COST & MANAGEMENT ACCOUNTING

S. No. CHAPTER PAGES

1. Introduction to Cost & Management Accounting 1.1 - 1.1

2. Material Cost 2.1 - 2.36

3. Employee Cost and Direct Expenses 3.1 - 3.18

4. Overheads 4.1 - 4.27

5. Activity Based Costing 5.1 - 5.15

6. Cost Sheet 6.1 - 6.15

7. Cost Accounting System 7.1 - 7.38

8. Reconciliation of Cost & Financial Statements 8.1 - 8.12

9. Contract Costing 9.1 - 9.23

10. Process & Costing 10.1 - 10.21

11. Joint Products & By Products 11.1 - 11.31

12. Service Costing 12.1 - 12.29

13. Standard Costing 13.1 - 13.17

14. Marginal Costing 14.1 - 14.38

15. Budget and Budgetary Control 15.1 - 15.42

16. Unit, Job & Batch Costing 16.1 - 16.18

Introduction to Cost & Management Accounting BY: CA NITIN GURU

Chapter 1
Introduction to Cost & Management Accounting

COVERED SEPARATELY IN THEORY CLASS

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 Material Cost BY: CA Nitin Guru

Chapter 2
MATERIAL COST
 Introduction

Question 1.
What is the significance of Material Cost Control? What are the primary areas of Material Cost Control?

Solution:
Materials constitute a very significant proportion of total cost of finished product. A proper recording and control over
the material costs is very essential.
The major areas are as follows:
(a) Dependence of the Quality of finished product: The exact quality of materials required should be determined
according to the required quality of the finished product. If too superior quality of material is purchased, it would
mean higher cost due to high prices, if the quality of materials purchased is too low, the product will be of inferior
quality.
(b) Price of the product: The price paid should be the minimum possible otherwise the higher cost of the finished
products would make the product uncompetitive in the market.
(c) Continuity in production: There should not be any interruption in the production process for want of materials and
stores, including small inexpensive items like lubricating oil for a machine. Sometime their out of stock situation
may lead to stoppage of machines.
(d) Cost of holding material: There should be no over stocking of materials because that would result in loss of interest
charges, higher warehouse charges, deterioration in quality and losses due to obsolescence.
(e) Wastages: Wastage and losses while the materials are in store and during the process of manufacture should be
avoided as far as possible.

Question 2. [RTP]
What are the objectives of system of Cost Control?

Solution:
The objectives of a system of material control are the following:
(i) Minimizing interruption in production process: Ensuring that no activity, particularly production, suffers from
interruption for want of materials and stores.
(ii) Cost of Material: Seeing to it that the materials and stores are acquired at the lowest possible price considering the
quality and other relevant factors like reliability in respect of delivery, etc. Holding cost should also be tried to be
minimized.
(iii) Reduction in Wastages: Avoidance of unnecessary losses and wastages that may arise from deterioration in quality
due to defective or long storage or from obsolescence.
(iv) Adequate Information: Maintenance of proper records to ensure that reliable information is available for all items
of materials and stores that not only helps in detecting losses and pilferages but also facilitates proper production
planning.

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 Stock Level and Economic Order Quantity

Question 3. [RTP, MAY 02, NOV 03]

Bring out the Significance and formulae of stock levels?

Solution:
(i) Re-Order Level: it is the level at which fresh order should be placed for the replenishment of stock.
= (Maximum Consumption × Maximum Lead Time)
OR
= Safety stock + (Normal Consumption × Normal lead time)

(ii) Maximum Stock Level: It indicates the maximum figure of stock held at any time.
= Re-order Level + Re-order quantity – [Minimum consumption × Minimum re-order period]

(iii) Minimum Stock Level: It indicates the lowest figure of stock balance, which must be maintained in hand at all times,
so that there is no stoppage of production due to non-availability of inventory.
= Re-order level – [Average rate of consumption × Average time of stock delivery]

(iv) Average Level: Average Stock is used to determine the value of stocks for stock insurance, stock statements,
preparation of Interim financial statements.
=
OR
= Minimum Level + ½ Re-order Quantity
OR
=

(v) Danger Level: At this level emergency purchases are made to replenish upto Minimum Level.
= Minimum Usage Rate × Minimum Lead Time
OR
= Average Usage Rate × Minimum Lead Time
OR
= Minimum Usage Rate × Average Lead Time
OR
= Normal Consumption × Delivery Period emergency Purchase.
Important Notes
 If in Question, Normal is given then use it but if it is not given then use average
 If Reorder Quantity is not-given.

Then use EOQ = √ = units

Economic order Quantity/Reorder Quantity.
A = Annual Requirement /Demand of Raw Material.
O = Ordering cost (per order)
Annual ordering & Carrying Cost = √

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 Carrying Cost = Given

Or
If not = Cost of unit × Rate of Interest.
 If interest is also paid on inventory then kept that interest is also added in carrying cost.
 In absence of maximum and minimum information we can assume normal to be maximum and minimum both.
 Normal Consumption × days = Annual Consumption
 Whenever we followed reorder Quantity which is not EOQ or when we have safety stock then Total ordering +
carrying cost will not be save and formula of √ cannot be used.

Question 4. [RTP, MAY 94, MAY 02, NOV 03]

What is Economic Order Quantity? How is it computed?

Or
‘’Optimum level of inventory is that which minimizes the total Costs”. Discuss?

Solution:
Economic Order Quantity: It refers to the quantity of stock for which an order is to be placed at any one point of time. It
should be such that it minimizes the combined annual costs of-placing an order and holding stock. Such an ordering
quantity is known as economic order quantity (EOQ).

EOQ =√
A = Annual raw material usage quantity
O = Ordering Cost per order
C = Cost per unit
i = Carrying cost percentage per unit per annum

(a) Associated Costs of EOQ:

= Buying Costs p.a. + Carrying Costs p.a.
= (No. of Orders × Cost per Order + (Average Inventory × Carrying Cost p.u. p.a.)

(b) Associated Costs of EOQ may also be computed as = √

(c) At EOQ under Wilson’s Formula, Buying Costs p.a. = Carrying Costs p.a. = ½ of Associated Costs p.a.
ORDER SIZE
(I) Total Annual ordering cost
( )×O = ----

(II) Total Annual Carrying Cost

(Safety stock + )×C = ----

(III) Purchase cost

= -----

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 EOQ With Backorder cost

EOQ = √

B = Back order Cost per unit

 Total carrying & Ordering Cost = √

Question 5. [STUDY MATERIAL]

CALCULATE the Economic Order Quantity from the following information. Also state the number of orders to be placed
in a year.
Consumption of materials per annum: 10,000 kg.
Order placing cost per order: Rs. 50
Cost per kg. of raw materials: Rs. 2
Storage costs: 8% on average inventory

Question 6. [STUDY MATERIAL]

COMPUTE EOQ and the total variable cost for the following
Annual Demand =5000 units
Unit Price = Rs. 20
Order Cost = Rs. 16
Storage Cost = Rs. 2 % per annum
Interest rate = Rs. 12 % per annum
Obsolescence rate = 6% per annum
DETERMINE the total cost that would result for the items if an incorrect price of Rs. 12.8 is used.

 Computation of EOQ and Stock Level

Question 7. [NOV 06, STUDY MATERIAL, SIMILAR IN NOV 2018]

PQR Ltd., manufactures a special product, which requires ‘ZED’. The following particulars were collected for the year
2005-06:
 Monthly demand of Zed : 7,500 units
 Cost of placing an order : Rs. 500
 Re-order period : 5 to 8 weeks
 Cost per unit : Rs. 60
 Carrying cost % p.a. : 10%
 Normal usage : 500 units per week
 Minimum usage : 250 units per week
 Maximum usage : 750 units per week
Required:
(i) Re-order quantity.
(ii) Re-order level.
(iii) Minimum stock level.
(iv) Maximum stock level.
(v) Average stock level.

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Question 8. [NOV 14]

Following details are related to a manufacturing concern:
Re-order Level 1,60,000 units
Economic order quantity 90,000 units
Minimum stock level 1,00,000 units
Maximum stock level 1,90,000 units
Average lead time 6 days
Difference between minimum lead time & maximum lead 4 days
time
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day

Question 9. [NOV 2008]

The annual carrying cost of material ‘X’ is Rs.3.6 per unit and its total carrying cost is Rs.9,000 per annum. What would be
the Economic order quantity for material ‘X’, if there is no safety stock of material X ?

Question 10. [NOV 2009]

The following information relating to a type of Raw material is available: Annual demand 2000 units Unit price Rs.20.00
.Ordering cost per order Rs.20.00. Storage cost 2% p.a.Interest rate 8% p.a., Lead time Half-month. Calculate economic
order quantity and total annual inventory cost of the raw material.

Question 11. [NOV 2012]

KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product requires 3 kgs. quantity of
material 'X' for every finished unit of product. The other information are follows:
Cost of material 'X' : Rs.20 per kg.
Cost of placing an order Carrying Cost : Rs.1000 per order
Carrying Cost : 15% per annum of average inventory

You are required:

(i) Calculate the Economic Order Quantity for material 'X'.
(ii) Should the' company accept an offer of 2 percent discount by the supplier, if he wants to supply the annual
requirement of material 'X' in 4 equal quarterly installments ?

Question 12. [NOV 2013]

Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing ` 10 per unit. Other relevant
information are:
Cost of placing an order : Rs.800 per order
Carrying cost : 15% per annum of average inventory
Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.
You are required to calculated:
(i) Economic Order Quantity for material 'Rex'.
(ii) Re-order Level
(iii) Maximum Stock Level
(iv) Average Stock Level

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Question 13. [MAY 2014]

A company manufactures a product from a raw material, which is purchased at Rs.80 per kg. The company incurs a
handling cost of Rs.370 plus freight of Rs.380 per order. The incremental carrying cost of inventory of raw material is
Rs.0.25 per kg per month. In addition, the cost of working capital finance on the investment in inventory of raw material
is Rs.12 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg.
of raw material.

Required:
(i) Calculate the economic order quantity of raw materials.
(ii) Advice, how frequently company should order for procurement be placed.
(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?
Assume 360 days in a year.

Question 14. [MAY 96, NOV 87, STUDY MATERIAL]

You are required to calculate the following levels for part No. 123456 from the information given here under:
(a) Re-ordering level,
(b) Maximum level,
(c) Minimum level,
(d) Danger level,
(e) Average Stock level.
The following data may be used to calculate the re-ordering quantity.
Total Cost of purchasing relating to the order. Rs. 20
Number of units to be purchased during the year. 5,000
Purchase Price per unit including transportation. Rs. 50
Annual Cost of storage of one unit. Rs. 5

Lead Times
Average 10 days
Maximum 15 days
Minimum 6 days
Maximum for emergency purchase 4 days
Rate of Consumption
Average 15 units per day
Maximum 20 units per day

Question 15. [STUDY MATERIAL, MTP]

In manufacturing its products a company uses three raw materials A, B, C in respect of which the following apply:
Usage per unit of Re-Order Price Per Delivery Order
Raw Materials Product Quantity Kg. Period Level Minimum Level
(Kg.) (Kg.) (Re.) (Weeks) (Kg.) (Kg.)
A 10 10,000 0.10 1 to 3 8,000 -
B 4 5,000 0.30 3 to 5 4,750 -
C 6 10,000 0.15 2 to 4 - 2,000

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Weekly production varies from 175 to 225 units, averaging 200. What would you expect the quantities of the following to
be:
(a) Minimum Stock of A,
(b) Maximum Stock level of B,
(c) Re-order level of C, and
(d) Average Stock level of A?

Question 16.
Q Ltd uses annually 48,000 units of raw material costing Rs. 1.20 per unit. Placing each order costs Rs. 45 and inventory
carrying costs are 15% per year of the average inventory values:
(i) Find the E.O.Q.
(ii) Suppose that Q Ltd follows the E.O.Q. policy and it operates for 300 days a year, that the procurement time is 12
operating days and the safety stock is 500 units, find
(a) Re-ordering level,
(b) The maximum level,
(c) The minimum level;
(d) The average inventory.

Question 17. [Nov 13]

Primex Limited produces product ‘P’. It uses annually 60,000 units of a material ‘Rex’ costing Rs. 10 per unit. Other
relevant information is:
Cost of placing an order Rs.800 per order
Carrying cost 15% per annum of average
inventory
Re-order period 10 days
Safety stock 600 units
The company operates 300 days in a year. You are required to calculate:
(i) Economic order quantity for material ‘Rex’.
(ii) Re-order level
(iii) Maximum stock level
(iv) Average stock level

Question 18. [May 10]

Re-order quantity of material X is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage 50 kg. per hour; minimum re-
order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate the re-order level of
material X.

Question 19. [STUDY MATERIAL, MAY 95)]

Two components, A and B are used as follows:
Normal usage 50 units per week each
Maximum usage 75 units per week each
Minimum usage 25 units per week each
Re-order quantity ‘A’: 300; ‘B’: 500
Re-order period ‘A’: 4 to 6 weeks, ‘B’: 2 to 4 weeks
Calculate for each component:
(a) Re-order level,
(b) Minimum level,

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(c) Maximum level and

(d) Average Stock level.

Question 20.
(i) If the minimum stock level and average stock level of raw-material A are 4,000 and 9,000 units respectively, find out
its ‘Re-order quantity’.
[MAY 97]

(ii) The annual carrying cost of material ‘X’ is Rs. 3.6 per unit and its total carrying cost is Rs, 9000 per annum. What
would be the Economic order quantity for material ‘X’, if there is no safety stock of material X?
[NOV 08]

(iii) The demand for a certain product is random. It has been estimated that the monthly demand of the product has a
normal distribution with a mean of 390 units. The unit price of product is Rs. 25. Ordering cost is Rs. 40 per order
and inventory carrying cost is estimated to be 35 per cent per year. Calculate Economic Order Quantity (EOQ).
[NOV 07]
[(i) 10,000 units; (ii) EOQ: 5,000 units; (iii) EOQ: 207 units]
 EOQ and Associated Cost

Question 21. [STUDY MATERIAL, MAY 06]

PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a component X
which is purchased at Rs.15 per unit. For every finished product, 2 units of component X are required. The ordering cost
is Rs.350 per order and the Carrying cost is 12% p.a. Required:
(i) Calculate the economic order quantity for Component X.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the Company has to incur?

Question 22.
The following information is available about A Ltd which manufactures Air Conditioner. The company has an average
total inventory of Rs. 200 lakhs and places 12,000 orders every year.
Procurement costs Rs. 4,00,000
Purchase Department Expenses Rs. 4,00,000
Stores Warehouse Personnel Salary: Rs. 4,00,000
Obsolescence, Spoilage, etc Rs. 1,20,000
Floor Space Charge Related to Stores
Activities (Warehousing) Rs. 2,80,000
Cost of Collecting Material Rs. 80,000
Cost of Receiving Material Rs. 70,000
Cost of Inspection Rs. 1,00,000
Cost of Material Handling for Warehousing Activities Rs. 3,00,000
Cost of Bill Payment Rs. 1,50,000
Interest 12.5%
Insurance Charges 2%
The company wants to buy a certain part, whose price is Rs. 24 each and the annual requirement is 34,560 units.
Calculate cost of placing an order, cost of carrying inventory as a % of inventory and EOQ.
[Ordering Cost = Rs. 100 per order; Cost of carrying inventory as a % of Inventory = 20%; EOQ = 1,200 units)

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Question 23.
The India Gate Ltd buys and then sells (as bread) 5.2 million kgs of rice annually. The rice must be purchased in multiples
of 2000 kgs. Ordering cost, which includes grain lifting removal charges of Rs. 7,000 are Rs. 10,000 per order. Annual
carrying costs are 4% of the purchase price per kg of Rs. 10. The company maintains a safety stock of 4,00,000 kgs. The
delivery time is six weeks.
(a) What is the E.O.Q.?
(b) At what inventory level should reorder be placed to prevent the drawal on the safety stock?
(c) What was the total inventory cost?
(d) The rice processor agrees to pay the lifting and removal charges if India Gate Ltd will purchase rice in quantities of
6,50,000 kgs. Would it be to the India Gate advantage to order under this alternative?

 EOQ with Discount and Evaluation of Supplier’s Proposals

Question 24. [STUDY MATERIAL, NOV 07,SIMILAR IN MAY 2018]

A Company manufactures a special product which requires a component ‘Alpha’.
The following particulars are collected for the year 2008:
 Annual demand of Alpha 8,000 units
 Cost of placing an order Rs. 200 per order
 Cost per unit of Alpha Rs. 400
 Carrying cost % p.a. 20%
The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’, provided the order size is 4,000
components at a time.
Required:
(i) Compute the economic order quantity.
(ii) Advise whether the quantity discount offer can be accepted.

Question 25. [NOV 94, NOV 12 (SIMILAR)]

JP Limited manufactures of a special product, follows the policy of EOQ (Economic Order Quantity) for one of its
components. The component’s details are as follows:
Rs.
Purchase price per component 200
Cost of an Order 100
Annual Cost of Carrying one Unit in Inventory 10% of Purchase Price
Total Carrying Cost of Inventory and Ordering per Annum 4,000
The company has been offered a discount of 2% on the price of the component provided the lot size is 2,000 components
at a time. You are required to:
(a) Compute the EOQ.
(b) Advise whether the quantity offer can be accepted. (Assume that the inventory carrying cost does not carry
according to discount policy).
(c) Would your advice differ if the company is offered 5% discount on a single order?

Question 26. [STUDY MATERIA]

Anil & Company buys its annual requirement of 36,000 units in 6 instalments. Each unit costs Rs. 1 and the ordering cost
is Rs. 25. The inventory carrying cost is estimated at 20% of unit value. FIND the total annual cost of the existing
inventory policy. CALCULATE ,How much money can be saved by Economic Order Quantity?

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Question 27. [MAY 09]

X Ltd. is reviewing its stock policy, and has the following alternatives available for the evaluation of stock:
 Purchase stock twice in a month 400 units
 Purchase monthly 800 units
 Purchase every three months 2,400 units
 Purchase six monthly 4,800 units
 Purchase annually 9,600 units
It is ascertained that the purchase price per unit is Rs. 40 for deliveries upto 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.

 EOQ and Related Concepts

Question 28. [STUDY MATERIAL, NOV 99]

The complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: Super Grow and
Nature’s Own. The following information is collected:

Particulars Fertilizer
Super Grow Nature’s Own
Annual Demand 2,000 Bags 1,280 Bags
Relevant ordering cost per purchase order Rs. 1,200 Rs. 1,400
Annual relevant carrying cost per bag Rs. 480 Rs. 560
Required:
(i) Compute EOQ for Super Grow and Nature’s Own.
(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant carrying costs for
Super Grow and Nature’s Own?
(iii) For the EOQ, compute the number of deliveries per year for Super Grow and Nature’s Own.

Question 29.
A toy cost Rs. 20 whose requirement is expected to be 24,000 units per year. The set-up cost is Rs. 4.000 per set-up. The
carrying cost is 1.25% of the inventory per unit per month. Calculate economic order quantity (EOQ), number of set-ups
and total relevant cost.

Question 30.

Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is required. As
per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the coming year. The
following is the information regarding the raw material Dee:

(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).

(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.

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(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by
bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work. From the above information FIND
OUT the followings in relation to raw material Dee:
(a) Re-order Quantity

(b) Maximum Stock level

(c) Minimum Stock level

(d) CALCULATE the impact on the profitability of the company by not ordering the EOQ. [Take 364 days for a year]

 EOQ Analysis – Timing of an Order

Question 31.
Mr. True supplies 60 calculators each week day to various shops. Calculators are purchased from the manufacturer in lots
of 240 each of Rs. 2400 per lot. Every order incurs a handling charge of Rs. 120 plus a freight charge of Rs. 500. Small lots
of different quantities also can be ordered and all orders are filed the next day. The incremental cost is Re. 1.20 per year
to store a calculator in inventory. The wholesaler finances inventory investment by paying its holding company 4%
monthly for borrowed funds.
(a) How much calculators should be ordered at a time in order to minimize the total inventory cost?
(b) Assume that there are 250 week days in a year. How frequently should he order?

Question 32. [MAY 08]

ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products is a special bowl,
disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces at a price of Rs. 50 per
pack.
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The company
purchases the bowl direct from manufacturer at Rs. 40 per pack within a three days lead time. The ordering and related
cost is Rs. 8 per order. The storage cost is 10% per cent per annum of average inventory investment.
Required:
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order is to be placed. (Assuming that the company does maintain a safety stock
and that the present inventory level is 333 packs with a year of 360 working days.

Question 33. [NOV 01, MAY 14]

A company manufactures a product from a raw material, which is purchased at Rs. 60 per kg. The company incurs a
handling cost of Rs. 360 plus freight of Rs. 390 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. 9 per kg. per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg of
raw material:
Required:
(i) Calculate the economic order quantity of raw materials.

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 Material Cost BY: CA Nitin Guru

(ii) Advice, how frequently should orders for procurement be placed.

(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?
[(i) 2,000 kg (ii) 18 days, 20 orders, (iii) 2%]

 EOQ with Discount – Tabular Analysis

Question 34. [NOV 10]

ABC Limited has received an offer of quantity discounts on its order of materials as under:
Price per tonne (Rs.) Tonnes (Nos.)
4,800 Less than 50
4,580 50 and less than 100
4,560 100 and less than 200
4,440 200 and less than 300
4,320 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs. 6,250 and the stock holding cost
is estimated at 25% of the material cost per annum.
Required:
(i) Compute the most economical purchase level.
(ii) Compute E.O.Q. if there are no quantity discounts and the price per tone is Rs. 5,250.

Question 35. [STUDY MATERIAL]

(a) EXE Limited has received an offer of quantity discounts on its materials as under:

Price per ton (`) Ton (Nos.)

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 tons. The ordering 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 COMPUTE the most economical purchase level.

(b) WHAT will be your answer to the above question if there are no discounts offered and the price per ton is Rs.
1,500?

 EOQ and Inventory Level Planning

Question 36. [MAY 05]

(a) From the following information, find out the economic order quantity.
Annual consumption 12,000 units (360 days)
Cost per unit Rs. 1
Ordering cost Rs. 12 per order

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Inventory carrying charge 24%

Normal Lead time 15 days
Safety Stock 30 days consumption.
(b) Also find out:
(1) When should the order be placed; and
(2) What should be the ideal inventory level immediately before the order material is received.
[(a) EOQ = 1,095 units; (b) (i) 1,500 units; (ii) 1,000 units]

 EOQ – Stock Out – Reorder Point

Question 37. [MAY 04]

IPL Limited uses a small costing in one of its finished products. The castings are purchased from a foundry. IPL limited
purchases 54,000 castings per year at a cost of Rs. 800 per casting. The castings are used evenly throughout the year in
the production process on a 360 day per year basis. The company estimates that it costs Rs. 9,000 to place a single
purchase order and about Rs. 300 to carry one casting in inventory for a year. The high carrying costs results from the
need to keep the castings in carefully controlled temperature and humidity conditions, and from the high cost of
insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time and
percentage of their occurrence are shown as follows:
Delivery Time (Days) Percentage of Occurrence
6 75
7 10
8 5
9 5
10 5
Required:
(i) Compute the economic order quantity (EOQ)?
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock? The re-
order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock? The re-
order point?
(iv) Assume 5% stock – out risk. What would be the total cost of ordering and carrying inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of placing a
purchase order to only Rs. 600. In addition, company estimates that when the waste and inefficiency caused by
inventories are considered, the true costs of carrying a unit in stock is Rs. 720 per year.
(a) Compute the new EOQ?
(b) How frequently would the company be placing an order, as compared to the old purchasing policy?
[(i) 1,800 castings; (ii) Safety stock 150 castings, Re-order point 1,050 Castings; (iii) Safety stock 450 castings, Re-order
point 1,350 Castings; (iv) Total cost of ordering = Rs. 2,70,000, Total cost of carrying = Rs. 4,05,000; (v) (a) EOQ = 300
castings, (b) Each Order is placed after 12 days]

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 Stock Levels – Reverse Working – Computing Lead Time and Usage Rates

Question 38.
Karthik Ltd provides you the following information:-
 ROL: 64,000 units, ROQ: 40,000 units, Minimum Stock: 34,000 units, Maximum Stock: 94,000 units
 Average Lead – Time in the past been 2.5 days.
 The difference between maximum and minimum lead times is 3 days.
Determine the Usage Rates and Lead Times (maximum & minimum).

 EOQ without Material Price

 Back Order Cost

Question 39.
Given the following data for an item of uniform demand:
Annual demand 800 units
Cost of an item Rs. 40
Ordering cost Rs. 800
Inventory carrying Cost 40%
Back order cost Rs. 10
Find out:
(i) Minimum cost order quantity.
(ii) Maximum number of back orders.
(iii) Time between orders
(iv) Total annual cost.
[(i) 456 units, (ii) 281 units, (iii) 205 days, (iv) Rs. 34,807]
 Optimal Safety Stock Level

 Reorder Level – Stock Out Costs – Probability Analysis

Question 40. [RTP]

ABC Ltd distributes a wide range of Water purifier systems. One of its best-selling items is a standard water purifier. The
management of ABC Ltd uses the EOQ decision model to determine optimal number of standard water purifiers to order.
Management now wants to determine how much safety stock to hold.
ABC Ltd estimates the annual demand (360 working days) to be 36,000 standard water purifiers. Using the EOQ decision
model, the Company order 3,600 standard water purifiers at a time. The lead-time for an order is 6 days. The annual
carrying cost of one standard purifier is Rs. 450. Management has also estimated the additional stock-out costs would be
Rs. 900 for shortage of each standard water purifier.
ABC Ltd. has analyzed the demand during 200 re-order periods.
The records indicate the following patterns:

Demand during Lead Time Number of Quantity was demand

540 6
560 12

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580 16
600 130
620 20
640 10
660 6
Total 200
1. Determine the level of safety stock for standard water purifier that ABC Ltd. should maintain in order to minimize
expected stock-out costs and carry costs. When computing carrying costs, assume that the safety stock is on hand at
all times and that there is no overstocking caused by decrease in expected demand (consider safety stock level of 0,
20, 40, and 60 units).
2. What would be ABC’s new re-order point?
3. What factors ABC Ltd. should have considered in estimating stock-out costs?

Question 41. [STUDY MATERIAL]

M/s Tyrotubes trades in four wheeler tyres and tubes. It stocks sufficient quantity of tyres of almost every vehicle. In
year end 20X8-X9, the report of sales manager revealed that M/s Tyrotubes experienced stock-out of tyres.
The stock-out data is as follows:

Stock-out of Tyres No. of times

100 2
80 5
50 10
20 20
10 30
0 33
M/s Tyrotubes loses Rs. 150 per unit due to stock-out and spends Rs. 50 per unit on carrying of inventory.
DETERMINE optimum safest stock level.

Question 42.
Square Ltd uses a particular type of Raw Material which costs Rs. 5. The demand averages 800 units p.a. and the EOQ has
been calculated at 200 units. Holding costs are 20% p.a. and stock out costs have been estimated at Rs. 2 per item that is
unavailable. Demand and lead times vary, but fortunately the company has kept records of usage over 50 lead timed as
follows:
Usage in Lead Time No. of times recorded
25 – 29 units 1
30 – 34 units 8
35 – 39 units 10
40 – 44 units 12
45 – 49 units 9
50 – 54 units 5
55 – 59 units 5
50
From the above, the optimal safety stock level should be calculated if the Reorder level is to be 45 units, 50 units, 55
units & 60 units.

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[55 units]
 Inventory Turnover Ratio

Question 43. [MAY 89]

Write a brief note on Inventory Turnover Ratio. Why would Management try to maintain Inventory Turnover at higher
Levels?

Solution:
Inventory Turnover Ratio may be computed as follows:
(a) Cost based:

(b) Quantity Based:

Where, Cost of Raw Materials Consumed = Opening Stock + Purchases – Closing Stock
Average Stock of Raw Materials = ½ × [Opening Stock + Closing Stock]
OR
= ½ × [Maximum Level + Minimum Level]
Number of Days average inventory is held =

Inventory Turnover Ratio:

(i) Computation of inventory turnover ratios for different items of material and comparison of the turnover rates,
provides a useful guidance for measuring inventory performance.
(ii) High inventory turnover ratio indicates that the material in the question is a fast moving one.
(iii) A low turnover ratio indicates over-investment and locking up of the working capital in inventories.

Question 44. [NOV 01]

How are slow moving and non-moving items of stores detected? What steps are necessary to reduce such stocks?

Solution:
The existence of slow moving and non-moving item of stores can be detected in the following ways:
(a) By preparing and scanning periodic reports showing the status of different items or stores.
(b) By calculating the stock holding of various items in terms of number of days/months of consumption.
(c) By computing ratios periodically, relating to the issues as a percentage of average stock held.
(d) By implementing the use of a well-designed information system.

Necessary steps to reduce stock of slow moving and non-moving item of stores:
(i) Proper procedure and guidelines should be laid down for the disposal of non-moving items, before they further
deteriorates in value.
(ii) Diversify production to use up such materials.
(iii) Use these materials as substitute, in place of other materials.

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 Practical Problems

 Determination of Inventory Turnover Ratio

Question 45. [STUDY MATERIAL, NOV 97]

st
The following data are available in respect of material X for the year ended 31 March,2007:
Opening Stock Rs. 90,000
Purchases during the year Rs. 2,70,000
Closing Stock Rs. 1,10,000
Calculate:
(i) Inventory turnover Ratio; an
(ii) The number of days for which the average inventory is held.

Question 46. [STUDY MATERIAL, SIMILAR IN MAY 2018]

st
From the following data for the year ended 31 December, 2006, calculate the inventory turnover ratio of the two items
and put forward your comments on them.
Particulars Material A (Rs.) Material B (Rs.)
Opening stock 1.1.2006 10,000 9,000
Purchase during the year 52,000 27,000
Closing stock 31.12.2006 6,000 11,000

 Fast Moving v/s Slow Moving Material

Question 47.
Find out the fast-moving materials from the following information. How will you deal slow-moving items?
Particulars Material X Material Y
Maximum Stock Level 2,500 kg 1,200 kg
Minimum Stock Level 1,000 kg 600 kg
Issues during the period 31,250 kg 5,400 kg
Average Cost per kg of material Rs. 45 Rs. 60

 Ideal Level of Inventory Turnover Ratio – Effect of Last Sales and Carrying Costs

Question 48. [MAY 02]

Senapati Ltd uses inventory turnover as one of the performance measures to evaluate its production Manager. Currently,
its inventory turnover (based on Cost of Goods Sold ÷ Average Inventory) is 10 times per annum, as compared with the
industry average of 4. Average Sales are Rs. 4,50,000 p.a. Variable Cost of Sales are 70% of Sales are Fixed Costs are Rs.
10,000 per annum. Carrying Costs of inventory levels are resulting in lost sales due to Stock-outs. The sales manager has
made as estimate based on stock- out reports as under –
Inventory Policy Inventory Turnover Sales
Current 10 Rs. 4,50,000
A 8 Rs. 5,00,000
B 6 Rs. 5,40,000
C 4 Rs. 5,65,000

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On the basis of the above estimates and assuming a 40% tax rate and an after – tax required return of 20% on
investment in inventory, which policy would you recommend?

 ABC Analysis

Question 49. [RTP, NOV 93, MAY 96, MAY 00, NOV 04, NOV 05, MAY 08, NOV 11]
What is ABC analysis?

Solution:
The items are divided into three categories according to their importance, namely, their value and frequency of
replenishment during a period.
(i) ‘A’ Category of items consists of only a small percentage i.e., about 10% of the total items handled by the stores but
require heavy investment about 70% of inventory value, because of their high prices or heavy requirement of both.
(ii) ‘B’ Category of items are relatively less important; they may be 20% of the total items of material handled by stores.
The percentage of investment required is about 20% of the total investment in inventories.
(iii) ‘C’ Category of items do not require much investment; it may be about 10% of total inventory value but they are
nearly 70% of the total items handled by store.

Question 50. [NOV 04, NOV 05]

What are the advantages of ABC analysis?

Solution:
The advantages of ABC analysis are the following:
(i) Continuity in Production: 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.
(ii) Lower Cost: The cost of placing orders, orders, receiving goods and maintaining stocks is minimized especially if the
system is coupled with the determination of proper economic order quantities.
(iii) Less Attention Required: 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.
(iv) Systematic Working: 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.

 Practical Problems

Question 51. [STUDY MATERIAL]

A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the following
information is compiled:
No. of varieties of % % value of inventory % of inventory usage (in
inventory holding (average) end- product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100

CLASSIFY the items of inventory as per ABC analysis with reasons.

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Question 52. [STUDY MATERIAL]

From the following details, DRAW a plan of ABC selective control:
Item Units Unit cost (`)
1 7,000 5.00
2 24,000 3.00
3 1,500 10.00
4 600 22.00
5 38,000 1.50
6 40,000 0.50
7 60,000 0.20
8 3,000 3.50
9 300 8.00
10 29,000 0.40
11 11,500 7.10
12 4,100 6.20

 Just-in-Time-Purchases (JIT)

Question 53. [MAY 99]

What is Just-in-Time (JIT) Purchases? What are its advantages?

Solution:
Just in time (JIT) purchases means the purchase of goods or materials such that delivery immediately precedes their use.
Advantages of JIT purchases:
1. 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.
2. JIT purchases results in cost savings for example, the costs of stock out, inventory carrying, materials handling and
breakage are reduced.
3. 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.

 Practical Problems

 Effect of JIT Purchasing

Question 54.
The Apple Corporation manufactures I pods. Apple is deciding whether to implement a JIT production system, which
would require annual tooling costs of Rs. 150,000.
Apple estimates that the following annual benefits would arise from JIT production:
a) Average inventory would decline by Rs. 7,00,000 from Rs. 9,00,000 to Rs. 2,00,000.
b) Insurance, space, materials-handling, and setup costs, which currently total Rs. 2,00,000, would decline by 30%.

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c) The emphasis on quality inherent in JIT systems would reduce rework costs by 20%. Apple currently incurs Rs.
3,50,000 on rework.
d) Better quality would enable Apple to raise the selling prices of its products by Rs. 3 per unit. Apple sells 30,000 units
each year. Apple required rate of return on inventory investment is 12% per year.
Required: Calculate the net benefit or cost to the Apple Corporation from implementing a JIT production system.
[Net Benefit = Rs. 1,54,000]
Question 55.
Kumar Enterprises has decided to adopt JIT policy for materials. The following effects of JIT policy are identified –
 To implement JIT, the Company has to modify its production and material receipt facilities at a Capital Cost of Rs.
6,00,000. The new facilities will require a cash operating cost Rs. 48,000 per annum.
 Raw Material Stockholding will be reduced from Rs. 28,00,000 to Rs. 8,00,000.
 The Company can earn 15% on its long – term investments.
 The company can avoid rental expenditure on storage facilities amounting to Rs. 30,000 per annum. Property Taxes
and Insurance amounting to Rs. 12,000 will be saved due to JIT programme.
 Presently there are 7 workers in the Stores Department at a Salary of Rs. 3,000 each per month. After implementing
JIT Scheme, only 2 workers will be required in this Department. Of the balance 5 workers, 3 will be transferred to
other departments, while 2 workers’ employment will be terminated.
 Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The Costs of Stock-out
will be Rs. 3,40,000 in the first year only. This Stock-out Costs can be brought down from the second year onwards.
Determine the financial impact of the JIT policy. Is it advisable for the Company to implement JIT system?

 Stores Ledger

Question 56. [MAY 09]

What is Two Bin System?

Solution:
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.

Question 57. [MAY 07]

Compare Bin Cards and Stock Control Cards? Give their merits and demerits.

Solution:
Bin Cards: These are records of quantities received, issued and those in balance. They are kept attached to the bins or
receptacles so that these also assist in the identification of stock.
Stock Control Cards: These are quantitative records of stores showing quantities received, issued and those in balance.
These are kept in cabinets or trays or loose binders.

Merits/Advantages of Bin Cards:

(i) There would be less chances of mistakes.
(ii) Control over stock can be more effective.
(iii) Identification of the different items of materials is facilitated.

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Demerits/Disadvantages of Bin Cards:

(i) Store records are dispersed over a wide area.
(ii) The cards are liable to be smeared with dirt and grease.
(iii) People handling materials are not ordinarily suitable for the clerical work involved in writing Bin Cards.

Merits/Advantages of Stock Control Cards:

(i) Records are kept in a more compact manner.
(ii) Division of labour between record keeping and actual material handling is possible.
(iii) It is possible to get an overall idea of the stock position.

Demerits/Disadvantages of Stock Control Cards:

(i) On the spot comparison of the physical stock of an item with its book balance is not facilitated.
(ii) Physical identification of materials in stock may not be as easy.

Question 58. [RTP, MAY 99, MAY 00, MAY 02, MAY 03, NOV 04]
Distinguish between Bin Card and Stores Ledger.

Solution:
Bin Card Stores Ledger
 It is maintained by the storekeeper in the store.  It is maintained in costing department.
 It contains only quantitative details of material received,  It contains information both in quantity and value.
issued and returned to stores.
 Entries are made when transactions take place.  It is always posted after the transaction
 Each transaction is individually posted.  Transactions may be summarized and then posted.
 Inter-department transfers do not appear in Bin Card.  Material transfers from one job to another job are
recorded for costing purposes.

 Pricing of Material Issues

Question 59. [RTP, MAY 02]

Write a short note on the First-in-First Out Method (FIFO).

Solution:
It is a method of pricing the issues of materials, in the order in which they are purchased. In other words, the materials
are issued in the order in which they arrive in the store or the items longest in stock are issued first. Thus each issue of
material only recovers the purchase price which does not reflect the current market price.
Advantages:
1. It is simple to understand and easy to operate.
2. Material cost charged to production represents actual cost with which the cost of production should have been
charged.
3. In the case of falling prices, the use of this method gives better results.
4. Closing stock of material will be represented very closely at current market price.

Disadvantages:
1. If the prices fluctuate frequently, this method may lead to clerical error.

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2. 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.
3. In the 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 materials at the ruling price.

Question 60. [NOV 07]

What do you understand by Last-in-First-Out? What are its advantages?

Solution:
This method is based on the assumption that the items of the last batch (lot) purchased are the first to be issued.
Therefore, under this method the prices of the last batch (lot) are used for pricing the issues, until it is exhausted, and so
on.
Advantages:
1. The cost of materials issued will be either nearer to and 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.
2. The use of the method during the period of rising prices does not reflect undue high profit in the income statement.
3. 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.
4. Over a period, the use of LIFO helps to iron out the fluctuations in profits.
5. In the period of inflation LIFO will tend to show the correct profit and thus avoid paying undue taxes to some
extent.

Disadvantages:
1. Calculation under LIFO system becomes complicated and cumbersome when frequent purchases are made at highly
fluctuating rates.
2. Costs of different similar batches of production carried on at the same time may differ a great deal.
3. In time of falling prices, there will be need for writing off stock value considerably to stick to the principle of stock
valuation, i.e., the cost or the market price whichever is lower.
4. This method of valuation of material is not acceptable to the income tax authorities.

Question 61.
st
Transactions below are extracted from books of Accounts of a factory as on 31 December 2011, compute (a)
st
consumption value of raw materials in the month and (b) value of closing stock as on 31 December, 2011, under the
following four methods of pricing issues:
(i) FIFO;
(ii) LIFO;
(iii) Moving Weighted Average Cost (end of month);
(iv) Periodic Weighted Average cost (end of month).
Show the results in a tabular form.
Quantity in Units Rate per Unit
2011 December 1 Opening Stock 300 9.70
3 Purchases 250 9.80
11 Issues 400
15 Purchases 300 10.05
20 Issues 210
25 Purchases 150 10.30
29 Issues 100

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Question 62. [STUDY MATERIAL, NOV 82]

A. T. Ltd. furnishes the following store transaction for September, 2002:
1.9.02 Opening balance 25 Units Rs. 162.50
4.9.02 Issues Req. No. 85 8 Units
6.9.02 Receipts from B & Co. GRN No. 26 50 Units @ Rs. 5.75 per unit
7.9.02 Issues Req. No. 97 12 Units
10.9.02 Returns to B & Co. 10 Units
11.9.02 Issues Req. No. 108 15 Units
13.9.02 Issues Req. No. 110 20 units
15.9.02 Receipts from M & Co. GRN No. 33 25 Units @ Rs. 6.10 per unit
17.9.02 Issues Req. No. 121 10 units
19.9.02 Received replacement-from B & Co. GRN No. 38 10 Units
20.9.02 Returned from department material of M & Co. MRR No. 4 5 Units
22.9.02 Transfer from Job 182 to Job 187 in the Dept. M TR 6 5 Units
26.9.02 Issues Req. No. 146 10 Units
29.9.02 Transfer from Dept. ''A'' to Dept. 'B' MIR 10 5 Units
30.9.02 Shortage in stock taking 2 units
Write up the priced stores ledger on FIFO Method and discuss how would you treat the shortage in stock taking.

Question 63.

The following transactions in respect of material Y occurred during the six months ended 30th June, 20X8:

Month Purchase (units) Price per unit (`) Issued Units

January 200 25 Nil
February 300 24 250
March 425 26 300
April 475 23 550
May 500 25 800
June 600 20 400
Required: The Chief Accountant argues that the value of closing stock remains the same no matter which method of
pricing of material issues is used. Do you agree? Why or why not? EXPLAIN. Detailed stores ledgers are not required.

Question 64.
The particulars relating to 1,200 Kg. of a certain raw material purchased by company during June were as follows:
 Lot prices quoted by supplier and accepted by the company for placing the purchase order:
Lot upto 1,000 kg. @ Rs. 22 per kg.
Between 1,000-1,500 kg. Rs. 20 per kg.
Between 1,500-2,000 kg. @ Rs. 18 per kg.
 Trade discount 20%
 Additional charge for containers @ Rs. 10 per drum of 25 kg.
 Credit allowed on return of containers @ Rs. 8 per drum.
 Sales Tax at 10% on raw material and 5% on drums.
 Total freight paid by the purchaser Rs. 240

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 Insurance at 2.5% (on Net Invoice Value) paid by the purchaser.

 Stores overhead applied at 5% on total purchase cost of material.
The entire quantity was received and issued to production. The containers are returned in due course. Draw up a suitable
statement to show:
(1) Total cost of material purchased; and
(2) Unit cost of material issued to production.
[(i) Rs. 23,058; (ii) Rs. 19.215]

Question 65. [STUDY MATERIAL]

The following information is provided by Sunrise Industries for the fortnight of April, 20X9:
Material Exe:
Stock on 1-4-20X9 100 units at Rs. 5 per unit.
Purchases:
5-4-20X9, 300 units at Rs. 6
8-4-20X9, 500 units at Rs.7
12-4-20X9, 600 units at Rs. 8

Issues
6-4-20X9, 250 units
10-4-20X9,400 units
14-4-20X9,500 units

Required:
(A) CALCULATE using FIFO and LIFO methods of pricing issues:
a) the value of materials consumed during the period
b) the value of stock of materials on 15-4-20X9.
(B) EXPLAIN why the figures in (a) and (b) in part A of this question are different under the two methods of pricing of
material issues used. You need not draw up the Stores Ledgers.

Question 66. [MAY 11]

Prepare a Store Ledger Account from the following transactions of XY Company Ltd:
April, 2011
1 Opening balance 200 units @ Rs. 10 per unit.
5 Receipt 250 units costing Rs. 2,000
8 Receipt 150 units costing Rs. 1,275
10 Issue 100 units
15 Receipt 50 units costing Rs. 500
20 Shortage 10 units
21 Receipt 60 units costing Rs. 540
22 Issue 400 units

The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO.
Shortage will be charged as overhead.

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 Miscellaneous Practical Problems

 Computing Receiving and Handling Rate

Question 67.
You are supplied with the following information extracted from the budget estimates of a company:
Particulars Amount (Rs.)
Net purchases 1,00,000
Freight and insurance 5,000
Buying expenses 2,500
Receiving expenses 2,000
Inspection expenses 1,000
Storage expenses 1,500

The company made the following purchases during the budget period:
Particulars Amount (Rs.)
Consignment No. 1 15,000
Consignment No. 2 25,000
Consignment No. 3 35,000

Actual costs during the period were:

Particulars Amount (Rs.)
Freight and insurance 3,000
Buying expenses 2,000
Receiving expenses 1,500
Inspection expenses 750
Storage expenses 500

Compute the applied:

(i) Material receiving and handling rate for the period
(ii) Determine the amount of receiving and handling cost chargeable to purchases.
Also state whether there is any under/or over-absorption.

 Computation of Landed Cost

Question 68. [NOV 91]

A manufacturer of Surat purchased three chemicals A, B and C from Bombay. The invoice gave the following information:
Chemical
A 3,000 kg. @ Rs. 4.20 Per Kg. 12,600
B 5,000 Kg. @ Rs. 3.80 Per Kg. 19,000
C 2,000 kg. @ Rs. 4.75 Per Kg. 9,500
Sales tax 2,055
Railway freight 1,000

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Total Cost 44,155

A shortage of 200 kg. in chemical A, of 280 Kg. in chemical B and of 100 Kg. in chemical C was noticed due to breakages.
At Surat, the manufacturer paid octroi duty of Re. 0.10 per Kg. He also paid cartage of Rs. 63.12 for chemical B and Rs.
31.80 for chemical C. Calculate the stock rate that you would suggest for pricing issue of chemicals assuming a provision
of 5% towards further deterioration.

 Determination of Price

Question 69 [NOV 95, STUDY MATERIAL]

At what price per unit would Part No. A 32 be entered in the Stores Ledger, if the following invoice was received from a
supplier:
200 units Part No. A 32 @ Rs. 5 1,000.00
Less: 20% discount 200.00
800.00
Add: GST @ 15% 120.00
920.00
Add: Packing charges (5 non-returnable boxes) 50.00
970.00
Notes:
(1) A 2% discount will be given for payment in 30 days.
(2) Documents substantiating payment of excise duty is enclosed for claiming GST credit.

Question 70 [RTP NOV2019]

HBL Limited produces product 'M' which has a quarterly demand of 20,000 units. Each product requires 3 kg. and 4 kg.
of material X and Y respectively. Material X is supplied by a local supplier and can be procured at factory stores at any
time, hence, no need to keep inventory for material X. The material Y is not locally available, it requires to be purchased
from other states in a specially designed truck container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:

Particulars Material –X Material-Y

Purchase price per kg. (excluding GST) Rs. 140 Rs. 640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - Rs. 28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%

*On purchased quantity

Other information:
The company has to pay 15% p.a. to bank for cash credit facility.
Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y
(ii) CALCULATE the Economic Order quantity for both the materials.

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 Buffer Stock

Question 71.
The scrutiny of past records gives the following distribution for lead time and daily demand during lead time.
Lead Time Distribution
Lead Time (Days) Frequency
3 2
4 3
5 4
6 4
7 2
8 2
9 2
10 1

Demand Distribution
Demand/Day (Units) Frequency
0 2
1 4
2 5
3 5
4 4
5 2
6 1
7 2
Assuming that the lead time distribution and daily demand distribution are independent, determine:
(i) The buffer-stock; and
(ii) The reorder level.
[(i) 52 units, (ii) 70 units]
 Choice of Supplier

Question 72. [MAY 01]

A Company has the option to procure a particular material from two sources:
Source I assures that defectives will not be more than 2% of supplied quantity.
Source II does not give any assurance, but on the, basis of past experience of supplies received from it, is observed that
defective percentage is 2.8%.
The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by Rs. 100 as compared
to source I. The defective units of material can be rectified for use at a cost of Rs. 5 per unit. You are required to find out
which of the two sources is more economical.
[Source II]

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 Make or Buy

Question 73.
Unlimited Ltd is considering the possibility of purchasing from a supplier a part now makes. The supplier will provide the
parts in the necessary quantities at a unit of Rs. 9. Transportation and storage costs would be negligible.
The company produces the parts from a single raw material in economic lots of 2,000 units at a cost of Rs. 2 per unit.
Average annual demand is 20,000 units. The annual holding cost is Rs. 0.25 per unit and the minimum stock level is set at
400 units. Direct labour costs for the part are Rs. 6 per unit, fixed manufacturing overhead is charged at a rate of Rs. 3
per unit based on a normal activity of 20,000 units. The company also hires the machine on which the parts are produced
at the rate of Rs. 200 per month. Should the company make the parts?
[Yes, make the component, Net Gain = Rs. 17,000]
 Choice of Substitute Material

Question 74.
A Dying Co. uses chemical H as a raw material. This chemical costs Rs. 20 per Kg and I-O Ratio is 125%. Due to non-
availability of this material, the following two substitutes are available:
Material Rate per Kg. I-O Ratio
H-1 Rs. 30 110%
H-2 Rs. 24 140%
Recommend which of the grades is to be used.
[Chemical A-1 is recommended because it is more economical]

 Material Mix to Retain Profit

Question 75.
Raw materials x costing Rs. 100 per kg and y costing Rs. 60 per kg are mixed in equal promotions for making a Product.
The loss of materials in processing 25% of the output. The production expenses are allocated at 50% of Direct Material
Cost. The end – product is priced with a margin of 33 1/3% over the total costs. Material Y is not easily available and
substitute raw material Z costing Rs. 50 per kg has been found for Y. It is required to keep the proportion of this
substitute material Z in the mixture Z in the mixture as low as possible and at the same time maintain the selling price of
the end product at existing levels and ensure the same quantum of profit as at present.
You are required to compute what should be the ratio of mix the material X and Z.

 Treatment of Stock Deficiencies

Question 76.
After the annual stocktaking, you come to know of some significant discrepancies between book stock and physical
stock. You gather the following information.
Item Stock Card (units) Stores Ledger (units) Physical Check (units) Cost p.u
A 600 600 560 60
B 380 380 385 40
C 750 780 720 10

(a) What action should be taken to record the information shown above?

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(b) Suggest reasons for the shortage and discrepancies disclosed above and recommended a possible course of action
by management to prevent future losses.

 Miscellaneous Theory

 Documentation and Stores Procedures

Question 77. [NOV 98 (ADAPTED)]

Write a brief note on Purchase requisitions?

Solution:
(1) A purchase requisition is a form used for making a formal request to the purchasing department to purchase
materials.
(2) This form is usually filled up by the store keeper for regular materials and by the departmental head for special
materials (not stocked as regular items). The requisition form is duly signed by either works manager or plant
superintendent, in addition to the one originating it.
(3) Four Copies are prepared to be used by:
(i) Purchase Department
(ii) Planning Department
(iii) Cost Accounting Department
(iv) Stores Department
(4) Bill of Material of the Purchase department should include item of material as ‘’Regular’’ Item. Any new item should
be properly sanctioned and approved.
(5) Re-order Level of the stock of the item should have been reached and there should be co-ordination between
Purchase, stores and production departments.

Question 78. [MAY 97 (ADAPTED)]

What is Purchase Order?

Solution:
(1) It is written request to the supplier to supply certain specified materials at specified rates and within a specified
period and as per the terms and conditions specified.
(2) Five copies of purchase order are generated and sent to:

Purchase Order

Supplier Store or
Receiving Accounting Purchase
order indenting department Department
Department
department

(3) The purchase manager or concerned officer prepares the formal purchase order.

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Question 79. [RTP]

What is Material Requisition Note (MRN)?

Solution:
(1) It is the voucher of the authority as regards issue of materials for use in the factory or in any of its departments.
(2) Where a ‘Materials List’ has been prepared, either the whole of the materials would be withdrawn on its basis or
separate materials requisitions would be prepared by the person or department and the material drawn upto the
limit specified in the list.
(3) If no material list has been prepared, it is desirable that the task of the preparation of Material Requisition Notes be
left to the Planning Department. If there is no Planning Department, the Requisition Notes should be prepared by
the person or department that requires the materials.
(4) The Requisition Notes are made out in triplicate. The copies are distributed in the following manner:

Material Requisition Note

Store-Keeper Cost Department Department Requiring it

Question 80. [MAY 87, MAY 98]

What is Bill of Materials (BOM)?

Solution:
(i) It is also known as Material Specification List or simply Material List. It is a schedule of standard quantities of
materials required for any job or other unit of production.
(ii) It lays down the exact description and specifications of all materials required for a job or other unit of production.
(iii) The materials List is prepared by the Engineering or Planning Department in a standard form.
(iv) Five copies are prepared and sent to each of the following department:

Bills of Materials

Store Cost Account Production Planning Purchase

Department Department Control Department Department
Department

Question 81. [MAY 92, MAY 94,MAY 12]

What is the difference between Bill of Material and Material Requisition Note?

Solution:
Bills of Material Material Requisition Note
 It is prepared by the Foreman of the consuming
 It is the document prepared by the drawing office. department.
 It is complete schedule of component parts and raw  It is a document authorizing Store-keeper to issue
materials for a particular job or work order. materials to the consuming department.

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 It often serves the purpose of a Stores Requisition as it  It cannot replace a bill of materials.
shows the complete schedule of materials required for
a particular job i.e. it can replace stores requisition.
 It can be used for the purpose of quotations.  It is useful in arriving historical cost only.
 It helps in keeping a quantitative control on materials  It shows the material actually drawn from stores.
drawn through Stores Requisition.

Question 82. [RTP]

Describe the procedure of receipt and inspection of materials.

Solution:
(1) The receiving department or section is responsible for taking charge of the incoming materials, checking and
verifying their quantities, inspecting them as regards their grade, quality or other technical specifications and if
found acceptable, passing them on to the stores.
(2) Technical appraisal is carried out by Inspection Department, if it is attached to Receiving Department.
(3) In case the quality is not the same as ordered, the goods are not accepted.
(4) If material is suitable for acceptance, the Receiving department prepares a Receiving Report or Material Inward
Note or Goods Received Note.
(5) It is prepared in quadruplicate, the copies being distributed as under:

Goods Received
Note

Purchase Store or order Receiving Cost

Department indenting Department Department
department

Question 83. [RTP]

What is the procedure for Transfer of Materials from one job to another?

Solution:
(1) The surplus material arising on a job or other units of production may sometime be unsuitable for transfer to Stores
because of its bulk, heavy weight, brittleness or some such reason.
(2) It may, however, be possible to find some alternative use for such materials by transferring it to some other job
instead of returning it to the Store Room.
(3) It must be stressed that generally transfer of material from one job to another is irregular, if not improper.
(4) At the time of material transfer a material transfer note should be made in triplicate, the disposition of the copies
of this note being are as follows:

Material Transfer
Note

Department Recipient
Cost Department
Making Transfer Department

(5) No copy is required for the Store as no entry in the stores records would be called for.

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 Inventory Control

Question 84. [MAY 01]

Distinguish between Periodic and Continuous Stock Verification.

Solution:
Periodic Stock Verification Continuous Stock Verification
 It takes place at the end of the year.  It takes place at regular intervals during the year.
 Inventory Records must be maintained up-to-date at all
 Inventory Records are updated periodically at any time
times.
before physical verification.

 All the items are covered in single verification  Two or three items are covered on random basis.
 Regular workflow has to be stopped.  No interference with regular work flow.
 Discrepancies are known at the end of the period.  Discrepancies are immediately known.

Question 85.
What are the advantages of Continuous Stock Taking? [MAY 92, NOV 96, NOV 06]
Continuous Stock Taking is Similar to the concept of preventive maintenance in workshop management. Discuss?
[MAY 85]

Solution:
The advantages of continuous stock-taking are:
1. Closure of normal functioning is not necessary.
2. Stock discrepancies are likely to be brought to the notice and corrected much earlier than under the annual stock-
taking system.
3. The system generally has a sobering influence on the stores staff because of the element of surprise present
therein.
4. The movement of stores items can be watched more closely by the stores auditor so that chances of obsolescence
buying are reduced.
5. Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

Question 86. [MAY 92, NOV 96, MAY 01, NOV 06, MAY 13]
What are the advantages of Perpetual Inventory Records?

Solution:
The main advantages of perpetual inventory are as follows:
(1) Physical stocks can be counted and book balances adjusted as and when desired without waiting for the entire
stock-taking to be done.
(2) Quick compilation of Profit and Loss Account (for interim period) due to prompt availability of stock figures.
(3) Discrepancies are easily located and thus corrective action can be promptly taken to avoid their recurrence.
(4) A systematic review of the perpetual inventory reveals the existence of surplus, dormant, obsolete and slow-
moving materials, so that remedial measures may be taken in time.
(5) Fixation of the various stock levels and checking of actual balances in hand with these levels assist the Store Keeper
in maintaining stocks within limits and in initiating purchase requisitions for correct quantity at the proper time.

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 Material Cost and Loss Accounting

Question 87.
How will you deal with the following items in Material Costs?
(i) Material Handling Cost [MAY 99]
It refers to the expenses involved in receiving, storing, issuing and handling materials. To deal with this cost in cost
accounts there are two prevalent approaches as under:
First approach suggests the inclusion of these costs as part of the cost of materials by establishing a separate
material handling rate e.g., at the rate of percentage of the cost of material issued or by using a separate material
handling rate which may be established on the basis of weight of materials issued.
Under another approach these costs may be included along with those of manufacturing overhead and be charged
over the products on the basis of direct labour or machine hours.

(ii) Insurance on Stocks of Material [NOV 83, NOV 98]

Stock insurance premium should be apportioned over the items of materials based on their value.

(iii) Cash Discount [RTP, NOV 83]

(1) It may be deducted from the Invoice Price of the materials.
(2) It may be treated as financial expense and not treated in Cost Accounts.
(3) The full Invoice Price may be debited to Purchase Account crediting the Supplier’s Account with the Net Invoice
Price, and the Discount Earned Account with the amount of Cash Discount Available.

Question 88.
At the time of the physical Stock taking it was found that actual stock Level was different from the clerical or computer
records. What can be possible reasons for such differences? How will you deal with such differences?

Solution:
Possible reasons for differences arising at the time of physical stock taking may be as follows when it was found that
actual stock level was different from that of the clerical or computer records:
(i) Wrong entry might have been made in stores ledger account or bin card,
(ii) The items of materials might have been placed in the wrong physical location in the store,
(iii) Arithmetical errors might have been made while calculating the stores balances on the bin cards or store-ledger
when a manual system is operated,
(iv) Theft of stock.
When a discrepancy is found at the time of stock taking, the individual stores ledger account and the bin card must be
adjusted so that they are in agreement with the actual stock. For example, if the actual stock is less than the clerical or
computer record the quantity and value of the appropriate store ledger account and bin card (quantity only) must be
reduced and the difference in cost be charged to a factory overhead account for stores losses.

Question 89. [MAY 01]

Describe the treatment of Normal and Abnormal Loss of Materials?

Solution:
Cost Accounts treatment of normal and abnormal loss of material arising during storage.
The difference between the book balance and actual physical stock, which may either be gain or loss, should be
transferred to Inventory Adjustment Account pending scrutiny to ascertain the reason for the difference.

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If on scrutiny, the difference arrived at is considered as normal, then such a difference should be transferred to overhead
control and if abnormal, it should be debited to costing profit and loss account.
In the case of normal losses, an alternative method may be used. Under this method the price of the material issued to
production may be inflated so as to cover the normal loss.

Question 90. [RTP, MAY 86]

Give the accounting treatment for Waste?

Solution:
The portion of basic raw materials lost in processing having no recoverable value.
Waste may be visible – remnants of basic raw materials – or invisible; example: disappearance of basic raw materials
through evaporation, smoke etc. Shrinkage of material due to natural causes may also be a form of a material wastage.
In case of Normal Wastage
Normal waste is absorbed in the cost of net output.

In case of Abnormal Wastage

The abnormal waste is transferred to the Costing Profit and Loss Account.

Question 91. [RTP, MAY 86, NOV 08]

Explain the accounting treatment for Scrap?

Solution:
It is defined as the incidental residue from certain types of manufacture, usually of small amount and low value,
recoverable without further processing.
Scrap may be treated in cost accounts in the following ways:
(i) When the scrap value is negligible: It may be excluded from costs. In other words, the cost of scrap is borne by good
units and income scrap is treated as other income.
(ii) When the scrap value is not identifiable to a particular process or job: The sales value of scrap net of selling and
distribution cost, is deducted from overhead to reduce the overhead rate. A variation of this method is to deduct
the net realizable value from material cost.
(iii) When scrap is identifiable with a particular job or process and its value is significant: The scrap account should be
charged with full cost. The credit is given to the job or process concerned. The profit or loss in the scrap account, on
realization, will be transferred to the Costing Profit and Loss Account.

Question 92. [RTP, MAY 86, MAY 03, NOV 03, MAY 05, MAY 07, NOV 07, MAY 09]
Explain the accounting treatment for material spoilage?

Solution:
It is the term used for materials which are badly damaged in manufacturing operations, and they cannot be rectified
economically and hence taken out of process to be disposed of in some manner without further processing.
In case of Normal Spoilage
Normal Spoilage (i.e., which is inherent in the operation) costs are included in costs either charging the loss due to
spoilage to the production order or by charging it to production overhead so that it is spread over all products.
Any value realized from spoilage is credited to production order or production overhead account, as the case may be.

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In case of Abnormal Spoilage

The cost of Abnormal Spoilage (i.e., arising out of causes not inherent in manufacturing process) is charged to the 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 charged to production overhead.

Question 93. [RTP, MAY 86, MAY 00, MAY 03, NOV 03, MAY 05, MAY 07, NOV 07, NOV 08, MAY 09]
What is meant by ‘Defective Work”? Explain the accounting treatment for Defective Work?

Solution:
1. It signifies those units or portions of production which can be rectified and turned out as good units by the
application of additional material, labour or other service. For example: There may be duplication of pages or
omission of some pages in a book.
2. Defectives arise due to sub-standard materials, bad-supervision, bad-planning, poor workmanship, inadequate-
equipment and careless inspection.

Rectification of loss from defective units: In the case of articles that have been spoiled, it is necessary to take steps to
reclaim as much of the loss as possible. For this purpose:
(a) All defective units should be sent to a place fixed for the purpose;
(b) There should be dismantled;
(c) Goods and serviceable parts should be separated and taken into stock;
(d) Parts which can be made serviceable by further work should be separated and sent to the workshop for the purpose
and taken into stock after the defects have been removed; and
(e) Parts which cannot be made serviceable should be collected in one place for being melted or sold.

Distinction between spoilage and defectives

The difference between spoilage and defectives is that while spoilage cannot be repaired or reconditioned, defectives
can be rectified and transferred, either back to standard production or to seconds.

Treatment of Defectives in Cost Accounting:

Defectives are generally treated in two ways:
(1) They can be brought up to the standard by incurring further costs – additional material and labour,
(2) They can be sold as inferior products (seconds) at lower prices, where possible.

Question 94. [MAY 86, MAY 00]

Give the accounting treatment for Rectification Costs of Defective Work?

Solution:
The problem of accounting for defective work is the problem of accounting of the costs of rectification or network.
The possible ways of treatment 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’ have a
normal value and defectives rectified into ‘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 the department overheads: If the department responsible for defectives can be identified then the
rectification costs should be charged to that department;

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(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 Account.

(ii) Where defectives are easily identifiable with specific jobs, the work costs are debited to the job.

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Employee Cost and Direct Expenses BY: CA Nitin Guru

Chapter 3
EMPLOYEE COST AND DIRECT EXPENSES
 Labour Cost
Question 1. [NOV 01 (ADAPTED)]
What is Labour Cost? Distinguish between Direct Labour and Indirect Labour?

Solution:
Labour Cost: It means the cost incurred for hiring of human resource of employees.
Direct Labour Cost: Any Labour Cost that is specifically incurred for or can be readily charged to or identified with a specific job,
contract work order or any other unit of cost.
Indirect Labour Cost: Any Labour Cost that cannot be clearly identified or charged to a product, job, etc but is incurred during
production.

 Determination of Basic Wages

Basic Wages/Pay ----
(+) Dearness Allowance (DA) ----
(+) City Compensatory allowance (CCA) ----
(+) House Rent Allowance (HRA) ----
(+) Other Allowance ----
(+) Cost of Perquisites ----
(+) Employer’s Contribution to SSS ----
(+) Overtime Wages ----
(+) Facilities of Doctors ----
(+) Employee Welfare Cost ----
(+) Bonus or Share of Profit ----
Total Labour Cost ----

 Effective Hourly Rate =

Normal Effective Hours = Total hours available – Normal Idle time

 Conversion Cost = It means the cost of converting Raw Materials into Finished Goods.
It includes Labour Cost and Factory Overheads.

 Practical Problems

 Computation of Labour Cost

Question 2. [RTP (ADAPTED)]
Calculate the Labour Cost per man-day from the following data –
 Basic Salary ₹ 200 per day
 Dearness Allowance – ₹ 2.50 per every point over 100 cost of living for working class. Current cost of Living Index = 700
points.
 Leave Salary 10% of (Basic + DA)
 Employer’s Contribution to PF, ESI and Associated Costs = 20% of (Basic + DA + Leave Salary)
 Expenditure on amenities to Labour per month = ₹ 600 per worker.
 Working Days per month = 25 days of 8 hours each.

Question 3. [Study Material]

A worker is paid ₹ 10,000 per month and a dearness allowance of ₹ 2,000 p.m. Worker contribution to provident fund is @ 10%
and employer also contributes the same amount as the employee. The Employees State Insurance Corporation premium is 6.5% of
wages of which 1.75% is paid by the employees. It is the firm’s practice to pay 2 months’ wages as bonus each year.
The number of working days in a year are 300 of 8 hours each. Out of these the worker is entitled to 15 days leave on full pay.
CALCULATE the wage rate per hour for costing purposes.

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Question 4. [Study Material]

CALCULATE the Employee hour rate of a worker X from the following data:
Basic pay - ₹ 10,000 p.m.
D.A. - ₹ 3,000 p.m.
Fringe benefits - ₹ 1,000 p.m.
Number of working days in a year 300. 20 days are availed off as holidays on full pay in a year. Assume a day of 8 hours.

 Idle Time and Labour Cost

Question 5. [RTP, MAY 00, NOV 08]
What is Idle Time? What are the cases which lead to idle time?

Solution:
It is a time during which no production is carried out because the worker remains idle even though they are paid.
Idle time can be normal idle or abnormal idle time.
 Normal idle time: It is the time which cannot be avoided or reduced in the normal course of business.
 Causes of Normal Idle time are as follows:
1. The time lost between factory gate and the place of work
2. The interval between one job and another
3. The setting up time for the machine
4. Normal fatigue etc.
 Abnormal idle time: Apart from normal idle time, there may be factors which give rise to abnormal idle time.
 Causes for Abnormal Idle Time are as follows:
1. Idle time may also arise due to abnormal factors like lack of coordination
2. Power failure, Breakdown of machines
3. Non-availability of raw materials, strikes, lockouts, poor supervision, fire flood etc.
 The causes for abnormal idle time should be further analyzed into controllable and uncontrollable.
1. Controllable abnormal idle time refer to that time which could have been put to productive use had the management
been more alert and efficient.
2. Uncontrollable abnormal idle time refer to time lost due to abnormal causes, over which management does not have
any control e.g., breakdown of machines, etc.

Question 6. [RTP, NOV 85, MAY 93, MAY 94, MAY 00, MAY 03, MAY 06, NOV 08]
How is idle time treated in Cost Accounting?

Solution:
Idle Time

Normal Abnormal
 It is normal in nature. Example = Tea Break, Lunch Break.  It is abnormal in nature. Example = Breakdown of Machine.
 It is charged from customers  Cannot be charged from customers.
 It is treated as a part of the Cost of Production.  Charged to Costing and P& L Account.

Effective Hourly Rate =

Total Hours Available

Abnormal Idle Time Normal Idle Time

Effective Normal Hours

Actual Working Hours

 Normal Idle Time = Total hours – Effective hours

 Abnormal Idle Time = Effective Working hours – Actual Working hours

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 Practical Problems

 Computation of Idle Time Cost

Question 7. [STUDY MATERIAL]
X’ an employee of ABC Co. gets the following emoluments and benefits:
 Basic pay ₹ 1,000 p.m
 Dearness allowance ₹ 200 p.m
 Bonus 20% of salary and D.A
 Other allowances ₹ 250 p.m
 Employee’s contribution to P.F 10% of salary and D.A
‘X’ works for 2,400 hours per annum, out of which 400 hours are non-productive and treated as normal idle time. You are required
to find out the effective hourly cost of employee ‘X’.

Question 8. [STUDY MATERIAL]

In a factory working six days in a week and eight hours each day, a worker is paid at the rate of ₹ 100 per day basic plus D.A. @
120% of basic. He is allowed to take 30 minutes off during his hours shift for meals-break and a 10 minutes recess for rest. During
a week, his card showed that his time was chargeable to :
Job X 15 hrs.
Job Y 12 hrs.
Job Z 13 hrs.
The time not booked was wasted while waiting for a job. In Cost Accounting, STATE how would you allocate the wages of the
workers for the week?

 Overtime Premium and Labour Cost

Question 9. [MAY 85, NOV 95]
What is overtime? What are the causes leading to overtime?

Solution:
Work done beyond normal working hours is known as ‘overtime work’. Factories Act, 1948, lays down that a worker is entitled to
overtime when he works for more than 9 hours on any day or more than 48 hours in a week.

Question 10.
Overtime means increased Costs. In what ways Overtime leads to increase in Costs. [MAY 85]
What is Overtime premium? Discuss the effect of Overtime on productivity. [RTP, NOV 01]

Solution:
Overtime Premium: Overtime payment is the amount of wages paid for working beyond normal working hours. The rate for
overtime work is higher than the normal time rate; usually it is at double the normal rates. The extra amount so paid over the
normal rate is called overtime premium.

Effect of overtime payment on productivity: The overtime payment increases the cost of production in the following ways:
1. The overtime premium paid is an extra payment in addition to the normal rate.
2. The efficiency of operators during overtime work way fall and thus output may be less than normal output.
3. In order to earn more the workers may not concentrate on work during normal time and thus the output during normal
hours may also fall.
4. Reduced output and increased premium of overtime will bring about an increase in costs of production.

Question 11. [RTP, MAY 85, NOV 95, MAY 02, MAY 03, NOV 04, MAY 08]
Give the treatment of Overtime Premium in Cost Accounting.

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Solution:
Overtime Wages

Normal Overtime Wages Abnormal Overtime Wages On Demand of Customer

 Normal Nature  Abnormal Nature  Because of urgency
 May be because of shortage of Labour  Because of Strike, lock outs, break  It can be recovered from
down of machine Customers.
 Cost can be recovered from customers  Cannot be recovered from customers  Add to specific jobs.
 Effective Hourly Rate  Charge it to Costing P&L Account.
=

 It means we will calculate a single rate and  Here we will use separate rate for
apply it to all. separate hours.
(Calculate this rate on overall basis for the
whole factory not just for a single job).

Question 12. [MAY 85, NOV 95]

What are the steps for controlling Overtime?

Solution:
1. Watch on the output during normal hours should be maintained to ensure that overtime is not granted when normal output
is not obtained during the normal hours, without any special reasons.
2. Statement concerning overtime work be prepared along with justifications, at appropriate places for putting up before the
competent authority.
3. Prior sanction about overtime should be obtained from competent authority.
4. Actual rate of output produced during the overtime period should be compared with normal rate of output.
5. Periodical reports on overtime wages should be sent to top management for taking corrective action.

 Practical Problems

 Overtime Premium and Labour Cost

Question 13.
A company’s basic wage rate is ₹ 6 per hour and its overtime rates are:
Evening – Time and one third
Week-ends – Double the time
During the previous year, the following hours were worked:
Normal time 2,20,000 clock hours
Time plus one third 20,000 clock hours
Double time 10,000 clock hours
The following times have been worked:
Particulars Job
Normal time (Hours) 5,000
Evening overtime (Hours) 600
Week-end Overtime (Hours) 50
Calculate the labour cost chargeable to job in each of the following circumstances:
(1) Where overtime is worked regularly throughout the year as the policy of the company due to labour shortage.
(2) Where overtime is worked specially at the request of the customer.
[(1) ₹ 36,160; (2) ₹ 35,400]

Question 14. [Study Material]

CALCULATE the earnings of A and B from the following particulars for a month and allocate the employee cost to each job X, Y and
Z:
A B
(i) Basic wages (₹ ) 10,000 16,000

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(ii) Dearness allowance 50% 50%
(iii) Contribution to provident fund 8% 8%
(on basic wages)
(iv) Contribution to employee's state 2% 2%
insurance (on basic wages)
(v) 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 state Insurance and Provident Fund are at equal rates with employees’ contributions. The two
workers were employed on jobs X, Y and Z in the following proportions:
Jobs X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%

Overtime was done on job Y.

Question 15. [Study Material]

It is seen from the job card for repair of the customer’s equipment that a total of 154 labour hours have been put in as detailed
below:
Worker ‘A’ paid at ₹ 200 per Worker ‘B’ paid at ₹ 100 per Worker ‘C’ paid at ₹ 300 per
day of 8 hours day of 8 hours day of 8 hours
Monday (hours) 10.5 8.0 10.5
Tuesday (hours) 8.0 8.0 8.0
Wednesday (hours) 10.5 8.0 10.5
Thursday (hours) 9.5 8.0 9.5
Friday (hours) 10.5 8.0 10.5
Saturday (hours) - 8.0 8.0
Total (hours) 49.0 48.0 57.0

In terms of an award in an employee conciliation, the workers are to be paid dearness allowance on the basis of cost of living
index figures relating to each month which works out @ ₹ 968 for the relevant month. The dearness allowance is payable to all
workers irrespective of wages rate if they are present or are on leave with wages on all working days.

Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 4 hours on Saturdays; the workers are
however paid full wages for Saturday (8 hours for 4 hours worked).

Workers are paid overtime according to the Factories Act, 1948. Excluding holidays, the total number of hours works out to 176 in
the relevant month. The company’s contribution to Provident Fund and Employees State Insurance Premium are absorbed into
overheads.

CALCULATE the wages payable to each worker.

Question 16. [Study Material]

In a factory, the basic wage rate is ₹ 100 per hour and overtime rates are as follows:

Before and after normal working hours - 175% of basic wage rate
Sundays and holidays - 225% of basic wage rate
During the previous year, the following hours were worked:
 Normal time - 1,00,000 hours
 Overtime before and after working hours - 20,000 hours
Overtime on Sundays and holidays - 5,000 hours
Total - 1,25,000 hours

The following hours have been worked on job ‘Z’

Normal - 1,000 hours
Overtime before and after working hrs. - 100 hours.
Sundays and holidays - 25 hours.
Total - 1,125 hours

You are required to CALCULATE the labour cost chargeable to job ‘Z’ and overhead in each of the following instances:
a) Where overtime is worked regularly throughout the year as a policy due to the workers’ shortage.
b) Where overtime is worked irregularly to meet the requirements of production.

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c) Where overtime is worked at the request of the customer to expedite the job.

 Labour Turnover
Question 17. [RTP, NOV 85, NOV 94, MAY 96, MAY 03, NOV 04, NOV 14]
What is Labour Turnover? What are the terms associated with Labour Turnover?

Solution:
Meaning: Labour Turnover is the rate of change in the composition of labour force during a specified period, measured against a
suitable index.
Terms associated with Labour turnover are as follows:
(a) Separation: It refers to the employees who have left and discharged i.e. an old employee goes out and no new employee
comes in.
(b) Replacement: It refers to substitution i.e. an old employee goes out and a new employee comes in.
(c) New Recruitment: It refers to new additions due to expansion etc. i.e. new employee comes in but no old employee goes
out.
(d) Accessions: Accessions = Replacement + New Recruitment
OR
Number of Workers at end -
Add: Number of separation during that period -
Less: Number of Workers at the beginning -
Accessions -

(e) Average Labour force:

Question 18. [NOV 85, MAY 11]

What are the causes of Labour Turnover?

Solution:
Causes of Labour Turnover: The main causes of labour turnover in an organization/industry can be broadly under the following
three heads:
(I) Personal causes These induce or compel workers to leave their jobs; such causes include the following:
(i) Change of jobs for betterment.
(ii) Premature retirement due to ill health or old age.
(iii) Domestic problems and family responsibilities.
(iv) Discontent over the jobs and working environment.

(II) Unavoidable causes: It becomes obligatory on the part of management to ask one or more of their employees to leave
organization; such causes include the following:
(i) Seasonal nature of the business;
(ii) Shortage of raw material, power slack market for the product etc.;
(iii) Change in the plant location;
(iv) Disability, making a worker unfit for work;

(III) Avoidable causes: These require the attention of management on a continuous basis so as to keep the labour turnover ratio
as low as possible. The main causes under this case are indicated below:
(1) Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
(2) Strained relationship with management, supervisors or fellow workers;
(3) Lack of training facilities and promotional avenues;
(4) Lack of recreational and medical facilities;

Question 19. [RTP, NOV 94, NOV 98, NOV 99, NOV 03]
What are the costs associated with Labour Turnover?

Solution:
Two types of costs which are associated with labour turnover are:
(a) Preventive costs: These include costs incurred to keep the labour turnover at a low level, i.e. cost of medical services,
welfare schemes and pension schemes. If a company incurs high preventive costs, the rate of labour turnover is usually low.
(b) Replacement costs: These are the costs which arise due to high labour turnover and refer to additional costs that will be
incurred on new workers.

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It is clear that a company will incur very high replacement costs if the rate of labour turnover is high. Similarly, only
adequate preventive costs can keep labour turnover at a low level. Each company must, therefore, work out the optimum
level of labour turnover keeping in view its personnel policies and the behavior of replacement cost and preventive costs at
various levels of labour turnover rates.

Question 20.
What are the effects of High & Low Labour Turnover? Why is Low Labour Turnover preferred?

Solution:
Effects of High Labour Turnover:
High labour turnover increases the cost of production in the following ways:
(i) Even flow of production is disturbed;
(ii) Efficiency of new workers is low; productivity of new but experienced workers is low in the beginning;
(iii) There is increased cost of training and induction;
(iv) New workers cause increased breakage of tools, wastage of materials, etc.

Effects of Low Labour Turnover

(i) Minimum material wastage, tool breakage and breakdown of machines.
(ii) No loss of customers due to timely and prompt supply of quality finished goods.
(iii) Reduction in number of accidents.
(iv) Low cost of selection, recruitment and training.
(v) Achievement of production targets.

Question 21. [NOV 85, NOV 94, MAY 96, NOV 07]
What are the steps to minimize Labour Turnover?

Solution:
The following steps are useful for minimize labour turnover.
1. Exit interview: An interview be arranged with each outgoing employee to ascertain the reasons of his leaving the
organization.
2. Job analysis and evaluation: Before recruiting workers, job analysis and evaluation may be carried out to ascertain the
requirements of each job.
3. Scientific system of recruitment, placement and promotion: The organization should make use of a scientific system of
recruitment, selection, placement and promotion for employees.
4. Enlightened attitude of management: The management should introduce the following steps for creating a healthy working
atmosphere:
(i) Service rules should be framed, discussed and approved among management and workers, before their
implementation.
(ii) Provide facilities for education and training of workers.
(iii) Introduce a procedure for settling worker’s grievances.
Use of committee: Issues like control over workers, handling their grievances etc., may be dealt by a committee, comprising of
members from management and workers.

Question 22. [NOV 85, MAY 03, NOV 04, NOV 07, NOV 10]
What are the various methods for computing Labour Turnover.

Solution:
(A) LABOUR TURNOVER WITHOUT EXPANSION
(1) Separation Method: = × 100

(2) Replacement Method: = × 100

(3) Mixed Method: = × 100

(B) LABOUR TURNOVER WITH EXPANSION

(1) Separation Method: = × 100

(2) Accession Method: = × 100

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(3) Flux Method: = × 100

OR
× 100
Note:
Equivalent Annual Labour Turnover Rate = × 365

 Practical Problems

 Expansion and Labour Turnover Rate

Question 23. [MAY 01]
From the following information, calculate Labour turnover rate and Labour flux rate:
No. of workers as on 01.01.2000 = 7,600
No. of workers as on 31.12.2000 = 8,400
During the year, 80 workers left while 320 workers were discharged. 1500 workers were recruited during the year of these, 300
workers were recruited because of exits and the rest were recruited in accordance with expansion plans.

 Labour Turnover Rate Given – Compute No. of Worker

Question 24 [STUDY MATERIAL]
st
The Cost Accountant of Y Ltd. has computed labour turnover rates for quarter ended 31 March, 2007 as 10%, 5% and 3%
respectively under ‘Flux method’, ‘Replacement method’ and ‘Separation method’ respectively. If the number of workers replaced
during that quarter is 30. Find out the number of:
(1) Workers recruited and joined
(2) Workers left and discharged

Question 25. [NOV 12, NOV 15, May 17]

Accountant of your company had computed labour turnover rates for the quarter ended 30th September, 2012 as 14%, 8% and 6%
under Flux method, Replacement method and Separation method respectively. If the number of workers replaced during 2nd
quarter of the financial year 2012-13 is 36, find the following: (i) The number of workers recruited and joined; and (ii) The number
of workers left and discharged.

Question 26. [NOV 13]

st
The rate of change of labour force in a company during the year ending 31 March, 2013 was calculated as 13%, 8% and 5%
respectively under ‘Flux method’, ‘Replacement method’ and ‘Separation method’. The number of workers separated during the
year is 40. You are required to calculate:
(i) Average number of workers on roll.
(ii) Number of workers replaced during the year.
(iii) Number of new accessions i.e., new recruitment.
(iv) Number of workers at the beginning of the year.

 Effects of Labour Turnover on Profit or Loss

Question 27. [STUDY MATERIAL, NOV 01, NOV 86, NOV 97, MAY 98]
The management of Bina and Rina Ltd. are worried about their increasing labour turnover in the factory and before analyzing the
causes and taking remedial steps, they want to have an idea of the profit foregone as a result of labour turnover in the last year.
Last year sales amounted to ₹ 83,03,300 and P/V ratio was 20 per cent. The total number of actual hours worked by the Direct
Labour force was 4.45 lakhs. As a result of the delays by the Personnel Department in filling vacancies due to labour turnover,
1,00,000 potentially productive hours were lost. The actual direct labour hours included 30,000 hours attributable to training new
recruits, out of which half of the hours were unproductive.
The costs incurred consequent on labour turnover revealed, on analysis, the following:
Settlement cost due of leaving ₹ 43,820
Recruitment costs ₹ 26,740
Selection costs ₹ 12,750
Training ₹ 30,490

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Assuming that the potential production lost as a consequence of labour turnover could have been sold at prevailing prices, find
the profit foregone last year on account of labour turnover.

 Computation of Labour Turnover Rate

Question 28. [NOV 08]
st
The following information is collected from the personnel department of ST limited for the year ending 31 March, 2008:
Number of workers at the beginning of the year 8,000
Number of workers at the end of the year 9,600
Number or workers left the company during the year 500
Number of workers discharge during the year 100
Number of workers replaced due to left and discharges 700
Additional workers employed for expansion during the year 1,500
You are required to calculate labour turnover rate by using separation method, replacement method and flux method.

 Incentive System
Question 29. [RTP, NOV 87]
What factors are to be considered in introducing an Incentive System?

Solution:
 System of Quality Control: Only if a system of quality control can be relied upon to maintain the quality of goods of the
standard required, an incentive scheme should be introduced; otherwise, workers should be paid on time basis.
 Maximize production: The need to maximize production – thus required incentives to be given to workers. But sometimes
workmanship is more important than quantity of output.
 Precision in measuring quantity of Work: Where the quantity of work done cannot be measured precisely, incentive schemes
cannot be offered.
 Role of Management in Incentive Schemes: 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, as in the case of job work, the
management should share the fruits of extra efficiency achieved.
 Effort of Workers: Whether the quantity of output is within the control of the worker and if so, to what extent. Sometimes,
as in the case of chain assembly work the output is not dependent on the effort put in by workers; incentive schemes in such
cases are not suitable.

 SYSTEMS OF WAGE PAYMENT AND INCENTIVES

(I) Time Rate System

(i) Time Rate:
Earnings = Hours worked × Rate per hour

(II) Straight Piece Rate System

Earnings = Number of units × Piece rate per unit

(III) Premium Bonus Plan

(i) Halsey Premium Plan [MAY 91, NOV 08]
Earnings = Hours worked × Rate per hour + ( × Time saved × Rate per hour)

(ii) Halsey-Weir Premium Plan [MAY 91, NOV 08]

Earnings = Hours worked × Rate per hour + ( × Time saved × Rate per hour)

(iii) Rowan System [MAY 91, NOV 08]

Earnings = Hours worked × Rate per hour + ( × Hours worked × Rate per hour)

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 Practical Problems

 Time Rate, Piece Rate and Rowan Scheme

Question 30. [NOV 02]
A company is undecided as to what kind of wage scheme should be introduced. The following particulars have been compiled in
respect of three systems. Which are under consideration of the management?
Particulars A B C
Actual hours of wages in a week 38 40 34
Hourly rate of wage (in ₹ ) 6 5 7.20
Productions in Units
Product P 21 - 60
Product Q 36 - 135
Product R 46 25 -
Standard time allowed per unit
Minutes 12(P) 18(Q) 30(R)
For the purpose of piece rate, each minute is valued at ₹ 0.10
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rate basis.
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earning are than 50% of basic
pay.
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.

 Piece Rate
Question 31. [STUDY MATERIAL, MAY 99]
During audit of account of G Company, your assistant found errors in the calculation of the wages of factory workers and he wants
you to verify his work.
He has extracted the following information:
(i) The contract provides that the minimum wage for a worker is his base rate. It is also paid for downtimes i.e., the machine is
under repair or the worker is without work. The standard work week is 40 hours. For overtime production, workers are paid
150 percent of base rates.
(ii) Straight Piece Work – The worker is paid at the rate of 20 paise per piece.

Your assistant has produced the following schedule pertaining to certain workers of a weekly pay roll:
Workers Wage Incentive Plan Total Down time Units Standard Base Gross wages
hours hours produced units rate as per book
Rajesh Straight piece work 40 5 400 - 1.80 85
Mohan* Straight piece work 46 - 455 - 1.80 95
John Straight piece work 44 - 425 - 1.80 85
(40 hours production)
*Total hours of Mohan include 6 overtime hours.
Prepare a schedule showing whether the above computations of worker’s wages are correct or not. Give details.

Question 32. [STUDY MATERIAL]

From the following information you are required to calculate the bonus and earnings under Halsey Efficiency system. The relevant
information is as under:
Standard working hours 8 hours a day
Standard output per hour in units 5
Daily wage rate ₹ 50
Actual output in units
Worker A 25 units
Worker B 40 units
Worker C 45 units

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 Halsey and Rowan System

Question 33. [MAY 11]
You are given the following information of a worker:
 Name of worker ‘X’
 Ticket No. 002
 Work started 1-4-11 at 8 a.m.
 Work finished 5-4-11 at 12 noon
 Work allotted Production of 2.160 units
 Time done and approved 2,000 units
 Time and units allowed 40 units per hour
 Wage rate ₹ 25 per hour
 Bonus 40% of time saved
 Worker X worked 9 hours a day.
You are required to calculate the remuneration of the worker on the following basis:
(i) Halsey plan and
(ii) Rowan plan

Question 34. [MAY 95, MAY 13 (SIMILAR)]

A worker produced 200 units in a week’s time. The guaranteed weekly wage payment for 45 hours is ₹ 81. The expected time to
produce one unit is 15 minutes which is raised further by 20% under the incentive scheme. What will be the earnings per hour of
that worker under Halsey (50% Sharing) and Rowan bonus scheme?

Question 35. [NOV 09]

2 hours allowed to a worker to produce 5 units and wages has been paid @ ₹ 25 per hour. In a 48 hours week the worker
produced 170 units.
You are required to calculate the total earnings and effective hourly rate of earnings of the worker under the following incentive
wage systems:
(i) Halsey 50 percent system
(ii) Rowan system

Question 36. [MAY 12]

The management of a company wants to formulate an incentive plan for the workers with a view to increase productivity. The
following particulars have been extracted from the books of company:

Piece Wage rate 10

Weekly working hours - 4
Hourly wages rate 40 (guaranteed)
Standard/normal time per unit 15 minutes.
Actual output for a week:

Worker A 176 pieces

Worker B 140 pieces

Under Halsey scheme, Worker gets a bonus equal to 50% of Wages of time saved.
Calculate earning of workers under Halsey’s and Rowan’s premium scheme.

 Rowan to Halsey – Effect of Change

Question 37. [MAY 09, NOV 09 (ADAPTED)]
The standard time for a job is 50 hours. The hourly rate of guaranteed wages is ₹ 9. Because of saving in time, a worker X gets an
hourly wages of ₹ 10.80 under Rowan premium bonus system. For the same saving in time, calculation the hourly rate of wages a
worker Y will get under Halsey premium bonus system assuming 50 per cent Bonus to worker.

Question 38. [NOV 09 ]

Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is ₹ 50. Because of the saving in time a worker a gets an
effective hourly rate of wages of ₹ 60 under Rowan premium bonus system. For the same saving in time, calculate the hourly rate
of wages a worker B will get under Halsey premium bonus system assuring 40% to worker.

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Question 39. [STUDY MATERIAL, NOV 09]
A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ₹ 30 per hour. The standard time per unit for a particular product is
4 hours. A machine man has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of ₹
37.50 on the manufacture of that particular product.
Required: What could have been his total earning and effective hourly rate, had been put on Halsey Incentive Scheme (50%)?

 Halsey and Rowan System-Comparative Cost Statement

Question 40. [RTP (ADAPTED)]
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
and his wage rate is ₹ 45 per hour. Material Cost of the Job is ₹ 480 and OH is recovered at 150% of Direct Wages. Calculate the
Factory Cost of the Job under – (a) Rowan, and (b) Halsey System of incentive payments.

 Halsey Rowan Comparative Analysis

Question 41. [MAY 91, MAY 10]
The time allowed for a job is 8 hours. The hourly rate is ₹ 8. Prepare a statement showing (a) Bonus earned, (b) Total Earnings of
workers, & (c) Hourly earnings, under Halsey & Rowan System, for each hours saved progressively.

Question 42. [Study Material]

A factory having the latest sophisticated machines wants to introduce an incentive scheme for its workers, keeping in view the
following:
(i) The entire gains of improved production should not go to the workers.
(ii) In the name of speed, quality should not suffer.
(iii) The rate setting department being newly established are liable to commit mistakes.

You are required to PREPARE a suitable incentive scheme and DEMONSTRATE by an illustrative numerical example how your
scheme answers to all the requirements of the management.

 Choice Of Plan Halsey Vs Rowan

Question 43. [MAY 04]
ZED Limited is working by employing 50 skilled workers; it is considering the introduction of incentive scheme-either Halsey
scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour productivity to cope up the increasing
demand for the product by 40%. It is believed that proposed incentive scheme could bring about an average 20% increase over the
present earnings of the workers; it could act as sufficient incentive for them to produce more.
Because of assurance, the increase in productivity has been observed as revealed by the figures for the month of April, 2004.
Hourly rate of wages (guaranteed) ₹ 30
Average time for producing one unit by one worker at the previous performance 1,975 hours
(This may be taken as time allowed)
Number of working days in the month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme.
(ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece.
(iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance.

Question 44. [Study Material]

Mr. A. is working by employing 10 skilled workers. He is considering the introduction of some incentive scheme - either Halsey
Scheme (with 50% bonus) or Rowan Scheme - of wage payment for increasing the Employee productivity to cope with the
increased demand for the product by 25%. He feels that if the proposed incentive scheme could bring about an average 20%
increase over the present earnings of the workers, it could act as sufficient incentive for them to produce more and he has
accordingly given this assurance to the workers.
As a result of the assurance, the increase in productivity has been observed as revealed by the following figures for the current
month:
Hourly rate of wages (guaranteed) - ₹ 40
Average time for producing 1 piece by one worker at the previous performance (This may be taken as time allowed) - 2 hours
No. of working days in the month - 25
No. of working hours per day for each worker - 8

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Actual production during the month - 1,250 units

Required:
(i) CALCULATE effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
(ii) CALCULATE the savings to Mr. A in terms of direct labour cost per piece under the schemes.

 Missing Figures – Halsey And Rowan

Question 45. [MAY 09]
Two workmen, A and B produce the same product using the same material. A is paid bonus according to Halsey plan, while B is
paid bonus according to Rowan plan. The time allowed to manufacture the product is 100 hours. A has taken 60 hours and B has
taken 80 hours to complete the product. The normal hourly rate of wages of workman A is ₹ 24 per hour. The total earnings of
both the workers are same. Calculate normal hourly rate of wages of workman B.

 Reverse Working – Halsey And Rowan

Question 46. [STUDY MATERIAL, NOV 97]
A job can be executed either through workman A or B. A takes 32 hours to complete the job while B 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 A is entitled to receive bonus according to Halsey plan
(50%) sharing while B is paid bonus as per Rowan plan. The works overheads are absorbed on the job at ₹ 7.50 per labour hour
worked. The factory cost of the job comes to ₹ 2,600 irrespective of the workman engaged.
Find out the hourly wage rate and cost of raw material input. Also show cost against each element of cost included in a factory
cost.
[Hourly wage rate is ₹ 10 and cost of raw material input is ₹ 2,000]

Question 47. [May 13]

A skilled worker is paid a guaranteed wage rate of ₹ 120 per hour. The standard time allowed for a job is 6 hour. He took 5 hours
to complete the job. He is paid wages under Rowan Incentive Plan.
(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of
earnings, calculate the time in which he should complete the job.

 Halsey And Rowan Scheme’s Effect On Profit

Question 48. [MAY 02]
The finishing shop of a company employs 60 direct workers. Each worker is paid ₹ 400 as wages per week of 40 hours. When
necessary, overtime is worked upto a maximum of 15 hours per week per worker at time rate plus one-half as premium. The
current output on an average is 6 units per man 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 man hour. The workers will, if necessary, continue to work overtime upto
the specified limit although no premium on 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 19,200 units. The selling price is ₹ 11 per unit and the direct Material Cost is ₹ 8 per unit. The variable overheads
amount to ₹ 0.50 per direct labour hour and the fixed overheads is ₹ 9,000 per week. Prepare a Statement to show the effect on
the Company’s weekly profit of the proposal to introduction (a) Halsey Scheme, and (b) Rowan Scheme

 Halsey And Rowan – Simultaneous Equation

Question 49. [STUDY MATERIAL, NOV 97, NOV 07]
Two workmen, ‘A’ and ‘B’, produce the same product using the same material. Their normal wage rate is also the same. ‘A’ is paid
bonus according to the Rowan system, while ‘B’ is paid bonus according to the Halsey system. The time allowed to make the
product is 50 hours. ‘A’ takes 30 hours while ‘B’ takes 40 hours to complete the product. The factory overhead rate is ₹ 5 per
man-hour actually worked. The factory cost for the product for ‘A’ is ₹ 3,490 and for ‘B’ it is ₹ 3,600.
Required:
(a) Compute the normal rate of wages;
(b) Compute the cost of materials cost;
(c) Prepare a statement comparing the factory cost of the products as made by the two workmen.

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 Equal Wages Under Halsey And Rowan Scheme

Question 50. [MAY 91, Study Material]
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).

 Choice Of Incentive Scheme

Question 51. [STUDY MATERIAL, NOV 86]
A factory having the latest sophisticated machines wants to introduce an incentive scheme for its workers, keeping in view the
following:
(i) The entire gains of improved production should not go to the workers.
(ii) In the name of speed, quality should not suffer.
(iii) The rate setting departments being newly established are liable to commit mistakes.
You are required to devise a suitable incentive scheme and demonstrate by an illustrative numerical example how your scheme
answers to all the requirements of the management.

Solution:
Rowan Scheme of premium bonus (variable sharing plan) is a suitable incentive scheme for the workers of the factory. If this
scheme is adopted, the entire gains due to time saved by a worker will not pass to him.
Another feature of this scheme is that a worker cannot increase his earnings or bonus by merely increasing its work speed because
bonus under Rowan Scheme is maximum when the time taken by a worker on a job is half of the time allowed.
Lastly, Rowan System provides a safeguard in the case of any loose fixation of the standards by the rate-setting department. It
may be observed from the following illustration that in the Rowan Scheme the bonus paid will be low due to any loose fixation of
standards.

 Job Costing and Labour Cost

Question 52. [MAY 10]
Following are the particulars for April, relating to four employees working in a factory exclusively for job No. 201.
Employee Designation Wages
Employee I Foreman ₹ 6400 per month
Employee II Mechanic ₹ 180 per day
Employee III Machine Operator ₹ 150 per day
Employee IV Workman ₹ 120 per day
The normal working hours per week of six days are 48 at 8 hours per day. Sundays are paid holidays and there was no other
holiday during the month. Provident Fund Contribution was 12% of monthly wages by both Employer and Employee. Employees’
State Insurance Contribution was 1.75% of Monthly Wages by Employee and 4.75% of Monthly wages by Employer.
From the foregoing data, calculate –
1. Net wages payable by the Employer for the month.
2. Total Amount of Provident Fund Contribution to be deposited by Employer.
3. Total Amount of ESI Contribution to be deposited by Employer.
4. Total Labour Cost to the Employer for the month of April, 2010 chargeable to Job No. 201.
5. Total cost of Job no. 201 requiring Material valued at ₹ 40,500 and Overheads at 50% of Prime Cost.

 Computing No. Of Operators for each operation and Labour Cost

Question 53. [MAY 96]
An article passes through five hand operations as follows:
Operation No Time per article Grade of worker Wage rate per hour
1 15 minutes A Re. 0.65
2 25 minutes B Re. 0.50
3 10 minutes C Re. 0.40
4 30 minutes D Re. 0.35
5 20 minutes E Re. 0.30

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Employee Cost and Direct Expenses BY: CA Nitin Guru
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement showing for each
operation and in total the number of operators required, the labour cost per dozen and the total labour cost per week to produce
the total targeted output.

Operation No. 1 2 3 4 5
No. of operators 45 75 30 90 60
Labour Cost per dozen ₹ 1.95 ₹ 2.5 ₹ 0.8 ₹ 2.1 ₹ 1.2
Labour Cost per week ₹ 1,170 ₹ 1,500 ₹ 480 ₹ 1,260 ₹ 720

 Miscellaneous Theory

 Time and Motion Study

Question 54. [RTP, MAY 99]
What is Time and Motion/Work study?

Solution:
Time Study: It determines the standard time to complete a job i.e. the time to be spent on a job.
Motion Study: It determines the proper method to perform a job so as to reduce or eliminate unnecessary movements during the
job.
Both Time Study and Motion Study are techniques to reduce the Labour Cost.

Procedure:
(a) Observe the workers and record their movements.
(b) Classify the movements into Necessary and Wasteful and eliminate the wasteful movements.
(c) Observe and record the time taken for necessary movements.
(d) Determine the standard time by adding average time required to complete a job and the Idle Time Allowance.

Objectives:
(1) To avoid wasteful movements.
(2) To Determine Standard time and method to complete a job.
(3) To determine fair rate of wages etc.

 Time Keeping and Time Booking

 Time Keeping
Question 55. [MAY 94]
What is Time Keeping and what are its objectives?

Solution:
Time Keeping means correct recording of the employees attendance time i.e. recording the time of arrival and departure at the
factory gate.

Objectives of Time Keeping:

(1) For Preparation of Payroll: Wage bills are prepared based on the records of time keeping department.
(2) For Calculating Overtime: Overtime is determined on the basis of total time spent, and the excess time over and above
regular working hours.
(3) For Calculating and Controlling Labour Cost: From payrolls, total labour cost can be ascertained. It is further classified into
Direct and Indirect, in order to facilitate control.
(4) For ascertaining idle time: Idle time is the difference between total time spent (as per Time-Keeping Records) and total
productive time (as per Time-Booking Records).
(5) For disciplinary Purposes: Time Keeping is a part of organizational procedures. It reflects the discipline that prevails in the
organization.
(6) For Overhead Distribution: Production Overhead is absorbed over jobs or products using Labour Hour Rate as the basis.

Question 56. [Nov 18]

Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) - ₹ 30,000

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Employee Cost and Direct Expenses BY: CA Nitin Guru
(ii) Bonus - 25% of salary
(iii) Employer's contribution to PF, ESI etc. - 15% of salary
(iv) Total cost at employees' welfare activities - ₹ 6,61,500 per annum
(v) Total leave permitted during the year - 30 days
(vi) No. of employees - 175
(vii) Normal idle time - 70 hours per annum
(viii) Abnormal idle time (due to failure of power supply) - 50 hours
(ix) Working days per annum - 310 days of 8 hours

You are required to calculate:

1. Annual cost of each employee
2. Employee cost per hour
3. Cost of abnormal idle time, per employee

Question 57. [RTP, MAY 94]

What is time booking and what are its objectives?

Solution:
Time Booking: It means the recording of the time spent by each individual worker in the factory on various jobs, day by day and
period by period.

Objectives
1. To ensure that time paid for, according to time keeping, has been properly utilized on different jobs or work orders.
2. To ascertain the cost of each job or work order.
3. To provide a basis for the apportionment of overhead expenses over various jobs/work orders when the method for the
allocation of overheads depends upon time spent on different jobs.
4. To calculate the amount of wages and bonus payable under the wages incentive system.
5. To ascertain the labour hours spent on each job and the idle labour hours.

 Job Evaluation and Merit Rating

Question 58. [RTP, NOV 91, MAY 94, NOV 96, NOV 99, NOV 01, MAY 08]
Distinguish between Job Evaluation and Merit Rating

Solution:
The main points of distinction job evaluation and merit rating are as follows:
1. 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
these jobs.
2. 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.
3. Job evaluation simplifies wage administration by bringing 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.

 Casual Worker and Out Worker

Question 59.
Distinguish between Casual Worker and Outworker? [MAY 97]
OR
Distinguish how will you deal with Casual Worker and workers employed on outdoor work in Cost Accounting? [MAY 02]

Solution:
Casual Workers
Casual Workers (badli workers) are employed temporarily, for a short duration to cope with sporadic increase in volume of work.
If the permanent labour force is not sufficient to cope effectively with a rush of work, additional labour (casual worker) are
employed to work for a short duration.
Casual workers are engaged on a daily basis. Wages are paid to them either at the end of the day’s work or after a periodic
interval. Wages paid are charged as direct or indirect labour cost depending on their identifiability with specific jobs work orders,
or department.

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Outdoor workers
Outdoor workers are those workers who do not carry out their work in the factory premises. Such workers either carry out the
assigned work in their homes (e.g., knitwear, lamp shades) or at a site outside the factory.
Rigid control should be exercised over the out-workers especially with regard to following:
1. Reconciliation of materials drawn/issued from the store with the output.
2. Ensuring the completion of output during the stipulated time so as to meet comfortably the orders and contracts.

 Treatment of Various Items in Labour Cost

Question 60.
Give the treatment of following in Cost records
(a) Fringe Benefits [RTP, NOV 92, NOV 98, NOV 99, MAY 11]
(b) Training Expenses [NOV 00]
(c) Supervisor’s Wages [MAY 10]
(d) Expenses for Welfare Activities [MAY 96]
(e) Holiday Pay [MAY 10]
(f) Overtime in Lubricating Department caused by general pressure of work [MAY 10]
(g) Fines recovered from workers [MAY 10]

Solution:
(a) Fringe Benefits:
(1) If the amount of Fringe Benefits is considerably large, it may be recovered as direct charge by mean of a
supplementary Wage or Labour Rate.
(2) Otherwise these may be treated as part of production OH.
(b) Training Expenses: Training Expenses of Factory Workers/Office Staff/Salesmen are treated POH/AOH/SOH respectively.
These are apportioned over various departments of the Firm, based on the number of workers.
(c) Supervisor’s Wages: Included in Departmental OH, being Indirect Costs.
(d) Expenses for Welfare Activities: They may be specially recorded under the head ‘’Welfare Department Costs’’. Such expense
should be apportioned between Factory, Office, Selling and Distribution OH on the basis of number of employees involved.
(e) Holiday Pay:
(1) Paid Holiday and Leave Wages can be included in Departmental OH, by recording such wages separately.
(2) Alternatively, the wage rate for costing purposes can be inflated, so as to include Holiday and Leave Wages. This can be
done only in the case of Direct Workers.
(f) Overtime in Lubricating Department caused by general pressure of work: Charge to Job – treated as Factory Overheads
(g) Either ignored or Reduction from Labour Cost.

 Practice Questions
Question 61. [Nov 17]
A skilled worker is paid a guaranteed wage rate of ₹ 150.00 per hour. The standard time allowed for a job is 50 hours. He gets an
effective hourly rate of wages of ₹ 180.00 under Rowan Incentive Plan due to saving in time. For the same saving in time,
calculate the hourly rate of wages he will get, if he is placed under Halsey Premium Scheme (50%).

Question 62. [Nov 18]

The following information of a work is given:
Weekly working hours - 45
Wage Rate per hour (₹ ) - 8.00
Piece Rate per Unit (₹ ) - 4.00
Normal time taken per piece - 20 Minutes
Normal Output Per Week - 100 Pieces
Actual Output for the week - 120 Pieces
Differential Piece Rate - 80% of Piece Rate when actual output is below normal output that is 100 pieces and 120% of Piece Rate
when actual output is above normal output.
You are required to calculate the earnings of a worker for a week under following plans:
Halsey Premium Scheme (50% sharing)

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Question 63. [May 18]
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours. His wage rate is ₹ 5 per hour. Following
additional information are also available:
Material cost of work - ₹ 50
Factory overheads - 100% of wages
Calculate the factory cost of work under the following methods of wage payments:
(i) Rowan Plan
(ii) Halsey Plan

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 Overheads: Absorption Costing Method BY: CA NITIN GURU

Chapter 4
Overheads: Absorption Costing Method
 Meaning
Question 1.
What is Overhead Cost?

Solution 1:
Overheads represent expenses that have been incurred in providing certain ancillary facilities or services which facilitate or make
possible the carrying out of the production process; by themselves these services are not of any use.

 Classification of Overheads
Question 2.
How are Overheads classified on the basis of Functions and Nature?

Solution 2:
(I) Types of Overheads on the basis of function:
(i) Factory or Manufacturing Overheads:
(a) Stores Overheads (Expenses connected with purchasing and handling of materials);
(b) Labour Overheads (Expenses connected with labour); and
(c) Factory Administration Overheads (Expenses connected with administration of the factory).

(ii) Overheads and Administration Overheads:

(a) Administration Expenses (Expenses incurred on managerial personnel – their salaries, costs of facilities provided to
them and salaries of their personal staff); and
(b) Office Expenses (Expenses on the routine office work).

(iii) Selling and Distribution Overheads:

(a) Selling Expenses (Expenses incurred to persuade customers to purchase the firm’s products and, or engage its services,
that is to maintain and expand the market); and
(b) Distribution Expenses are those which are incurred to execute orders.

(iv) Research and Development Overheads:

Research Expenses and Development Expenses.

(II) Types of Overheads on the basis of Nature:

(i) 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 one period to another except when they are deliberately changed, e.g., on increments being granted
to staff or additional staff being engaged. Fixed Overhead per unit of output is inversely related to level of activity.

(ii) Variable: Expenses that change in proportion to the change in the volume of activity. Example: Power consumed,
consumable stores, etc. Variable Expenses are generally constant per unit of output or activity.

(iii) Semi Variable: These expenses usually have two parts – Fixed and 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.
(b) Change in the same direction as change in the level of activity but not in the same proportion.
(c) Expenses which remain fixed upto a particular level and thereafter become variable, or vice-versa.
Examples of such expenses are: Delivery van expenses, telephone charges, etc.

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 Absorption Costing
Question 3.
What are the steps involved in the study of Manufacturing Overheads? [RTP]
Distinguish between Cost Allocation and Cost Absorption? [MAY 98, NOV 01,MAY 13]
Explain how Department Overhead Rates are arrived at? [NOV 85]

Solution 3:
Following steps are involved in the study of Manufacturing Overheads:
(i) Estimation and Collection of Manufacturing Overheads: The first stage is to estimate the amount of overheads, keeping in view
the past figures and adjusting them for known future changes. There are four main sources available for the collection of Factory
Overheads viz,
(a) Invoices;
(b) Stores Requisition;
(c) Wage Analysis Book;
(d) Journal Entries.

(ii) Cost Allocation: The term ‘allocation’ refers to assignment or allotment of an entire item of cost to a particular cost centre or
cost unit. The estimated amount of various items of manufacturing overheads should be allocated to various cost centres or
departments.

(iii) Cost Apportionment: There are some items of estimated overheads (like the salary of the works manager) which cannot be
directly allocated to the various departments and cost centres. Such unallocable expenses are to be spread over the various
departments or cost centres on an appropriate basis. This is called apportionment.

(iv) Re-apportionment: The overheads of service departments are to be shared by the production departments since service
departments operate primarily for the purpose of providing services to production departments. The process of assigning service
department overheads to production departments is called re-assignment or re-apportionment.

(v) Recovery/Absorption:
 Absorption: Absorption of Overhead is charging of Overhead from Cost Centres to products or services, by means of
Absorption Rates for each Cost Centre. Overhead Absorption Rate = Total Overhead of a Cost Centre ÷ Total Quantum of
Base.
 Base: The base (Denominator) is selected on the basis of type of the Cost Centre and its contribution to the products or
services, example: machine hours, labour hours, quantity produced, etc.
 Absorbed Overhead: Overhead Absorbed = Overhead Absorption Rate × Units of base in product or service.
Note: Apportionment is called Primary Distribution, and Re-Apportionments is called as Secondary Distribution.

Question 4. [RTP, NOV 90]

List some common expenses and the methods of apportioning the same?

Solution 4:
Common Expenses, i.e. Overhead Basis of Apportionment
 Rent/Maintenance/Insurance on Building Floor Space
 Factory Lighting Expenses Number of Light Points or Floor Space
 Depreciation and Insurance of Assets Value of Assets
 Power for machines Horse Power (HP) Rating or (HP Rating × Machine Hours operated)
 Indirect Wages Direct Wages
 Supervision Time Spent, or Number of Employees, or Direct Wages
 Material Handling Expenses Value of Materials consumed
 Purchase Department Expenses Number of Purchase Orders or Value of Purchases
 Miscellaneous Production Expenses Direct Wages
 General Administration Expenses Works Cost / Labour Cost / Machine Cost
 Personnel Department Expenses Number of Employees

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 Credit Department Expenses Value of Credit Sales

 Carriage Outwards/Delivery Expenses Volume of units sold, weight or distance, etc.
 Advertisement, Sales Commission, etc. Sales (Actuals)
 Sales Assistants Salaries Time devoted for various products

 Distribution of Overheads
Cost Distribution Sheet
Particulars Basis of Apportionment Production Department Service Department
A B C X Y
Rent Floor Area
Canteen Expenses Number of Workers Primary
Lighting Number of Light Points/Floor Area Distribution
Direct Labour Allocation
a b C x Y
Secondary
(+) (+) (+) Distribution

Even the Direct Expenses of Service Departments can be taken in Overheads because the whole Service Department is considered to
be of indirect nature.

 Overheads are distributed in following steps:

STEP I: PRIMARY DISTRIBUTION:
 Here the overheads are apportioned to various departments on some rational basis.
 If there are some already pre-distributed expenses they should simply be written as it is in the production departments.

STEP II: SECONDARY DISTRIBUTION:

The total overhead of Service Department should be reapportioned in production departments on some particular method like:
1) Direct Distribution Method
2) Step Distribution Method
3) Reciprocal Service Method

STEP III: TERTIARY STEPS:

It means dividing the total Overheads by some suitable base to calculate Overhead Absorption Rate.
There are following methods:
(i) Rate per unit of output
(ii) Percentage of Direct Material Cost
(iii) Percentage to Direct Labour Cost
(iv) Percentage to Prime Cost
(v) Direct Labour Hour Rate
(vi) Machine Hour Rate

Question 5.
What are the methods of re-apportionment of Service Department Expenses to Production Departments? Of these which method is
conceptually preferable? [RTP, NOV 99, NOV 10]
Explain Step Method and Reciprocal Services Method of Secondary Distribution of Overheads? [NOV 04, RTP]

Solution 5:
Methods of Re-apportionment of Service Department Expenses to Production Departments are as follows:

Direct Re – Distribution Method:

 Under this method service department costs are apportioned over the production departments only.
 Here we assume that one service department does not provide any services to other service department.
 So, it is simple to distribute and it can be solved quickly in single step only.

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Step Distribution Method / Step Ladder Method:
This method gives cognizance to the service rendered by service department to another service department. The sequence here begins
with the department that renders service to the maximum number of other service departments.

Reciprocal Service Method

 These methods are used when different service departments render services to each other, in addition to rendering services to
production departments. In such cases various service departments have to share overheads of each other.
 So, here the Balance will not easily become zero.

Following methods are used:

(a) Repeated Distribution Method:

Here we keep on distributing the amount one by one till the time the total amount distributable does not become small like
rupee 1.
For last round of Distribution, distribute the amount only in production department not to the other service department.

(b) Simultaneous Equation Method:

Here we make equation for total amount of service department. Then these amounts are distributed in the main equation and then
solved. So, we quickly get the balance at zero.

 Apportionment and Direct Re-Distribution

Question 6. [STUDY MATERIAL]
XL Ltd. has three production departments and four service departments. The expenses for these departments as per primary
Distribution Summary are as follows:
Production Departments: ₹ ₹
A 30,000
B 26,000
C 24,000 80,000
Service Departments: ₹ ₹
Stores 4,000
Time-keeping and Accounts 3,000
Power 1,600
Canteen 1,000 9,600
The following information is also available in respect of the production departments:
Dept. A Dept. B Dept. C
Horse power of machine 300 300 200
Number of workers 20 15 15
Value of stores requisition in (₹ ) 2,500 1,500 1,000
Apportion the costs of service department over the production departments.

Question 7. [RTP]
TRI-D has three production Departments – Extrusion, Machining and Finishing and a Service Department known as production services
which for the Production Departments in the ratio of 3:2:1.
st
The following which represent normal normal activity levels have been budgeted for the ending 31 December.
Cost (In ₹ ) Extrusion Machining Finishing Production Services Total
Direct Wages 58,000 72,000 90,000 - 2,20,000
Direct Materials 40,000 29,000 15,000 - 84,000
Indirect Wages 15,000 21,000 8,000 58,000 1,02,000
Depreciation 84,000
Rent 22,000
Power 1,80,000

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Personnel Department Expenses 60,000

Insurance 48,000
Other Data:
Direct Labour Hours 7,250 9,000 15,000 - 31,250
Machine Hours 15,500 20,000 2,500 2,000 40,000
Floor Area (sqm) 800 1,200 1,000 1,400 4,400
Fixed Assets (₹ ) 1,60,000 1,40,000 30,000 70,000 4,00,000
Employees 40 56 94 50 240
1. Prepare an Overhead Analysis Sheet and calculate Overhead Absorption Rates for the production Departments.
2. The following data are available for the actual result of the Extrusion Department for the period.
Actual Overheads = ₹ 2,11,820, Actual Labour Hours = 7,380, Actual Machine Hours = 16,250.
Calculate the Under/Over Recovery of Overheads for the Extrusion Department.

 Re – Apportionment : Direct Method and Step Ladder Method

Question 8. [Study Material]
Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1and S2 details pertaining to
which are as under:
P1 P2 P3 S1 S2
Direct wages (₹) 3,000 2,000 3,000 1,500 195
Working hours 3,070 4,475 2,419 - -
Value of machines 60,000 80,000 1,00,000 5,000 5,000
(₹)
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sp. 2,000 2,500 3,000 2,000 500
ft.)

The following figures extracted from the Accounting records are relevant:
(₹)
Rent and Rates 5,000
General Lighting 600
Indirect wages 1,939
Power 1,500
Depreciation on machines 10,000
Sundries 9,695

The expenses of the Service Departments are allocated as under :

P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -

FIND OUT the total cost of product X which is processed for manufacture in Departments P1, P2 and P3 for 4, 5 and 3 hours
respectively, given that its Direct Material Cost is ₹ 50 and Direct Labour Cost is ₹ 30.

Question 9. [STUDY MATERIAL]

Suppose the expenses of two production departments A and B and two service department X and Y are as under:
Particulars Amount (₹ ) Apportionment Basis
Y A B
X 2,000 25% 40% 35%
Y 1,500 - 40% 60%
A 3,000
B 3,200

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Question 10. [Study Material]
Deccan Manufacturing Ltd., have three departments which are regarded as production departments. Service departments’ costs are
distributed to these production departments using the “Step Ladder Method” of distribution. Estimates of factory overhead costs to
be incurred by each department in the forthcoming year are as follows. Data required for distribution is also shown against each
department:
Department Factory overhead (₹) Direct labour hours No. of employees Area in sq. m.
Production:
X 1,93,000 4,000 100 3,000
Y 64,000 3,000 125 1,500
Z 83,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000

The overhead costs of the four service departments are distributed in the same order, viz., P, Q, R and S respectively on the following
basis.

Department - Basis
P - Number of employees
Q - Direct labour hours
R - Area in square metres
S - Direct labour hours

You are required to:

a) PREPARE a schedule showing the distribution of overhead costs of the four service departments to the three production
departments; and
b) CALCULATE the overhead recovery rate per direct labour hour for each of the three production departments.

Question 11. [NOV 06]

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:
Particulars HR (₹ ) Maintenance (₹ ) Design (₹ )
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
5,00,000 4,60,000 7,00,000

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 production departments.
(ii) Determine the proper sequence to use 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.

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 Re – Distribution of Power Generation Costs – Step Ladder Method

Question 12. [NOV 85, Nov 18]
Self-help Ltd has Gen sets and produces its own power. Data for Power Costs are as follows:
Particulars Production Department Service Department
A B X Y
Needed at Capacity Production (HP hours) 10,000 20,000 12,000 8,000
Used during a month (HP hours) 8,000 13,000 7,000 6,000
During the month, costs for generating power amounted to ₹ 9,300, of this ₹ 2,500 is Fixed Cost. Service Department X renders
service to Departments A, B and Y in the ratio 13: 6: 1, while Y renders service to Departments A and B in the ratio 31: 3. Given that the
Direct Labour Hours in Departments A and B are 1,650 hours and 2,175 hours respectively, find out the Power Cost per Labour Hour in
each of these two Departments.

 Re – Apportionment – Repeated Distribution Method

Question 13. [STUDY MATERIAL]
PH Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’ and two service departments ‘X’ and ‘Y’.
The following is the budget for December 2005:
Particulars Total (₹ ) A (₹ ) B (₹ ) C (₹ ) X (₹ ) Y (₹ )
Direct material 1,000 2,000 4,000 2,000 1,000
Direct wages 5,000 2,000 8,000 1,000 2,000
Factory rent 4,000
Power 2,500
Depreciation 1,000
Other overheads 9,000
Additional information:
Area (Sq.ft.) 500 250 500 250 500
Capital value (₹ Lakhs) of assets 20 40 20 10 10
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25

A technical assessment of the apportionment of expenses of service departments is as under:

Particulars A (%) B (%) C (%) X (%) Y (%)
Service Dept. 'X' 45 15 30 - 10
Service Dept. 'Y' 60 35 - 5 -

Required:
(i) A statement showing distribution of overheads to various departments.
(ii) A statement showing re-distribution of service departments expenses to production departments.
(iii) Machine hour rates of production departments ‘A’, ‘B’ and ‘C’.
(iv) A statement showing distribution of overheads to various departments after re-apportioning service departments’ overhead by
using simultaneous equation method.

Question 14. [NOV 96]

A company has two production departments and two service departments. The data relating to a period are as under:
Particulars Production Departments Service Departments
PD1 PD2 SD1 SD2
Direct Materials (₹ ) 80,000 40,000 10,000 20,000
Direct Wages (₹ ) 95,000 50,000 20,000 10,000

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Overheads (₹ ) 80,000 50,000 30,000 20,000

Power Requirement of 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 requirement of these departments is met by a power generation plant. The said plant incurred an expenditure, which is not
included above, of ₹ 1,21,875 out of which a sum of ₹ 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 bases:
Particulars PD1 PD2 SD1 SD2
SD1 50% 40% - 10%
SD2 60% 20% 20% -
You are required to:
(i) Apportion the power generation plant costs to the four departments.
(ii) Re-apportion service department cost 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 ₹ 5 and 4 per hour respectively.

 Re – Apportionment – Simultaneous Equation Method

Question 15. [STUDY MATERIAL]
Service departments expenses
₹
Boiler House 3,000
Pump Room 600
3,600
The allocation is:
Particulars Production department Boiler House Pump Room
A B
Boiler House 60% 35% - 5%
Pump Room 10% 40% 50% -

Question 16. [May 18]

Delta Ltd. is a manufacturing concern having two production departments PI and P2 and two service departments S1 and S2. After
making a primary distribution of factory overheads, the total overheads of all departments are as under:
In (₹)
P1 4,02,000
P2 2,93,000
S1 3,52,000
S2 33,000

Overheads of service departments are reapportioned as below :

P1 P2 S1 S2
S1 40% 50% - 10%
S2 50% 40% 10% -

A product 'Z' passes through all the two production departments – P1 and P2 and each unit of product remain there in process for 2
and 3 hours respectively. The material and labour cost of one unit of product ‘Z’ is ₹ 500 and ₹ 350 respectively.
The company run for all the 365 days of the year and 16 hours per day. You are required:
(i) To make secondary distribution of overheads of service departments by applying Simultaneous Equation method and
(ii) Determine the total cost of one unit of product Z.

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(c) Trial and Error Method

Question 17. [Study Material, Nov 12]
The following account balances and distribution of indirect charges are taken from the accounts of a manufacturing concern for the
year ending on 31st March, 2012:
Item Total Amount Production Departments Service Departments
(₹) X (₹) Y (₹) Z ( ₹) A (₹) B (₹)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent's 96,000 - - 96,000 - -
Salary
Fuel & Heat 15,000
Power 1,80,000
Rent & Rates 1,50,000
Insurance 18,000
Meal Charges 60,000
Depreciation 2,70,000

The following departmental data are also available:

Item Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets (₹) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20

Expenses charged to the service departments are to be distributed to other departments by the following percentages:
X Y Z A B
Department A 30 30 20 - 20
Department B 25 40 25 10 -

Prepare an overhead distribution statement to show the total overheads of production departments after re-apportioning service
departments' overhead by using simultaneous equation method.' Show all the calculations to the nearest rupee.

 Segregation of Semi-Variable Expense

Question 18. [RTP, NOV 97, MAY 02]
List the methods of segregating Semi-Variable Costs into Fixed and Variable Cost.

Solution 18:
The segregation of Semi-Variable Costs into Fixed and Variable Costs can be carried out by using the following methods:
1. Graphical Method
2. High Points and Low Points Method
3. Analytical Method
4. Comparison by Period or Level of Activity Method
5. Least Squares Method.

Question 19. [MAY 09]

Write short note on High and Low Points of segregating Semi-Variable Costs?

Solution 19:
 Determine the Sales Value and Total Costs at the highest volume and lowest volume.
 Compute Variable Costs as a % of Sales Value =

 Compute Variable Costs at either highest or lowest volume as Sales × Variable Cost % computed above.
 Compute Fixed Costs = Total Costs – Variable Costs

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Question 20. [MAY 09]

Following information is available for the first and second quarter of the year 2008-09 of ABC Limited:
Production (in units) Semi-variable cost ( ₹ )
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000

You are required to segregate the semi-variable cost and calculate : (a) Variable cost per unit; and (b) Total fixed cost.

 Analysis of Semi Variable Expense

Question 21. [NOV 95]
Beginners & Co. has recorded the following data in the two most recent periods:
Total Cost of Production (₹ ) Volume of Production (Units)
14,600 800
19,400 1,200
What is the best estimate of the Firm’s Fixed Costs per period?

Question 22. [NOV 09]

From the following information, calculate the amount of Variable OH per unit & amount of Total Fixed OH for the whole year.
Particulars Output (Units) Total Overheads (₹ )
st th
1 April to 30 June 10,000 40,000
st st
1 July to 31 March 35,000 1,35,000

 Different Bases of Absorption

Question 23.
What are the methods of Absorbing Overheads to various products or jobs?

Solution 23:
Methods of Absorbing Overheads are as follows:
I. Direct Method
Rate per Unit of Output Method
Overhead Rate = × 100

II. Indirect Method

(i) Percentage to Direct Material and Prime Cost
Overhead Rate = × 100

(ii) Percentage to Direct Labour

Overhead Rate = × 100

(iii) Labour Hour Rate = × 100

(iv) Machine Hour Rate = × 100

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Question 24. [MAY 99, NOV 00, MAY 05, MAY 07, NOV 07]
What are Blanket and Departmental Overhead Recovery Rate? When should they be used?

Solution 24:
(1) Blanket Overhead Rate: Blanket Overhead Rate refers to the computation of one single overhead rate for the whole factory.
Blanket Rate =

A blanket rate should be applied in the following cases:

(a) Where only one major product is being produced.
(b) Where several products are produced, but
(i) All products pass through all departments; and
(ii) All products are processed for the same length of time in each department.
Where these conditions do not exist, departmental rates should be used.

(2) Multiple/Departmental Overhead Rate: It involves computation of separate rates for each Department, Cost Centre and each
product, for both fixed and variable expenses. It may be computed as follows:
Multiple Overhead Rate =

Using multiple overhead rates, jobs or products are charged with varying amount of Factory Overhead, 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.
Note: Departmental Overhead Rates are used in situations where Blanket Rate cannot be applied.

 Impact of Blanket and Departmental Overhead Recovery Rates

Question 25. [STUDY MATERIAL, NOV 94]
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 Materials (₹ ) Direct Wages (₹ ) Factory Overheads (₹ ) Direct Labour Hour Machine Hours
Budget
Machining 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 -
Actual
Machining 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 7083:
Department Direct materials (₹ ) Direct wages (₹ ) Direct labour hour Machine hours
Machining 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:
(i) Calculate the overhead absorption rate as per the current policy of the company and determine the selling price of the Job No.
CW 7083.
(ii) 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.
(iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii) above.

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(iv) Calculate the department wise and total under or over recovery of overheads based on the company’s current policy and the
method(s) recommended by you.

 Choice of Method of Recovery

Question 26. [STUDY MATERIAL]
The products of a factory pass through two departments, though the output emerging from the first department is also saleable. The
direct labour in the two processes per period is ₹ 60,000 and ₹ 40,000 and the indirect expenses are ₹ 45,000 and ₹ 40,000. The rate
for recovery of the overheads is 85%. Do you think the method followed is proper?
[There should be separate rates for the two departments.]

 Various Methods of Absorption and Job Costs

Question 27. [RTP]
The following figures have been extracted from the books of a manufacturing Company. All jobs pass through the Company’s two
Departments:
Particulars Welding Department Finishing Department
Material Labour ₹ 60,000 ₹ 50,000
Direct Labour ₹ 30,000 ₹ 15,000
Factory Overheads ₹ 18,000 ₹ 12,000
Direct Labour Hours 12,000 hours 5,000 hours
Machine Hours 10,000 hours 2,000 hours
The following information relates to Job 27:
Material ₹ 1,200 ₹ 100
Direct Labour ₹ 650 ₹ 250
Direct Labour Hours 265 hours 70 hours
Machine Hours 255 hours 25 hours
1. List 5 methods of absorbing Factory OH by jobs, showing the rate for each Department under the methods, and
2. Prepare a statement showing the different cost results for Job 27 under each of the methods referred to.

Question 28. [STUDY MATERIAL]

The actual figures relating to production for a period in a factory were as follows:
Material used ₹ 5,00,000
Direct labour (Total 1,20,000) ₹ 4,00,000
Factory expenses ₹ 3,00,000
Machine hours totaled 1,00,000
A job requires ₹ 20,000 in material, and 4,000 hours of labour @ ₹ 3 per hour (on the average) of which 2,800 were machine hours.
Ascertain the cost of the job using different methods of absorbing overheads.
[₹ 44,000, ₹ 41,000, ₹ 42,667, ₹ 42,000 and ₹ 40,400 respectively on the basis of materials, labour, prime cost, productive labour
hours and machine hours.]

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 Treatment of Absorption Differences

Question 29.
Describe the accounting treatment of Under Absorption of Production Overheads[RTP, MAY 86, NOV 89, MAY 94, NOV 98, MAY 04, MAY 06, NOV 10, NOV 14, NOV 15]
Describe the accounting treatment of Over Absorption of Production Overheads? [RTP, NOV 89, MAY 94, NOV 98, MAY 04, MAY 06, MAY 10, NOV 14, NOV 15]

Solution 29:
 Over and Under Absorption of Overheads
Because of Abnormal Factor on very small Reversible Overhead Under and Over
Because of Normal Error amount Absorption
Significant Amount In such a case transfer to Costing P & L. If Overhead are easily reversible then they
Use Supplementary Rate Because abnormal cost cannot be changed from Should be left in the Balance in hope of
Can be positive or negative Production. reversing them in next Accounting Period.
Positive Supplementary Rate =

Negative Supplementary Rate =

 In Under Absorbed Case

Positive Supplementary Rate =

 Sold Units
 Finished Goods Units
 Equivalent WIP Units
We will add amount to
 Cost of Sales
 Finished Goods Stock
 WIP Stock

 In Over Absorbed Case

Negative Supplementary Rate =

 Sold Units
 Finished Goods Stock
 WIP Stock

When we add extra overhead to Cost of Sales

the cost is appearing to increase. But as this
amount cannot be recovered because it has
already been sold out so we will have to
suffer
a loss equal to this much amount.

Note:
 Abnormal Extra Cost Incurred like Loss due to faulty planning or other abnormal wastages are not added in the overheads
because they should not be charged from the customers.
 These expenses should be debited in Costing P & L Account because they are abnormal loss not a normal loss.

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 Treatment of Under Absorption

Question 30. [MAY 08, Nov 18, RTP Nov 2019]
PQR manufactures – 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 budgeted production overheads of the factory are ₹
10,08,000 and budgeted machine hours are 96,000.
For a period of first six months of the financial year 2007-2008, following information were extracted from the books:
Actual production overheads ₹ 6,79,000
Amount included in the production overheads:
Paid as per court’s order ₹ 45,000
Expenses of previous year booked in current year ₹ 10,000
Paid to workers for strike period under an award ₹ 42,000
Obsolete stores written off ₹ 18,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 22,000 units
Works-in-progress
(50% complete in every respect) 16,000 units
Sale:
Finished goods 18,000 units
The actual machine hours worked during the period were 48,000 hours. It is revealed from the analysis of information that 25% of the
under-absorption was due to defective production policies and the balance was attributable to increase in costs.
You are required:
(i) To determine the amount of under absorption of production overheads for the period,
(ii) To show the accounting treatment of under-absorption of production overheads, and
(iii) To apportion the unabsorbed overheads over the items.

Question 31. [STUDY MATERIAL, NOV 00, NOV 89 (ADAPTED), NOV 99 (ADAPTED)]
The total overhead expenses of a factory are ₹ 4,46,380. Taking into account the normal working of the factory, overhead was
recovered in production at ₹ 1.25 per hour. The actual hours worked were 2,93,104. How would you proceed to close the books of
accounts, assuming that besides 7,800 units produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress.
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the cost of indirect materials and
indirect labour and the remaining 50% was due to factory inefficiency. Also give the profit implication of the method suggested.

Question 32. [Study Material]

In a factory, overheads of a particular department are recovered on the basis of ₹ 5 per machine hour. The total expenses incurred and
the actual machine hours for the department for the month of August were ₹ 80,000 and 10,000 hours respectively. Of the amount of
₹ 80,000, ₹ 15,000 became payable due to an award of the Labour Court and ₹ 5,000 was in respect of expenses of the previous year
booked in the current month (August). Actual production was 40,000 units, of which 30,000 units were sold. On analysing the reasons,
it was found that 60% of the under-absorbed overhead was due to defective planning and the rest was attributed to normal cost
increase. EXPLAIN how would you treat the under-absorbed overhead in the cost accounts?

Question 33. [RTP, NOV 83, NOV 97 (ADAPTED)]

Your Company uses an integrated accounting system and applies overheads on the basis of “pre-determined” rates. The following
st
figures are extracted from the Trial Balance as at 31 March.
 Manufacturing Overhead ₹ 4,26,544 Dr.
 Manufacturing Overhead applied ₹ 3,65,904 Dr.
 Work-in-Progress ₹ 1,41,480 Dr.
 Finished Goods Stock ₹ 2,30,732 Dr.
 Cost of Goods Sold ₹ 8,40,588 Dr.
You are required to show the profit implications of treating under-absorption under the following methods –
1. Write off to Profit and Loss Account,
2. Adjustment to Cost of Sales and Inventories of WIP and Finished Goods.

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Question 34. [Nov 2011 (adapted), Nov 17, Study Material]
In a manufacturing unit, factory overhead was at a pre-determined rate of ₹ 25 per man-day. The total factory overhead expenses
incurred and the man-days actually worked were ₹ 41.50 lakhs and 1.5 lakh man-days respectively. Out of the 40,000 units produced
during a period, 30,000 were sold.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the rest were
attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Accounts?

 Computation of Over/Under Recovery

Question 35. [RTP]
The Factory Overhead costs of four Production Departments of a Company engaged in executing job orders, for an accounting week,
are as: Dept A: ₹ 19,300, Dept B: ₹ 4,200, Dept C: ₹ 4,000, Dept D: ₹ 2,000.
Overheads have been applied as under:
Department A: ₹ 1.50 per Machine Hour for 14,000 hours.
Department B: ₹ 1.30 per Direct Labour Hour for 3,000 hours.
Department C: 80% of Direct Labour Cost of ₹ 6,000.
Department D: ₹ 2 per piece for 950 pieces.
Find out the amount of Department-wise under and over-absorbed Overheads.

Question 36. [Study Material]

A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of 12 Nos. machine parts to
customers’ specifications and the expenditure incurred on the job for the week ending 21st August, 20X8 is given below:
(₹) (₹)
Direct materials (all items) 780.00
Direct labour (manual) 20 hours @ ₹ 15 per hour 300.00
Machine facilities :
Machine No. I : 4 hours @ ₹ 45 180.00
Machine No. II : 6 hours @ ₹ 65 390.00 570.00
Total 1,650.00
Overheads @ ₹ 8 per hour on 20 manual hours 160.00
Total cost 1,810.00

The overhead rate of ₹ 8 per hour is based on 3,000 man hours per week; similarly, the machine hour rates are based on the normal
working of Machine Nos. I and II for 40 hours out of 45 hours per week.
After the close of each week, the factory levies a supplementary rate for the recovery of full overhead expenses on the basis of actual
hours worked during the week. During the week ending 21st August, 20X8, the total labour hours worked was 2,400 and Machine Nos.
I and II had worked for 30 hours and 32.5 hours respectively.
PREPARE a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the supplementary rates.

 Concepts Related to Capacity

Question 37. [RTP]
Explain various concepts relating to capacity.

Solution 37:
1. Related 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. It is also known as Maximum Capacity or Theoretical Capacity.

2. 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 etc. Generally,
practical capacity is taken between 80 to 90% of the rated capacity. It is also used as a base for determining overhead rates.
Practical capacity is also called net capacity or available capacity.

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3. Normal Capacity: It is the capacity of a plant which is expected to be utilized over a long period based on sales expectancy. The
determination of this capacity considers the average utilization of plant capacity during one full business cycle which may extend
over 2 to 3 yea₹ It is also known as average capacity and is used to compute overhead recovery rate.

4. Actual Capacity: It is the capacity actually achieved during a given period. This capacity may lie between practical capacity and
capacity based on sales expectancy.

Question 38. [NOV 83, MAY 97, NOV 15]

What is Idle Capacity?

Solution 38:
It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilized in production. In other words, it is
the difference between the practical or normal capacity and capacity utilization based on expected sales.
Abnormal Idle Capacity = Practical (or Normal) Capacity – Actual Capacity Utilization
The idle capacity may arise due to lack of product demand, non-availability of raw material, shortage of skilled labour, absenteeism,
shortage of power fuel or supplies, seasonal nature of product etc. These are identified into Normal and Abnormal and also as
Controllable and Non-Controllable.

Question 39. [RTP, NOV 83, MAY 97, NOV 01, MAY 09, NOV 15]
Explain the treatment of Idle Capacity Costs?

Solution 39:
Costs associated with idle capacity are mostly fixed in nature. These include depreciation, repairs and maintenance charges, insurance
premium, rent, rates, management and supervisory costs. These costs remain unabsorbed or unrecovered due to under-utilization of
plant and service capacity.
Idle capacity cost can be calculated as follows:
Idle Capacity Cost = × Idle Capacity

Treatment of Idle Capacity Costs:

(a) If the idle capacity cost is due to unavoidable reasons such as repairs, maintenance, changeover of job etc. a supplementary
overhead rate may be used to recover the idle capacity cost. In this case, the costs are charged to the production capacity
utilized.
(b) If the idle capacity cost is due to avoidable reasons such as faulty planning, power failure etc., the cost should be charged to
Profit and Loss Account.
(c) If the idle capacity cost is due to seasonal factors, then, the cost should be charged to the cost of production by inflating
overhead rates.

Question 40. [RTP, NOV 85]

Write a brief note on Idle Facility.

Solution 40:
Facilities may be provided by fixed assets such as building space, plants equipment capacity, etc. or by various service functions such
as material services, production services, personal services etc. If a firm fails to make full use of the facilities of its disposal, the firm
may be said to have idle facilities. Thus idle facilities refers to that part of total facilities which remains unutilized due to any reason
such as non-availability of raw material, power, lack of demand, etc. In Cost Accounting idle facilities are treated in the same way as
those of idle capacity.

Question 41. [NOV 08]

Machinery was purchased from a manufacturer who claimed that his machine could produce 36.5 tons in a year consisting of 365 days.
Holidays, break-down, etc., were normally allowed in the factory for 65 days. Sales were expected to be 25 tones during the year and
the actually produced 25.2 tons during the year.
You are required to state the following figures:
(a) Rated capacity
(b) Practical capacity
(c) Normal capacity

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(d) Actual capacity.

 Accounting of Selling and Distribution Overhead

Question 42. [STUDY MATERIAL]
A company which sells four products, some of them unprofitable, proposes discontinuing the sale of one of them. The following
st
information is available regarding income, costs and activity for the year ended 31 March, 2006.
Particulars Products
A B C D
Sales (₹ ) 3,00,000 5,00,000 2,50,000 4,50,000
Cost of sales (₹ ) 2,00,000 4,50,000 2,10,000 2,25,000
Area of storage (Sq.ft.) 50,000 40,000 80,000 30,000
Number of parcels sent 1,00,000 1,50,000 75,000 1,75,000
Number of invoices sent 80,000 1,40,000 60,000 1,20,000
Selling and Distribution overheads and the basis of allocation are:
Particulars Basis of allocation ₹ to products
Fixed Costs:
Rent & Insurance 30,000 Sq. Ft.
Depreciation 10,000 Parcel
Salesmen's salaries & expenses 50,000 Sales Volume
Administrative wages and salaries 50,000 No. of invoices
Variable Costs:
Packing wages & materials 20 paisa per parcel
Commission 4% of sales
Stationery 10 paisa per invoice
You are required to prepare Profit & Loss Statement, showing the percentage of profit or loss to sales for each product.

Question 43.
Apportion Ltd produces a single product in three sizes A, B and C. Prepare a statement showing the Selling and Distribution Expenses
apportioned over these three sizes applying the appropriate basis for such apportionment in each case from the particulars indicated.
Express the total of the costs so apportioned to each size as: (1) Cost per unit sold – (nearest paisa), and (2) Percentage of Sales
turnover (nearest two places of decimal). The expenses are as under:
Expenses Amount (₹ ) Basis of Apportionment
Salesmen Salaries 10,000 Direct Charges
Sales Commission 6,000 Sales Turnover
Sales Office Expenses 2,096 Number of orders
Advertising General 5,000 Sales Turnover
Advertising Specific 22,000 Direct Charges
Packing Expenses 3,000 Total Volume in cubic feet of produces sold
Delivery Expenses 4,000 Total Volume in cubic feet of produces sold
Warehouse Expenses 1,000 Total Volume in cubic feet of produces sold
Credit Collection Expenses 1,296 Number of orders

Data available relating to the three sizes are as follows:

Particulars Total A B C
Number of Salesmen (all paid same Salary) 10 4 5 1
Units sold 10,400 3,400 4,000 3,000
Number of Orders 1,600 700 800 100

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Percentage of Specific Advertising 100% 30% 40% 30%

Sales Turnover ₹ 2,00,000 ₹ 58,000 ₹ 80,000 ₹ 62,000
Volume in cu. Ft. per unit of finished product - 5 8 17

Question 44. [MAY 96]

A company is making a study of the relative profitability of the two products – A and B. In addition to direct costs, indirect selling and
distribution costs to be allocated between the two products are as under:
Particulars Amount (₹ )
Insurance charges for inventory (finished) 78,000
Storage costs 1,40,000
Packing and forwarding charges 7,20,000
Salesmen salaries 8,50,000
Invoicing costs 4,50,000
Other details are:
Particulars Product A Product B
Selling Price per unit (₹ ) 500 1,000
Cost per unit (exclusive of indirect Selling and distribution costs) (₹ ) 300 600
Annual sales in units 10,000 8,000
Average inventory (units) 1,000 800
Number of invoices 2,500 2,000
One unit of product A requires a storage space twice as much as product B. The cost to pack and forward one unit is the same for both
the products. Salesmen are paid salary plus commission @ 5% on sales and equal amount of efforts are put worth on the sales of each
of the products.
Required:
(i) Set up a schedule showing the apportionment of the indirect selling and distribution costs between the two products.
(ii) Prepare the statement showing the relative profitability of the two products.

 Use of Rates Based on Actual Overhead Incurred – Effects of WIP and Finished Goods
Question 45. [RTP]
A Manufacturing Company absorbs OH into the cost of its 3 production departments by means of pre-determined departmental rates
per Direct Labour Hour (DLH). The following data is obtained for the year:
Total OH
Departments Overhead Incurred Actual DLH (Hours) Predetermined OH Rate Absorbed DLH contained in
WIP (Hours) FG (Hours)
A ₹ 10,000 25,000 ₹ 0.50 per hour ₹ 12,500 3,000 7,000
B ₹ 37,800 84,000 ₹ 0.30 per hour ₹ 25,200 14,000 8,000
C ₹ 22,500 45,000 ₹ 0.40 per hour ₹ 18,000 2,000 4,000
1. Calculate for each department, the Recovery Rate per DLH, based on OH actually incurred.
2. Calculate the extent to which the values of WIP and Finished Goods for the year should be increased / decreased for each
department, in view of the OH rates based on OH actually incurred.

 Miscellaneous Theory
Question 46. [NOV 90, MAY 94, MAY 13, MAY 14]
Distinguish between Allocation and Apportionment.

Solution 46:
(i) Allocation deals with the whole items of cost, which are identifiable with any one department. For example, indirect wages of
three departments are separately obtained and hence each department will be charged by the respective amount of wages
individually.

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On the other hand apportionment deals with the proportions of an item of cost. For example: The cost of the benefit of a service
department will be divided between those departments which has availed those benefits.
(ii) Allocation is a direct process of charging expenses to different cost centres whereas apportionment is an indirect process
because there is a need for the identification of the appropriate portion of an expense to be borne by the different departments
benefited.
(iii) The allocation or apportionment of an expense is not dependent on its nature, but the relationship between the expense and
the cost centre decides that whether it is to be allocated or apportioned.
(iv) Allocation is a much wider term than apportionment.

 Treatment of Specific items in Overheads

Question 47. [NOV 96]
What are the methods of Accounting for Administrative Overheads?

Solution 47:
There are three distinct methods of Accounting for Administrative Overheads, which are as follows:
(i) Apportioning Administrative Overheads between Production and Sales Departments: The reason for the apportionment of
overhead expenses over these departments, recognizes the fact that administrative overheads are incurred for the benefit of
both of these departments. Therefore each department should be charged with the proportionate share of the same.

Disadvantages:
(a) It is difficult to find suitable bases of administrative overhead apportionment over production and sales departments.
(b) Lot of clerical work is involved in apportioning overheads.
(c) It is not justified to apportion total administrative overheads only over production and sales departments when other
equally important department like finance is also there.

(ii) Charging to Profit and Loss Account: The reason for charging to Costing Profit and Loss are:
1. The Administrative Overheads are concerned with the formulation of policies and thus are not directly concerned with
either the production or the selling and distribution functions.
2. It is difficult to determine a suitable basis for apportioning administrative overheads over production and sales
departments.
3. These overheads are the fixed costs and relate only to the period.

Disadvantages:
(a) Costs of products are understated as administrative overheads are not charged to costs.
(b) The exclusion of administrative overheads from cost of products is against sound accounting principle.

(iii) Treating Administrative Overheads as a separate addition to Cost of Production/Sales: This method considers administration as a
separate function like production and sales and, as such costs relating to formulating the policy, directing the organization and
controlling the operations are taken as a separate charge to the cost of the jobs or a product, sold along with the cost of other
functions. The basis which are generally used for apportionment are:
(a) Works Cost
(b) Sales Value or Quantity
(c) Gross Profit on Sales
(d) Quantity produced
(e) Conversion Cost, etc.

Question 48. [NOV 99, MAY 06]

Write a brief note on Absorption/Accounting of Selling and Distribution Overheads?

Solution 48:
Selling Overheads: These are incurred for the purpose of promoting the marketing and sales of different products.
Example: Commission to salesman, packing expenses, etc.

Distribution Overheads: These expenses are related to delivery and dispatch of goods sold.
Example: Warehouse expenses, travelling expenses, etc.

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Accounting Treatment for Selling and Distribution Expenses:
(1) Allocation or Apportionment of Selling and Distribution Expenses: These expenses are absorbed to products on the basis of:
(a) Sales Value of Goods;
(b) Cost of Goods Sold;
(c) Gross Profit on Sales; and
(d) Number of orders or units sold.
Another method for absorbing selling and distributing expenses over various products is to separate fixed expenses from
variable expenses. Apportion the fixed expenses according to the benefit derived by each product and thus ascertaining the fixed
expenses per unit. Some of the fixed expenses and the basis of apportionment are as follows:
Expenses Basis
Salaries in the Sales Department and of the salesmen. Estimated time devoted to the sale of various products.
Advertisement Actual amount incurred for each product since these days it is usual to advertise
each product separately; common expenses, such as in an exhibition, should be
apportioned on the basis of advertisement expenditure on each product.
Show Room expenses Average space occupied by each product.
Rent of finished goods godowns and expenses on own Average quantities delivered during a period.
delivery vans.

The total of fixed expenses apportioned in this manner, divided by the number of units sold or likely to be sold, will give the
fixed expenses per unit. To this should be added the variable expenses which will be different for each product. Example:
Packaging, freight outwards, etc. All these items will be worked out per unit for each product separately. These items added to
fixed expenses per unit will give an estimated amount of the selling and distribution expenses per unit.

(2) Recovery of Selling and Distribution Overheads: These expenses may be recovered by using any one of following method of
recovery.
(a) Percentage on Cost of Production/Cost of Goods Sold.
(b) Percentage on Selling Price.
(c) Rate per unit sold.

Question 49. [MAY 02]

Why is control of Selling and Distribution Overheads difficult?

Solution 49:
Control of selling and distribution expenses is a difficult task. The reasons for this are as follows:
(i) The incidence of selling and distribution overheads depends mainly on external factors, such as distance of market, extent and
nature of competition, terms of sales, etc. which are beyond the control of management.
(ii) These overheads are dependent upon the customers, behaviour, their liking and disliking, tastes, etc. Therefore, as such control
over the overheads may result in loss of customers.
(iii) These expenses being of the nature of policy costs, are not amenable to control.

Question 50. [NOV 93, NOV 97]

Give some arguments for including Interest and Financial Charges as Overhead Expenses.

Solution 50:
The following arguments are generally advanced in favour of interest to be included in overhead expenses:
1. Element of Cost: 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 especially true in business where raw materials in different stages can be used.

2. Part of Cost of Capital: Interest is the cost to be paid for the use of capital, capital is also a factor of production just as labour.

3. Helps in Managerial Decision Making: If interest is not included in cost calculation, a number of managerial decisions may be
taken wrongly. Thus, where a decision involves replacement of labour with expensive machinery, the question of interest
assumes importance, since, if interest is not included, the cost accountant may conclude that machinery is cheaper.

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4. Helps in Comparison: Inclusion of interest also allows comparison of profit on different jobs. Thus, if a job takes 3 months and
another 6 months the cost of the jobs must include a charge by way of interest before profit can be compared.

Question 51.
Give the treatment of following items in Costing.
(a) Expenses on removal and re-erection of machines [RTP, NOV 92]
(i) These expenses may be incurred due to factors like change in the method of production, an addition or alteration in the
factory building, change in the flow of production, etc.
(ii) All such expenses are treated as production overheads. When amount of such expenses is large, it may be spread over a
period of time.

(b) Research and Development Expenses [RTP, NOV 92, MAY 96, NOV 98, MAY 05, NOV 07]
Research Expenses: It is incurred for searching new or improved products, production methods/techniques or plants/equipment.
Research relates to original investigations to gain from new scientific or technical knowledge and understanding. It may be –
(i) Basic Research: It is general and not directed towards any specific practical aim.
Treatment:
 If continuous: Charged to revenue as an expense of the period, or as a separate functional overhead like Administrative
Overhead and Selling Overhead.
 If not continuous: Spread over a number of years (like Deferred Revenue Expenditure, if the amount is large).

(ii) Applied Research: It is directed towards a specific practical aim or objective.

Treatment:
 For specific existing products: Directly charged/allocated to the product.
 For all existing products/methods: Treated as Manufacturing Overhead and absorbed over all products.
 For new products: Charged to the product if the venture is successful. Otherwise written off to Costing Profit and Loss
Account either in lumpsum or by amortization.

Development Expenses: It begins with the implementation of the decision to produce a new or improved product or to employ a
new or improved method. Treatment of Development Expenses is the same as that of Applied Research.

Unsuccessful Research: If Research is unsuccessful, it is appropriate to change off that expenditure to Costing Profit and Loss
Account.

(c) Royalties paid on Patents of other party used in own manufacturing process [MAY 10]
Included as Direct Expenses.

(d) Depreciation [MAY 96]

Depreciation is charged to the cost of production
(i) To show a true and fair picture of Balance Sheet.
(ii) To ascertain the true cost of production.
(iii) To keep the asset intact by distributing losses in its value over a number of yea₹
(iv) To keep the capital intact and to make a provision of the resources for the replacement of asset in future.

(e) Carriage and Cartage Expenses [NOV 83]

(i) It includes the expenses incurred on the movement (inward and outwards) and transportation of materials and goods.
(ii) Transportation expenses related to direct material may be included in the cost of direct material and those relating to
indirect material (stores) may be treated as factory overheads.
(iii) Expenses related to the transportation of finished goods may be treated as distribution overhead.

(f) Cost of small books having short effective life [MAY 02]
Small tools are mechanical appliances used for various operations on a work place, especially in engineering industries. Such
tools include drill bits, chisels, screw cutter, files etc.

Treatment of cost of small tools of short effective life:

(i) Small tools purchased may be capitalized and depreciated over life if their life is ascertainable. Revaluation method of
depreciation may be used in respect of very small tools of short effective life. Depreciation of small tools may be charged
to:
 Factory Overheads
 Overheads of the department using the small tool.

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(ii) Cost of small tools should be charged fully to the departments to which they have been issued, if their life is not
ascertainable.

(g) Advertisement Expenses [RTP]

1. General Advertising (Company Advertisement): The total expenses should be apportioned to various products based either
on sales value or on the number of advertisements for each product etc.

2. Deferred Revenue Expenditure: The expenses should be treated as Deferred Revenue Expenditure and written off over the
expected period of benefit.

3. Specific Advertising (Product Advertisement): The expenses should be charged to that product.

4. Launch Advertising (New Product Advertisement): The expenses should be carried forward and charged to the product
when it is actually sold in the market.

(h) Notional Rent of Factory Building [NOV 95]

Notional Rent is a reasonable charge for the use of owned premises, included in Cost Accounts for decision-making. The inclusion
for such Notional Rental Charge is to enable comparison between the cost of goods made in factories which are owned and in
rented factories. In case of Owned Factory, cost for the same is accounted for by means of Depreciation.

(i) Bad Debts [RTP, NOV 99]

1) One view is that ‘bad debts’ should be excluded from cost. According to this view bad debts are financial losses and
therefore, they should not be included in the cost of a particular job or product.
2) According to another view it should form part of selling and distribution overheads, especially when they arise in the
normal course of trading. Therefore bad debts should be treated in cost accounting in the same way as any other selling
and distribution cost.
3) However extra ordinarily large bad debts should not be included in cost accounts.

(j) Loss of Stores [MAY 10]

Included in Cost if Normal.

(k) Packing Expenses [RTP, NOV 92, MAY 11]

1) Cost of primary packing necessary for protecting the product or for convenient handling, should become a part of the prime
cost.
2) 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.
3) If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the
job.
4) The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling
overhead.

(l) Handling expenses of Material and Stores [MAY 10]

They are treated as Factory Overheads.

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 Machine Hour Rate

Question 52.
Explain how we compute Machine Hour Rate?

Question 53. [MAY 11]

You are given the following information of the three machines of a Manufacturing Department of X Ltd:
Preliminary Estimates of Expenses (₹ per annum)
Particulars Total Machine A Machine B Machine C
Depreciation 20,000 7,500 7,500 5,000
Spare Parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable Stores 8,000 3,000 2,500 2,500
Insurance of Machinery 8,000
Indirect Labour 20,000
Building Maintenance Expenses 20,000
Annual Interest on Capital Outlay 50,000 20,000 20,000 10,000
Monthly Charge for Rent and Rates 10,000
Salary of Foreman (Per month) 20,000
Salary of Attendant (per month) 5,000
Note: The Foreman and the Attendant control all the three machines and spend equal time on them.

The following additional information is also available:

Particulars Machine A Machine B Machine C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor Space (Sq. Ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The Manufacturing Department works 8 hours in a
day but Saturdays are half days. All Machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.
Calculate pre-determined Machine Hour Rates for the above Machines, after taking into consideration the following factors:
1. An increase of 15% in the Price of Spare Parts.
2. An increase of 25% in the Consumption of Spare parts for Machine ‘B’ & ‘C’ only.
3. 20% general increase in Wage Rates.

Question 54. [STUDY MATERIAL]

A machine costing ₹ 10,000 is expected to run for 10 yea₹ At the end of this period its scrap value is likely to be ₹ 900. Repair during
the whole life of the machine are expected to be ₹ 18,000 and the machine is expected to run 4,380 hours per year on the average. Its
electricity consumption is 15 units per hour, the rate per unit being 5 paisa. The machine occupies one-fourth of the area of the
department and has two points out of a total of ten for lighting. The foreman has to devote about one sixth of his time to the machine.
The monthly rent of the department is ₹ 300 and lighting charges amount to ₹ 80 per month. The foreman is paid a monthly salary of
₹ 960. Find out the machine hour rate, assuming insurance is @ 1% p.a and the expenses on oil, etc., are ₹ 9 per month.

Question 55. [May 2012]

A Machine costing ₹ 10 lacs was purchased on 1-4-2011. The expected life of the machine is 10 yea₹ At the end of this period its
scrap value is likely to be ₹ 10,000. The total cost of all the machines including new one was ₹ 90 lacs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ₹ 5,000.
(iii) Insurance Premium was paid for all the machine ₹ 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ₹ 3.75
(v) The new machine occupies area of the department. Rent of the department is 2,400 per month.
(vi) Depreciation is charged on straight line basis

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Compute machine hour rate for the new machine.

Question 56. [May 19]

M/s Zaina Private Limited has purchased a machine costing ₹ 29,14,800 and it is expected to have a salvage value of ₹ 1,50,000 at the
end of its effective life of 15 yea₹ Ordinarily the machine is expected to run for 4,500 hours per annum but it is expected to run for
4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal repair & maintenance. The other details in
respect of the machine are as follows:
(i) Repair & maintenance during the whole life of the machine are expected to be ₹ 5,40,000
(ii) Insurance premium (per annum) 2% of the cost of the machine
(iii) Oil and lubricants required for operating the machine (per annum) ₹ 87,384
(iv) Power consumptions: 10 units per hour @ 7 per unit. No power consumption during repair and maintenance.
(v) Salary to operator per month ₹ 24,000. The operator devotes one-third of his time to the machine.
You are required to calculate comprehensive machine hour rate.

Question 57. [NOV 07, MAY 15]

Machine shop Cost Centre contains three machines of equal capacities. Three operators are employed on each machine, Payable ₹ 20
per hour each. The Factory works for forty-eight hours in a week which includes 4 hours set-up time. The work is jointly done by
Operators. The Operators are paid fully for the forth-eight hours. In additions they paid a bonus of 10% of productive time. Costs are
reported for this Company on the basis of thirteen tour-weekly period.
The company for the purpose of computing machine hour rate includes the Direct Wages of the Operator and also recoups the Factory
Overheads allocated to the machines.
The following details of Factory OH applicable to the Cost Centre are available-
 Depreciation 10% per annum on Original Cost of the Machine. Original Cost of each Machine is ₹ 52,000.
 Maintenance and Repairs per week per Machine is ₹ 60.
 Consumable Stores per week per Machine are ₹ 75.
 Power 20 units per hour per Machine at the rate of 80 paisa per unit.
 Apportionment to the Cost Centre: Rent p.a. ₹ 5,400, Heat and Light p.a. ₹ 9720, and Foreman’s Salary p.a. ₹ 12,960.
Calculate:
(a) Cost of running one machine for a four-week period, and
(b) Machine Hour Rate.

Question 58. [STUDY MATERIAL, MAY 00,MAY 12 (SIMILAR]

A machine shop has 8 identical Drilling machines manned by 6 operators. The machine cannot be worked without an operator wholly
engaged on it. The original cost of all these machines works out to ₹ 8 lakhs. These particulars are furnished for a 6 months 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 worked for 8 hours a day ₹ 20
Production bonus estimated 15% on wages
Value of power consumed ₹ 8,050
Supervision and indirect labour ₹ 3,300
Lighting and electricity ₹ 1,200
These particulars are for a year
Repairs and maintenance including consumables 3% of value of machines.
Insurance ₹ 40,000
Depreciation 10% of original cost.
Other sundry works expenses allocated ₹ 12,000
General management expenses allocated ₹ 54,530
You are required to work out a comprehensive machine hour rate for the machine shop.

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Question 59. [MAY 16]
The following particulars refers to process used in the treatment of material subsequently, incorporated in a component forming part
of an electrical appliance:
(i) The original cost of the machine used (purchased in June 2008) was ₹ 10, 000. Its estimated life is 10 years, the estimated
scrap value at the end of its life is ₹ 1,000, and the estimated working time per year (50 weeks of 44 hours) is 2200 hours of
which machine maintenance etc., is estimated to take upto 200 hours.
No other loss of working time expected, setting up time, estimated at 100 hours, is regarded as productive time. (Holiday to
be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit. No current is taken during
maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of ₹ 20 each time.
(iv) The estimated cost of maintenance per year is ₹ 1,200.
(v) Two attendants control the operation of machine together with five other identical machines. Their combined weekly wages,
insurance and the employer's contribution to holiday pay amount ₹ 120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to ₹ 2,000.

You are required to calculate the machine hour rate of operating the machine.

Question 60. [May 05]

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 10% p.a. on Original Cost) ₹ 3,24,000
Normal working hours for the month (The machine works to only 75% of capacity) 200 hours
Wages of Machine man ₹ 125 per day (of 8 hours)
Wages for a Helper (Machine Attendant) ₹ 75 per day (of 8 hours)
Power Cost for the month for the time worked ₹ 15,000
Supervision Charges apportioned for the machine centre for the month ₹ 3,000
Electricity & Lighting for the month ₹ 7,500
Repairs & Maintenance (Machine) including Consumable Stores per month ₹ 17,500
Insurance of Plant & Building (apportioned) for the year ₹ 16,250
Other General Expenses per annum ₹ 27,500
The workers are paid a fixed Dearness Allowance (DA) of ₹ 1575 per month. Production Bonus payable to workers in terms of an
award is equal to 33.33% of Basic Wages and DA. Add 10% of the Basic Wages and DA against Leave Wages and Holidays with pay to
arrive at a comprehensive labour-wage for debit to production.

Question 61. [MAY 02]

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 expense data relating to the machine are as under:
Cost of the machine is ₹ 5,00,000, Life 10 yea₹ Estimated scrap value at the end of life is ₹ 20,000.
Particulars ₹
Repairs and maintenance per annum 60,480
Consumable stores per annum 47520
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 ₹ 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.
Required:

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Calculate a two-tier machine hour rate for (a) set up time, and (b) running time.

Question 62. [Study Material]

Job No. 198 was commenced on October 10, 2018 and completed on November 1, 2018. Materials used were ₹ 600 and labour
charged directly to the job was ₹ 400. Other information is as follows:
Machine No. 215 used for 40 hours, the machine hour rate being ₹ 3.50.
Machine No. 160 used for 30 hours, the machine hour rate being ₹ 4.00. 6 welders worked on the job for five days of 8 hours each: the
direct labour hour per welder is 20P.
Expenses not included for calculating the machine hour or direct labour hour rate totaled ₹ 2000, total direct wages for the period
being ₹ 20,000. Ascertain the works costs of job No. 198.

Question 63. [MAY 05, May 19]

A manufacturing unit has purchased and installed a new machine of ₹ 12,70,000 to its fleet of 7 existing machines. The new machine
has an estimated life of 12 years end is expected to realize ₹ 70,000 as scrap at the end of its working life. Other relevant data are as
follows:
(i) 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.
(ii) Estimated cost of maintenance of the machine is ₹ 25,000 (per annum).
(iii) 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 ₹ 400
each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to ₹ 420 per week plus 15% fringe
benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of ₹ 3 per unit. No current is taken during
maintenance and setting up.
(vi) Departmental and general works overhead allocation to the operation during last year was ₹ 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.

Question 64. [Nov 13]

Calculate Machine Hour Rate from the following particulars:
Cost of Machine - ₹ 25,00,000
Salvage Value - ₹ 1,25,000
Estimated life of the machine - 25,000 Hours
Working Hours (per annum) - 3,000 Hours
Hours required for maintenance - 400 Hours
Setting-up time required - 8% of actual working hours

Additional Information:
(i) Power 25 units @ ₹ 5 per unit per hour.
(ii) Cost of repairs and maintenance ₹ 26,000 per annum.
(iii) Chemicals required for operating the machine ₹ 2,600 per month.
(iv) Overheads chargeable to the machine ₹ 18,000 per month.
(v) Insurance Premium (per annum) 2% of the cost of machine
(vi) No. of operators - 02 (looking after three other machines also)
(vii) Salary per operator per month ₹ 18,500

Question 65. [STUDY MATERIAL]

Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a special machine and also the use of a
computer. The computer is hired and the hire charges work out to ₹ 4,20,000 per annum. The expenses regarding the machine are
estimated as follows:
Particulars ₹
Rent for the quarter 17,500

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Depreciation per annum 2,00,000

Indirect charges per annum 1,50,000

During the first month of operation the following details were taken from the job register:

Job A B C
Number of hours the machine was used:
 Without the use of the computer 600 900 -
 With the use of the computer 400 600 1,000
You are required to compute the machine hour rate:
(a) For the firm as a whole for the month when the computer was used and when the computer was not used.
(b) For the individual jobs A, B and C.

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 Activity Based Costing BY: CA NITIN GURU

Chapter 5
ACTIVITY BASED COSTING
Question 1. [Study Material]
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C. The budgeted costs and production for the year ending
31st March, 20X8 are as follows:
Particulars A B C
Production quantity (units) 4,000 3,000 1,600
Resources per unit
- Direct material (kg.) 4 6 3
- Direct labour (minutes) 30 45 60

The budgeted direct labour rate was ₹ 10 per hour, and the budgeted material cost was ₹ 2 per kg. Production overheads were
budgeted at ₹ 99,450 and were absorbed to products using the direct labour hour rate. ABC Ltd. followed an Absorption Costing
System. ABC Ltd. is now considering to adopt an Activity Based Costing system. The following additional information is made available
for this purpose.

1. Budgeted overheads were analyzed into the following: in (₹)

Material handling - 29,100
Storage costs - 31,200
Electricity - 39,150

2. The cost drivers identified were as follows:

Material handling - Weight of material handled
Storage costs - Number of batches of material
Electricity - Number of Machine operations

3. Data on Cost Drivers was as follows:

Particulars A B C
For completion production:
Batches of material 10 5 15
Per unit of production:
Number of machine operators 6 3 2

You are requested to:

1) PREPARE a statement for management showing the unit costs and total costs of each product using the absorption costing
method.
2) PREPARE a statement for management showing the product costs of each product using the ABC approach.
3) STATE what are the reasons for the different product costs under the two approaches?

Solution 1:
1. Traditional Absorption Costing
Particulars A B C Total
a) Quantity (units) 4,000 3,000 1,600 8,600
b) Direct labour (minutes) 30 45 60 -
c) Direct labour hours (a x b)/60 mins 2,000 2,250 1,600 5,850
Overhead rate per direct labour hour:
= Budgeted overheads ÷Budgeted labour hours
= ₹ 99,450 ÷ 5,850 hours
= ₹ 17 per direct labour hour

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Unit Costs:
Particulars A (₹) B (₹) C (₹)
Direct costs:
- Direct labour 5.00 7.50 10.00
- Direct material 8.00 12.00 6.00
Production overhead: 8.50 12.75 17.00

Total unit costs 21.50 32.25 33.00

Number of units 4,000 3,000 1,600
Total costs 86,000 96,750 52,800

2. Activity Based Costing

Particulars A B C Total
Quantity (units) 4,000 3,000 1,600 -
Weight per unit (kg) 4 6 3 -
Total weight 16,000 18,000 4,800 38,000
Machine operations per unit 6 3 2 -
Total operations 24,000 9,000 3,200 36,200
Total batches of material 10 5 15 30

Material handling rate per kg. = ₹ 29,000 ÷ 38,800 kg. = ₹ 0.75 per kg.
Electricity rate per machine operations = ₹ 39,150 ÷ 36,200 = ₹ 1,082 per machine operations
Storage rate per batch = ₹ 31,200 ÷ 30 batches = ₹ 1,040 per batch

Unit Costs:
Particulars A (₹) B (₹) C (₹)
Direct costs:
- Direct labour 5.00 7.50 10.00
- Direct material 8.00 12.00 6.00
Production overhead:
Material handling: 3.00 4.50 2.25
(₹ 0.75 x 4) (₹ 0.75 x 6) (₹ 0.75 x 3)
Electricity: 6.49 3.25 2.16
(₹ 1.082 x 6) (₹ 1.082 x 3) (₹ 1.082 x 2)
Storage 2.60 1.73 9.75

Total unit costs 25.09 28.98 30.16

Number of units 4,000 3,000 1,600
Total costs ₹ 1,00,360 ₹ 86,940 ₹ 48,256

3. Comments: The difference in the total costs under the two systems is due to the differences in the overheads borne by each of the
products. The Activity Based Costs appear to be more precise

Question 2. [Study Material]

MST Limited has collected the following data for its two activities. It calculates activity cost rates based on cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hours 5,000 kilowatt hours ₹ 2,00,000
Quality inspections Number of inspections 10,000 inspections ₹ 3,00,000

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 Activity Based Costing BY: CA NITIN GURU
The company makes three products M, S and T. For the year ended March 31, 20X9, the following consumption of cost drivers was
reported:
Product Kilowatt hours Quality inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000

Required:
(i) COMPUTE the costs allocated to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) DISCUSS the factors the management considers in choosing a capacity level to compute the budgeted fixed overhead cost rate.

Solution 2:
(i) Statement of cost allocation to each product from each activity
Particulars Product
M (₹) S (₹) T (₹) Total (₹)
Power (Refer to working note) 40,000 (10,000 kWh 80,000 (20,000 60,000 (15,000 kWh 1,80,000
× ₹4) kWh × ₹4) × ₹4)
Quality Inspections (Refer to 1,05,000 (3,500 75,000 (2,500 90,000 (3,000 2,70,000
working note) inspections × ₹30) inspections × ₹30) inspections × ₹30)

Working note
Rate per unit of cost driver:
Power (₹ 2,00,000 / 50,000 kWh) ₹ 4/kWh
Quality inspection (₹ 3,00,000 / 10,000 inspections) ₹ 30 per inspection

(ii) Computation of cost of unused capacity for each activity:

Particulars (₹)
Power (₹2,00,000 – ₹ 1,80,000) 20,000
Quality Inspections (₹. 3,00,000 – ₹ 2,70,000) 30,000
Total cost of unused capacity 50,000

(iii) Factors management consider in choosing a capacity level to compute the budgeted fixed overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting chosen capacity level concepts.

Question 3. [Study Material]

ABC Ltd. Manufactures two types of machinery equipment Y and Z and applies/absorbs overheads on the basis of direct-labour hours.
The budgeted overheads and direct-labour hours for the month of December, 20X8 are ₹ 12,42,500 and 20,000 hours respectively.
The information about Company’s products is as follows:
Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ₹ 300 per unit ₹ 450 per unit
Direct labour cost
Y : 3 hours @ ₹ 150 per hour
X : 4 hours @ ₹ 150 per hour ₹ 450 ₹ 600

ABC Ltd.’s overheads of ₹ 12,42,500 can be identified with three major activities: Order Processing ( ₹ 2,10,000), machine processing (
₹ 8,75,000), and product inspection ( ₹ 1,57,500). These activities are driven by number of orders processed, machine hours worked,
and inspection hours, respectively. The data relevant to these activities is as follows:

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 Activity Based Costing BY: CA NITIN GURU
Particulars Orders processed Machine hours worked Inspection hours
X 350 23,000 4,000
Y 250 27,000 11,000
Total 600 50,000 15,000

Required:
(i) Assuming use of direct-labour hours to absorb/apply overheads to production, COMPUTE the unit manufacturing cost of the
equipment Y and Z, if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity-based costing, COMPUTE the unit manufacturing costs of the equipment Y and Z, if the budgeted
manufacturing volume is achieved.
(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hours as an application base, CALCULATE the amount of
cost distortion (under-costed or over-costed) for each equipment.

Solution 3:
(i) Overheads application base: Direct labour hours
Particulars Equipment Y (₹) Equipment Z (₹)
Direct material cost 300 450
Direct labour cost 450 600
Overheads* 186.38 248.50
936.38 1,298.50

*Pre-determined rate = = = ₹ 62.125

(ii) Estimation of Cost-Driver rate

Activity Overhead cost (₹) Cost driver level Cost driver rate (₹)
Order processing 2,10,000 600 orders processed 350
Machine processing 8,75,000 50,000 machine hours 17.50
Inspection 1,57,500 15,000 inspection hours 10.50

Particulars Equipment Y (₹) Equipment Z (₹)

Direct material cost 300 450
Direct labour cost 450 600
Prime cost 750 1,050
Overhead cost
Order processing 350 : 250 1,22,500 87,500
Machine processing 23,000 : 27,000 4,02,500 4,72,500
Inspection 4,000 : 11,000 42,000 1,15,500
Total overhead cost 5,67,000 6,75,500

Per unit cost

5,67,000 /2,500 ₹ 226.80 ₹ 216.16
6,75,500/ 3,125
Unit manufacturing cost ₹ 976.80 ₹ 1,266.16

(iii)
Particulars Equipment Y (₹) Equipment Z (₹)
Unit manufacturing cost–using direct labour hours as an 936.38 1,298.50
application base
Unit manufacturing cost-using activity based costing 976.80 1,266.16
Cost distortion (-) 40.42 + 32.34

Low volume product Y is under-costed and high volume product Z is over costed using direct labour hours for overhead absorption.

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Question 4. [Study Material]
RST Limited specializes in the distribution of pharmaceutical products. It buys from the pharmaceutical companies and resells to each
of the three different markets.
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April, 20X9 in respect of RST Limited has been reported:
Particulars General Drugstore Chains (₹) Chemist Shops (₹)
Supermarket Chains
(₹)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold per delivery 82,500 27,500 4,950
Number of deliveries 330 825 2,750

In the past, RST Limited has used gross margin percentage to evaluate the relative profitability of its distribution channels. The
company plans to use activity –based costing for analyzing the profitability of its distribution channels. The Activity analysis of RST
Limited is as under:

Activity Area Cost Driver

Customer purchase order processing Purchase orders by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store per delivery
Shelf-stocking at customer store Hours of shelf-stocking

The April, 20X9 operating costs (other than cost of goods sold) of RST Limited are ₹ 8,27,970. These operating costs are assigned to five
activity areas. The cost in each area and the quantity of the cost allocation basis used in that area for April, 20X9 are as follows:

Activity Area Total costs in April, 20X9 Total Units of Cost

(₹) Allocation Base used in
April, 20X9
Customer purchase order processing 2,20,000 5,500 orders
Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries
Cartons dispatched to store 2,09,000 2,09,000 cartons
Shelf-stocking at customer store 28,160 1,760 hours

Other data for April, 20X9 include the following:

Particulars General Drugstore Chains Chemist Shops
Supermarket Chains
Total number of orders 385 990 4,125
Average number of line items per order 14 12 10
Total number of store deliveries 330 825 2,750
Average number of cartons shipped per store delivery 300 80 16
Average number of hours of shelf-stocking per store 3 0.6 0.1
delivery

Required:
(i) COMPUTE for April, 20X9 gross-margin percentage for each of its three distribution channels and compute RST Limited’s
operating income.
(ii) COMPUTE the April, 20X9 rate per unit of the cost-allocation base for each of the five activity areas.
(iii) COMPUTE the operating income of each distribution channel in April, 20X9 using the activity-based costing information.
Comment on the results. What new insights are available with the activity-based cost information?
(iv) DESCRIBE four challenges one would face in assigning the total April, 20X9 operating costs of ₹ 8,27,970 to five activity areas.

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 Activity Based Costing BY: CA NITIN GURU
Question 5. [Study Material]
Alpha Limited has decided to analyze the profitability of its five new customers. It buys bottled water at ₹ 90 per case and sells to
retail customers at a list price of ₹ 108 per case. The data pertaining to five customers are:
Particulars Customers
A B C D E
Cases sold 4,680 19,688 1,36,800 71,550 8,775
List Selling Price ₹ 108 ₹ 108 ₹ 108 ₹ 108 ₹ 108
Actual Selling Price ₹ 108 ₹ 106.20 ₹ 99 ₹ 104.40 ₹ 97.20
Number of Purchase 15 25 30 25 30
orders
Number of 2 3 6 2 3
Customer visits
Number of 10 30 60 40 20
deliveries
Kilometers travelled 20 6 5 10 30
per delivery
Number of 0 0 0 0 1
expedited deliveries

Its five activities and their cost drivers are:

Activity Cost Driver rate
Order taking ₹ 750 per purchase order
Customer visits ₹ 600 per customer visit
Deliveries ₹ 5.75 per delivery Km travelled
Product handling ₹ 3.75 per case sold
Expedited deliveries ₹ 2,250 per expedited delivery

Required:
(i) COMPUTE the customer-level operating income of each of five retail customers now being examined (A, B, C, D and E). Comment
on the results.
(ii) STATE what insights are gained by reporting both the list selling price and the actual selling price for each customer?

Question 6. [May 2018]

PQR Pens Ltd. manufactures two products - 'Gel Pen' and 'Ball Pen'. It furnishes the following data for the year 2017:
Product Annual Output (units) Total machine hours Total number of Total number of set ups
purchase orders
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56

The annual overheads are as under:

Particulars ₹
Volume related activity costs 4,75,020
Set up related costs 5,79,988
Purchase related costs 5,04,992

Calculate the overhead cost per unit of each product - Gel Pen and Ball Pen on the basis of:
(i) Traditional method of charging overheads
(ii) Activity based costing method and
(iii) Find out difference in cost per unit between both the methods.

Question 7. [Nov 2018]

M/s. HMB Limited is producing a product in 10 batches each of 15,000 units in a year and incurring following overheads there on
(amount in ₹) :
Material procurement - 22,50,000
Maintenance - 17,30,000

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 Activity Based Costing BY: CA NITIN GURU
Set - up - 6,84,500
Quality control - 5,14,800
The prime costs for the year amounted to ₹ 3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of prime cost. Now it wants to shift to activity based
costing. Information relevant to activity drivers for a year are as under:

Activity driver - Activity volume

No. of purchase orders - 1,500
Maintenance hours - 9,080
No. of set ups - 2,250
No. of inspections - 2,710
The company has produced a batch of 15,000 units and has incurred ₹ 26,38,700 and ₹ 3,75,200 on material and wages respectively.
The usage of activities of the said batch are as follows:
Material orders - 48 orders
Maintenance hours - 810 hours
No. of set ups - 40
No. of inspections - 25
You are required to:
(i) find out cost of product per unit on absorption costing basis for the said batch.
(ii) determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity based costing.

Question 8. [May 2019]

MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour hours. The budgeted
overheads and direct labour hours for the month of March 2019 are ₹ 15,00,000 and 25,000 hours respectively. The information about
the company's products is as follows:
Particulars Equipment
A B
Budgeted production volume 3,200 units 3,850 units
Direct material cost ₹ 350 per unit ₹ 400 per unit
Direct labour cost
A: 3 hours @ 120 per hour ₹ 360
B: 4 hours @ 120 per hour ₹ 480

Overheads of ₹ 15,00,000 can be identified with the following three major activities:
Order processing - ₹ 3,00,000
Machine processing - ₹ 10,00,000
Product inspection - ₹ 2,00,000

These activities are driven by the number of orders processed, machine hours worked and inspection hours respectively. The data
relevant to these activities is as follows:
Particulars Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

Required:
(i) Prepare a statement showing the manufacturing cost per unit of each product using the absorption costing method assuming
the budgeted manufacturing volume is attained.
(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of each product using activity
based costing, assuming the budgeted manufacturing volume is attained.
(iii) MNO Ltd's selling prices are based heavily on cost. By using direct labour hours as an application base, calculate the amount of
cost distortion (under costed or over costed) for each equipment.

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 Activity Based Costing BY: CA NITIN GURU
Question 9. [RTP - May 2018]
G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows:
Particulars Product A Product B Product C
Direct materials 50 40 40 ₹/u
Direct labour @ ₹ 30 40 50 ₹/u
10/hour
Production overheads 30 40 50 ₹/u
Total cost 110 120 140 ₹/u
Quantity produced 10,000 20,000 30,000 Units

G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed management accountant has suggested
that the company should introduce ABC system and has identified cost drivers and cost pools as follows:

Activity cost pool Cost driver Associated cost (₹)

Stores receiving Purchase requisitions 2,96,000
Inspection Number of production runs 8,94,000
Dispatch Orders executed 2,10,000
Machine set up Number of set ups 12,00,000

The following information is also supplied:

Particulars Product A Product B Product C
No. of set ups 360 390 450
No. of orders executed 180 270 300
No. of production runs 750 1,050 1,200
No. of purchase 300 450 500
requisitions

Required:
CALCULATE activity based production cost of all the three products.

Question 10. [RTP - Nov 2018]

Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce and Packaged food.
Family store provides the following data for the year 20X7-X8 for each product line:

Particulars Soft drinks Fresh produce Packaged food

Revenue ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500
Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase orders 360 840 360
placed
Number of deliveries received 300 2,190 660
Hours of shelf stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000

Family store also provides the following information for the year 20X7-X8:
Activity Description of activity Total cost Cost allocation base
Bottle returns Returning of empty bottles ₹ 60,000 Direct tracing to soft drink line
Ordering Placing of orders for purchases ₹ 7,80,000 1,560 purchase orders
Delivering Physical delivery and receipt of ₹ 12,60,000 3,150 deliveries
goods
Shelf stocking Stocking of goods on store ₹ 8,64,000 8,640 hours of shelf stocking
shelves and ongoing restocking time
Customer support Assistance provided to ₹ 15,36,000 15,36,000 items sold
customers including check-out

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 Activity Based Costing BY: CA NITIN GURU
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on the basis of cost of goods
sold of each product line. CALCULATE the operating income and operating income as a % of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and activity based costing
system, CALCULATE the operating income and operating income as a % of revenues for each product line.

Question 11. [RTP - May 2019]

MST Limited has collected the following data for its two activities. It calculates activity cost rates based on cost driver capacity.
Activity Cost driver Capacity Cost (₹)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000
Quality inspections No. of inspections 10,000 inspections 60,00,000

The company makes three products M, S and T. For the year ended March 31, 20X9, the following consumption of cost drivers was
reported:
Product Kilowatt hours Quality inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000

Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to compute the budgeted fixed overhead cost rate.

Question 12. [RTP - Nov 2019]

SMP Pvt. Ltd. manufactures three products using three different machines. At present the overheads are charged to products using
labour hours. The following statement for the month of September 2019, using the absorption costing method has been prepared:
Particulars Product X (using machine A) Product Y (using machine B) Product Z (using machine C)
Production units 45,000 52,500 30,000
Material cost per unit (₹) 350 460 410
Wages per unit @ ₹ 80 per 240 400 560
hour
Overhead cost per unit (₹) 240 400 560
Total cost per unit (₹) 830 1,260 1,530
Selling price (₹) 1,037.50 1,575 1,912.50

The following additional information is available relating to overhead cost drivers.

Cost driver Product X Product Y Product Z Total
No. of machine set ups 40 160 400 600
No. of purchase orders 400 800 1,200 2,400
No. of customers 1,000 2,200 4,800 8,000

Actual production and budgeted production for the month is same. Workers are paid at standard rate. Out of total overhead costs,
30% related to machine set-ups, 30% related to customer order processing and customer complaint management, while the balance
proportion related to material ordering.

Required:
(i) COMPUTE overhead cost per unit using activity based costing method.
(ii) DETERMINE the selling price of each product based on activity-based costing with the same profit mark-up on cost.

Question 13. [May 2005]

A B C D Co. Ltd. produces and sells four products A, B, C and D. These products are similar and usually produced in production runs of
10 units and sold in a batch of 5 units. The production details of these products are as follows:

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 Activity Based Costing BY: CA NITIN GURU
Product A B C D
Production (Units) 100 110 120 150
Cost per unit:
Direct material ( ₹) 30 40 35 45
Direct labour ( ₹) 25 30 30 40
Machine hour (per unit) 5 4 3 4

The production overheads during the period are as follows:

Particulars (₹) (₹)
Factory works expenses 22,500
Stores receiving costs 8,100
Machine set up costs 12,200
Cost relating to quality control 4,600
Material handling and dispatch 9,600 57,000

The cost drivers for these overheads are detailed below:

Cost Cost drivers
Factory works expenses Machine hours
Stores receiving costs Requisitions raised
Machine set up costs No. of production runs
Cost relating to quality control No. of production runs
Material handling and dispatch No. of orders executed

The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96, each order was in a
batch of 05 units.

Required:
(i) Total cost of each product assuming the absorption of overhead on machine hour basis;
(ii) Total cost of each product assuming the absorption of overhead by using activity base costing; and
(iii) Show the differences between (i) and (ii) and comment.

Solution 13:
(i) Statement showing total cost of each product assuming absorption of overheads on Machine Hour Rate Basis.
Particulars A B C D Total
Output (units) 100 110 120 150 480
Direct material (₹) 30 40 35 45 150
Direct Labour (₹) 25 30 30 40 125
Direct labour- 5 4 3 4
Machine hrs
Overhead @ ₹ 30/- 150 120 90 120 480
per Machine hr
Total cost per unit 205 190 155 205 755
(₹)
Total cost (₹) 20,500 20,900 18,600 30,750 90,750

Overhead rate = = = ₹ 30 per unit

Total Overheads ₹
Factory works expenses 22,500 Factory exp per unit 22,500 / 1,900 = ₹ 11.84
Stores receiving cost 8,100 Stores receiving cost 8100 / 100 = ₹ 81
Machine set up costs 12,200 Machine set-up cost 12,200 / 48 = ₹ 254.1
Costs relating to quality control 4,600 Cost relating to QC 4,600/48 =₹ 95.83
Expense relating to material 9,600 Material handling & dispatch 9,600 / 96 = ₹ 100/-
handling & dispatch

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 Activity Based Costing BY: CA NITIN GURU
Total 57,000

Statement showing total cost of each product assuming activity based costing.
Particulars A B C D Total
Output (units) 100 110 120 150 480
No. of production 10 11 12 15 48
runs
No. of stores 25 25 25 25 100
requisition
No. of sales orders 20 22 24 30 96
Unit costs - Direct 30 40 35 45
material (₹)
Unit costs - Direct 25 30 30 40
Labour (₹)
Unit costs - Factory 59.20 47.36 35.52 47.36
works expenses (₹)
Unit costs - Stores 20.25 18.41 16.88 13.50
receiving cost (₹)
Unit costs - Machine 25.42 25.42 25.42 25.42
set-up cost (₹)
Unit costs – QC (₹) 9.58 9.58 9.58 9.58
Unit costs – 20 20 20 20
Material Handling
(₹)
Unit cost (₹) 189.45 190.77 172.40 200.86
Total cost (₹) 18,945 20,984.7 20,688 30,129

(iii) Statement showing differences (in ₹)

Particulars A B C D
Unit cost MHR 205 190 155 205
Unit cost ABC 189.45 190.77 172.40 200.86
Unit cost - difference 15.55 -0.77 -17.40 4.14
Total cost MHR 20,500 20,900 18,600 30,750
Total cost ABC 18,945 20,985 20,688 30,128

The difference is that A consumes comparatively more of Machine hours.

The use of activity based costing gives different product costs than what were arrived at by utilizing traditional costing. It can be
argued that Product costs using ABC are more precise as overheads have been identified with specific activities.

Question 14. [Nov 2005]

ABC Limited manufactures two radio models, the Nova which has been produced for five years and sells for ₹ 900, and the Royal, a
new model introduced in early 2004, which sells for ₹ 1,140. Based on the following Income statement for the year 2004-05, a
decision has been made to concentrate ABC Limited’s marketing resources on the Royal model and to begin to phase out the Nova
model.

ABC Limited - Income Statement for the year ending March 31, 2005
Particulars Royal Model (₹) Nova Model (₹) Total (₹)
Sales 45,60,000 1,98,00,000 2,43,60,000
Cost of Goods sold 31,92,000 1,25,40,000 1,57,32,000
Gross margin 13,68,000 72,60,000 86,28,000
Selling & 9,78,000 58,30,000 68,08,000
Administrative
Expenses
Net Income 3,90,000 14,30,000 18,20,000

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 Activity Based Costing BY: CA NITIN GURU
Unit Produced and 4,000 22,000
sold
Net Income per unit 97.50 65
sold

The standard unit costs for the Royal and Nova models are as follows:
Particulars Royal Model (₹) Nova Model (₹)
Direct materials 584 208
Direct Labour
Royal (3.5 hrs x ₹ 12) 42
Nova (1.5 hrs x ₹ 12) 18
Machine usage
Royal (4 hrs x ₹ 18) 72
Nova (8 hrs x ₹ 18) 144
Manufacturing overheads (applied on 100 200
the basis of machine hours at a pre-
determined rate of ₹ 25 per hour)
Standard Cost 798 570

ABC Ltd.'s Controller is advocating the use of activity-based costing and activity-based cost management and has gathered the
following information about the company's manufacturing overheads cost for the year ending March 31, 2005.
Activity centre (Cost driver) Traceable Costs Number of Events
(₹) Royal Nova Total
Soldering (Number of solder joints) 9,42,000 3,85,000 11,85,000 15,70,000
Shipments (Number of shipments) 8,60,000 3,800 16,200 20,000
Quality control (Number of Shipments) 12,40,000 21,300 56,200 77,500
Purchase orders (Number of orders) 9,50,400 1,09,980 80,100 1,90,080
Machine Power (Machine hours) 57,600 16,000 1,76,000 1,92,000
Machine setups (Number of setups) 7,50,000 14,000 16,000 30,000
Total Traceable costs 48,00,000

Required:
(i) Prepare a Statement showing allocation of manufacturing overheads using the principles of activity-based costing.
(ii) Prepare a Statement showing product cost profitability using activity-based costing.
(iii) Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model? Discuss.

Solution 14:
Statement Showing Allocation of Manufacturing Overheads Using Principles of Activity Based Costing.
Activity Centre Traceable cost ₹ Cost allocation basis Cost allocation basis
Royal (₹) Nova (₹)
Soldering 9,42,000 385 : 1185 2,31,000 7,11,000
Shipments 8,60,000 38 : 162 1,63,400 6,96,600
Quality control 12,40,000 213 : 562 3,40,800 8,99,200
Purchase orders 9,50,400 109980 : 80100 5,49,900 4,00,500
Machine lower 57,600 16 : 176 4,800 52,800
Machine set ups 7,50,000 14 : 16 3,50,000 4,00,000
48,00,000 16,39,900 31,60,100
Units produced and sold 4,000 22,000
Manufacturing Overheads ₹ 409.98 ₹ 143.64
Cost per unit

(ii) Statement Showing Product Cost and Profitability using Activity Based Costing
Particulars Royal (per unit cost ₹) Nova (per unit cost ₹) Total ₹
Standard cost other than 698 370

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 Activity Based Costing BY: CA NITIN GURU
manufacturing OHs cost
Manufacturing OHs using 409.98 143.64
activity-based costing
Cost 1,107.98 513.64
Selling Price/unit 1,140 900
Gross Margin / unit 32.02 386.36
Gross Margin 1,28,080 84,99,920 86,28,000
Selling & Adm. Expenses 9,78,000 58,30,000 68,08,000
Net Income (8,49,920) 26,69,920 18,20,000

(iii) Novo Model should continue to be bread and butter product and Royal model should not be over-emphasized; rather it’s pricing is
required to be corrected.

Question 15. [May 2006]

ABC Bank is examining the profitability of its Premier Account, a combined Savings and Cheque account. Depositors receive a 7%
annual interest on their average deposit. ABC Bank earns an interest rate spread of 3% (the difference between the rate at which it
lends money and rate it pays to depositors) by lending money for home loan purpose at 10%.

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, cheque facility, and foreign currency
drafts. Depositors with Premier Account balances of ₹ 50,000 or more receive unlimited free use of services. Depositors with
minimum balance of less than ₹ 50,000 pay ₹ 1,000-a-month service fee for their Premier Account.

ABC Bank recently conducted an activity-based costing study of its services. The use of these services in 2005-06 by three customers is
as follows:
Particulars Activity- Based Cost Per Account usage
Transaction Customer X Customer Y Customer Z
Deposits/withdrawal ₹ 125 40 50 5
with teller
Deposits/withdrawal ₹ 40 10 20 16
with automatic teller
machine (ATM)
Deposits/withdrawal on ₹ 25 0 12 60
prearranged monthly
basis
Bank Cheques written ₹ 400 9 3 2
Foreign Currency drafts ₹ 600 4 1 6
Inquiries about Account ₹ 75 10 18 9
balance
Average Premier Account ₹ 55,000 ₹ 40,000 ₹ 12,50,000
balance for 2005-06

Assume Customer X and Z always maintains a balance above ₹ 50,000, whereas Customer Y always has a balance below ₹ 50,000.
Required:
(i) Compute the 2005-06 profitability of the customers X, Y and Z Premier Account at ABC Bank.
(ii) What evidence is there of cross-subsidisation among the three Premier Accounts? Why might ABC Bank worry about this Cross-
subsidisation, if the Premier Account product offering is Profitable as a whole?
(iii) What changes would you recommend for ABC Bank’s Premier Account?

Solution 15:
(i) Customer Profitability Analysis
ABC Bank – Premier Account
Activity Activity based cost (₹) Customers
X (₹) Y (₹) Z (₹)
Deposits/withdrawal with 125 5,000 6,250 625
teller (40 x 125) (50 x 125) (5 x 125)

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Deposits/withdrawal with 40 400 800 640
ATM (10 x 40) (20 x 40) (16 x 40)
Deposits/withdrawal on 25 0 300 1,500
prearranged monthly (0 x 25) (12 x 25) (60 x 25)
basis
Bank cheques written 400 3,600 1,200 800
(9 x 400) (3 x 400) (2 x 400)
Foreign currency drafts 600 2,400 600 3,600
(4 x 600) (1 x 600) (6 x 600)
Inquiries about Account 75 750 1,350 675
balance (10 x 75) (18 x 75) (9 x 75)
Customer cost (A) 12,150 10,500 7,840
Spread on Average 3% 1,650 1,200 37,500
balance maintained (3% x 55,000) (3% x 40,000) (3% x 12,50,000)
Service fee ₹ 1,000 p.m. 12,000
1,650 13,200 37,500

Particulars Customers
X (₹) Y (₹) Z (₹)
Customer Profitability ₹ (10,500) ₹ 2,700 ₹ 29,660
(Benefits – Costs)

(ii) Customer Z is most profitable and is cross-subsidizing the most demanding customer X. Customer Y is paying for the services used,
because of not being able to maintain minimum balance. No doubt, ‘Premier Account’ product offering is profitable as a whole, but
the worry is of not finding customers like customer Z who will maintain a balance higher than the stipulated minimum. It appears, the
minimum balance stipulated is inadequate considering the services availed by depositors in ‘Premium Account’.

(iii) The changes suggested to ABC Bank’s ‘Premier Account’ are as follows:
 Increase the requirement of minimum balance from ₹ 50,000 to ₹ 1,00,000.
 ₹ 10,000 at the
teller. Only ATM machine withdrawal be allowed.
 Inquiries about account balance to be entertained only through Phone Banking/ATM.

Question 16. [Nov 2006]

ABC Ltd. Manufactures two types of machinery equipments Y and Z and applies/absorbs overheads on the basis of direct-labour
hours. The budgeted overheads and direct-labour hours for the month of December, 2006 are ₹ 12,42,500 and 20,000 hours
respectively. The information about Company’s products is as follows:
Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ₹ 300 per unit ₹ 450 per unit
Direct labour cost
Y : 3 hours @ ₹ 150 per hour
X : 4 hours @ ₹ 150 per hour ₹ 450 ₹ 600

ABC Ltd.’s overheads of ₹ 12,42,500 can be identified with three major activities: Order Processing ( ₹ 2,10,000), machine processing (
₹ 8,75,000), and product inspection ( ₹ 1,57,500). These activities are driven by number of orders processed, machine hours worked,
and inspection hours, respectively. The data relevant to these activities is as follows:
Particulars Orders processed Machine hours worked Inspection hours
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000

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Required:
(i) Assuming use of direct-labour hours to absorb/apply overheads to production, compute the unit manufacturing cost of the
equipments Y and Z, if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity-based costing, compute the unit manufacturing costs of the equipments Y and Z, if the budgeted
manufacturing volume is achieved.
(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hours as an application base, calculate the amount of
cost distortion (under-costed or over-costed) for each equipment.
(iv) Discuss, how an activity-based costing might benefit ABC Ltd.

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 Cost Sheet BY: CA Nitin Guru

Chapter-6
Cost Sheet
 Introduction
Question 1.
What is Cost Sheet? What are its uses?

Solution 1:
A Cost Sheet is a statement which shows the break-up and build-up of costs, it is a document which provides for the consolidation of
the detailed cost of a cost center or a cost unit.
Uses of the Cost Sheet
(i) Presentation of Cost information
(ii) Determination of Selling Price.
(iii) Ascertainment of profitability
(iv) Product-wise and Location-wise Cost Analysis,
(v) Inter-firm and Intra-firm Cost Comparison.
(vi) Preparation of Cost Estimates for submitting tenders/quotations.
(vii) Preparation of Budgets.

 Performa of Cost Sheet

Particulars Amount (Rs.)
Opening Stock of Raw Material
Cost of Raw Material Purchased (Net)
(-) Closing Stock of Raw Material
Raw Material Consumed XXXX
(+) Direct Labour/Productive Wages/Production Wages/Factory Wages/Chargeable Wages
(+) Direct Expenses/Chargeable Expenses (Example Royalty on Production)
Prime Cost XXXX
(+) Factory/Works Overheads
Gross Factory Cost/Gross Works Cost XXXX
(+) Opening Work-in-Progress
(-) Closing Work-in-Progress
Net Works Cost/Net Factory Cost/Factory Cost of Production XXXX
(+) Quality Control Cost
(+) Research and Development Cost
(+) Office and Administration Overhead (relating to production activity)
(-) Credit for Recoveries/ scrap/ by products/ misc. income
(+) Packing Cost (primary)
Cost of Production XXXX
(+) Value of Opening Stock of Finished Goods
(-) Value of Closing Stock of Finished Goods
Cost of Goods Sold (COGS) XXXX
(+) Administrative Overheads (General Overhead)
(+) Selling and Distribution Overhead / Marketing Overheads
Cost of Sales XXXX

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(+) Profit Margin

Sales XXXX

 Other Important Notes

 CLASSIFICATION OF COST:
1. Unproductive Wages Factory Overhead
2. Rent, Rates and Taxes Factory Overhead
3. Telephone Expenses Office and Administration Overhead
4. Printing and Stationary Office and Administration Overhead
5. Motive Power Factory Overhead
6. Cleaning Expenses Factory Overhead
7. Loose Tools written off Factory Overhead
8. Heating and Lighting Factory Overhead
9. Director Fees Office and Administration Overhead
10. Haulage (Lifting, Loading and Unloading) Factory Overhead
11. Accounting Expenses Office and Administration Overhead
12. Auditing Expenses Office and Administration Overhead
13. Drawing Office expenses (They represent planning work in Factory) Factory Overhead
14. Counting House Expenses (Accounting and Auditing Department) Office and Administration Overhead
15. Depreciation/Rent of Delivery Vans Selling and Distribution Overhead
16. Water Expenses Factory Overhead
17. Bank Charges Office & Administration Overhead
18. Deprecation/Rent of Plant and Machinery Factory Overhead
19. Bad Debts Selling and Distribution Overhead
20. Trade Discount Allowed Selling and Distribution Overhead
21. Advertisement Expenses Selling and Distribution Overhead
22. Trade Expenses Selling and Distribution Overhead
23. Rent of Show Room Selling and Distribution Overhead
24. Rent of Store Room Factory Overhead
25. Legal Charges Office and Administration Overhead
26. Factory Stores Factory Overhead
27. Estimating Factory Overhead
28. Consumable Stores (Indirect Material used in Factory) Factory Overhead
29. Rental for Leasehold Equipment Factory Overhead
30. Rectification & Cost of Defective (Normal) Factory Overhead
31. Wastages of Material
(a) Normal Wastage Already Included: Ignore
Not Included: Add it as Factory Overheads
(b) Abnormal Wastage Already Included: Subtract it from Gross Factory Cost
Not Included: Ignore in Cost Sheet (As shown in
Costing P & L A/c)
32. Scrap Value of Wastage
(a) Normal Wastage Reduce scrap value from Gross Factory Cost
(b) Abnormal Wastage Ignore in Cost Sheet and write in Costing P & L
33. Discount Allowed to Customers
(a) Trade Discount Write it in Selling and Distribution Overheads (Add it)
(b) Cash Discount Ignore from Cost Sheet as it is financial expense in nature

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 Items which are Excluding while preparing Cost Sheet (Financial and Notional Expenses)
(i) Income Tax (iv) Interest on Debentures (vii) Dividend and Rent Income
(ii) Cash Discount (v) Interest Paid (viii) Transfer Fee Receipt (Share Transfer, Royalty
Received)
(iii) Obsolesce Cost (vi) Interest Income (ix) Tax Refunds

 Custom Duty Paid on Goods Purchased

It is shown as a part of Raw Material Consumed and it is added while calculating Cost of Raw Material.
Opening Stock of Raw Material ----
(+) Purchases ----
(+) Custom Duty ----
(-) Closing Stock of Raw Material ----
Raw Material Consumed ----

 Other Notes:
 Duty Drawback is added to Sales and shown as Total Revenue.
Duty Drawback means the refund of prior paid taxes when we export the goods.
 Financial Cost is not taken in Cost Sheet.
 The value of Closing WIP is generally made at Factory Cost because it is shown below Factory Cost only.
 The Cost of the Finished Goods closing stock is valued at Cost of Production because it is shown below it only.
 Factory Wages are direct expenses but Factory salaries are indirect expenses.
 If nothing is mentioned then closing raw material can be on FIFO.

 Conversion Cost
It means Direct Manufacturing Cost plus Indirect Manufacturing Cost. It includes both Labour and expenses.
Conversion Cost = Direct Manufacturing Cost + Indirect Manufacturing Cost
Conversion Cost = Direct Labour + Direct Expenses + Indirect Labour + Indirect Expenses

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 Practical Problems

 Preparation of Cost Sheet

Question 2. [Study Material]]
The following data relates to the manufacture of a standard product during the month of April, 2018:

Particulars Amount (Rs.)

Raw materials 1,80,000
Direct wages 90,000
Machine hours worked (hours) 10,000
Machine hour rate (per hour) 8
Administration overheads 35,000
Selling overheads (per unit) 5
Units produced 4,000
Units sold 3,600
Selling price per unit 125

You are required to PREPARE a cost sheet in respect of the above showing:
(i) Cost per unit
(ii) Profit for the month

Question 3. [Study Material]]

The following information has been obtained from the records of ABC Corporation for the period from June 1 to June 30, 20X8:
On June On June 30, 20X8
1, 20X8 (Rs. ) (Rs. )
Cost of raw materials 60,000 50,000
Cost of work-in-process 12,000 15,000
Cost of stock of finished goods 90,000 1,10,000
Purchase of raw materials during June’ 20X8 4,80,000
Wages paid 2,40,000
Factory overheads 1,00,000
Administration overheads (related to production) 50,000
Selling & distribution overheads 25,000
Sales 10,00,000
PREPARE a statement giving the following information:
(a) Raw materials consumed;
(b) Prime cost;
(c) Factory cost;
(d) Cost of goods sold; and
(e) Net profit.

Question 4. [Study Material]]

The books of Adarsh Manufacturing Company present the following data for the month of April, 20X9:
Direct labour cost Rs. 17,500 being 175% of works overheads.
Cost of goods sold excluding administrative expenses Rs. 56,000.
Inventory accounts showed the following opening and closing balances:
April 1(Rs. ) April 30 (Rs. )
Raw materials 8,000 10,600
Work in progress 10,500 14,500
Finished goods 17,600 19,000

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Other data are:
(Rs. )
Selling expenses 3,500
General and administration expenses 2,500
Sales for the month 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.

Question 5. [Study Material]]

A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at varying levels of production is as under:
Level Works cost per unit (Rs. )
10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310
Its fixed administration expenses amount to Rs. 1,50,000 and fixed marketing expenses amount to Rs. 2,50,000 per month
respectively. The variable distribution cost amounts to Rs. 30 per unit.
It can sell 100% of its output at Rs. 500 per unit provided it incurs the following further expenditure:
(a) it gives gift items costing Rs. 30 per unit of sale;
(b) it has lucky draws every month giving the first prize of Rs. 50,000; 2nd prize of Rs. 25,000, 3rd prize of Rs. 10,000 and three
consolation prizes of Rs. 5,000 each to customers buying the product.
(c) it spends Rs. 1,00,000 on refreshments served every month to its customers;
(d) it sponsors a television programme every week at a cost of Rs. 20,00,000 per month.
It can market 30% of its output at Rs. 550 per unit without incurring any of the expenses referred to in (a) to (d) above.
PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.

Question 6.
The cost of sale of Product Z is made up as follows:
Particulars Rs.
Materials used in manufacturing 5,500
Materials used in packing materials 1,000
Materials used in selling the product 150
Materials used in the factory 75
Materials used in the office 125
Primary Packing Costs 800
Quality Control Cost 600
Labour required in producing 1,000
Labour required for supervision of the Management – Factory 200
Freight inward of material used in manufacturing 1,000
Expenses – Indirect – Factory 100
Expenses – Office 125
Depreciation – Office Building and Equipment 75

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Depreciation – Factory 175

Research and Development Costs 700
Recoveries on account of sale of scrap produced in the normal course of manufacture 100
Selling Expenses 350
Advertising 125
Assuming that all the products manufactured are sold, what should be the selling price to obtain a profit of 25% on selling price?
Show the divisions of costs for Product Z.

 Cost Sheet – Cost of Raw Material Purchased

Question 7. [NOV 81]
The books and records of the Anand Manufacturing Company present the following data for the month of August, 1998:
Direct labour cost Rs. 17,500 (175% of factory overhead) Cost of sales Rs. 56,000.
Inventory accounts showed these opening and closing balances:
Particulars August 1 (Rs.) August 31 (Rs.)
Raw Materials 8,000 10,600
Work-in-Progress 10,500 14,500
Finished Goods 17,600 19,000
Other data:
Selling Expenses 3,500
General and Administration Expenses 2,500
Sales for the month 75,000
You are required to compute cost of Raw Materials purchased & prepare a statement showing cost of goods manufactured and sold
and profit earned.

 Cost Sheet – Current and Future Cost and Selling Price

Question 8. [NOV 81]
Cool-Wind Ltd. manufactures fans, which are sold at Rs. 400 per piece. The cost of sale is composed of 40% of direct material, 30%
wages and 30% overhead.
An increase in material price by 25% and in wage rate by 10% is expected in the forthcoming year; as a result of which the profit at
current selling price may dwindle by 39% of present gross profit.
With the above information, you are required to:
(a) Prepare a statement showing current and future cost and profit at present selling price, and
(b) Determine the future selling price, if the present rate of gross profit is to be maintained.

 Cost Sheet – Reverse Working to Compute Purchases

Question 9. [MAY 92 (ADAPTED)]
Comprehensive Ltd gives you the following information –
1. From Financial Records:
Particulars Rs. 000s
Sales for the year 75,00
Direct Labour 17,50
Management Expenses 2,50
Selling Expenses 3,50
2. From Inventory Records:
st st
Particulars As at 31 Dec (Rs. 000s) As at 1 Jan (Rs. 000s)
Raw Materials 10,60 8,00

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Finished Goods 19,00 17,60

WIP (50% complete) 14,50 10,50
3. From analysis of past data:
(a) Direct Labour would be 175% of Works Overheads.
(b) Cost of Goods Sold (excluding Administration Overheads) would be Rs. 11,200 per unit.
(c) Selling expenses would be Rs. 700 per unit.
You are required to:
1. Compute the value of materials purchased during the year.
2. Determine the rate of profit earned on Sales.
3. Discuss whether interest payment of Rs. 2,00,000 on working Capital would affect the above rate of profit.

 Cost Sheet – Product Wise Cost Analysis and Apportionment

Question 10. [MAY 09]
Bright Shoe-Polish Company manufacturing black and brown polish in one standard size of tin retailing at Rs. 12 and Rs. 13.30
respectively. Following information is supplied to you:

Opening Stock:
Black polish 2,400 tins
Brown polish 8,000 tins
Closing Stock:
Black polish 5400 tins
Brown polish 3,000 tins
Sales:
Black polish 72,000 tins
Black polish 30,000 tins
Direct materials:
Polish Rs. 2,46,000
Tins Rs. 1,20,000
Direct wages Rs. 2,04,000
Production overhead Rs. 3,06,000
Administration and selling overhead Rs. 1,02,000
The opening stock of black and brown polish was valued at its production cost. The cost of raw materials for brown polish is 10 per
cent higher than for black, but there is no difference in the cost of tins. Direct wages for brown polish are 8 per cent higher than those
of black polish and production overheads are considered to vary with direct wages. Administration and selling overhead is absorbed at
a uniform rate per tin of polish sold. Prepare a statement to show the cost and profit per tin of polish.

Question 11. [NOV 09]

SK Engineering Company Limited manufactures two types of auto bearing type ‘XD’ and type ‘XE’. The company’s records show the
following particulars for those bearing for the month of May, 2009:
Particulars Amount (Rs.)
Direct Materials 38,10,000
Direct labour 20,10,000
Production overheads 6,03,000
Office Overheads 6,42,300
There was no work-in-progress at the beginning or at the end of the month. It was ascertained that:
 Direct material cost per bearing for type ‘XD’ was 160 percent of those for type ‘XE’.
 Direct labour cost per bearing for type ‘XE’ was 40 percent of those for type ‘XD’.
 Production overheads were absorbed on the basis of direct labour cost.

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 Office overheads were absorbed on the basis of factory cost.
 Selling and distribution overheads were Rs. 2 per bearing sold for each type.
st
 Stock of finished bearing on 1 May, 2009 was 15,000 bearings @ Rs. 15 of type ‘XD’ and 20,000 bearing @ Rs. 8 of type ‘XE’.
 Production during the month of May, 2009 was 2,70,000 bearings of type ‘XD’ and 3,30,000 bearings of type ‘XE ‘ and out of
st
May’s output 25,000 bearings of type ‘XD’ and 40,000 bearings of type ‘XE’ would be remains in stock on 31 May, 2009 which
valued at cost of production. You are required to:
(1) Prepare a statement showing cost of production each type of bearings.
(2) Prepare, if the company desires at 20 percent profit on selling price.

 Cost Sheet – Finding Out Missing Figures

Question 12. [NOV 03]
A fire occurred in the factory premises on October 31, 2003. The accounting records have been destroyed. Certain accounting records
were kept in another building. They reveal the following for the period September 1, 2003 to October 31, 2003:
 Direct material purchased Rs. 2,50,000
 Work in process inventory, 1.9.2003 Rs. 40,000
 Direct materials inventory, 1.9.2003 Rs. 20,000
 Finished goods inventory, 1.9.2003 Rs. 37,750
 Indirect manufacturing costs 40% of conversion cost
 Sales revenues Rs. 7,50,000
 Direct manufacturing labour Rs. 2,22,250
 Prime costs Rs. 3,97,750
 Gross margin percentage based on revenues 30%
 Cost of goods available for sale Rs. 5,55,775
The loss is fully covered by insurance company. The insurance company wants to know the historical cost of the inventories as a basis
for negotiating a settlement, although the settlement is actually to be based on replacement cost, not historical cost.
Required:
(i) Finished goods inventory, 31.10.2003
(ii) Work in process inventory, 31.10.2003
(iii) Direct materials inventory, 31.10.2003

 Cost Estimation for New Orders Quotation

 Estimation of Selling Price Overhead Estimation – Quotation
Question 13. [NOV 15]
Stand Ltd is engaged in manufacture of leather items as per customers’ specifications. Summary of their accounts for the last year
shown in the following information:
Particulars Amount (Rs.)
Opening stock of Raw Materials 50,000
Purchases of Raw Materials 12,60,000
Closing Stock of Raw Materials 75,000
Production OH 1,96,000
Administration OH 1,45,000
Workers' Wages 7,00,000
In the current year, the Company has obtained a job from Ram. Estimates of Material and Labour Cost for this job are Rs. 5,500 and Rs.
4,000 respectively. The Company’s costing system recognizes Production OH as a % of Direct labour and Administration OH as a % of
Works Cost. Calculate the Price that the Company should quote Ram, in order to earn a profit of 20% on Sales.

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 Simultaneous Equation in Basic Cost Analysis

 Estimation of New Selling Price

Question 14. [MAY 01]
A Company manufactures Radios, which are sold at Rs. 1,600 per unit. The total cost is composed of 30% for Direct Materials, 40% for
Direct Wages and 30% for Overheads. An increase in material price by 30% and in wage rates by 10% is expected in the forthcoming
year, as a result of which the profit at current selling price may decrease by 40% of the present profit per unit. You are required to
prepare a statement showing current and future profit at present Selling Price. What should be the Selling Price to maintain the
present rate of profit?

Question 15. [MAY 10]

A Company produces a Machine and sells it for Rs. 3,000. There is an increase of 20% in the Cost of Material, 10% in Labour, and 10%
in Overhead Cost. The only figures available are that Material Cost is 50% of Cost of Sales, Labour Cost is 30% of Cost of Sales and
Overhead is 20% of Cost of Sales.
The anticipated increased cost in relation to the present Sales Price would cause a 30% decrease in the amount of the present Gross
Profit. What would be the Selling Price of the machine to give the same percentage of Gross Profit as before?

Question 16. [NOV 87]

The cost structure of an article the selling price of which is Rs. 45,000 is as follows:
Direct Materials 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.
You are required
(a) To prepare a statement of profit per article at present and
(b) The revised selling price to produce the same percentage of profit to sales as before.

 Estimation of Overhead as Percentage of Costs

Question 17. [NOV 08]
In a manufacturing company factor overheads are charged as fixed percentage basis on direct labour and office overheads are charged
st
on the basis of percentage of factory cost. The following information is available related to the ending 31 March, 2008:

Particulars Production A Production B

Direct Materials Rs. 19,000 Rs. 15,000
Direct Labour Rs. 15,000 Rs. 25,000
Sales Rs. 60,000 Rs. 80,000
Profits 25% on cost 25% on sales price
You are required to find out:
(a) The percentage of factory overheads on direct labour.
(b) The percentage of office overheads on factory cost.

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 Preparation of Income Statement

 Overhead Analysis into Fixed and Variable
Question 18. [NOV 04]
Popeye Company is a metal and wood cutting manufacturer, selling products to home construction market. Consider the following
data for the month of October.
Particulars Rs. Particulars Rs.
Sandpaper 5,000 Plant Leasing Costs 1,35,000
Material Handling Costs 1,75,000 Depreciation - Plant Equipment 90,000
Lubricants and Coolants 12,500 Property Taxes on Plant Equipment 10,000
Miscellaneous Indirect Manufacturing Labour 1,00,000 Fire Insurance on Plant Equipment 7,500
Direct Manufacturing Labour 7,50,000 Direct Materials Purchased 11,50,000
Direct Materials, 1 October 1,00,000 Sales Revenues 34,00,000
Direct Materials, 31 October 1,25,000 Marketing Promotions 1,50,000
Finished Goods, 1 October 2,50,000 Marketing Salaries 2,50,000
Finished Goods, 31 October 3,75,000 Distribution Costs 1,75,000
Work-in-Process, 1 October 25,000 Customer Service Costs 2,50,000
Work-in-Process, 31 October 35,000
1. Prepare an Income Statement with separate supporting schedule of Cost of Goods Manufactured.
2. For all manufacturing items, indicate by V or F, whether each is basically a Variable Cost or a Fixed Cost (where the cost object is
a product unit).

 Preparation of Income Statement – With Supporting Schedules

Question 19. [NOV 86]
th
The following figures are extracted from the Trial Balance of Gogetter Co. on 30 September, 1986:
Particulars Rs. Particulars Rs.
Inventories: Indirect Labour 18,000
Finished Stock 80,000 Factory Supervision 10,000
Raw Materials 1,40,000 Repairs and Upkeep-Factory 14,000
Work-in-Process 2,00,000 Heat, Light and Power 65,000
Office Appliances 17,400 Rates and Taxes 6,300
Plant & Machinery 4,60,500 Miscellaneous Factory expenses 18,700
Buildings 2,00,000 Sales Commission 33,600
Sales 7,68,000 Sales Travelling 11,000
Sales Return & Rebates 14,000 Sales Promotion 22,500
Materials Purchased 3,20,000 Distribution Department Salaries and expenses 18,000
Freight incurred on Materials 16,000 Office Salaries and Expenses 8,600
Purchase Returns 4,800 Interest on Borrowed Funds 2,000
Direct labour 1,60,000
Further details are available as follows:
 Closing Inventories:
Finished Goods Rs. 1,15,000
Raw Materials Rs. 1,80,000
Work-in-Process Rs. 1,92,000
 Accrued expenses on:
Direct Labour Rs. 8,000
Indirect Labour Rs. 1,200

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Interest on Borrowed Funds Rs. 2,000
 Depreciation to be provided on:
Office Appliances 5%
Plant and Machinery 10%
Buildings 4%
 Distribution of the following costs:
Heat, light and Powers to Factory, Office and Selling in the ratio 8:1:1.
Rates and Taxes are two-thirds to Factory and one-third of Office. Depreciation on Buildings to Factory, Office and Selling in the ratio
8:1:1.
With the help of the above information, you are required to prepare a condensed Profit and Loss Statement of Gogetter Co. for the
th
year ended 30 September, 1986 along with supporting schedules:
(i) Cost of Sales
(ii) Administration Expenses
(iii) Selling and Distribution Expenses.

 Income Statement – Wrong Estimation of Overhead based Selling Price

Question 20. [RTP]
Dayalan has a small furniture factory and specializes in the manufacture of small tables of standard sizes of which he can make 15,000
a year. Last year, he made and sold 10,000 tables and his cost per table was Rs. 55, made up as – (a) Materials Rs. 30, (b) Labour Rs. 10
and (c) OH (Fixed) recovered at 50% of Material Cost Rs. 15.
Prices are fixed by adding a standard margin of 10% to the total cost arrived at as above. For the current year, due to a fall in the cost
of materials, total cost was determined at Rs. 40 per table as under – (a) Materials Rs. 20, (b) Labour Rs. 10 and (c) Overhead (Fixed)
recovered at 50% of Material Cost Rs. 10.
Dayalan maintained his standard margin at 10% of his total cost of sales. Sales were at the same level as in the previous year. You are
required to –
1. Determine Profit or Loss for the current year
2. Compute the price that should have been charged in the current year to yield the same profit as in previous year.

 Direct and Indirect Cost Apportionment for a Dealership Business

Question 21. [MAY 06]
XYZ Auto Ltd is in the business of selling cars. It also sells insurance and finance as part of its overall business strategy. The following
information is available for the Company –
Particulars Physical Units Sales Value
Sales of Cars 10,000 Cars Rs. 30,000 Lakhs
Sales of Insurance 6,000 Policies Rs. 1,500 Lakhs
Sales of Finance 8,000 Loans Rs. 19,200 Lakhs
The Revenue Earnings from each line of business before expenses are as follows:
Sale of Cars – 3% of Sales Value, Sale of Insurance – 20% of Sales Value, Sale of Finance – 2% of Sales Value.
The expenses of the Company are as follows –
Salesman Salaries Rs. 200 Lakhs
Rent Rs. 100 Lakhs
Electricity Rs. 100 Lakhs
Advertising Rs. 200 Lakhs
Documentation Cost per Insurance Policy Rs. 100
Documentation Cost for each Loan Rs. 200
Direct Sales Expenses per Car Rs. 5,000
Indirect Costs have to be allocated in the ratio of physical units sold. You are required to:
 Make a Cost Sheet for each product allocating the Direct and Indirect Costs, and also showing the product-wise profit and Total
Profit.
 Calculate the percentage of profit to revenue earned from each line of business.

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 Determination of Selling Price

Question 22. [NOV 05]
A Re-roller produced 400 metric tons of MS bars spending Rs. 36,00,000 towards Material and Rs. 6,20,000 towards Rolling Charges.
Ten percent of the output was found to be defective, which has to be sold at 10% less than the price for good production. If the sales
realization should give the Firm an overall profit of 12.5% on cost, find the Selling Price per Metric Ton of both the categories of bars.
The scrap arising during the rolling process fetched a realization of Rs. 60,000.

 Decision Making Based on Cost Sheet

 Decision Making on Foreign Offer

Question 23. [RTP]
New Products Company wishes to launch its product in the market. The estimates of costs are –
 Direct Materials and Direct Labour per unit = Rs. 40 and Rs. 36 respectively.
 Production OH will be as under –
Production Normal Working Hours for OH Fixed OH included in Time required p.u. of the
Department OH Rate purposes Total OH product
A Rs. 3.60 per hour 30,000 hours Rs. 36,000 5 hours
B Rs. 4.80 per hour 20,000 hours Rs. 12,000 2.5 hours
C Rs. 6.00 per hour 40,000 hours Rs. 60,000 4 hours

 Annual Administration and Selling Expenses applicable to the new product is Rs. 2,50,000.
 Estimated Sales Quantity per annum = 50,000 units.
You are required to:
1. Prepare a Cost Sheet and compute the unit selling price with a Profit Margin of 40% of Total Cost.
2. Advise management whether to accept an offer from a Foreign Buyer, for additional 10,000 units at Rs. 125 p.u.

 Basic Decision Making

Question 24. [June 16 - CMA]
st
The following information is available to Z Ltd. for the financial year ending 31 March 2016:
Particulars (Rs. )
Direct material 3,45,000
Direct wages 3,90,000
Production overheads (75% variable) 2,40,000
Administration overheads (75% fixed) 1,20,000
Selling and distribution overheads (50% fixed) 1,60,000
Sales – 10,000 units 15,50,000
Opening stock – Nil
Closing stock – Finished goods – 5,000 units
No WIP (Opening / closing)

For the year 2016 - 17, it is estimated that:

i. Output will increase by one – third; sales quantity will increase by 50% by incurring additional advertisement expenses of Rs.
1,45,200. Assume that opening stock is first sold before using the current year’s output.
ii. Material prices will increase by 5%.
iii. Wage rate will increase by 5% while overall direct labour efficiency will decrease by 4%.
iv. The variable overheads will be at the same unit rates as last year.
v. Fixed production overheads will increase by 25%.
vi. Assume that production and sales units were achieved as per budget last year and will be achieved as per estimate this year
also.

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 Cost Sheet BY: CA Nitin Guru
vii. The company will revise its selling price in 2016-17 to Rs. 125 per unit. The same selling price will hold for the units sold from
the opening stock also.

You are required to prepare a statement showing cost of sales and sales profit giving effect to the above for the financial year 2016-17.

 Semi Variable Costs and Pricing Decision using Cost Sheet

 Semi Variable Cost and Pricing Decision

Question 25. [NOV 06]
A manufacturing Company has an installed capacity of 1,50,000 units per annum. Its cost structure is given below:
Particulars Rs.
Variable cost unit
Materials 10
Labour (subject to a minimum of Rs. 1,00,000 per month) 10
Overheads 4
Fixed overheads per annum 1,92,300
Semi-variable overheads per annum at 75% capacity (It will increase by Rs. 4,000 per annum for increase of every 5% of
the capacity utilization or any part thereof) 60,000
The capacity utilization for the next year is budgeted at 75% for first months 80% for the next six month and 90% for the remaining
three months.
Required: If the company is planning to have a profit of 20% on the selling price, calculate the selling price per unit for the next year.

Question 26. [NOV 97]

A manufacturing Company has an installed capacity of 1,20,000 units p.a. The cost structure of the product is given below –
Material Costs Rs. 8 per unit
Labour (subject to a minimum of Rs. 56,000 per month) Rs. 8 per unit
Variable Overheads Rs. 3 per unit
Fixed Overheads Rs. 1,04,000 per annum
Semi-Variable Overheads Rs. 48,000 per annum at 60% capacity, which increase 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 for the 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 the Selling Price, calculate the Selling Price per unit. Assume that there
are no Opening and Closing Stocks.

Question 27. [NOV 08 MAY 19 (Similar)]

Maximum production capacity of JK Ltd is 5,20,000 units per annum. Details of estimated cost of production are –
 Direct Material Rs. 15 per unit.
 Direct wages Rs. 9 per unit (subject to a minimum of Rs. 2,50,000 per month).
 Fixed Overheads Rs.9,60,000 per annum.
 Variable Overheads Rs. 8 per unit.
 Semi-Variable Overheads are Rs. 5,60,000 per annum up to 50% capacity and additional Rs. 1,50,000 per annum for every 25%
increase in capacity or a part of it.
JK limited worked at 60% capacity for the first 3 months during the year 2008, but it is expected to work at 90% capacity for the
remaining nine months.
The Selling Price per unit was Rs. 44 during the first 3 months.
Calculate what Selling Price per unit should be fixed for the remaining nine months to yield a total profit of Rs. 15,62,500 for the whole
year.

Question 28. [RTP]

A Factory can produce 60000 units p.a. at 100% capacity. The estimated cost of production is as under:
Direct Material Rs. 18 per unit

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 Cost Sheet BY: CA Nitin Guru
Direct Labour Rs. 12 per unit
Indirect Expenses:
Fixed Rs. 9,00,000 per annum
Variable Rs. 30 per unit
Semi Variable Rs. 3,00,000 per annum up to 50% capacity and an extra amount of Rs.
60,000 for every 20% increase in capacity or part thereof.
If the production programme of the Factory is as indicated below, and the Management desires to ensure a profit of Rs. 2,76,000 for
the year, work out the Average Selling Price at which each unit should be quoted.
 First three months of the year 50% of the capacity.
 Remaining nine months 80% of the capacity.

Question 29. [MAY 08]

A Factory incurred the following expenditure during last year –
Particulars Rs. Rs.
Direct Material Consumed 12,00,000
Manufacturing Wages 7,00,000
Manufacturing Overhead:
Fixed 3,60,000
Variable 2,50,000 6,10,000
Total 25,10,000
In the next year, the following changes are expected in production and cost of production –
 Production will increase due to recruitment of 60% more workers in the factory.
 Overall Efficiency will decline by 10% on account of recruitment of new workers.
 There will be an increase of 20% in Fixed Overhead and 60% in Variable Overhead.
 The cost of Direct Material will be decreased by 6%.
 The Company desires to earn a profit of 10% on Selling Price.
Ascertain the Cost of Production and Sales Value for the next year.

 Miscellaneous Theory
Question 30. [NOV 09]
List a few items that are not regarded as ‘’Cost and not included in the Cost Sheet.

Solution 30:
(1) Losses or Profits of capital nature, e.g. Profit or Loss on sale of Investments, Plant and Equipment, etc.
(2) Appropriation of Profits, e.g. Payment of Dividends, Transfers to Reserve etc.
(3) Write-offs of Goodwill, Preliminary Expenses, etc.
(4) Non-Operating Incomes, e.g. Rent, Interest and Dividends received.
(5) Imputed items that are not actually incurred by the firm but constitute arbitrary charges against profit, e.g. interest on own
capital at an arbitrary rate.

Question 31. [RTP, NOV 98, MAY 00]

How does Production A/c differ from a Cost Sheet?

Solution 31:
Production A/c Cost Sheet
It is prepared on the basis of double-entry system of book- keeping. It is only a statement and hence double-entry system is not applicable.
Cost Sheet shown costs in a detailed and analytical manner, which
Total Cost is shown in aggregate. Product-wise or Location-wise analysis facilitates
is not generally given. cost comparison.
The primary objective of preparation is Reporting. The primary objective is decision-making.
It has two parts- one showing the cost of manufacture and the other
part It is a step-by-step presentation of total cost and shows Prime Cost, Works

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showing Sales and Gross Profit. Cost, Cost of Production, Cost of Goods Sold, Cost of Sales and Profit.
This is not useful for preparing tenders or quotations. Estimated Cost Sheets can be prepared based on past experience, and
useful for submitting quotations.

Question 32. [NOV 19]

XYZ a manufacturing firm has revealed following information for September 2019:
st th
1 September (Rs. ) 30 September (Rs. )
Raw materials 2,42,000 2,92,000
Work in progress 2,00,000 5,00,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the month:

(Rs. )
Consumable stores and spares of factory 3,50,000
Research and development cost for process improvements 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000
Administrative expenses (general) 2,24,000
Selling and distribution expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5,000 units
Detective output which is 4% of targeted production, realizes Rs. 61 per unit. Closing stock is valued at cost of production (excluding
administrative expenses).
Cost of goods sold, excluding administrative expenses amounts to Rs. 78,26,000.
Direct employees cost is ½ of the cost of material consumed.
Selling price of the output is Rs. 110 per unit.
You are required to –
(i) Calculate the value of material purchased
(ii) Prepare cost sheet showing the profit earned by the firm.

Question 33. [NOV 18]

th
Following details are provided by M/s ZIA Private Limited for the quarter ending 30 September 2018 (amount in Rs. ):
i. Direct expenses – 1,80,000
ii. Direct wages being 175% of factory overheads – 2,57,250
iii. Cost of goods sold – 18,75,000
iv. Selling and distribution overheads – 60,000
v. Sales – 22,10,000
vi. Administrative overheads are 10% of factory overheads

Stock details as per stock register:

th th
Particulars 30 June 2018 (Rs. ) 30 September 2018 (Rs. )
Raw materials 2,45,600 2,08,000
Work in progress 1,70,800 1,90,000
Finished goods 3,10,000 2,75,000

You are required to prepare a cost sheet showing:

(i) Raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of goods sold
(v) Cost of sales and profit

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 Cost Accounting System BY: CA NITIN GURU

Chapter 7
COST ACCOUNTING SYSTEM
Cost Book Keeping

Non Integrated Books Integrated Books

- Separate Books of - A single set of Books are
Accounts are prepared for Costing and Financial
prepared for Costing Accounts.
and Financial
Accounts.
- Here the main
function is controlling.
So, each Account
name is attached with
words Control
Account or
Adjustment Account.
Note:
Self-Balancing Ledger/ General Ledger Adjustment Account/ General Ledger Control Account/ Cost Ledger Adjustment Account/ Cost
Ledger Control Account/ Nominal Ledger Adjustment Account. They all are name of General Ledger Adjustment.

 Journal Entries

Transactions
Material
1. Material Purchase on Credit /
for Cash
(a) For Stock

(b) For Special Jobs

2. Material Issued
(a) Direct Material

(b) Indirect Material

3. Material return to Supplier

4. Material returned from shop

floor

5. Material transferred from one

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 Cost Accounting System BY: CA NITIN GURU
job transfer to

another job (A to B)

6. Sale of Material

7. Normal Loss of Material kept

in storeroom

8. Abnormal Loss of Material

kept in storeroom

9. Transportation of incoming
Material
/carriage / freight inwards

Wages
10. Labour Cost
(a) Total Wages & salaries paid
(including Employer's
Contribution to various funds)
(b) Allocation of Wages as Direct
and
Indirect

Overheads
11. Direct Expenses (Paid /
Accrued)

12. Overheads Incurred (Paid /

Accrued)

13. Interest on borrowed capital

(paid / Accrued)

14. Works Overheads recovered

15. Administration Overheads

Related to production allocated to
Production:

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16. General Administration

Overheads recovered
To cost of sales:

17. Selling & distribution

overheads recovered

18. Interest Expense recovered

19. Finished goods produced

20. Cost of Goods Sold

21. Cash / Credit Sales

22. Cost of goods returned by

customers

23. Sales return

24. For transferring Cost of Sales

to Costing P&L A/c

25. Under-absorbed overheads

written off

26. Over-absorbed Overheads

written off

27. For profit in costing P&L A/c

28. For losses in costing P&L A/c

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 Non Integrated Accounting System

Question 1.
What are the features of the Non Integrated Accounting System?
Write short notes on General Ledger Adjustment A/c Cost Ledger Control A/c [MAY 96]

Solution 1:
Non Integral System of Accounting:
A system of accounting where two sets of books are maintained: (i) For Costing transactions and (ii) for financial transactions.

Features of Non Integrated Accounting System:

1. Entity Aspect: Cost Flows/movements within the Firm as well as transaction with outsiders (Suppliers, Customers are captured
by the system.
2. No Personal Accounts: The Non-Integrated System involves the use of Nominal Accounts and three Real Accounts (Stores Ledger
Control A/c, WIP Control A/c, Finished Goods Control A/c] and no Personal and other Real Accounts.
3. General Ledger Adjustment Account: For completing contra-posting involving Personal Accounts and other Real Accounts (Cash,
Bank, Assets, etc.), the General Ledger Adjustment Account is used. This account is also called as Cost Ledger Adjustment, or Cost
Ledger Control, or General Ledger Control A/c.
4. Costing P & L A/c: Trial Balance is drawn under this System. The Costing P & L Account is prepared, to ascertain the Profits as per
Cost Records. Balance Sheet is not prepared under this System.
5. Reconciliation: Non-cost transactions are not fully recorded by this System. Hence, whenever Non-Integrated System is in use,
regular Financial Accounting should also be done in parallel. This creates the need for reconciling between Profit as per Cost
Records and Profits as per Financial Records.

 Practical Problems

 Non Integrated Accounts – Journal Entries and Accounts

Question 2. [STUDY MATERIAL]
st
As on 31 March, 2008 the following balances existed in a firm’s Cost Ledger:
Particulars Dr. (₹) Cr. (₹)
Stores Ledger Control A/c 3,01,435
Work-in-Progress Control A/c 1,22,365
Finished Stock Ledger Control A/c 2,51,945
Manufacturing Overhead Control A/c 10,525
Cost Ledger Control A/c 6,65,220
6,75,745 6,75,745

During the next three months the following items arose:

Particulars Amount (₹)
Finished product (at cost) 2,10,835
Manufacturing overhead incurred 91,510
Raw materials purchased 1,23,000
Factory Wages 50,530
Indirect Labour 21,665
Cost of Sales 1,85,890
Material issued to production 1,27,315
Sales returned at Cost 5,380
Material returned to suppliers 2,900
Manufacturing overhead charged to production 77,200
You are required to pass the journal Entries, write up the accounts and schedule the balances, stating what each balance represents.

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Solution 2:
Journal entries are as follows:
Particulars Dr. (₹) Cr. (₹)
1. Finished stock ledger Control A/c Dr. 2,10,835
To Work-in-progress Control A/c 2,10,835
2. Manufacturing Overhead Control A/c Dr. 91,510
To Cost Ledger Control A/c 91,510
3. Stores Ledger Control A/c Dr. 1,23,000
To Cost Ledger Control A/c 1,23,000
4. (i) Wage Control A/c Dr. 72,195
To Cost Ledger Control A/c 72,195
(ii) Work-in-progress Control A/c Dr. 50,530
To Wage Control A/c 50,530
(iii) Manufacturing Overhead Control A/c Dr. 21,665
To Wage Control A/c 21,665
5. Cost of Sales A/c Dr. 1,85,890
To Finished Stock Ledger A/c 1,85,890
6. Work-in-Progress Control A/c Dr. 1,27,315
To Stores Ledger Control A/c 1,27,315
7. Finished Stock Ledger Control A/c Dr. 5,380
To Cost of Sales A/c 5,380
8. Cost Ledger Control A/c Dr. 2,900
To Stores Ledger Control A/c 2,900
9. Work-in-Progress Control A/c Dr. 77,200
To Manufacturing Overhead Control A/c 77,200

COST LEDGER
Cost Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control A/c (return) 2,900 By Balance b/d 6,65,220
To Balance c/d 9,49,025 By Manufacturing Overhead Control A/c 91,510
By Stores Ledger Control A/c 1,23,000
By Wage Control A/c 72,195
9,51,925 9,51,925

Stores Ledger Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 3,01,435 By Work-in-Progress Control A/c 1,27,315
To Cost Ledger Control A/c 1,23,000
By Cost Ledger Control A/c 2,900
By Balance c/d 2,94,220
4,24,435 4,24,435

Work-in-Progress Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 1,22,365 By Finished Stock Ledger Control A/c 2,10,835
To Wage Control A/c 50,530 By Balance c/d 1,66,575
To Stores Ledger Control A/c 1,27,315

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To Manufacturing Overhead Control A/c 77,200

3,77,410 3,77,410

Finished Stock Ledger Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 2,51,945 By Cost of Sales A/c 1,85,890
To Work-in-Progress Control A/c 2,10,835 By Balance c/d 2,82,270
To Cost of Sales A/c (return at cost) 5,380
4,68,160 4,68,160
Manufacturing Overhead Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c 91,510 By Balance b/d 10,525
To Wage Control A/c 21,665 By Work-in-Progress Control A/c 77,200
By Balance c/d (under recovered) 25,450
1,13,175 1,13,175

Wage Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c 72,195 By Work-in-Progress Control A/c 50,530
By Manufacturing Overhead Control A/c 21,665
72,195 72,195

Cost of Sales Account

Particulars Amount (₹) Particulars Amount (₹)
To Finished Stock Ledger Control A/c 1,85,890 By Finished Stock Ledger Control A/c (Return) 5,380
By Balance c/d 1,80,510
1,85,890 1,85,890

Trial Balance
Particulars Dr. (₹) Cr. (₹)
Stores Ledger Control A/c 2,94,220
Work-in-Progress Control A/c 1,66,575
Finished Stock Ledger Control A/c 2,82,270
Manufacturing Overhead Control A/c 25,450
Cost of Sales A/c 1,80,510
Cost Ledger Control A/c 9,49,025
9,49,025 9,49,025

Question 3. [Study Material]

JOURNALISE the following transactions assuming that cost and financial transactions are integrated:
Particulars ₹
Raw materials purchased 2,00,000
Direct materials issued to production 1,50,000
Wages paid (30% indirect) 1,20,000
Wages charged to production 84,000
Manufacturing expenses incurred 84,000
Manufacturing overhead charged to production 92,000
Selling and distribution costs 20,000
Finished products (at cost) 2,00,000
Sales 2,90,000
Closing stock Nil
Receipts from debtors 69,000

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 Cost Accounting System BY: CA NITIN GURU
Payments to creditors 1,10,000

Question 4. [NOV 97 (ADAPTED), NOV 00 (ADAPTED)]

Pass Journal Entries under Non-Integrated System for the following transaction-
 Issue of Materials: Direct ₹ 5,50,000, Indirect ₹ 1,50,000.
 Materials worth ₹ 45,000 returned to Stores from Production Floor.
 Gross Wages paid ₹ 48,000, Employer’s Contribution to PF and ESI amount to ₹ 2,000. Wage Analysis sheet shows ₹ 20,000
towards Direct Labour, ₹ 12,000 towards Indirect Factory Labour, ₹ 10,000 towards Salaries to Office Staff and ₹ 8,000 for
Salaries to Sales Staff.
 Production Overhead incurred ₹ 1,40,000, Absorbed ₹ 2,65,000.
 During physical verification of Stores, it was found that 100 units of Raw Materials returned to the Supplier has not been
recorded. Its Purchase Invoice Price is ₹ 50 per unit, while the current Standard Cost is ₹ 48 per unit. [The Company policy is to
written off/adjust the differences in Costing P & L A/c.]

Solution 4:
Particulars Dr. Cr.
1 Work-in-Progress Control A/c Dr. 5,50,000
Production OH Control A/c Dr. 1,50,000
To Raw Materials Control A/c 7,00,000
(Being Raw Materials issued for Direct and Indirect purposes.)
2 Raw Materials Control A/c Dr. 45,000
To Work-in-Progress Control A/c 45,000
(Being Materials returned to Stores from Production Floor.)
3 Wages Control A/c Dr. 50,000
To General Ledger Adjustment A/c 50,000
(Being Wages paid ₹ 48,000 + Employers' Contribution to PF and ESI ₹ 2,000 = Total Labour Cost ₹ 50,000)
4 Work-in-Progress Control A/c Dr. 20,000
Production OH Control A/c Dr. 12,000
Administrative OH Control A/c Dr. 10,000
Selling & Distribution OH Control A/c Dr. 8,000
To Wages Control A/c 50,000
(Being Wages analyzed as ₹ 20,000 towards Direct Labour, ₹ 12,000 towards Indirect Factory Labour, ₹ 10,000 towards
Salaries to Office Staff and ₹ 8,000 for Salaries to Sales Staff.)
5 Production OH Control A/c Dr. 1,40,000
To General Ledger Adjustment A/c 1,40,000
(Being Production OH incurred)
6 Work-in-Progress Control A/c Dr. 2,65,000
To Production OH Control A/c 2,65,000
(Being Production OH absorbed)
7 Costing P & L A/c Dr. 37,000
To Production OH Control A/c 37,000
(Being under absorption transferred to Costing P & L Account)
8 General Ledger Adjustment A/c (₹ 50 × 100 units) Dr. 5,000
To Ram Material Control A/c [at Standard Cost] (₹ 48 × 100 units) 4,800
To Costing P & L A/c (Variance written off/written back) 200
(Being Materials returned to Supplier, price difference adjusted in Costing P & L)

Notes:
 It is assumed that sufficient stock of RM is available for issue.

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 Cost Accounting System BY: CA NITIN GURU
 Difference in absorption is ignored. Alternatively, difference in absorption can be transferred to Costing P & L A/c, after
preparing the POH Control A/c as indicated below.

Production Overheads Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Raw Material Control – Indirect Materials 1,50,000 By WIP Control – POH absorption 2,65,000
To Wages Control –Indirect wages 12,000 By Costing P & L A/c –transfer (Balancing Figure) 37,000
To General Ledger Adjustment – POH incurred 1,40,000
3,02,000 3,02,000

 Non Integrated System – Various Ledger Accounts

Question 5. [Study Material]
Acme Manufacturing Co. Ltd. opens the costing records, with the balances as on 1st July, 20X8 as follows:
(₹) (₹)
Material Control A/c 1,24,000
Work-in-Process Control A/c 62,500
Finished Goods Control A/c 1,24,000
Production Overhead Control A/c 8,400
Administrative Overhead Control A/c 12,000
Selling & Distribution Overhead Control A/c 6,250
Cost Ledger Control A/c 3,13,150
3,25,150 3,25,150

The following are the transactions for the quarter ended 30th September 20X8:
Particulars (₹)
Materials purchased 4,80,100
Materials issued to jobs 4,77,400
Materials to works maintenance 41,200
Materials to administration office 3,400
Materials to selling department 7,200
Wages direct 1,49,300
Wages indirect 65,000
Transportation for indirect materials 8,400
Production overheads 2,42,250
Absorbed production overheads 3,59,100
Administration overheads 74,000
Administration allocation to production 52,900
Administration allocation to sales 14,800
Sales overheads 64,200
Sales overheads absorbed 82,000
Finished goods produced 9,58,400
Finished goods sold 9,77,300
Sales 14,43,000
Make up the various accounts as you envisage in the Cost Ledger and PREPARE a Trial Balance as at 30th September, 20X8.

Question 6. [NOV 98, NOV 18 (similar)]

st
The following balances were extracted from a company’s ledger as on 31 December, 1997:
Particulars Amount (₹) Amount (₹)
Raw materials control A/c 48,836
Work-in-progress control A/c 14,745
Finished stock control A/c 21,980
Nominal ledger control A/c 85,561
85,561 85,561
Further transactions took place during the following quarter as follows:

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Particulars Amount (₹)

Factory overhead – allocated to WIP 11,786
Goods finished – at cost 36,834
Raw materials purchased 22,422
Direct wages – allocated to WIP 18,370
Cost of goods sold 42,000
Raw materials – issued to production 17,000
Raw materials – credited by suppliers 1,000
Inventory audit – raw materials losses 1,300
WIP rejected (with no scrap value) 1,800
Customer's returns (at cost) of finished goods 3,000
Prepare all Leger Accounts in Cost Leger.

Solution 6:
Raw Materials Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 48,836 By W.I.P. control A/c 17,000
To Nominal ledger control A/c 22,422 By Nominal ledger control A/c 1,000
By Nominal ledger control A/c 1,300
By Balance c/d 51,958
71,258 71,258
Work-in-Progress Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 14,745 By Finishing stock control A/c 36,834
To Nominal ledger control A/c 11,786 By Nominal ledger control A/c 1,800
To Raw material control A/c 17,000 By Balance c/d 23,267
To Nominal ledger control A/c 18,370
61,901 61,901
Finished Stock Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 21,980 By Nominal ledger control A/c 42,000
To W.I.P. Control A/c 36,834 By Balance c/d 19,814
To Nominal ledger control A/c 3,000
61,814 61,814
Nominal Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Raw material control A/c 1,000 By Balance b/d 85,561
To Raw material control A/c 1,300 By Raw material control A/c 22,422
To Finished stock control A/c 42,000 By W.I.P. control A/c 11,786
To W.I.P. Control A/c 1,800 By W.I.P. control A/c 18,370
To Balance c/d 95,039 By Finishing stock control A/c 3,000
1,41,139 141139

 Treatment of Selling Overhead and Administration Overhead as Period Costs

Question 7. [STUDY MATERIAL, MAY 89]
st
On 31 March, 2008 the following balances were extracted from the books of the Supreme Manufacturing Company:

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Particulars Dr. (₹) Cr. (₹)

Stores Ledger Control A/c 35,000
Work-in-Progress Control A/c 38,000
Finished Goods Control A/c 25,000
Cost Ledger Control A/c 98,000
98,000 98,000
The following transactions took place in April 2008:
Particulars Amount (₹)
Raw Materials:
Purchased 95,000
Returned to Suppliers 3,000
Issued to Production 98,000
Returned to Stores 3,000
Productive Wages 40,000
Indirect Labour 25,000
Factory overhead expenses incurred 50,000
Selling and Administrative expenses 40,000
Cost of finished goods transferred to warehouse 2,13,000
Cost of Goods sold 2,10,000
Sales 3,00,000
Factory overheads are applied to production at 150% of direct wages, any under/over absorbed overhead being carried forward for
adjustment in the subsequent months. All administrative and selling expenses are treated as period costs and charged off to the Profit
and Loss Account of the month in which they are incurred.
Show the following Accounts:
(a) Cost Ledger Control A/c
(b) Stores Ledger Control A/c
(c) Work-in-Progress Control A/c
(d) Finished Goods Stock Control A/c
(e) Factory Overhead Control A/c
(f) Costing Profit & Loss A/c
th
(g) Trial Balance as at 30 April, 2008.

Solution 7:

(a) Cost Ledger Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Costing Profit & Loss A/c (Sales) 3,00,000 By Balance b/d 98,000
To Stores Ledger Control A/c 3,000 By Stores Ledger Control A/c 95000
To Balance c/d 95,000 By Wages Control A/c (Productive wages + Indirect wages) 65000
By Factory Overhead Control A/c 50,000
By Selling & Administration Overhead Expenses 40,000
By Costing Profit & Loss A/c 50,000
3,98,000 3,98,000
(b) Stores Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 35,000 By Cost Ledger Control A/c 3,000
To Cost Ledger Control A/c 95,000 By Work-in-Progress Control A/c 98,000
To Work-in-Progress Control A/c 3,000 By Balance c/d 32,000

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1,33,000 1,33,000
(c) Work-in-Progress Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 38,000 By Stores Ledger Control A/c 3,000
To Stores Ledger Control A/c 98,000 By Finished Goods A/c 2,13,000
To Wages Control A/c 40,000 By Balance c/d 20,000
To Factory Overhead Control A/c 60,000
2,36,000 2,36,000
(d) Finished Goods Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 25,000 By Cost of goods sold A/c 2,10,000
To Work-in-Progress Control A/c 2,13,000 By Balance c/d 28,000
2,38,000 2,38,000
(e) Factory Overhead Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Wage Control A/c (Indirect Labour) 25,000 By Work-in-Progress A/c (150% of ₹40,000) 60,000
To Cost Ledger Control A/c 50,000 By Balance c/d 15,000
75,000 75,000

(f) Costing Profit and Loss Account

Particulars Amount (₹) Particulars Amount (₹)
To Cost of Goods Sold A/c 2,10,000 By Cost Ledger Control A/c (Sales) 3,00,000
To Selling and Administration Overhead A/c 40,000
To Cost Ledger Control A/c (Costing profit - balancing fig.) 50,000
3,00,000 3,00,000
th
(g) Trial Balance (as at 30 April, 2008)
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control A/c 32,000
To Work-in-Progress Control A/c 20,000
To Finished Goods Control A/c 28,000
To Factory Overhead Control A/c 15,000 By Cost Ledger Control A/c 95,000
95,000 95,000
Working Notes:
(1) Wages Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c 65,000 By Work-in-Progress Control A/c 40,000
By Factory Overhead Control A/c 25,000
65,000 65,000

(2) Cost of Goods Sold Account

Particulars Amount (₹) Particulars Amount (₹)
To Finished Goods Control A/c 2,10,000 By Costing Profit & Loss A/c 2,10,000
2,10,000 2,10,000

(3) Selling & Administrative Expenses Account

Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c 40,000 By Costing Profit & Loss A/c 40,000

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40,000 40,000

 Completion of Accounts – Incomplete Records

Question 8. [MAY 97, Study Material]
A fire destroyed some accounting records of Unfortunate Ltd. You have been able to collect the following from the spoilt papers/
records and as a result of consultation with accounting staff in respect of January.

Incomplete Ledger Entries:

Raw-Materials Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 32,000

Work-in-Progress Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 9,200 By Finished Goods Control A/c 1,51,000

Payables (Creditors) Account

Particulars Amount (₹) Particulars Amount (₹)
By Balance b/d 16,400
To Balance c/d 19,200

Manufacturing Overheads Account

Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c (Amount Spent) 29,600

Finished Goods Account

Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 24,000
By balance c/d 30,000
Additional Information:
 The Cashbook showed that ₹ 89,200 have been paid to Creditors for Raw Material.
 Ending inventory of Work-in-Progress included Material ₹ 5,000 on which 300 Direct Labour Hours have been booked against
Wages and Overheads.
 The Job Card showed that workers have worked for 7,000 hours. The Wage Rate is ₹ 10 per Labour Hour.
 Overhead Recovery Rate was ₹ 4 per Direct Labour Hour.
You are required to complete the above accounts in the Cost Ledger of the Company.

Solution 8:

(Materials) Stores Ledger Control Account

Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 32,000 By WIP Control A/c (RM issued to Production) 53,000
To Cost Ledger Control (RM Purchases) 92,000 Taken from WIP Control A/c
Taken from Memorandum Creditors A/c By balance c/d (balancing figure) 71,000
1,24,000 1,24,000

Memorandum Creditors Account (to calculate Purchases)

Particulars Amount (₹) Particulars Amount (₹)
To Cash/ Bank (amount paid to Creditors) 89,200 By balance b/d 16,400
To balance c/d 19,200 By Stores Ledger Control (RM Purchases) (Bal. Figure) 92,000

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1,08,400 1,08,400

Manufacturing OH Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Cost Ledger Control A/c (OH incurred) 29,600 By WIP Control A/c (OH absorbed)
= 7,000 hours at ₹ 4 per hour 28,000
By balance c/d (balancing figure) 1,600
29,600 29,600

Work-in-Progress Control Account

Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 9,200 By Finished Goods Control A/c (Production 1,51,000
To Stores Ledger Control (RM Issues) (b/f) 53,000 By balance c/d 9,200
To Wages Control A/c (7,000 hours at ₹ 10) 70,000
To POH Control (Absorbed) (7,000 hours at ₹ 4) 28,000
1,60,200 1,60,200
Value of Closing WIP = Materials ₹ 5,000 + Labour 300 hours at ₹ 10 + OH 300 hours at ₹ 4 = ₹ 9,200.

Finished Goods Control Account

Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 24,000 By Cost of Sales A/c (COGS Transfer) 1,45,000
To WIP Control A/c (FG Production) 1,51,000 By balance c/d 30,000
1,75,000 1,75,000

Question 9. [Study Material]

The following incomplete accounts are furnished to you for the month ended 31st October, 20X8.
Stores Ledger Control Account
1.10.20X8 To Balance ₹ 54,000
Work in Process Control Account
1.10.20X8 To Balance ₹ 6,000
Finished Goods Control Account
1.10.20X8 To Balance ₹ 75,000
Factory Overheads Control Account
Total debits for October, 20X8 ₹ 45,000
Factory Overheads Applied Account

Cost of Goods Sold Account

Creditors for Purchases Account

1.10. 20X8 By Balance ₹ 30,000
Additional information:
(i) The factory overheads are applied by using a budgeted rate based on direct labour hours. The budget for overheads for 20X8
is ₹ 6,75,000 and the budget of direct labour hours is 4,50,000.
(ii) (ii) The balance in the account of creditors for purchases on 31.10.20X8 is ₹ 15,000 and the payments made to creditors in
October, 20X8 amount to ₹ 1,05,000.
(iii) The finished goods inventory as on 31st October, 20X8 is ₹ 66,000.
(iv) The cost of goods sold during the month was ₹ 1,95,000.
(v) On 31st October, 20X8 there was only one unfinished job in the factory. The cost records show that ₹ 3,000 (1,200 direct
labour hours) of direct labour cost and ₹ 6,000 of direct material cost had been charged.
(vi) A total of 28,200 direct labour hours were worked in October, 20X8. All factory workers earn same rate of pay.
(vii) All actual factory overheads incurred in October, 20X8 have been posted.

You are required to FIND:

a) Materials purchased during October, 20X8.
b) Cost of goods completed in October, 20X8.

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c) Overheads applied to production in October, 20X8.
d) Balance of Work-in-process Control A/c on 31st October, 20X8.
e) Direct materials consumed during October, 20X8.
f) Balance of Stores Ledger Control Account on 31st October, 20X8.
g) Over absorbed or under absorbed overheads for October, 20X8.

 Sales and Gross Profit Margin

Question 10. [NOV 01]
A company operates separate cost accounting and financial accounting system. The following is the list of Opening balance as on
1.04.2001 in the Cost Ledger.
Particulars Debit (₹) Credit (₹)
Stores Ledger Control Account 53,375 -
WIP Control Account 1,04,595 -
Finished Goods Control Account 30,780 -
General Ledger Adjustment Account - 1,88,750

Transactions for the quarter ended 30.06.2001 are as under:

Particulars Amount (₹)
Materials Purchased 26,700
Materials issued to Production 40,000
Materials issued for Factory Repairs 900
Factory Wages Paid (Including Indirect Wages ₹ 23,000) 77,500
Production Overheads incurred 95,200
Production Overheads under-absorbed and written off 3,200
Sales 2,56,000
The Company’s gross profit is 25% on Factory Cost. At the end of the quarter, WIP stocks increased by ₹ 7,500.
Prepare the relevant Control Accounts, Costing Profit and Loss Account and General Leger Adjustment Account to record the above
transactions for the quarter ended 30.06.2001.

Solution 10:

General Ledger Adjustment Account

Particulars Amount (₹) Particulars Amount (₹)
To Sales 2,56,000 By Balance b/d 1,88,750
To Balance c/d 1,80,150 By Stores ledger control A/c 26,700
By Wages control A/c 77,500
By Overheads control A/c 95,200
By Costing Profit & Loss A/c 48,000
4,36,150 4,36,150
Stores Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 53,375 By WIP control A/c 40,000
To General ledger adjustment A/c 26,700 By Factory overhead control A/c 900
By Balance c/d 39,175
80,075 80,075

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WIP Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 1,04,595 By Finished goods control A/c 2,02,900
To Stores ledges control A/c 40,000 By Balance c/d 1,12,095
To Wages control A/c 54,500
To Factory O/H control A/c 1,15,900
3,14,995 3,14,995
Finished Goods Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 30,780 By Cost of sales A/c 2,04,800
To WIP control A/c 2,02,900 By Balance c/d 28,880
2,33,680 2,33,680
Gross profit is 25% on Factory cost on 20% on sales.
Hence cost of sales = ₹ 2,56,000 - 20% of ₹ 2,56,000 = ₹ 2,04,800
Factory Overhead Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores ledger control A/c 900 By Costing Profit & Loss A/c 3,200
To Wages control A/c 23,000 By WIP control A/c 1,15,900
To General Ledger Adjustment A/c 95,200
1,19,100 1,19,100
Cost of Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Finished goods control A/c 2,04,800 By Costing Profit & Loss A/c 2,04,800
2,04,800 2,04,800
Wages Control Account
Particulars Amount (₹) Particulars Amount (₹)
To General ledger adjustment A/c 77,500 By Factory overhead control A/c 23,000
By WIP control A/c 54,500
77,500 77,500
Costing Profit & Loss Account
Particulars Amount (₹) Particulars Amount (₹)
To Factory OH Control A/c 3,200 By GLA A/c 2,56,000
To Cost of sales A/c 2,04,800
To General ledger adjustment A/c (Profit) 48,000
2,56,000 2,56,000
Trial Balance (as on 30.06.2001)
Particulars Amount (₹) Particulars Amount (₹)
To Stores ledger control A/c 39,175
To WIP control A/c 1,12,095
To Finished goods control A/c 28,880 By General ledger adjustment A/c 1,80,150
1,80,150 1,80,150

 Non Integrated System and Reconciliation

Question 11. [MAY 08, MAY 95 (ADAPTED)]
The following figures have been extracted from the cost records of a manufacturing company:

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Particulars Amount (₹)

Stores
Opening Balance 63,000
Purchases 3,36,000
Transfer from Work-in-progress 1,68,000
Issue to Work-in-progress 3,36,000
Issue to Repairs and Maintenance 42,000
Deficiencies found in Stock taking 12,600
Work-in-progress:
Opening Balance 1,26,000
Direct Wages applied 1,26,000
Overhead Applied 5,04,000
Closing Balance 84,000
Finished Products: Entire output is sold at Profit of 10% on actual cost from work-in-progress.
Other: Wages incurred ₹ 1,47,000; Overhead incurred ₹ 5,25,000.
Income from investment ₹ 21,000; Loss on sale of Fixed Assets ₹ 42,000.
Draw the stores control account, work in progress control account, costing profit and loss account, profit and loss account and
reconciliation statement.

Solution 11:
Stores Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 63,000 By Work-in-progress 3,36,000
To General Ledger Adjustment A/c 3,36,000 By Overhead A/c 42,000
By Overhead A/c (Deficiency Assumed as
To work-in-progress A/c 1,68,000 Normal) 12,600
By Balance c/d 1,76,400
5,67,000 5,67,000
Work-in-Progress Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 1,26,000 By Stores Ledger Control A/c 1,68,000
To Stores Ledger Control A/c 3,36,000 By Costing Profits & Loss A/c
To Work-in-progress A/c 1,26,000 (Finished goods at cost Balancing figure) 8,40,000
To Overhead A/C (applied) 5,04,000 By Balance c/d 84,000
10,92,000 10,92,000
Costing Profit and Loss Account
Particulars Amount (₹) Particulars Amount (₹)
To Work-in-Progress A/c 8,40,000 By General Ledger Adjustment A/c (Sales)
To General Ledger Adjustment A/c (Profit) 84,000 (8,40,000 + 84,000) 9,24,000
9,24,000 9,24,000

Financial Profit and Loss Account

Particulars Amount (₹) Particulars Amount (₹)
To Opening Stock By Sales 9,24,000
Stores 63,000 By Income from investment 21,000
WIP 1,26,000 1,89,000 By Closing Stock
To Purchases 3,36,000 Stores 1,76,400
To Wages 1,47,000 WIP 84,000 2,60,400

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To Overhead 5,25,000 By Loss 33,600

To Loss on sale of fixed Assets 42,000
12,39,000 12,39,000

Reconciliation Statement
Particulars Amount (₹)
Profit as per Cost Account 84,000
Add: Income from investment 21,000
1,05,000
Less: Under absorption of overhead 96,600
Loss on sale of fixed assets 42,000 1,38,600
Loss as per Financial Accounts 33,600
Note: Deficiency in stock taking may be treated as abnormal loss and it can be transferred from stores ledger Control Account to
Costing Profit Account. Then consequential changes in accounting entries in overheads Control Account has to be done.

Working Notes:
Overheads Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control A/c 42,000 By Working in Progress 5,04,000
To Stores Ledger Control A/c 12,600 By Balanced c/d 96,600
To Wages Control A/c
Indirect Wages (1,47,000 – 1,26,000) 21,000
To General Ledger Adjustment A/c 5,25,000
6,00,600 6,00,600

Solution 11:
Stores Ledger Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 63,000 By Work-in-progress 3,36,000
To General Ledger Adjustment A/c 3,36,000 By Overhead A/c 42,000
By Overhead A/c (Deficiency Assumed as
To work-in-progress A/c 1,68,000 Normal) 12,600
By Balance c/d 1,76,400
5,67,000 5,67,000
Work-in-Progress Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 1,26,000 By Stores Ledger Control A/c 1,68,000
To Stores Ledger Control A/c 3,36,000 By Costing Profits & Loss A/c
To Work-in-progress A/c 1,26,000 (Finished goods at cost Balancing figure) 8,40,000
To Overhead A/C (applied) 5,04,000 By Balance c/d 84,000
10,92,000 10,92,000
Costing Profit and Loss Account
Particulars Amount (₹) Particulars Amount (₹)
To Work-in-Progress A/c 8,40,000 By General Ledger Adjustment A/c (Sales)
To General Ledger Adjustment A/c (Profit) 84,000 (8,40,000 + 84,000) 9,24,000
9,24,000 9,24,000

Financial Profit and Loss Account

Particulars Amount (₹) Particulars Amount (₹)

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To Opening Stock By Sales 9,24,000

Stores 63,000 By Income from investment 21,000
WIP 1,26,000 1,89,000 By Closing Stock
To Purchases 3,36,000 Stores 1,76,400
To Wages 1,47,000 WIP 84,000 2,60,400
To Overhead 5,25,000 By Loss 33,600
To Loss on sale of fixed Assets 42,000
12,39,000 12,39,000

Reconciliation Statement
Particulars Amount (₹)
Profit as per Cost Account 84,000
Add: Income from investment 21,000
1,05,000
Less: Under absorption of overhead 96,600
Loss on sale of fixed assets 42,000 1,38,600
Loss as per Financial Accounts 33,600
Note: Deficiency in stock taking may be treated as abnormal loss and it can be transferred from stores ledger Control Account to
Costing Profit Account. Then consequential changes in accounting entries in overheads Control Account has to be done.

Working Notes:
Overheads Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control A/c 42,000 By Working in Progress 5,04,000
To Stores Ledger Control A/c 12,600 By Balanced c/d 96,600
To Wages Control A/c
Indirect Wages (1,47,000 – 1,26,000) 21,000
To General Ledger Adjustment A/c 5,25,000
6,00,600 6,00,600

Question 12. [NOV 14]

Following information has been extracted from the records of XYZ Pvt. Ltd.:
Stores: ₹
Opening balance 54,000
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 A/c, WIP control A/c, Overheads Control A/c and Costing Profit & Loss Account.

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Question 13. [MAY 11, NOV 11(SIMILAR), NOV 2014, MAY 17]
You are given the following information of the Cost Department of a Manufacturing Company:
Particulars Amount (₹) Particulars Amount (₹)
Stores: Work-in-Progress:
Opening Balance 12,60,000 Opening Balance 25,20,000
Purchases 67,20,000 Direct Wages applied 25,20,000
Transfer from Work-in-Progress 33,60,000 Overhead applied 90,08,000
Issue to Work-in-Progress 67,20,000 Closing Balance 15,20,000
Issue to Repairs and Maintenance 840,000
Shortage found in stock taking 2,52,000
Finished Products: Entire output is sold at a profit of 12% on actual cost from work-in-progress.
Others information: Wages incurred ₹ 29,40,000, Overhead Incurred ₹ 95,50,000.
Income from Investments – ₹ 4,00,000, Loss on sale of Fixed Assets ₹ 8,40,000.
Shortage in stock taking is treated as normal loss.
You are required to prepare –
(a) Stores Control Account, (b) Work-in-Progress Control Account, (c) Costing P & L Account, (d) Profit & Loss Account, and (e)
Reconciliation Statement.

Solution 13:

(a) Stores Ledger Control Account

Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 12,60,000 By WIP Control – Materials Issued 67,20,000
To General Ledger Adjustment – Purchases 67,20,000 By POH Control – Materials for R & M 8,40,000
To WIP Control – Transfer from WIP 33,60,000 By POH Control A/c – Stock shortage 2,52,000
By Balance c/d (Balancing Figure) 35,28,000
1,13,40,000 1,13,40,000
Here, the stock Shortage/ Deficiency is assumed as Normal, and transferred to POH Control A/c.
Wage Control Account
Particulars Amount (₹) Particulars Amount (₹)
To General Ledger Adjustment – Wages Paid 29,40,000 By WIP Control – Direct Wages applied 25,20,000
By POH Control – Indirect Wages transfer 4,20,000
29,40,000 29,40,000
Production OH Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control – Repairs & Maintenance 8,40,000 By WIP Control – OH applied/absorbed 90,08,000
To General Ledger Adjustment – POH incurred 95,50,000 By Costing P & L A/c – Absorption difference transferred 20,54,000
To Wages Control – Indirect Wages 4,20,000
To Stores Ledger Control A/c – Normal Loss 2,52,000
1,10,62,000 1,10,62,000
(b) Work-in-Progress Control Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 25,20,000 By Stores Control – Material return/transfer 33,60,000
To Stores Ledger Control – Materials issued 67,20,000 By Finished Goods Control – Production at
To Wages Control – Direct Wages applied 25,20,000 Factory Cost (Balancing figure) 1,58,88,000
To POH Control – POH absorbed 90,08,000 By balance c/d 15,20,000
2,07,68,000 2,07,68,000
(c) Costing P & L Account
Particulars Amount (₹) Particulars Amount (₹)

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To Finished Goods Control - Factory Cost tfr 1,58,88,000 By Sales (at 12% Profit on Factory Cost)
To Costing profit c/d 19,06,560 ₹ 1,58,88,000 + 12% thereon 1,77,94,560
Total 1,77,94,560 Total 1,77,94,560
To POH Control - Absorption Diff. w/off 20,54,000 By Costing Profit b/d 19,06,560
By Loss transferred to General Ledger Adjt. 1,47,440
20,54,000 20,54,000
General Ledger Adjustment Account
Particulars Amount (₹) Particulars Amount (₹)
To Sales 1,77,94,560 By balance b/d (12,60,000 + 25,20,000) 37,80,000
To Costing P & L A/c – Loss Transfer 1,47,440 By Stores Ledger Control – Purchases 67,20,000
To balance c/d (Balancing Figure) 50,48,000 By Wages Control – Wages Paid 29,40,000
(tallied with RM 35,28,000 + WIP 5,20,000) By POH Control – OH incurred 95,50,000
2,29,90,000 2,29,90,000
(d) Financial Profit and Loss Account (to calculate Financial Profit during the period)
Particulars Amount (₹) Particulars Amount (₹)
To Opening Stock: Raw Materials 12,60,000 By Sales 1,77,94,560
WIP 25,20,000 By Closing Stock: Raw Materials 35,28,000
To Materials Purchased 67,20,000 WIP 15,20,000
To Wages Paid 29,40,000 By Gross Loss c/d 1,47,440
To POH incurred 95,50,000
Total 2,29,90,000 Total 2,29,90,000
To Gross Loss b/d 1,47,440 By Income from Investments 4,00,000
To Loss on Sale of Fixed Assets 8,40,000 By Net Loss c/d 5,87,440
9,87,440 9,87,440
(e) Reconciliation Statement
Particulars Amount (₹) Particulars Amount (₹)
Profit as per Cost Records before Difference in Wages
adjustment of absorption differences 19,06,560 (Incurred 29,40,000 – Applied 25,20,000) 4,20,000
Income from Investment credited only in Difference in POH
Financial Records 4,00,000 (Incurred 95,50,000 – Applied 90,08,000) 5,42,000
Loss as per Financial Records 5,87,440 Loss on Sale of Assets debited only in Fin. Books 8,40,000
Difference in Material Consumption Cost
* As per Fin Books: Opening RM + Purchases – Closing RM
12,60,000 + 67,20,000 - 35,28,000 = 44,52,000
*As per Cost Books: Issues – Returns
67,20,000 – 33,60,000 = 33,60,000 10,92,000
28,94,000 28,94,000

 Reverse Working – Reconciliation – Non Integrated Accounts Ledger Preparation

Question 14. [MAY 09]
st
ABC Pvt. Ltd. has furnished its profit and Loss account for the year ended 31 March, 2009 and also given a statement showing
reconciliation between the profit as per financial records and cost records. The profit and Loss account is given below:
st
Profit and Loss Account for the year ended 31 March, 2009
Particulars Amount (₹) Particulars Amount (₹)
To Opening Stock: By Sales 17,80,000

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Raw Materials 95,500 By Closing Stock:

W.I.P 45,000 Raw Materials 99,000
Finished goods 78,000 W.I.P 58,000
To Purchases 6,42,000 Finished goods 80,000
To Direct wages 2,22,000 By Dividend received on Shares 1,65,000
To Factory overheads 2,45,000
To Administrative expenses 1,98,500
To Selling expenses 3,42,000
To Goodwill written off 80,000
To Interest on loans 50,000
To Legal charges 42,000
To Net profit 1,42,000
21,82,000 21,82,000
Reconciliation Statement as at 31st March, 2009 is given below:
Particulars Amount (₹) Amount (₹)
Profits as per financial records 1,42,000
Add:
Raw Material – Closing stock 1,500
W.I.P. – Opening Stock 2,000
Finished goods – Operating Stock 3,000
Finished goods – Closing Stock 1,000
Goodwill written off 80,000
Interest on loans 50,000
Legal charges 42,000 1,79,500
3,21,500
Less:
Raw Material – Opening Stock 2,500
W.I.P. – Closing Stock 3,500
Dividend received on shares 1,65,000 1,71,000
Profits as per cost records 1,50,500
You are required to draw up the following accounts in the cost ledger of ABC Pvt. Ltd.:
(i) Material control Account
(ii) W.I.P. Control Account
(iii) Finished goods control Account
(iv) Cost of sales Account
(v) Costing profit and loss Account

Solution 14:

(i) Material Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 98,000 By WIP Control A/c 6,39,500
To General ledger adjustment 6,42,000 By Balance c/d 1,00,500
7,40,000 7,40,000
(ii) WIP Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 43,000 By Finished Goods A/c 10,95,000

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To Material Control 6,39,500 By Balance c/d 54,500

To Wages Control A/c 2,22,000
To Factory overhead Cont. A/c 2,45,000
11,49,500 11,49,500
(iii) Finished Goods Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 75,000 By Cost of Sales A/c 12,87,500
To WIP Control A/c 10,95,000 By Balance c/d 81,000
To Administration Expenses A/c 1,98,500
13,68,500 13,68,500
(iv) Cost of Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Finished goods Control 12,87,500 By Costing P/L A/c 16,29,500
To Selling Expenses A/c 3,42,000
16,29,500 16,29,500
(v) Costing Profit and Loss Account
Particulars Amount (₹) Particulars Amount (₹)
To Cost of Sales A/c 16,29,500 By General Ledger Adjustment A/c 17,80,000
To Profit 1,50,500
17,80,000 17,80,000

 Treatment of Gross Profit Margin, Capital WIP and Royalty Payment

Question 15. [RTP (SIMILAR), MAY 96, STUDY MATERIAL]
A Company operates on historic cost accounting system, which is not integrated with the financial accounts. At the beginning of a
month, the Opening Balances in Cost Ledger were – (In ₹ Lakhs)
Stores Ledger Control Account 80
Work-in-Progress Control Account 20
Finished Goods Control Account 430
Building Construction Account 10
Credit Balance in the Cost Ledger Control A/c at the beginning of the month was ₹ 540 Lakhs.
During the month, the following transactions took place (₹ in lakhs)
Materials Purchased 40
Issued to Production 50
Issued to Factory Maintenance 6
Issued to Building Construction 4
Wages Gross Wages Paid 150
Indirect Wages 40
For Building Construction 10
Works Overheads Amount Incurred (excluding items shown above) 160
Absorbed Building Construction 20
Under – absorbed 8
Other Items Royalty paid (related to production) 5
Selling, distribution and Administration OH 25
Sales 450
At the end of the month, the stock of Raw Material and WIP was ₹ 55 Lakhs and ₹ 25 Lakhs respectively. The loss arising in the Raw
Material Account is treated as Factory Overheads. The Building under Construction was completed during the month. Company’s
Gross Profit Margin is 20% on Sales. Prepare the relevant Control Accounts to record the above transactions in the Cost Ledger of the
Company.

Solution 15:

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Stores Ledger Control Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To balance b/d 80 By WIP Control A/c (RM issued to Production) 50
To Cost Ledger Control A/c (RM Purchases) 40 By POH Control A/c (General Maintenance) 6
By Building Construction A/c (Material issued) 4
By POH Control A/c (loss = balancing figure) 5
By balance c/d 55
120 120
Wages Control Account
Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Cost Ledger Control (Gross Wages paid) 150 By WIP Control A/c (Direct Wages) (balancing figure) 100
By Manufacturing OH Control (Indirect Wages) 40
By Building Construction A/c (Wages paid) 10
150 150
Production OH Control Account
Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Raw Material Control A/c (Maintenance Material) 6 By WIP Control A/c (POH absorbed) (bal. figure) 183
To Raw Material Control A/c (Normal Loss transfer) 5 By Building Construction A/c (POH transfer) 20
To Wages Control A/c (Indirect Wages) 40 By Costing P & L A/c (under absorption transfer) 8
To Cost Ledger Control (Other OH incurred) 160
211 211

Work-in-Progress Control Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To balance b/d 20 By Finished Goods Control A/c (Production transfer) 333
To Stores Ledger Control A/c (RM Issues) 50 By balance c/d 25
To Wages Control A/c (Direct Wages) 100
To Manufacturing OH Control A/c (Absorbed) 183
To General Ledger Adjustment (Royalty) 5
358 358

Finished Goods Control Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To balance b/d 430 By Cost of Sales A/c 360
To WIP Control A/c (FG Production) 333 By balance c/d (balancing figure) 403
763 763
It is given that Sales = 450 with Gross Profit of 20% on Sales. Hence, Cost of Goods sold (without considering SOH & AOH) = 450 × 80%
= 360.
Selling & Administration OH Control Account
Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Cost Ledger Control (OH incurred) 25 By Cost of Sales A/c (OH absorbed) (balancing figure) 25
25 25

Cost of Sales Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Finished Goods Control A/c (COGS transfer) 360 By Costing P & L A/c (balancing figure) 385
To SOH & AOH Control A/c (OH absorbed) 25

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385 385

Sales Account
Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Costing P & L A/c (transfer) (balancing figure) 450 By Cost Ledger Control (Sales made) 450
450 450

Costing Profit and Loss Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Cost of Sales 385 By Sales 450
To Normal Profit c/d (balancing figure) 65
Total 450 Total 450
To POH under absorption written off 8 By Normal Profit b/d 65
To Cost Ledger Control - Profit transferred 57
65 65

Building Construction Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To balance b/d 10 By Cost Ledger Control (Asset Construction) transfer 44
To Stores Ledger Control A/c (Material Issues) 4
To Wages Control A/c (Wages paid) 10
To Manufacturing OH Control A/c (Absorbed) 20
44 44

Cost Ledger Control Account

Particulars ₹ In Lakhs Particulars ₹ In Lakhs
To Sales 450 By balance b/d 540
To Building Construction (Asset completed) 44 By Stores Ledger Control (RM Purchases) 40
To balance c/d (balancing figure) 483 By Wages Control A/c (Total Wages paid) 150
By Manufacturing OH Control A/c (incurred) 160
By WIP Control A/c (Royalty = Direct Transfer) 5
By SOH and AOH Control A/c (OH Incurred) 25
By Costing P & L A/c (Profit transferred) 57
977 977

Trial Balance at the end of the period

Particulars Dr (₹ In Lakhs) Cr (₹ In Lakhs)
Raw Material Control 55
Work-in-Progress Control 25
Finished Goods Control 403
Cost Ledger Control 483
Total 483 483

 Integrated Accounting System

Question 16. [MAY 12]
What is Integrated Accounting System?

Solution 16:
Under Integrated Books Cost Accounts and Financial Accounts are maintained together in the same books because of which:
 General Ledger Adjustment Account is removed and the name of Creditor or Debtor or Cash or Bank is written.

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 Reconciliation Account is not required here because cost books and financial books are in same set.
 Both purely financial and purely costing both entries will be passed.

Question 17. [NOV 93, MAY 95, MAY 98, MAY 99, MAY 07]
What are the features of the Integrated or Integral system of Accounting?

Solution 17:
Following are the main points of integrated accounting:
(a) Complete analysis of cost and sales are kept.
(b) Complete details of all payments in case are kept.
(c) Complete details of all assets and liabilities are kept and this system does not use a notional account to represent all impersonal
accounts.

Following accounts are used for ‘’General Ledger Adjustment Account’’ of non-integrated system:
(a) Bank account
(b) Debtors account
(c) Creditors account
(d) Provision for depreciation account etc.

In integrated system, all accounts necessary for showing classification of cost will be used but the general ledger adjustment account
of non-integrated accounting is replaced by use of following accounts:
(a) Bank account
(b) Debtors account
(c) Creditors account
(d) Provision for depreciation account
(e) Fixed assets account
(f) Share capital account.

Question 18. [NOV 96, NOV 01, NOV 06, NOV 07, NOV 08]
What are essential pre requisites to install the Integrated Accounting System?

Solution 18:
The essential pre-requisites for integrated accounts include the following steps:
1. The management’s decision about the extent of integration of the two sets of books. Some concerns find it useful to integrate up
to the stage of primary cost or factory cost while other prefer full integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustment necessary for
preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient
processing of accounting documents should be ensured.

Question 19 [NOV 91, NOV 97, MAY 02, MAY 07, MAY 10, MAY 12, MAY 15]
What are the advantages of integrated system of Accounting?

Solution 19:
The main advantages of Integrated Accounts are as follows:
(a) No need for Reconciliation: The question of reconciling costing profit and financial profit does not arise, as there is one figure of
profit only.
(b) Less efforts: Due to use of one set of books, there is a significant extent of saving in efforts made.
(c) Less Time consuming: No delay is caused in obtaining information as it is provided from books of original entry.
(d) Economical process: It is economical also as it is based on the concept of ‘’Centralization of Accounting function’’.

Question 20 [MAY 13]

“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system?’’

Solution 20:
Integrated accounting system refers to the interlocking of the financial and cost accounting systems to ensure all relevant
expenditure is absorbed into the cost accounts. Under this accounting system transactions are classified both according to their

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function and nature.
Under integrated accounting system, both Financial and Cost Accounting records are maintained in one set of books to meet the
requirements of Financial Accounting and Cost Accounting purposes.
In this system only one set of accounts are maintained and there will be single profit figure. The necessity of preparation of
reconciliation statement does not arise.

 Practical Problems

 Ledger Accounts and Trial Balance Preparation

Question 21. [NOV 03]
BPR Limited keeps books on integrated accounting system. The following balances appear in the books as on April 1, 2002:
Particulars Dr. (₹) Cr. (₹)
Stores Control A/c 40,950 -
Work-in-progress A/c 38,675 -
Finished Goods A/c 52,325 -
Bank A/c - 22,750
Creditors A/c - 18,200
Fixed Assets A/c 1,47,875 -
Debtors A/c 27,300 -
Share Capital A/c - 1,82,100
Provision for Depreciation A/c - 11,375
Provision for Doubtful Debts A/c - 3,725
Factory overheads Outstanding A/c - 6,250
Pre-Paid Administration Overheads A/c 9975 -
Profit & Loss A/c - 72,800
3,17,100 3,17,100
The transactions for the year ended March 31, 2003 were as given below:
Particulars Amount (₹) Amount (₹)
Direct Wages 1,97,925
Indirect Wages 11,375 2,09,300
Purchase of materials (on credit) 2,27,500
Materials issued to production 2,50,250
Materials issued for repairs 4,550
Goods finished during the year (at cost) 4,89,125
Credit Sales 6,82,500
Cost of Goods sold 5,00,500
Production overheads absorbed 1,09,200
Production overheads paid during the year 91,00,000
Production overheads outstanding at the end of year 7,775
Administration overheads paid during the year 27,300
Selling overheads incurred 31,850
Payments to Creditors 2,29,775
Payments received from Debtors 6,59,750
Depreciation of Machinery 14,789
Administration overheads outstanding at the end of year 2,225
Provision for doubtful debts at the end of the year 4,590
Required: Write up accounts in the integrated ledger of BPR Limited and prepare a Trial Balance.

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Solution 21:

Stores Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 40,950 By WIP A/c 2,50,250
To Creditors A/c 2,27,500 By Production overheads A/c 4,550
By Balance c/d 13,650
2,68,450 2,68,450
Wages Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank 1,97,925 By Work-in-progress A/c 1,97,925
To Bank 11,375 By Production overheads A/c 11,375
2,09,300 2,09,300
Work-in-Progress Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 38,675 By Finished goods A/c 4,89,125
To Wages control A/c 1,97,925 By Balance c/d 1,06,925
To Stores control A/c 2,50,250
To Production overheads A/c 1,09,200
5,96,050 5,96,050
Production Overheads Account
Particulars Amount (₹) Particulars Amount (₹)
To Wages control A/c 11,375 By WIP A/c 1,09,200
To Stores control A/c 4,550 By Profit & loss A/c 14,039
To Bank (91,000 – 6,250) 84,750 (Under absorbed overheads written off)
To Production overheads outstanding 7,775
To Provision for depreciation 14,789
1,23,239 1,23,239
Finished Goods Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 52,325 By Cost of sales A/c 5,00,500
To Work-in-progress A/c 4,89,125 By Balance c/d 80,450
To Administration Overheads A/c 39,500
5,80,950 5,80,950

Administration Overheads Account

Particulars Amount (₹) Particulars Amount (₹)
To Prepaid Administration Overheads A/c 9,975 By Finished goods A/c 39,500
To Bank 27,300
To Administration Overheads outstanding 2,225
39,500 39,500
Cost of Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Finished goods A/c 5,00,500 By Sale A/c 5,32,350
To Selling overheads 31,850

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5,32,350 5,32,350
Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Cost of sales A/c 5,32,350 By Debtors A/c 6,82,350
To Cost & loss A/c 1,50,000
6,82,350 6,82,350
Factory overheads/Production overheads outstanding Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank 6,250 By Balance b/d 6,250
To Balance c/d 7,775 By Production overheads 7,775
14,025 14,025
Prepaid Administration overheads Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 9,975 By Administration overheads A/c 9,975
9,975 9,975
Provision for depreciation Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 26,164 By Balance b/d 11,375
By Production overheads A/c 14,789
26,164 26,164
Provision for doubtful debts Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 4,590 By Balance b/d 3,725
By Profit & loss A/c 865
4590 4590

Profit & Loss A Account

Particulars Amount (₹) Particulars Amount (₹)
To Provision for doubtful debts 865 By Balance b/d 72,800
To Production overheads 14,039 By Sales A/c 1,50,150
To Balance c/d 2,08,046
2,22,950 2,22,950
Debtors Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 27,300 By Bank A/c 6,59,750
To Sales A/c 6,82,500 By Balance c/d 50,050
7,09,800 7,09,800
Creditors Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank 2,29,775 By Balance b/d 18,200
To Balance c/d 15,925 By Stores control A/c 2,27,500
2,45,700 2,45,700
Fixed Assets Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 1,47,875 By Balance c/d 1,47,875

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1,47,875 1,47,875
Bank Account
Particulars Amount (₹) Particulars Amount (₹)
To Debtors 6,59,750 By Balance b/d 22,750
By Direct wages 1,97,925
By Indirect wages 11,375
By Production overheads (₹ 84,750 + ₹ 6,250) 91,000
By Administration Overheads A/c 27,300
By Selling overheads A/c 31,850
By Creditors A/c 2,29,775
By Balance c/d 47,775
6,59,750 6,59,750

Trail Balance As on March 31, 2003

Particulars Dr. (₹) Cr. (₹)
Stores control A/c 13,650
Work-in-progress A/c 1,06,925
Finished goods A/c 80,450
Bank A/c 47,775
Creditors A/c 15,925
Fixed assets A/c 1,47,875
Debtors A/c 50,050
Share capital A/c 1,82,000
Provision for depreciation A/c 26,164
Profit & loss A/c 2,08,046
Production overheads outstanding A/c 7,775
Outstanding administrative overheads A/c 2,225
Provision for doubtful debts A/c 4,590
4,46,725 4,46,725
Question 22. [RTP]
From the following information write up Control Accounts and prepare a Trial Balance:
 Opening Balances
Share Capital 5,00,000 Sundry Creditors 3,00,000 Bank 50,000
Reserves 3,00,000 Sundry Debtors 3,00,000 Cash 50,000
Plant and Machinery 5,00,000 Stock 2,00,000
 Transactions during the year were as follows:
Purchases of Stores 12,00,000 Manufacturing OH charged to production 3,75,000
Stores issued to Production 12,00,000 Selling and Distribution Expenses 2,00,000
Stores in Hand 1,00,000 Finished Stock Production at Cost 20,00,000
Wage (Direct) incurred 7,00,000 Sales 30,00,000
Direct Wages charged to production 6,50,000 Inventory Adjustment 1,00,000
Manufacturing OH incurred 4,00,000 Payment to Creditors 10,00,000
Received from Debtors 20,00,000
Cost and Financial Records are integrated and books are kept accordingly.

Solution 22:
Stores Ledger Control Account

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Particulars Amount (₹) Particulars Amount (₹)

To balance b/d 2,00,000 By WIP Control – issued to production 12,00,000
To Cash/ Bank / Creditors (RM Purchases) 12,00,000 By Inventory Adjustment A/c 1,00,000
By balance c/d (balancing figure) 1,00,000
14,00,000 14,00,000
Wages Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Cash / Bank 7,00,000 By WIP Control – Direct Wages 6,50,000
By POH Control – Indirect Wages (balancing figure) 50,000
7,00,000 7,00,000

POH Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Cash/Bank/ – POH paid 4,00,000 By WIP Control – POH absorbed 3,75,000
To Wages Control (Indirect Wages transfer) 50,000 By balance c/d (balancing figure) 75,000
4,50,000 4,50,000
WIP Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control – RM Consumed 12,00,000 By Finished Goods Control – Production transfer 20,00,000
To Wages Control – Direct Wages 6,50,000 By balance c/d (balancing figure) 2,25,000
To POH Control – POH absorbed 3,75,000
22,25,000 22,25,000
Finished Goods Control Account
Particulars Amount (₹) Particulars Amount (₹)
To WIP Control – Production transfer 20,00,000 By Cost of Sales A/c – COGS transfer 20,00,000
20,00,000 20,00,000
SOH Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Cash/ Bank / – SOH paid 2,00,000 By Cost of Sales A/c – SOH absorbed 2,00,000
2,00,000 2,00,000
Cost of Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Finished Goods Control A/c 20,00,000 By P & L A/c – COS transfer 22,00,000
To SOH Control A/c 2,00,000
22,00,000 22,00,000
Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To P & L A/c – Sales transfer 30,00,000 By Debtors A/c – Sales made 30,00,000
30,00,000 30,00,000

Inventory Adjustment Account

Particulars Amount (₹) Particulars Amount (₹)
To Stores Ledger Control A/c 1,00,000 By P & L A/c – transfer 1,00,000
1,00,000 1,00,000
Profit and Loss Account

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Particulars Amount (₹) Particulars Amount (₹)

To Cost of Sales 22,00,000 By Sales 30,00,000
To Normal Profit c/d (balancing figure) 8,00,000
Total 30,00,000 Total 30,00,000
To Inventory Adjustment written off 1,00,000 By Normal Profit b/d 8,00,000
To Net Profit for the year c/d (balancing figure) 7,00,000
8,00,000 8,00,000
Sundry Debtors Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 3,00,000 By Cash/Bank (Received from Debtors) 20,00,000
To Sales A/c 30,00,000 By balance c/d (balancing figure) 13,00,000
33,00,000 33,00,000
Sundry Creditors Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank (Payments) 10,00,000 By balance b/d 3,00,000
To balance c/d (balancing figure) 5,00,000 By Stores Ledger Control A/c 12,00,000
15,00,000 15,00,000
Share Capital Account
Particulars Amount (₹) Particulars Amount (₹)
To balance c/d (balancing figure) 5,00,000 By balance b/d 5,00,000
5,00,000 5,00,000
Reserves Account
Particulars Amount (₹) Particulars Amount (₹)
To balance c/d (balancing figure) 3,00,000 By balance b/d 3,00,000
3,00,000 3,00,000
Plant and Machinery Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 5,00,000 By balance c/d (balancing figure) 5,00,000
5,00,000 5,00,000
Cash and Bank Account
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d Cash 50,000 By Sundry Creditors 10,00,000
Bank 50,000 By Wages Control A/c 7,00,000
To Sundry Debtors 20,00,000 By POH Control A/c 4,00,000
To balance c/d (Bank Overdraft) 2,00,000 By SOH Control A/c 2,00,000
23,00,000 23,00,000
Trial Balance at the end of the period
Particulars Dr. (₹) Cr. (₹)
Stores Ledger Control A/c 1,00,000
Work in Progress Control A/c 2,25,000
Production OH Control A/c 75,000
Bank Overdraft A/c 2,00,000
Debtors A/c 13,00,000
Creditors A/c 5,00,000
Plant and Machinery A/c 5,00,000

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Share Capital A/c 5,00,000

Reserves A/c 3,00,000
Profit and Loss A/c 7,00,000
Total 22,00,000 22,00,000

Question 23. [STUDY MATERIAL]

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Bangalore Petrochemicals Co. keeps books on integrated accounting system. The following balances appear in the books as on 1
January, 2005.
Particulars Dr. (₹) Cr. (₹)
Stores control A/c 18,000
Work-in-Progress A/c 17,000
Finished goods A/c 13,000
Bank A/c 10,000
Creditors A/c 8,000
Fixed assets A/c 55,000
Debtors A/c 12,000
Share capital A/c 80,000
Depreciation provision A/c 5,000
Profit and loss A/c 32,000
1,25,000 1,25,000

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Transactions for the year ended 31 Dec., 2005 were as given below:
Particulars Amount (₹) Amount (₹)
Wages – direct 87,000
Wages – indirect 5,000 92,000
Purchase of materials (on credit) 1,00,000
Materials issued to production 1,10,000
Materials for repairs 2,000
Goods finished during the year (at cost) 2,15,000
Sales (credit) 3,00,000
Cost of goods sold 2,20,000
Production overhead absorbed 48,000
Production overhead incurred 40,000
Administration overhead incurred (production) 12,000
Selling overhead incurred 14,000
Payments of creditors 1,01,000
Payments of debtors 2,90,000
Depreciation of machinery 1,300
Prepaid rent (included in factory overheads) 300
Prepare accounts in the integrated ledger.

Solution 23:

Stores Control Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 18,000 By Work-in-Progress A/c 1,10,000
To Creditors A/c 1,00,000 By Production Overheads 2,000

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By Balance c/d 6,000

1,18,000 1,18,000
Wages Control Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank A/c 92,000 By Work-in-Progress A/c 87,000
By Production overheads A/c 5,000
92,000 92,000
Work-in-Progress Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 17,000 By Finished goods A/c 2,15,000
To Stores control A/c 1,10,000 By Balance c/d 47,000
To Wages control A/c 87,000
To Production overheads A/c 48,000
2,62,000 2,62,000
Production Overhead Account
Particulars Amount (₹) Particulars Amount (₹)
To Wages Control A/c 5,000 By Work-in-Progress A/c 48,000
To Stores Control A/c 2,000 By Prepaid Rent A/c 300
To Bank A/c 40,000
To Depreciation Provision 1,300
48,300 48,300

Finished Goods Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 13,000 By Cost of Sales A/c 2,20,000
To Work-in-Progress 2,15,000 By Balance c/d 20,000
To Administration Overhead 12,000
2,40,000 2,40,000
Administration Overheads Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank A/c 12,000 By Finished Goods A/c 12,000
12,000 12,000
Cost of Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Finished Goods A/c 2,20,000 By Sales A/c 2,34,000
To Selling and Distribution Overheads A/c 14,000
2,34,000 2,34,000
Selling and Distribution Overheads Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank A/c 14,000 By Cost of Sales A/c 14,000
14,000 14,000

Sales Account
Particulars Amount (₹) Particulars Amount (₹)
To Cost of Sales 2,34,000 By Debtors A/c (Cr. Sales) 3,00,000

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To P & L A/c (Profit) 66,000

3,00,000 3,00,000

Prepaid Rent Account

Particulars Amount (₹) Particulars Amount (₹)
To Production Overheads 300 By Balance c/d 300
300 300

Depreciation Provision Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 6,300 By Balance b/d 5,000
By Production Overhead A/c 1,300
6,300 6,300

Profit and Loss Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 98,000 By Sales A/c 66,000
By Profit b/d (last year) 32,000
98,000 98,000

Debtors Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 12,000 By Bank A/c 2,90,000
To Sales 3,00,000 By Balance c/d 22,000
3,12,000 3,12,000

Creditors Account
Particulars Amount (₹) Particulars Amount (₹)
To Bank 1,01,000 By Balance b/d 8,000
To Balance c/d 7,000 By Stores Control A/c 1,00,000
1,08,000 1,08,000
Bank Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 10,000 By Creditors 1,01,000
To Debtors 2,90,000 By Wages Control A/c 92,000
By Production Overhead A/c 40,000
By Administration Overhead A/c 12,000
By Selling & Distribution Overhead A/c 14,000
By Balance c/d 41,000
3,00,000 3,00,000

Fixed Assets Account

Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 55,000 By Balance c/d 55,000
55,000 55,000
Share Capital Account
Particulars Amount (₹) Particulars Amount (₹)
To Balance c/d 80,000 By Balance b/d 80,000
80,000 80,000

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Trial Balance As on 31 December, 2005
Particulars Dr. (₹) Cr. (₹)
Stores Control A/c 6,000
Work-in-Progress A/c 47,000
Finished Goods A/c 20,000
Bank A/c 41000
Creditors A/c 7,000
Fixed Assets A/c 55,000
Debtors A/c 22,000
Share Capital A/c 80,000
Depreciation Provision A/c 6,300
Profit and Loss A/c 98,000
Prepaid Rent A/c 300
Total 1,91,300 1,91,300

Question 24. [May 16]

The following information is available from a company's records for March, 2016:
a) Opening balance of Creditor's Account 25,000
b) Closing balance of Creditor's Account 40,000
c) Payment made to Creditors 5,80,000
d) Opening balance of Stores Ledger Control Account 40,000
e) Closing balance of Stores Ledger Control Account 65,000
f) Wages paid (for 8,000 hours) 20% relate to indirect workers 4,00,000
g) Various indirect expenses incurred 60,000
h) Opening balance of WIP control account 50,000
i) Inventory of WIP at the end of the month includes material worth ₹ 35,000 on which 400 labour hours have
been booked
j) Factory overhead is charged to production at budgeted rate based on direct labour hours
k) Budgeted overhead cost is ₹ 20,80,000 for budgeted direct labour hours of 1,04,000
You are required to prepare Creditor's A/c, Stores ledger control A/c, WIP control A/c, Wages control A/c and Factory overheads
control A/c.

 Journal Entries
Question 25. [RTP]
Journalize the following transactions in the books of a Company maintaining Integrated Accounts –
 Credit Purchases ₹ 12,00,000
 Production Wages paid ₹ 7,00,000
 Stocks issued to Production Orders ₹ 8,00,000
 Works OH charged to production ₹ 4,50,000
 FG transferred from Production Orders ₹ 18,00,000
 AOH charged to Production ₹ 1,50,000
 Works OH outstanding ₹ 1,20,000
 Works Expenses Paid ₹ 4,60,000

Solution 25:
Journal Entries under Integrated System of Accounting
Particulars Dr. (₹) Cr. (₹)
1. Stores Ledger Control A/c Dr. 12,00,000
To Sundry Creditors A/c 12,00,000
(Being goods purchased on credit)

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2. Wages Control A/c Dr. 7,00,000

To Cash / Bank A/c 7,00,000
(Being Production Wages paid)
3. Work-in-Progress Control A/c Dr. 7,00,000
To Wages Control A/c 7,00,000
(Being Production Wages transferred to WIP Control A/c)
4. Work-in-Progress Control A/c Dr. 8,00,000
To Stores Ledger Control A/c 8,00,000
(Being Stores issued against Production Orders)
5. Work-in-Progress Control A/c Dr. 4,50,000
To Production Overheads Control A/c 4,50,000
(Being Production OH allocated to production/ jobs)
6. Finished Goods Control A/c Dr. 18,00,000
To Work-in-Progress Control A/c 18,00,000
(Being goods finished during the year transferred)
7. Finished Goods Control A/c Dr. 1,50,000
To Administration Overhead Control A/c 1,50,000
(Being Administration Expenses charged to production)
8. Production OH Control A/c Dr. 1,20,000
To Works Expenses Payable A/c 1,20,000
(Being Works Expenses incurred during the period but still unpaid)
9. Production OH Control A/c Dr. 4,60,000
To Cash/ Bank A/c 4,60,000
(Being Works Expenses paid during the period)

Question 26. [NOV 13]

Journalize the following transactions assuming cost and financial accounts are integrated:
Particulars ₹
Material issued:
Direct 3,25,000
Indirect 1,15,000
Allocation of wages (25% indirect) 6,50,000
Under / Over absorbed overheads
Factory (over) 2,50,000
Administration (under) 1,75,000
Payment to sundry creditors 1,50,000
Collection from sundry debtors 2,00,000

Question 27. [NOV 13]

Dutta Enterprises operates an integral system of accounting. You are required to PASS the Journal Entries for the following
transactions that took place for the year ended 30th June, 20X8. (Narrations are not required.)
Particulars ₹
Raw materials purchased (50% on Credit) 6,00,000
Materials issued to production 4,00,000
Wages paid (50% Direct) 2,00,000
Wages charged to production 1,00,000
Factory overheads incurred 80,000
Factory overheads charged to production 1,00,000
Selling and distribution overheads incurred 40,000
Finished goods at cost 5,00,000

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Sales (50% Credit) 7,50,000
Closing stock Nil
Receipts from debtors 2,00,000
Payments to creditors 2,00,000

Question 28. [NOV 19]

Journalize the following transactions in cost books under Non - Integrated system of accounting:
(i) Credit purchase of material - ₹27,000
(ii) Manufacturing overhead charged to production - ₹ 6,000
(iii) Selling and distribution overheads recovered from Sales - ₹ 4,000
(iv) Indirect wages incurred - ₹ 8,000
(v) Material returned from production to stores - ₹ 9,000

 Miscellaneous Practical Problems

 Discrepancies between Book Stock and Physical Stock

Question 29. [MAY 91]
After the annual stock taking you come to know of some significant discrepancies between book stock and physical stock. You gather
the following information:
Item Stock Card (Units) Stores Ledger (Units) Physical Check (Units) Cost/Unit (₹)
A 600 600 560 60
B 380 380 385 40
C 750 780 720 10

(a) What action should be taken to record the information shown above?
(b) Suggest reasons for the shortage and discrepancies disclosed above and recommend a possible course of action by management
to prevent future losses.

Solution 29:
(a) For recording the information shown in the problem under consideration, the following action may be taken:
1. Check the stock card and stores ledger. The correct physical quantity should be recorded.
2. Investigate reasons for stock losses or surpluses.
3. After ascertaining the reasons for stock losses the following treatment may be followed:
 Debit Factory Overhead A/c
Credit Stores Ledger Control A/c
(If the shortage is considered as normal loss)
 Debit Costing P & L A/c
Credit Stores Ledger Control A/c
(If the shortage is considered as abnormal)
 Debit Work-in-Progress A/c
Credit Stores Ledger Control A/c
(If the shortage is due to non-recording or short recording, etc.)
4. Rectification entry may be passed for clerical errors.
5. After ascertaining the reason for stock surpluses on appropriate action may be taken as follows:
 Debit Stores Ledger A/c
Credit Factory Overhead A/c
(If the Excess of stock is due to normal causes)
 Debit Stores Ledger Control A/c
Credit Costing P & L A/c
(If the excess at stock is due to abnormal causes)
 Debit Stores Ledger Control A/c
Credit Work-in-Progress A/c
(If the excess of stock is due to wrong recording, etc.)

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6. In the given example the losses are with reference to items A (₹ 60 × 40 units = ₹ 2,400) and C (₹ 10 × 60 = ₹ 600). As the
reasons for these losses are not given, they may be debited to P & L A/c and Stores Ledger Control A/c be credited
accordingly.
7. The gains are in respect of stock item B (₹ 40 × 5 = ₹ 200). For treating gain of ₹ 200, Stores Ledger Control A/c be debited
and Costing P & L A/c be credited.

(b) Reasons for the shortage and discrepancies:

(i) Wastage of material due to spoilage, evaporation etc. which may be normal or abnormal.
(ii) Components issued for production without entry on stock card and/or stores ledger.
(iii) Stores staff wrongly reading figures on the requisitions.
(iv) Theft of stock from stores.
(v) Clerical errors in stores ledger.

Recommended Course of action to prevent future losses

(i) Entry in the stores should be restricted to authorized persons only.
(ii) All issues of stock should be against proper stock requisition slips.
(iii) Stores should follow a system of internal check for all items of stock.
(iv) Proper accounting is done for all stock movements.
(v) Recording of entries in stores ledger and stock card should be made carefully.
(vi) Stock items which come first in the stores should be issued first to avoid losses due to deterioration or obsolescence.

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Chapter 8
RECONCILIATION OF COST & FINANCIAL STATEMENTS
 Reconciliation of Cost and Financial Statement
This statement is prepared to show the differences between cost books and financial books.

 Important Notes:
 Consider Opening Stock = Expense
Closing Stock = Income
 If some figures are not given for Costing records they are consider equal to financial records.
 If the Question gives us costing information also we should prepare the cost sheet and then reconcile.
 But if the Question tells us to prepare Costing P & L Account we should prepare it in T-form and show all the expenses or
debit.

 Memorandum Reconciliation Account

Memorandum Reconciliation Account
Particulars Amount Particulars Amount
To Loss as per Financial Books -- By Profit as per Financial Records --
To Overheads over-absorbed in Cost Books – Factory/ -- By Overheads under-absorbed in Cost Books – Factory/ --
Administration/ Selling and Distribution Overheads Administration/Selling and Distribution Overheads
To Non-Operating Incomes e.g. Interest, Dividend -- By Non-operating Expenditure, Income Tax, Write offs, etc. --
credited only in Financial Books debited only in Financial Books
To Opening Stocks (RM, WIP, FG) undervalued in -- By Opening Stocks (RM, WIP, FG) over valued in Financial --
Financial Books Books
To Closing Stocks (RM, WIP, FG) over valued in Financial -- By Closing Stocks (RM, WIP, FG) undervalued in Financial --
Books Books
To Profit as per Cost Records (Balancing Figure) -- By Loss as per Cost Records (Balancing Figure) --
-- --

 Practical Problems

 Computing Costing and Financial Profits and Preparation of Reconciliation Statement

Question 1. [STUDY MATERIAL]
The following figures are available from the financial records of ABC Manufacturing Co. Ltd. for the year ended 31-3-2006.
Particulars Amount (₹)
Sales (20,000 units) 25,00,000
Materials 10,00,000
Wages 5,00,000
Factory Overheads 4,50,000
Office and administrative Overhead (production related) 2,60,000
Selling and distribution Overheads 1,80,000
Finished goods (1,230 units) 1,50,000
Work-in-Progress:
Materials 30,000
Labour 20,000
Factory Overheads 20,000 70,000

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Goodwill written off 2,00,000

Interest on capital 20,000
In the Costing records, factory overhead is charged at 100% wages, administration overhead 10% of factory cost and selling and
distribution overhead at the rate of ₹ 10 per unit sold.
Prepare a statement reconciling the profit as per cost records with the profit as per financial records.

Question 2. [NOV 09]

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The following information is available in the financial accounts of a Manufacturing Company for the year ending 31 March:
Particulars Amount (₹) Particulars Amount (₹)
Direct Material Consumption 3,55,000 Interest on Debentures 48,000
Direct Wages 3,60,000 Preliminary Expenses written off 20,000
Manufacturing Expenses 2,45,000 Provision for Income-Tax 75,000
Office and Administrative Expenses (production related) 2,40,000 Interest Received on Deposits 25,000
Selling and Distribution Expenses 2,00,000 Sales: 1,80,000 units 16,20,000
Donation and Charity 20,000 Closing Stock of Finished Goods: 30,000 units 1,50,000
The Cost Account reveals:
 Manufacturing Overhead recovered at 80% on Direct Wages.
 Office and administration (production related) Overhead recovered at 25% on Factory Cost.
 Selling Overhead at ₹ 1.00 per unit sold.
 Closing Stock of Finished Goods is valued at Cost of Production.
Required:
1. Prepare Profit and Loss Account showing Net Profit in Financial Accounts.
2. Prepare a statement showing Profit in the Cost Accounts.
3. Prepare a statement reconciling the Profit disclosed as per the two accounts above.

Question 3. [MAY 02]

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The financial book of a company reveal the following data for the year ended 31 March, 2002:
Particulars Amount (₹)
Opening Stock:
Finished goods 875 units 74,375
Work-in-process [1.4.01 to 31.3.02] 32,000
Raw materials consumed 7,80,000
Direct Labour 4,50,000
Factory overheads 3,00,000
Goodwill 1,00,000
Administration overheads (production related) 2,95,000
Dividend paid 85,000
Bad Debts 12,000
Selling and Distribution Overheads 61,000
Interest received 45,000
Rent received 18,000
Sales 14,500 units 20,80,000
Closing Stock: Finished goods 375 units 41,250
Work-in-process 38,667
The cost records provide as under:
Factory overheads are recovered at 60% of direct wages.
Administration overheads (production related) are recovered at 20% of factory cost.
Selling and distribution overheads are charged at Rs 4 per unit sold.
Opening stock of finished goods is valued at ₹ 104 per unit.
The company value Work-in-Progress at factory cost for both Financial and Cost Profit Reporting.

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Required:
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(i) Prepare statements for the year ended 31 March, 2002 to show the profit as per financial records and the profit as per costing
records.
(ii) Present a statement reconciling the profit as per costing records with the profit as per Financial Records.

Question 4. [STUDY MATERIAL, MAY 90]

The following figures have been extracted from the Financial Accounts of a Manufacturing Firm for the first year of its operation:
Particulars Amount (₹)
Direct Material Consumption 50,00,000
Direct Wages 30,00,000
Factory Overhead 16,00,000
Administration Overheads (production related) 7,00,000
Selling and Distribution Overheads 9,60,000
Bad Debts 80,000
Preliminary Expenses written off 40,000
Legal Charges 10,000
Dividends Received 1,00,000
Interest Received on Deposits 20,000
Sales (1,20,000 units) 1,20,00,000
Closing Stock:
Finished Goods (4,000 units) 3,20,000
Work-in-Progress 2,40,000
The cost accounts for the same period reveal that the direct material consumption was ₹ 56,00,000. Factory overhead is recovered at
20% on prime cost. Administration overhead is recovered at ₹ 6 per unit of production. Selling and distribution overheads are
recovered at ₹ 8 per unit sold.
Prepare the Profit and Loss Accounts both as per financial records and as per cost records. Reconcile the profits as per the two records.

Question 5. [STUDY MATERIAL]

Following are the figures extracted from the Cost Ledger of a manufacturing unit.
Particulars Amount (₹)
Stores:
Opening balance 15,000
Purchases 80,000
Transfer from WIP 40,000
Issue to WIP 80,000
Issue to repairs and maintenance 10,000
Sold as a special case of cost 5,000
Shortage in the year 3,000
Work-in-Progress:
Opening inventory 30,000
Direct labour cost charged 30,000
Overhead cost charged 1,20,000
Closing Balance 20,000
Finished Products:
Entire output is sold at 10% profit on actual cost from work-in-progress
Others:
Wages for the period 35,000
Overhead Expenses 1,25,000
Ascertain the profit or loss as per financial accounts and cost accounts and reconcile them.

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 Computing Costing Profits – Preparation of Reconciliation Statement

Question 6. [MAY 94]
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M/s Sellwell Ltd. has furnished you the following information from the financial books for the year ended 31 December, 1993:

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Profit & Loss Account for the year ended 31 December, 1993
Particulars Amount (₹) Particulars Amount (₹)
Opening stock of finished goods 500 units at ₹ 17.50 each 8,750 Sales 10,250 units 3,58,750
Materials consumed 1,30,000 Closing stock of finished goods:
Wages 75,000 250 units at ₹ 25 each 6,250
Gross Profit c/d 1,51,250
3,65,000 3,65,000
Factory overheads 47,375 Gross Profit c/d 1,51,250
Administration overheads (production related) 53,000 Interest 125
Selling expenses 27,500 Rent received 5,000
Bad Debts 2,000
Preliminary expenses 2,500
Net profit 24,000
1,56,375 1,56,375
The cost sheet shows:
 The Cost of Materials at ₹ 13 per unit;
 The Labour Cost at ₹ 7.50 per unit;
 The Factory Overheads are absorbed at 60% of labour cost;
 The Administration Overheads (production related) are absorbed at 20% of factory cost;
 Selling Expenses are charged at ₹ 3 per unit;
 The opening stock of finished goods is valued at ₹ 22.50 per unit.
You are required to prepare:
(i) The cost sheet showing the number of units produced and the cost of production, by elements of costs, per unit and in total.
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(ii) The statement of profit or loss as per cost accounts for the year ended 31 December, 1993.
(iii) The statement showing the reconciliation of profit or loss as shown by the cost accounts with the profit as shown by the financial
accounts.

Question 7. [MAY 07]

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ABC Ltd. has furnished the following information from the financial books for the year ended 31 March, 2007:
Profit and Loss Account
Particulars Amount (₹) Particulars Amount (₹)
To Opening Stock (500 units at ₹ 140 each) 70,000 By Sales (10,250 units) 28,70,000
To Material Consumed 10,40,000 By Closing Stock (250 units at ₹ 200 each) 50,000
To Wages 6,00,000
To Gross Profit c/d 12,10,000
29,20,000 29,20,000
To Factory Overheads 3,79,000 By Gross Profit b/d 12,10,000
To Administration Overheads (production related) 4,24,000 By Interest 1,000
To Selling Expenses 2,20,000 By Rent Received 40,000
To Bad Debts 16,000
To Preliminary Expenses 20,000
To Net Profit 1,92,000
12,51,000 12,51,000

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The cost sheet shows the cost of materials at ₹ 104 per unit and the labour the cost at ₹ 60 per unit. The factory overheads are
absorbed at 60% of labour cost and administration overheads (production related) at 20% of factory cost. Selling expenses are charged
at ₹ 24 per unit. The opening stock of finished goods is valued at ₹ 180 per unit. You are required to prepare:
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(i) A statement showing profit as per Cost accounts for the year ended 31 March, 2007; and
(ii) A statement showing the reconciliation of profit as disclosed in Cost accounts with the profit shown in financial accounts.

 Reconciliation – Costing and Financial Profits – Absorption Based on Normal Capacity

Question 8. [STUDY MATERIAL, MAY 95]
The following information is available from the financial books of a company having a normal production capacity of 60,000 units for
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the year ended 31 March, 2006:
 Sales ₹ 10,00,000 (50,000 units).
 There was no opening and closing stock of finished units.
 Direct material and direct wages cost were ₹ 5,00,000 and ₹ 2,50,000 respectively.
 Actual factory expenses were ₹ 1,50,000 of which 60% are fixed.
 Actual administrative expenses (production related) were ₹ 45,000 which are completely fixed.
 Actual selling and distribution expenses were ₹ 30,000 of which 40% are fixed.
 Interest and dividends received ₹ 15,000.
You are required to:
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(a) Find out profit as per financial books for the year ended 31 March, 2006;
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(b) Prepare the cost sheet and ascertain the profit as per cost accounts for the year ended 31 March, 2006 assuming that the
indirect expenses are absorbed on the basis of normal production capacity; and
(c) Prepare a statement reconciling profits shown by financial and cost books.

 Computing Costing and Financial Profits – Two Products

Question 9. [RTP]
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A Firm of Sports equipment commenced business on 1 April manufacturing two varieties of bat, ‘Senior’ and ‘Sub-Junior. The
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following data has been extracted from the accounts records for the half-year period ended 30 September.
 Average Material Cost per unit – ‘Senior’ bat ₹ 80, ‘Sub-Junior’ bat ₹ 60.
 Average Cost of Labour per unit – ‘Senior’ bat ₹ 140, ‘Sub-Junior’ bat ₹ 110.
 Finished Goods sold – Senior: 300 bats, Sub-Junior: 700 bats.
 Sale Price per bat – Senior ₹ 500, Sub-Junior ₹ 390.
 Expenses incurred during the period – Works Expenses – ₹ 1,20,000, Office Expenses – ₹ 68,000.
You are required to prepare statements showing:
1. Profit per unit for each brand of bat, charge Labour and Material at actual average cost, Works Expenses at 100% on Labour Cost
and Office Expenses at 25% of Works Costs.
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2. Financial profit for the half-year ending 30 September.
3. Reconciliation between profit as shown by Cost Account and Financial Accounts.

 Reconciliation – Reverse Working – Preparing Cost Sheet

Question 10.
Ram Co. maintains its accounts on a non-integrated basis. Both Financial Accountant and Cost Accountant have completed their
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accounts for the year ended 30 June and a Memorandum Account reconciling the two profit figures has been prepared.
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The Financial Accountant has prepared the detailed Profit & Loss Account for the year ended 30 June.
Particulars Amount (₹) Particulars Amount (₹)
To Raw Material consumed: By Trading A/c Cost of Goods Manufactured c/d 4,74,772
Opening Stock 51,296
Add: Purchases 1,99,334
Less: Closing Stock (47,382) 2,03,248
To Direct Wages 80,072

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To Production Overhead 1,90,680

To Opening WIP 24,496
Less: Closing WIP (23,724) 772
Total 4,74,772 4,74,772
To Opening Stock of Finished Goods 63,890 By Sales 6,25,600
To Cost of Goods Manufactured b/fd 4,74,772 By Closing Stock of Finished Goods 65,702
To Gross Profit c/d 1,52,640
Total 6,91,302 Total 6,91,302
To Debenture Interest 2,000 By Gross Profit b/d 1,52,640
To Discount Allowed 2,964 By Discount Received 1,790
To Distribution Expenses 16,926
To Sales Expenses 30,562
To Administrative Expenses 53,058
To Net Profit c/d 48,920
Total 1,54,430 Total 1,54,430

The Memorandum Account reconciling the profit shown in Financial and Cost Account for the year is as follows:
Particulars Amount (₹) Particulars Amount (₹)
During as per Cost Accounts 1,00,300 Profit as per Financial Accounts 48,920
Difference in stock Valuation: Difference in Stock Valuation:
Opening Stock of Raw Materials 320 Opening Stock of Work in Progress 350
Closing Stock of Finished Goods 682 Opening Stock of Finished Goods 652
Discount Received 1,790 Closing Stock of Raw Material 422
Closing Stock of Work in Progress 296
Sales Expenses 30,562
Distribution Expenses 16,926
Debenture Interest 2,000
Discount Allowed 2,964
Total 1,03,092 Total 1,03,092

During the year, Production Overhead has been absorbed in the Cost Accounts at 250% of the Direct Wages. It is observed that the
Cost Account has lost his working papers and data is not available.
You are required to prepare a detailed statement showing how the profit as shown in the Cost Accounts was arrived was arrived at.
Any difference not explainable through the memorandum account should be taken as difference in the “Administrative Expenses’’
charged in the two sets of accounts.

 Performa Costing P/L A/c – WIP and Finished Goods Valuation

Question 11. [NOV 05 (ADAPTED)]
The following is the Trading and profit & Loss Accounts of Omega Limited.
Particulars Amount (₹) Particulars Amount (₹)
To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000
To Direct Wages 12,05,750 By Finished Goods Stock (1,000 units) 1,30,000
To Production Overheads 6,92,250 By Work-in-Progress:
To Administration Overheads (production related) 3,10,375 Materials 55,250
To Selling and Distribution Overheads 3,68,875 Wages 26,000
To Preliminary Expenses written off 22,750 Overheads 16,250 97,500
To Goodwill written off 45,500 By Dividends received 3,90,000
To Fines 3,250 By Interest on bank deposits 65,000

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To Interest on mortgage 13,000

To Loss on sale of machine 16,250
To Taxation 1,95,000
To Net Profit for the year 3,83,500
55,57,500 55,57,500
Omega Limited manufactures a standard unit.
The Cost Accounting records of Omega Ltd. show the following:
 Production Overheads have been charged to Work-in-Progress at 20% on Prime Cost.
 Administration Overheads (production related) have been recovered at ₹ 9.75 per Finished Unit.
 Selling & Distribution Overheads have been recovered at ₹ 13 per unit sold.
 The Under or Over-absorption of Overheads has not been transferred to Costing P & L A/c.
Required:
(i) Prepare a Performa Costing Profit & Loss Account, indicating Net Profit.
(ii) Prepare Control Accounts for Production Overheads, Administration Overheads and Selling & Distribution Overheads.
(iii) Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial Accounts.

Question 12. [MAY 92, MAY 93]

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Given below is the Trading and Profit and Loss Account of a Company for the year ended 31 March, 1993:
Particulars Amount (₹) Particulars Amount (₹)
To Materials 27,40,000 By Sales (60,000 units) 60,00,000
To Wages 15,10,000 Stock (2,000 units) 1,60,000
To Factory expenses 8,30,000 Work-in-Progress:
To Administration expenses (production related) 3,82,400 Materials 64,000
To Selling expenses 4,50,000 Wages 36,000
To Preliminary expenses written off 60,000 Factory Expenses 20,000 1,20,000
Net profit 3,25,600 By Dividend Received 18,000
62,98,000 62,98,000
The Company manufactures standard units. In the Cost Accounts:
(i) Factory expenses have been allocated to production at 20% of Prime Cost:
(ii) Administrative expenses (production related) at ₹ 6 per unit produced: and
(iii) Selling expenses at ₹ 8 per unit sold.
Prepare the Costing Profit and Loss Account of the company and reconcile the same with the profit disclosed by the Financial
Accounts.

 Reconciliation A/c – Adjustment Given to find Profit as per Financial Records

Question 13. [RTP]
From the following data prepare a Reconciliation Statement: (In ₹)
Profit as per Cost Accounts 1,45,500 Overvaluation of Opening Stock in Cost Accounts 15,000
Works OH under-recovered 9,500 Overvaluation of Closing Stock in Cost Accounts 7,500
Administrative OH under-recovered 22,750 Interest earned during the year 3,750
Selling OH over-recovered 19,500 Rent received during the year 27,000
Bad Debts w/off during the year 9,000 Preliminary Expenses written off during the year 18,000

 Reconciliation with Losses

Question 14. [RTP]
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A manufacturing Company disclosed a Net Loss of ₹ 5,72,000 as per their Cost Accounts for the year ended 31 March. The Financial
Accounts however disclosed a Net Loss of ₹ 8,84,000 for the same period. The following information was revealed as a result scrutiny
of the figures both the sale of Books:
Income-Tax Provided 1,54,000 Administration OH under absorbed 24,000
Interest on Loan Funds in Financial Accounts 2,63,000 Depreciation as per Financial Account 2,20,000

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Transfer Fees (Credit in Financial Books) 16,000 Depreciation charged in Cost Account 2,45,000
Stores Adjustment (Credit in Financial Books) 8,000 Interest on Investments not Included in Cost
Factory OH over-absorbed 16,000 Accounts 64,000
Prepare a Memorandum Reconciliation Account.

Question 15. [MAY 09]

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A manufacturing Company has disclosed a Net Loss of ₹ 2,13,000 as per their Cost Accounting Records for the year ended 31 March.
However, their Financial Accounting Records disclosed a Net Loss of ₹ 2,58,000 for the same period. A scrutiny of data of both the sets
of books of accounts revealed the following information (In ₹)
Particulars Amount (₹)
Factory Overheads under absorbed 5,000
Administration Overheads over absorbed 3,000
Depreciation charged in Financial Accounts 70,000
Depreciation Charged in Cost Accounts 80,000
Interest on Investment not included in Cost Accounts 20,000
Income Tax provided in Financial Accounts 65,000
Transfer Fees (Credit in Financial Accounts) 2,000
Preliminary Expenses written off 3,000
Over-valuation of Closing stock of Finished Goods in Cost Accounts 7,000
Required:
a) Explain this in Reconciliation Statement
b) Draw Memorandum Reconciliation Account

Question 16. [NOV 12 (SIMILAR)]

From the following figures prepare a reconciliation statement:
Particulars Amount (₹)
Net Loss as per costing records 1,72,400
Works overhead under recovered in costing 3,120
Administrative overhead recovered in excess 1,700
Depreciation charged in financial records 11,200
Depreciation recovered in costing 12,500
Interest received not included in costing 8,000
Obsolescence charged (loss) in financial records 5,700
Income-tax provided in financial books 40,300
Bank Interest credited in financial books 750
Stores adjustment (credit) in financial books 475
Value of opening stock in: Cost accounts 52,600
Financial accounts 54,000
Value of closing stock in: Cost accounts 52,000
Financial accounts 49,600
Interest charged in cost accounts but not in financial accounts 6,000
Preliminary expenses written off in financial accounts 800
Provision for doubtful debts in financial accounts 150

 Memorandum Reconciliation Account

Question 17. [NOV 10, MAY 14]
A manufacturing company has disclosed a net loss of ₹ 8,75,000 as per their cost accounting records for the year ended March 31,
2010. However, their financial accounting records disclosed a net loss of ₹ 7,91,250 for the same period. A scrutiny of the data of both
the sets of books of accounts revealed the following information:

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Particulars Amount (₹)

Factory overheads over-absorbed 47,500
Administration overheads under-absorbed 32,750
Depreciation charged in Financial Accounts 2,25,000
Depreciation charged in Cost Accounts 2,42,250
Interest on investments not included in Cost Accounts 62,750
Income Tax Provided in Financial Accounts 7,250
Transfer fees (Credit in Financial Accounts) 12,500
Preliminary expenses written off 27,500
Under-Valuation of opening stock in Cost Accounts 6,250
Under Valuation of closing stock in Cost Accounts 17,500
Prepare a Memorandum Reconciliation Account.

Question 18. [MAY 03]

A manufacturing company disclosed a net loss of ₹ 3,47,000 as per their cost account for the year ended March 31,2003. The financial
accounts however disclosed a net loss of ₹ 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:
Particulars Amount (₹)
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 Account 2,45,000
Transfer fees (Credit in financial books) 24,000
Stores adjustment (credit in financial books) 14,000
Dividend received 32,000
Prepare a Memorandum Reconciliation Account.

Question 19. [STUDY MATERIAL]

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M/s. H.K. Piano Company showed a net loss of ₹ 4,16,000 as per their financial accounts for the year ended 31 March, 2004. The cost
accounts, however, disclosed a net loss of ₹ 3,28,000 for the same period. The following information was revealed as a result of
scrutiny of the figures of both the sets of books:
Particulars Amount (₹)
Factory overheads under-recovered 6,000
Administration overheads over-recovered 4000
Depreciation charged in financial accounts 1,20,000
Depreciation recovered in costs 1,30,000
Interest on investment not included in costs 20,000
Income-tax provided 1,20,000
Transfer fees (credit in financial books) 2000
Stores adjustment (credit in financial books) 2000
Prepare a Memorandum reconciliation account.

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 Miscellaneous Theory
Question 20.
List same items causing difference between cost and financial Books? [RTP, NOV 99, MAY 00, MAY 07, NOV 07]
The chief Accountant of K Ltd found that the profit was the same as per cost as well as financial Accounts. State whether reconciliation
is necessary in such a case? [MAY 87]
Why is it necessary to reconcile the profits between cost Accounts and financial Accounts? [NOV 02, MAY 04, MAY 06]
‘’Reconciliation of Cost and financial Accounts in modern computer age is redundant” Explain. [MAY 98]

Solution 20:
1. Items included in Financial Accounts only-
(a) Purely Financial Expenses:
(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments
(v) Goodwill written off
(vi) Preliminary expenses written off
(vii) Income tax, donations, subscriptions etc

(b) Purely Financial Income

(i) Interest received on bank deposits, loans and investments
(ii) Dividends received
(iii) Profits on the sale of fixed assets and investments
(iv) Transfer fee received.
(v) Rent receivables

2. Item included in the cost accounts only (notional expenses):

(i) Charges in lieu of rent where premises are owned
(ii) Interest on capital at notional figure though not incurred
(iii) Salary for the proprietor at notional figure though not incurred
(iv) Notional Depreciation on the assets fully depreciated for which book value is nil.

3. Varying basis of valuation: It is another factor which sometimes is responsible for the difference. It is well known that in financial
accounts stock are valued either at cost or market price, whichever is lower. But in Cost Accounts, stocks are only valued at cost.

4. Differences in Absorption: Actual expenditure incurred during the period is charged to Profit and Loss Account under the
Financial Accounting system. In the Cost books, Absorbed Overheads are related to production. There may be overhead
variances or differences, due to various reasons. Hence over-absorption or under-absorption leads to differences in profits
reported.

Question 21. [Nov 2016]

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Given below is the Trading and Profit and Loss Account of a Company for the year ended 31 March, 2016:
Particulars Amount (₹) Particulars Amount (₹)
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing Stock (2,000 units) 1,50,000
To Factory expenses 9,50,000 By Dividend Received 20,000
To Administration expenses 4,80,200
To Selling expenses 2,50,000
To Preliminary expenses written off 50,000
Net profit 1,79,800
63,70,000 63,70,000
In the Cost Accounts:
(i) Factory expenses have been allocated to production at 20% of Prime Cost.
(ii) Administrative expenses absorbed at 10% of factory cost.

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(iii) Selling expenses charged at ₹ 10 per unit sold.
Prepare the Costing Profit and Loss Account of the company and reconcile the same with the profit disclosed by the Financial
Accounts.

Question 22. [May 2018]

GK Ltd. showed net loss of ₹ 2,43,300 as per their financial accounts for the year ended 31st March, 2018. However, cost accounts
disclosed net loss of ₹ 2,48,300 for the same period. On scrutinizing both the set of books of accounts, the following information were
revealed:
Works overheads over recovered 30,400
Selling overheads under recovered 20,300
Administrative overheads under recovered 27,700
Depreciation over charged in cost accounts 35,100
Bad debts written off in financial accounts 15,000
Preliminary exp w/off in financial accounts 5,000
Interest credited during the year in financial accounts 7,500
Prepare a reconciliation statement reconciling losses shown by financial and cost accounts by taking costing net loss as base.

Question 23. [May 2019]

M/s Abid Private Limited disclosed a net profit of ₹ 48,408 as per cost book for the year ending 31st March, 2019. However, financial
accounts disclosed net loss of ₹ 15,000 for the same period. On scrutinizing both the set of books of accounts, the following
information was revealed:
Works overheads under recovered in cost books - 48,600
Office overheads over recovered in cost books - 11,500
Dividend received on shares - 17,475
Interest on fixed deposits - 21,650
Provision for doubtful debts - 17,800
Obsolescence loss not charged in cost accounts - 17,200
Stores adjustments (debited in financial accounts) - 35,433
Depreciation charged in Financial accounts - 30,000
Depreciation recovered in cost books - 35,000
Prepare a memorandum reconciliation account.

Question 24. [RTP]

From the following prepare a reconciliation statement: (in ₹)
Profit as per cost accounts - 1,45,500
Works overheads under recovered - 9,500
Administrative overheads under recovered - 22,750
Selling overheads over recovered - 19,500
Bad debt w/off during the year - 9,000
Overvaluation of opening stock in cost accounts - 15,000
Overvaluation of closing stock in cost accounts - 7,500
Interest earned during the year - 3,750
Rent received during the year - 27,000
Preliminary exp w/off during the year - 18,000

Question 25. [RTP]

The following is the Trading and profit & Loss Accounts of XYZ Ltd. for the year ended 31st March, 2019.
Particulars Amount (₹) Particulars Amount (₹)
Direct Materials 14,16,000 By Sales (30,000 units) 30,00,000
Direct Wages 7,42,000 By Finished Goods Stock (2,000 units) 1,67,500
Works Overheads 4,26,000 By Work-in-Progress:
Administration Overheads 1,50,000 Materials 34,000
Selling and Distribution Overheads 1,65,000 Wages 16,000
Works Overheads 4,000 54,000

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To Net Profit for the year 3,22,500

32,21,500 32,21,500
The Cost Accounting records show the following in the course of manufacturing a standard unit:
 Works Overheads have been charged at 20% on Prime Cost.
 Administration Overheads (production related) have been recovered at ₹ 5 per Finished Unit.
 Selling & Distribution Overheads have been recovered at ₹ 6 per unit sold.
Required:
(i) Costing Profit & Loss Account, indicating Net Profit.
(ii) A statement reconciling the profit disclosed by cost records with that shown in Financial Accounts.

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Chapter 9
Contract costing
 Introduction
Question 1. [NOV 95 (ADAPTED)]
What is Contract Costing? What are its features?

Solution 1:
Contract or Terminal Costing, as it is termed, is one form of application of the principles of job costing. In fact a bigger job is referred to
as a contract. Contract Costing is usually adopted by building contractors engaged in the task of executing Civil Contracts.
Contract Costing have the following distinct features:
1. The major part of the work in connection with each contract is ordinarily carried out at the site of the contract.
2. The bulk of the expenses incurred by the contractor are considered as direct.
3. The indirect expenses mostly consist of office expenses of the yards, stores and works.
4. A separate account is usually maintained for each contract.
5. The number of contracts undertaken by a contractor at a time is not usually very large.
6. The cost unit in contract costing is the contract itself.

 Contract Account and Amount to be Credited to P & L A/c from Notional Profit
Contract Account
Particulars Amount (₹ ) Particulars Amount (₹ )
Material purchased & issued to site - Sale of Material -
P & L A/c (Abnormal Profit on sale of material) - P & L A/c (Abnormal Loss on sale of Material) -
Contract No. ** - Material transferred to other contracts (Contract No. **) -
(Material transferred from other contracts) - P & L A/c (Value of material destroyed, stolen or other -
Abnormal Loss)
Material at Site (Unused Material) -
Labour Cost Incurred (Direct & Indirect both) -
Cost of Plant Purchased (Specifically for the - By Plant at Site (WDV of Assets which was specifically -
Contract) purchased)
Hire Charges of Plant - P & L A/c (WDV of assets destroyed or stolen) -
Depreciation of Plant (For assets not specifically - (Specifically purchased)
purchased on time basis) Sale Proceeds of Plant (Specifically Purchased) -
P & L A/c (Profit on Sale on Plant) - P & L A/c (Loss on Sale of Plant) -
Repair & Maintenance of Plant & Machinery -
Other Works & Administration Expenses - *By Work-in-Progress
(Apportioned to the Contract) Work Certified (Contract Price × % of Work Certified) -
Work Uncertified -
Escalation Claim -
To Profit taken to Costing P& L A/c (Notional Profit)
(Balancing Figure) - Costing P & L A/c (Loss) (Balancing Figure) -

- -
Note: If some material is provided by owner himself, then it is not recorded anywhere.

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 Profit Recognition in Contract Costing

Question 2. [MAY 07,NOV 11]
What do you mean by Notional Profits and Retention Money?

Solution 2:
The term Notional Profit is used when the Contract is not complete i.e. during the course of the contract. Actual profit cannot be
determined till the completion of the contract.
Notional Profit represents the difference between the value of work certified and cost of work certified.
It is determined as follows:
Notional Profit = Value of Work Certified – (Cost of Work to date – Cost of work not yet certified)

Estimated Profit = Contract Price – (Total Estimated Cost incurred till date + Estimated Future Cost)

Retention Money
A contractor does not receive the full payment of work certified by the surveyor of work certified by the surveyor.
Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the work done by
the contractor. If any deficiency or defect is noticed it is to be rectified by the contractor before the release of the retention
money. Thus retention money provides a safe guard against the default risk in contract.

 Items of Income and Expenditure in a Contract

Question 3.
Briefly explain:
(i) Value of Work Certified and
(ii) Cost of Work Uncertified.

Solution 3:
(i) Value of Work Certified: All building contractors received payments periodically known as “running payment” on the basis of the
architect’s or surveyor’s certificates. But payments are not equal to the value of the work certified, a small percentage of the
amount due is retained as security for any defective work which may be discovered later within the guarantee period.

Value of Work certified is credited to the Contract A/c as it Constitutes income on the Contract, and debited to Work-in-Progress
A/c, if the contract is complete or the Contractee’ s A/c if the contract is completed.

(ii) Cost of Work Uncertified: It represents the cost of the work which has been carried out by the contractor but has not been
certified by the contractee’ s architect.
The Cost of Work Uncertified is credited to Contract A/c under the head ‘Work-in-Progress”.
Cost of Work Uncertified = Total Cost to date – Cost of Work Certified – Material in Hand – Plant at site (at WDV)
Note: Income on Contract = Value of Work Certified + Cost of Work Uncertified.

 Profit Recognition with Notional Profit

Question 4. [NOV 79]
SV Construction Ltd. have obtained a contract for construction of a bridge. The value of the contract is ₹ 12 lakhs and the work
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commenced on 1 October, 1998. The following details are shown in their books for the year ended 30 September, 1999.
Plant purchases ₹ 60,000 Wages accrued as on 30.9.1999 ₹ 2,800
Wages paid ₹ 3,40,000 Materials at site as on 30.9.1999 ₹ 4,000
Material issued to site ₹ 3,36,000 Direct expenses accrued as on 30.9.1999 ₹ 1,200
Direct expenses ₹ 8,000 Work not yet certified at cost ₹ 14,000
General overheads apportioned ₹ 32,000 Cash received being 80% of work certified ₹ 6,00,000
Life of plant purchased is 5 years and scrap value is nil.
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(1) Prepare the contract account for the year ended 30 September, 1999.

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(2) Show the amount of profit which you consider might be fairly taken on the contract and how you have calculated it.

Solution 4:
S.V. Construction Ltd.
Contract Account
Particulars Amount (₹ ) Particulars Amount (₹ )
To Materials 3,36,000 By Work-in-Progress
To Wages paid 3,40,000 Work Certified 7,50,000
Add: Accrued 2,800 3,42,800 Work Uncertified 14,000 7,64,000
To Direct expenses paid 8,000 By Plant at site 48,000
Add: Accrued 1,200 9,200 By Materials at site 4,000
To Plant purchased 60,000
To General Overheads 32,000
To Costing P & L A/c (notional profit) 36,000
8,16,000 8,16,000

Working Notes:
Value of work certified – Cash received is ₹ 6,00,000 representing 80% of the work certified, hence the value of the work certified
would be ₹ 7,50,000 (i.e. 6,00,000 × 100/80).

Question 5. [MAY 14]

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M/s ABID Constructions undertook a contract at a price of ₹ 171.00 lacs. The relevant data for the year ended 31 March, 2014 are as
under:
Particulars (₹ ‘000)
Material issued at site 7,700
Direct wages paid 3,300
Site office cost 550
Material return to store 175
Work certified 12,650
Work uncertified 225
Progress payment received 10,120
Prepaid site office cost as on 31-03-2014 50
Direct wages outstanding as on 31-03-2014 100
Material on site as on 31-03-2014 110

Additional Information:
a) A plant was purchased for the contract at ₹ 8,00,000 on 01-12-2013.
b) Depreciation @ 15% per annum is to be charged.
c) Material which costs ₹ 1,30,000 was destroyed by fire.

Prepare:
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(i) Contract account for the year ending 31 March, 2014 and compute the profit to be taken to the Profit & Loss account.
(ii) Account of Contractee.
(iii) Profit & Loss account showing the relevant items
(iv) Balance Sheet showing the relevant items.

Question 6. [STUDY MATERIAL]

The following expenses were incurred on a contract:
Particulars ₹
Material purchased 6,00,000
Material drawn from stores 1,00,000
Wages 2,25,000

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Plant issued 75,000

Chargeable expenses 75,000
Apportioned indirect expenses 25,000
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The contract was for ₹ 20,00,000 and it commenced on January 1, 2005. The value of the work completed and certified upto 30
November, 2005 was ₹ 13,00,000 of which ₹ 10,40,000 was received in cash, the balance being held back as retention money by the
st
contractee. The value of work completed subsequent to the architect’s certificate but before 31 December, 2005 was ₹ 60,000. There
st
were also lying on the site materials of the value of ₹ 40,000. It was estimated that the value of plant as at 31 December, 2005 was ₹
30,000.

Question 7. [MAY2012, NOV 14(SIMILAR), MAY 18(SIMILAR), MAY 19(SIMILAR)]

(a) A contractor commenced a contract on 1-7-2011. The costing records concerning the said contract reveal the following
information as on 31-3-2012.

Amount ( )
Material sent to site 7,74,300

Labour paid 10,79,000

Labour outstanding as on 31-3-2012 1,02,500

Salary to Engineer 20,500 per month

Cost of plant sent to site (1-7-2011) 7,71,000

Salary to Supervisor (3/4 time devoted to contract 9,000 per month

Administration & other expenses 4,60,600

Prepaid Administration expenses 10,000

Material in hand at site as on 31-3-2012 75,800

Plant used for the contract has an estimated life of 7 years with residual value at the end of life 50,000. Some of material
costing 13,500 was found unsuitable and sold for 10,000. Contract price was 45,00,000. On 31-3-2012 two third of the
contract was completed. The architect issued certificate covering 50% of the contract price and contractor has been paid
20,00,000 on account. Depreciation on plant is charged on straight line basis. Prepare Contract Account.

Solution 7:
(a) Contract Account
(For the period 1.7.11 to 31.3.12)
Particulars Amount Particulars Amount

To Material Issued 7,74,300 By Material (Sold) 10,000

To Labour 10,79,000 By P&L A/c (Loss)

Add: Outstanding 1,02,500 11,81,500 (13,500-10,000) 3,500

To Salary to engineer (20,500 × 9) 1,84,500 By Material in hand 75,800

To Salary to Supervisor By Cost of Contract c/d 26,39,600

60,750
9000× ×39

To Administration
4 & other

Expenses 4,60,600

Les: Prepaid 10,000 4,50,600

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Contract Costing BY: CA NITIN GURU

To Depreciation on Plant

(Working Note 1) 77,250

27,28,900 27,28,900

To Cost of Contract b/d 26,39,600 By work-in Progress:

To Costing P& L A/c (Notional Profit) 2,70,300 -Work certified

50% of 45,00,000 22,50,000

-Work uncertified (W.N.-2

(26,39,600-19,79,700) 6,59,900

29,09,900 29,09,900

Working Note

1. Calculation of depreciation on Plant

Cost of the Plant 7, 71,000
Less: Residual Value 50,000
7, 21,000
Estimates life 7 Years
Depreciation per annum 1, 03,000
Depreciation for 9 months = 1,03,000/12 ×9 = 77,25

2. Cost of work uncertified = Cost incurred to date minus 50% of the total cost of contract
= 26,39,600 (figure already shown in the contract A/c) - 19,79,700
= 6,59,900

 Contract Account For More Than One Year

nd
 If the Contract A/c is required to be prepared for 2 year also, then the closing balance of previous year shall become the
nd
opening balance of 2 year.

 Material at Site (Goes to Debit side)

Plant at Site (Goes to Debit Side)
Work-in-Progress (Goes to Debit Side. Certified & Uncertified both)
All Reserve (Subtracted from WIP or may be shown on credit side.)
Value of Work Certified =

 If we get loss in Contract A/c it straight away goes to P & L A/c and not to the second part of Contract A/c.

 Even Accrued Expenses can be shown in Contract A/c.

 CONTRACTEE ACCOUNT
In Contractee A/c whatever amount is received by Contractor is shown on the Credit side and balance c/d is shown in the Debit side.
 At end of the Contract Contractee A/c is debited because it is shown on the credit side of Contract A/c with full amount to be
received.
Note:
In last year we do not show WIP on credit side because work is already complete. So, we show Contractee A/c on the Credit side with
full amount.

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 Practical Problems

 Profit Recognition with Notional Profit and Abstract Balance Sheet

Question 8. [MAY 2008, NOV 2014]
Modern Constructions Ltd obtained a contract No.B-37 for ₹ 40 lakhs. The following balances and information relates to the contract
for the year just ended –
Particulars At the beginning of the year (₹ ) At the end of the year (₹ )
Work-in-Progress: Work Certified 9,40,000 30,00,000
Work Uncertified 11,200 32,000
Materials at site 8,000 20,000
Accrued Wages 5,000 3,000

Additional information relating to the year are:

Particulars Amount (₹ ) Particulars Amount (₹ )
Materials issued from Stores 4,00,000 Indirect Expenses 10,000
Materials directly purchased 1,50,000 Shares of General Overheads for B-37 18,000
Wages paid 6,00,000 Materials returned to Supplier 15,000
Architect's Fees 51,000 Fines and Penalties paid 12,000
Plant Hire Charges 50,000 Materials returned to Stores 25,000
The Contractee pays 80% of Work Certified in cash. You are required to prepare –
 Contract Account showing clearly the amount of profits transferred to Profit and Loss Account,
 Contractee’s Account, and
 Balance Sheet.

Solution 8:
1. Contract No.B-37 Account for the year ended ………….
Particulars Amount (₹ ) Particulars Amount (₹ )
To balance b/d – Work Certified 9,40,000 By Work in Progress – Work Certified 30,00,000
– Work uncertified 11,200 – Work Uncertified 32,000
To Material at Site b/d 8,000 By Materials Returns – Stores 25,000
To Materials issued 4,00,000 – Supplier 15,000
To Materials directly purchased 1,50,000
To Wages (6,00,000 + 3,000 – 5,000) 5,98,000
To Architects' Fees 51,000
To Plant Hire Charges 50,000 By balance c/d – Material at site 20,000
To Indirect Expenses 10,000
To Overheads 18,000
To Costing P& L A/c (Notional Profit – balancing figure) 8,55,800
Total 30,92,000 Total 30,92,000

Working Notes:

2. Contractee’s A/c
Particulars ₹ Particulars ₹
To balance c/d 24,00,000 By balance b/d (80% of Work Certified on Opening Date) 7,52,000
By Bank [80% (₹ 30,00,000 – ₹ 9,40,000)] 16,48,000
Total 24,00,000 Total 24,00,000

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3. Balance Sheet as on …………. (Abstract)
Liabilities ₹ Assets ₹
Profit and Loss A/c 8,55,800 Current Assets: Contract Work-in-Progress
Work Certified 30,00,000
Work Uncertified 32,000
Materials at Site 20,000
Sub-Total 30,52,000
Current Liabilities:
Wages Accrued 3,000
Less: Contractee's Account balance (24,00,000)
Net Value of Contract WIP 6,52,000
Total Total

Question 9. [MAY 09]

The following details are available from the books of accounts of a Contractor with respect to a particular construction work for the
st
year ended 31 March –
Particulars ₹ Particulars ₹
Contract Price 91,00,000 Material returned to Store 14,840
Cash Received from Contractee (90% of Work 71,91,000 Head Office Expenses apportioned 2,50,000
Certified) Cost of Work Uncertified 3,17,000
st
Material sent to site 35,82,600 On 31 March:
Planning and Estimation Cost 3,50,000 Material at site 85,400
Direct Wage paid 32,62,700 Accrued Direct wages 78,120
Cost of Plant installed at site 7,00,000 Accrued Direct Expenses 9,310
Direct Expenses 1,68,000 Value of Plant (as revalued) 6,16,000
Establishment Expenses 2,03,000

Solution 9:
st
1. Contract Account for the year ended 31 March
Particulars ₹ Particulars ₹
To Materials 35,82,600 By Work in Progress A/c

To Direct Wages Paid 32,62,700 – Work Certified 79,90,000

Add: Payable 78,120 33,40,820 – Work Uncertified 3,17,000
To Direct Expenses Paid 1,68,000 By Materials – returned to Stores 14,840
Add: Payable 9,310 1,77,310 By Materials at Site 85,400
To Planning and Estimation 3,50,000 By WDV of Plant at site 6,16,000
To Cost of Plant installed at site 7,00,000
To Establishment Expenses 2,03,000
To HO expenses – apportioned 2,50,000
To Costing P& L A/c (Notional Profit – balancing figure) 4,19,510
Total 90,23,240 Total 90,23,240
Working Notes:
st
2. Balance Sheet as on 31 March (Abstract)
Liabilities ₹ Assets ₹
Fixed Assets:
Profit and Loss A/c 4,19,510 Current Assets: Contract Work-in-Progress
Work Certified 79,90,000
Work Uncertified 3,17,000
Plant (WDV) at Site 6,16,000

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Materials at Site 85,400

Sub-Total 90,08,400
Current Liabilities:
Wages Accrued 78,120
Direct Expenses Accrued 9,310 Less: Contractee's Account balance (71,91,000)
Net Value of Contract WIP 18,17,400
Total Total

Question 10. [NOV 14]

Z Ltd. obtained a contract no.999 for ₹ 50 lacs. The following details are available in respect of this contract for the year ended March
31, 2014:
₹
Material purchased 1,60,000
Material issued from stores 5,00,000
Wages & salaries paid 7,00,000
Drawing & 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 March 31, 2013 and March 31, 2014 are available:
st st
As on 31 March 2013 As on 31 March, 2014
(₹) (₹ )
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% work certified in cash. Prepare Contract Account and Contractee’ s Account.

Question 11. [NOV 91]

st st
WIP Ltd commenced a contract on 1 April and provides the following information as at 31 December, (being the close of the
financial year) –
 Materials issued to Contract ₹ 2,51,000.
 Labour Charges Payable ₹ 5,65,600.
 Salary to Foreman ₹ 81,300.
 A machine costing ₹ 2,60,000 has been on site for 146 days, its working life is estimated at 7 years, and final scrap value ₹
15,000.
 A Supervisor, who is paid ₹ 8,000 per month has devoted one half of his time to this contract.
 All other expenses and administrative charges amount to ₹ 1,36,500.
st
 Material in hand at site costs ₹ 35,400 on 31 December.
st rd
 The Contract Price is ₹ 20 lakhs. On 31 December, 2/3 of the Contract was completed. However, the Architect has issued
certificates covering 50% of the Contract Price only and the Contractor had been paid ₹ 7,50,000 on account.
st
Prepare the Contract Account for the financial year ended 31 December and show the amount of profit or loss to be recognized on
this contract. Also show the summary entries in the Balance Sheet.

Solution 11:
st
Contract Account for the year ended 31 December
Particulars ₹ Particulars ₹
To Materials 2,51,000 By Cost of Contract c/d – balancing figure 10,49,000

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To Labour Charges 5,65,600 By Materials c/d 35,400

To Foreman's Salary 81,300
To Depreciation (₹ 2,60,000 – ₹ 15,000) × × 14,000
To Supervision (₹ 8,000 × 9 × 50%) 36,000
To Other Expenses & Administration 1,36,500
Total 10,84,400 Total 10,84,400
To Cost of Contract b/d 10,49,000 By Work-in-Progress Account
To Costing P& L A/c (Notional Profit – balancing figure) 2,13,250 – Work Certified 10,00,000
– Work Uncertified 2,62,250
Total 12,62,250 Total 12,62,250

Working Notes:
(a) Value of Work Certified = ₹ 20 Lakhs × 50% = ₹ 10 Lakhs.
(b) Cost of 66.67% work done = ₹ 10,49,000 (As per Contract Account above).
Proportionate Cost of 16.67% work done (i.e. Uncertified Work) = ₹ 10,49,000 × = ₹ 2,62,250.

(c) Percentage of Completion = = 50%

st
Balance Sheet as on 31 December (Abstract)
Liabilities ₹ Assets ₹
Profit and Loss A/c 2,13,250 Fixed Assets: (₹ 2,60,000 – ₹ 14,000) 2,46,000
Current Liabilities: Current Assets: Contract Work-in-Progress
Wages Accrued 78,120 Work Certified 10,00,000
Direct Expenses Accrued 9,310 Work Uncertified 2,62,250
Materials at Site 35,400
Sub-Total 12,97,650

Less: Contractee's Account balance (7,50,000)

Net Value of Contract WIP 5,47,650
Total Total

Question 12. [STUDY MATERIAL]

M/s. Bansals Construction Company Ltd. took a contract for ₹ 60,00,000 expected to be completed in three years. The following
particulars relating to the contract are available:
Particulars 2004 (₹ ) 2005 (₹ ) 2006 (₹ )
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Cartage 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 -
Plant costing ₹ 3,00,000 was bought at the commencement of the contract. Depreciation was to be charged at 25% per annum, on the
written down value method. The contractee pays 75% of the value of work certified as and when certified, and makes the final
payment on completion of the contract. You are required to make a contract account and contractee account as they would appear in
each of the three years. Also show how the work-in-progress and other items should appear in balance sheet.

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Solution 12:
Solution 14:
Contract Account
Particulars ₹ Particulars ₹
2004 2004
To Materials 6,75,000 By Plant at site c/d 2,25,000
To Wages 6,20,000 By Work-in-Progress c/d:
To Cartage 30,000 Work certified 13,50,000
To Other expenses 30,000 Work uncertified 15,000 13,65,000
To Plant 3,00,000 By Profit & Loss A/c (Loss transferred) 65,000
16,55,000 16,55,000
2005 ₹ 2005 ₹
To Work-in-progress b/d: By Work-in-Progress c/d:
Work certified 13,50,000 Work certified 45,00,000
Work uncertified 15,000 13,65,000 Work uncertified 75,000 45,75,000
To Plant b/d 2,25,000 By Plant at site c/d 1,68,750
To Materials 10,50,000
To Wages 9,00,000
To Cartage 90,000
To Other expenses 75,000
To Costing P& L A/c (Notional Profit – balancing figure) 10,38,750
47,43,750 47,43,750
2006 ₹ 2006 ₹
To Work-in-progress b/d:
Work certified 45,00,000 By Plant at site 1,26,562
Work Uncertified 75,000 45,75,000 By Contractee’s A/c (contract price) 60,00,000
To Plant b/d 1,68,750 To Profit & loss A/c (loss) 3,66,187
To Materials 9,00,000
To Wages 7,50,000
To Cartage 75,000
To Other expenses 24,000

64,92,750 64,92,750
Working Notes:
In 2004 there is a loss, and so the whole of it will be transferred to the profit and loss account.

Contractee’s Account
Particulars ₹ Particulars ₹
2004 2004
To Balance c/d 10,12,500 By Bank 10,12,500
2005 2005
To Balance c/d 33,75,000 By Balance b/d 10,12,500
By Bank 23,62,500
33,75,000 33,75,000
2006 2006
To Contract A/c (Contract price) 60,00,000 By Balance b/d 33,75,000
By balance 26,25,000*

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60,00,000 60,00,000
*The total value of work certified at the end of 2005 was ₹ 45,00,000 of that worth ₹ 13,50,000 was certified in 2004. Hence, the cash
to be received in 2005 is 75% of ₹ 31,50,000 (₹ 45,00,000 – ₹ 13,50,000) i.e., ₹ 23,62,500.

Balance Sheet (Extract) 2004

Liabilities ₹ Assets ₹
Capital - Plant at site 2,25,000
Less: Loss during the year 65,000 Work-in-progress: ₹
Work certified 13,50,000
Work uncertified 15,000
13,65,000
Less: Cash received 10,12,500 3,52,500
Balance sheet (Extract) 2005
Liabilities ₹ Assets ₹
Capital - Plant at site 1,68,750
Add: Profit during the year 10,38,750 Work-in-progress: ₹
Work certified 45,00,000
Work uncertified 75,000
45,75,000
Less: Cash received 33,75,000 12,00,000
Balance Sheet (Extract) 2006
Liabilities ₹ Assets ₹
Capital - Plant at site 1,26,562
Less: Loss for the year 3,66,187

 Profit on Completed Contract

Question 13. [RTP]
The following details relate to a contract that took exactly one year for completion –
 Materials Issued ₹ 58,000
 Direct Wages ₹ 75,000
 Cost of Special Plant (Depreciation = 20%) ₹ 30,000
 Direct Expenses ₹ 12,000
 Establishment Charges ₹ 8,000
 Material Returned to Stores ₹ 5,000
The Contract Price was ₹ 1,75,000 and was fully received at the end of the year. Prepare the Contract Account.

Solution 13:
st
Contract A/c for the year ended 31 December
Particulars ₹ Particulars ₹
To Materials (Issued ₹ 58,000 – Returns ₹ 5,000) 53,000 By Contractee’s A/c (Contract completed) 1,75,000
To Wages 75,000
To Direct Charges 12,000
To Establishment Charges 8,000
To Depreciation on plant (20% of ₹ 30,000) 6,000
To P & L A/c – Profit transferred (Balancing figure) 21,000
Total 1,75,000 Total 1,75,000
Note: Profit of ₹ 21,000 is to be entirely taken to P & L Account, since contract is fully complete and all cash is received.

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 Reverse Working – Profit Recognition with Notional Profit

Question 14. [NOV 09]
st
At the end of first year on 31 March, 2009, in the books of ABC Construction Ltd, the Bridge Contract Account stands debited with the
cost of Materials Issued, Labour, Overheads expended and Plant issued and its stands credited with Material at Site ₹ 25,000, Material
Returned ₹ 15,000 and Plant at Site ₹ 4,76,000 after charging depreciation at 15%. The Material Issued, Labour, Overheads and Plant
issued debited to the Contract Account, are in the ratio of 5 : 4 : 2 : 4. 75% of the Contract had been certified by the Contractee’s
Architect as completed at the end of the year and 90% of the certified work value had been received in cash ₹ 16,20,000. The
Accounts Department informs that profit credit to Profit and Loss Account on the contract is ₹ 3,56,000. You are required to prepare:
(i) The Bridge Account showing the cost of work done but uncertified.
(ii) Work-in-progress Account.
(iii) Contractee’s Account.

Solution 14:
st
(i) Contract Account for the year ended 31 March 2009
Particulars Amount (In ₹ ) Particulars Amount (In ₹ )
To Material issued 7,00,000 By Work in Progress A/c

To Direct Labour 5,60,000 – Work Certified 18,00,000

To Overheads 2,80,000 – Work Uncertified (Balancing figure) 1,40,000
To Plant at Cost 5,60,000 By Material at Site 25,000
To Costing P& L A/c (Notional Profit) 3,56,000 By Material returned 15,000
By WDV of Plant (After 15% depreciation) 4,76,000
(i.e. 100% – 15% = 85% of Cost of Plant)
Total 24,56,000 Total 24,56,000

Working Notes:
1.
Item Material Issued Labour Overheads Plant at Cost
Ratio 5 4 2 4
Amount (₹ 5,60,000 × 5/4) (₹ 5,60,000 × 4/4) (₹ 5,60,000 × 2/4) ₹ 5,60,000 computed using
= ₹ 7,00,000 = ₹ 5,60,000 = ₹ 2,80,000 Depreciation Rate & WDV

(ii) Work-in-Progress Account

Particulars ₹ Particulars ₹
To Contract A/c – Work Certified 18,00,000 By Balance c/d 19,40,000
To Contract A/c – Work Uncertified 1,40,000
19,40,000 19,40,000

(iii) Contractee’s Account

Particulars ₹ Particulars ₹
To Balance c/d 16,20,000 By Bank A/c 16,20,000
16,20,000 16,20,000

 Escalation Clause
Question 15. [MAY 95, NOV 00, MAY 02, NOV 07, NOV 13, MAY 15]
What is Escalation Clause?

Solution 15:
This clause is usually provided in the contracts as a safeguard against any likely changes in the price or utilization of material and
labour. If during the period of execution of a contract, the prices of materials or labour rise beyond a certain limit, the contract price

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will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an ‘escalation clause’. A contract with
such a clause is called Contract with escalation clause.

 Contract Account – Notional Profit – Escalation Clause

Question 16. [NOV 87,NOV 04]
st th
Deluxe Limited undertook a contract for ₹ 5,00,000 on 1 July 1996. On 30 June 1997, when the accounts were closed, the following
details about the contract were gathered:
Particulars ₹ Particulars ₹
Materials purchased 1,00,000 Wages accrued 30.6.1997 5,000
Wages paid 45,000 Work certified 2,00,000
General expenses 10,000 Work uncertified 15,000
Plant purchased 50,000 Cash received 1,50,000
Materials on hand 30.6.1997 25,000 Depreciation of 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 wage rates increased by 25%. The value of work
certified does not take into account the effect of the above clause. Prepare the contract account. Workings should be shown as part of
the answer.

Solution 16:
Contract Account of Deluxe Limited
th
(For the year ending 30 June, 1987)
Particulars Amount (in ₹ 000) Particulars Amount (in ₹ 000)
To Materials 1,00,000 By Work-in-Progress
To Wages paid and accrued 50,000 Work Certified 2,00,000
To General Expenses 10,000 Work Uncertified 15,000
To Plant Depreciation 5,000 By Materials on hand 25,000
To Profit and Loss A/c 80,000 By Contract Escalation 5,000

2,45,000 2,45,000
Working Notes:
1. Calculation of Escalation:
Particulars Total Increase (₹ ) Upto 5% (₹ ) Beyond 5% (₹ )
Materials: (Effect of increase in Price) 15,000 3,000 12,000
(₹ 1,00,000 – ₹ 25,000) × 25/125
Wages (Effect of increase in wage rates) (₹ 50,000 × 25/125) 10,000 2,000 8,000
Total Increase 25,000 5,000 20,000
Increase in Contract Price = 25%of Increase in Material and Wages beyond 5%
= 25% of ₹ 20,000 = ₹ 5,000

Question 17
st st
Sham Ltd undertook a contract in a year – on 1 January. On 31 December, when their accounts were made up, the position was as
follows –
Particulars ₹
Contract Price 2,00,000
Expenditure: Materials 39,400
Wages 63,250
General Expenses 2,000
Plant installed 10,000

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Materials on hand 2,000

Wages accrued 1,725
General Expenses accrued 300
Work Certified 1,20,000
Cash Received in respect thereof 90,000
Work finished but uncertified 3,000
Contract 1 had been negotiated two years back with an escalation clause providing that should Material Prices and Wage Rates
increase by more than 2.5%, the Contractee would increase the Contract Price by 20% of the rise in the cost of materials and 40% of
the rise in the wage rates beyond 2.5% in each case.
It is agreed that since the signing of the agreement the Material Prices had gone up by 10% and Wage Rates by 15%, the value of Work
Certified does not take into account the effect of the escalation clause.
The Plant was installed on the date of the contract and depreciation is taken at 10% per annum.
Prepare the account in the Contract Ledger and give suitable entries in the Company’s Balance Sheet.

Solution 17:
1. Escalation Claim
Journal Entry for recording the Escalation Claim of ₹ 510 + ₹ 2,825 = ₹ 3,335
Contractee's Account Dr. 3,335
To Contract Account 3,335

2. Computation of Depreciation on Plant used

Particulars Amount (₹ )
Value of Plant (₹ ) ₹ 10,000
st st
Period of use 1 Jan to 31 Dec = 12 months
Depreciation at 10% p.a. ₹ 1,000
st
3. Contract Account for the year ended 31 December
Particulars Amount (₹ ) Particulars Amount (₹ )
To Materials 39,400 By WIP A/c
To Wages – Work Certified 1,20,000
– Paid 63,250 – Work Uncertified 3,000
– Payable 1,725 By Contractee's A/c – Escalation 3,335
To General Expenses By balance c/d
– Paid 2,000 Materials 2,000
– Payable 300 By Loss c/d -
To Depreciation 1,000
To Costing P & L A/c ( Notional Profit) 20,660
Total 1,28,335 Total 1,28,335

4. WIP to be displayed in Balance Sheet

Particulars Amount (₹ )
Work Certified 1,20,000
Work Uncertified 3,000
Materials at Site 2,000
Less: Contractee's A/c (90,000 – Escalation Claim 3,335) (86,665)
Net Value of WIP 38,335
Note: Cash received on account should not be merely subtracted to arrive at the net WIP value. Where Escalation Claim is recorded by
a Journal Entry, the net balance in the Contractee’s A/c should be considered.

Question 18 [STUDY MATERIAL]

A contractor has entered into a long term contract at an agreed price of ₹ 17,50,000 subject to an escalation clause for materials and
wages as spelt out in the contract and corresponding actual are as follows:

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Particulars Standard Actual
Materials Qty [tons] Rate [₹ ] Qty [tons] Rate [₹ ]
A 5,000 50.00 5,050 48.00
B 3,500 80.00 3,450 79.00
C 2,500 60.00 2,600 66.00
Wages Hours Hourly rate [₹ ] Hours Hourly rate [₹ ]
X 2,000 70.00 2,100 72.00
Y 2,500 75.00 2,450 75.00
Z 3,000 65.00 3,100 66.00

Reckoning the full actual consumption of material and wages, the company has claimed a final price of ₹ 17,73,600. Give your
ANALYSIS of admissible escalation claim and indicate the final price payable.

Solution 18:
Statement showing final claim

Standard Qty / hrs Standard rate [₹ ] Actual rate [₹ ] Variation in rate Escalation claim [₹ ]
[₹ ]
Materials
A 5,000 50.00 48.00 (-) 2.00 (-) 10,000
B 3,500 80.00 79.00 (-) 1.00 (-) 3,500
C 2,500 60.00 66.00 (+) 6.00 15,000
Materials escalation claim (A) 1,500
Wages
X 2,000 70.00 72.00 (+) 2.00 4,000
Y 2,500 75.00 75.00 - -
Z 3,000 65.00 66.00 (+) 1.00 3,000
Wages escalation claim (B) 7,000
Final claim (A + B) 8,500

Statement showing final price payable

Agreed price 17,50,000
Agreed escalation
Material cost 1,500
Labour cost 7,000 8,500
Final price payable 17,58,500

The claim of ₹ 17,73,600 is based on the total increase in cost. This can be verified as shown below:

Statement showing total increase in cost

Standard cost Actual cost Increase/decrease
Qty/hrs Rate(₹ ) Amount(₹ ) Qty/hrs Rate(₹ ) Amount(₹ )
Materials
A 5,000 50.00 2,50,000 5,050 48.00 2,42,400 (7,600)
B 3,500 80.00 2,80,000 3,450 79.00 2,72,550 (7,450)
C 2,500 60.00 1,50,000 2,600 66.00 1,71,600 21,600
6,80,000 6,86,550 6,550
Wages
X 2,000 70.00 2,100 72.00 1,51,200
Y 2,500 75.00 2,450 75.00 1,83,750
Z 3,000 65.00 3,100 66.00 2,04,600
5,39,550 17,050
23,600

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Contract Costing BY: CA NITIN GURU
Contract price ₹ 17,50,000
Add: Increase in cost ₹ 23,600
The final price claimed by the company ₹ 17,73,600

This claim is not admissible because escalation clause covers only that part of increase in cost, which has been caused by inflation.

Note:
It is fundamental principle that the contractee would compensate the contractor for the increase in costs which are caused by factors
beyond the control of contractor and not for increase in costs which are caused due to inefficiency or wrong estimation.

 Notional Profit and Estimated Total Profits – Profit Recognition

Question 19. [RTP, MAY 01, MAY 02 (ADAPTED)]
Paramount Engineers are engaged in construction and erection of a bridge under a long-term contract. The cost incurred upto
31.03.2001 was as under:
Fabrication ₹ In Lakhs
Direct Material 280
Direct Labour 100
Overheads 60
440
Erection costs to date 110
550
The contract price is ₹ 11 crores and the cash received on account till 31.03.2001 was ₹ 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 and also calculate the profit that could be taken to Profit and Loss Account against this partly
completed contract as at 31.03.2001.

Solution 19:
Estimation of Profit to be taken to Profit and Loss Account against partly completed contract as at 31.03.2001.

Working Notes:
1. Statement showing estimated profit to date and future profit on the completion of contract
Particulars Cost to date Further Costs Total Cost (₹ )
% Completion Amount (₹ ) % Completion Amount (₹ ) (a) + (b)
to date (a) to be done (b)
Fabrication Costs:
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 92.48 65.85 158.33
642.48 457.52 1,100.00

2. Profit to date (Notional Profit) and future profit are calculated as below:
Profit to date (Notional Profit) =

= = ₹ 92.48 (lakhs)
Future Profit = ₹ 158.33 – ₹ 92.48 = ₹ 65.85

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3. Work certified:
= Cost of the contract to date + Profit to date
= ₹ 550 + ₹ 92.49 = ₹ 642.48 lakhs

Question 20. [RTP]

st
The following details are available relating to a contract nearing completion on 31 March:
Particulars Amount (In ₹ )
Contract Price 1,20,00,000
Value of Work Certified [Cash Received = 90% of Work Certified] 1,10,00,000
Work in Progress (Work Certified) 1st April (beginning) 55,50,000
Cost incurred during the year: Materials 10,50,000
Labour 9,75,000
Other Expenses 7,75,000
st
Plant and Equipment: Net Book Value 1 April (beginning) 7,00,000
st
Net Book Value 31 March (end) 1,75,000
Purchases during the year 1,25,000
Cost of work not yet certified 8,00,000
It is estimated that additional costs of ₹ 4,00,000 will be incurred to complete the contract, including contingencies. It is further
considered that the Plant and Equipment on Site will be worthless by the time the contract is completed.
The Directors of the Company proposed to recognize ₹ 24 Lakhs as Profit for the year just ended.
You are required to prepare a Contract Account and indicate whether you agree with the Director’s proposal.

 Notional Profit and Estimated Total Profit – Effect on Profit and Loss
Question 21. [STUDY MATERIAL]
From the following particulars compute a conservation estimate of profit on a contract which has 90% completion:

Total expenditure to date 4,50,000

Estimate further expenditure to complete the contract 25,000
Contract Price 6,12,000
Work Certified 5,50,800
Work not certified 34,000
Cash received 4,40,640

Solution 21:
Computation of Notional Profit (₹)
Value of work certified (a) - 5,50,800
Less: Cost of work certified ( ₹ 4,50,000 – ₹ 34,000) (b) - 4,16,000
Notional profit (a) - (b) = 1,34,800

Computation of Estimated Profit (₹)

Contract price (c) = 6,12,000
Less: Cost of work to date (d) = 4,50,000
Estimated further expenditure to complete the contract (e) = 25,000
Estimated total cost [c - d - e] = 4,75,000
Estimated profit = 1,37,000

 Estimation of Profit and Profit Recognition

Question 22. [NOV 99]
A Contractor had commenced a Building Contract on October 1 last year, for a value of ₹ 4.4 Lakhs. The following data pertaining to
the contract for this year has been compiled from his books and is as under –

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Beginning: 1 April Work-in-Progress not certified 55,000
Materials at Site 2,000
Expenses incurred during the year: Materials issued 1,12,000
Wages Paid 1,08,000
Hire of Plant 20,000
Other Expenses 34,000
st
End: 31 March Materials at Site 4,000
Work-in-Progress: Not Certified 8,000
Work-in-progress: Certified 4,05,000
The cash received represents 80% of work certified. It has been estimated that further costs to complete the contract will be ₹ 23,000
st
including the materials at site as on 31 March. From the above, you are required to determine the profit on the contract for the year
on prudent basis, which has to be credited to P & L A/c.

Solution 22:
st
Contract Account for the year ending 31 March
Particulars ₹ Particulars ₹
To Work-in-progress not certified b/d 55,000 By Materials at Site 4,000
To Materials at Site b/d 2,000 By Cost of Contract till data c/d (balancing figure) 3,27,000
To Materials Issued 1,12,000
To Wages Paid 1,08,000
To Hire of Plant 20,000
To Other Expenses 34,000
Total 3,31,000 Total 3,31,000
To Cost of Contract till date b/d 3,27,000 By Work-in-Progress A/c
To Costing P&L A/c (Notional Profit c/d) (balancing figure) 86,000 – Work Certified 4,05,000
– Work Uncertified 8,000
Total 4,13,000 Total 4,13,000

Estimated Total Profit (ETP) = Contract price less Estimated Total Costs
= Contract price less (Cost till data + Costs to be incurred)
= ₹ 4,40,000 – (₹ 3,27,000 + ₹ 23,000) = ₹ 90,000

 Estimation of Total Profit and Profit Recognition

Question 23. [STUDY MATERIAL, MAY 06]
RST Construction Limited commenced a contract on April 1, 2005. The total Contract was for ₹ 49,21,875. Actual expenditure for the
period April 1, 2005 to March 31, 2006 and estimated expenditure for April 1, 2006 to September 30, 2006 are given below:
Particulars April 1, 2005 to March 31, 2006 April 1, 2006 to September 30, 2006
(Actuals) (₹ ) (Estimated) (₹ )
Materials Issued 7,76,250 12,99,375
Labour:
Paid 5,17,500 6,18,750
Prepaid 37,500 -
Outstanding 12,500 5,750
Plant Purchased 4,00,000 -
Expenses:
Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000 -
Plant returns to Store (historical cost) 1,00,000 3,00,000
(On September 30, 2005) (On September 30, 2006)
Work certified 22,50,000 Full

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Work uncertified 25,000 -

Cash received 18,75,000 -
Materials at site 82,500 42,500
The plant is subject to annual depreciation @ 25% on written down method. The contract is likely to be completed on September 30,
2006.
Prepare the contract A/c. Determine the profit on the contract for the year 2005-06 on prudent basis, which has to be credited to
Profit and Loss Account and also calculate the estimated profit.

Solution 23:
Calculation of written down value of plant as on 30-9-2006 (In ₹ )
Plant purchased on 1-4-2005 4,00,000
Less: Plant returned to store on 30-9-2005 (Depreciation on it ₹ 1,00,000 × 25/100 × 6/12 = ₹ 12,500) (1,00,000)
3,00,000
Less: Depreciation on Balance Plant (3,00,000 × 25/100) (75,000)
WDV of Plant on 1-4-2006 2,25,000
Less: Depreciation (2,25,000 × 25/100 × 6/12) (28,125)
WDV of plant returned to store on 30-9-2006 1,98,875
Contract A/c (1-4-2005 to 31-3-2006)
Particulars ₹ Particulars ₹
To Materials issued 7,76,250 By Plant retuned to Store on 30-9-2005 1,00,000
To Labour 5,17,500 Less: Depreciation (1/2) (12,500) 87,500
Less: Prepaid (37,500) By Plant at site on 31.3.06 3,00,000
4,80,000 Less: Depreciation (75,000) 2,25,000
Add: Outstanding 12,500 4,92,500 By Materials at site 82,500
To Plant purchased 4,00,000 By Work-in-Progress
22,50,00
To Expenses 2,25,000 Work Certified 0
Less: Prepaid (15,000) Work Uncertified 25,000
2,10,000
Add: Outstanding 25,000 2,35,000
To Costing P&L A/c (Notional Profit) 7,66,250
26,70,00
26,70,000 0
Computation of Estimated Profit
Contract A/c (1-4-2005 to 30-9-2006)
Particulars ₹ Particulars ₹
To Materials issued (7,76,250 + 12,99,375) 20,75,625 By Materials at site 42,500
To Labour (5,17,500 – 37,500 + 12,500 + 6,18,750 By Plant returned to store on 30.9.2005 (1,00,000 – 12,500) 87,500
+ 37,500 – 12,500 + 5,750) 11,42,000 By Plant returned to store on 30.9.2006 1,96,875
To Plant purchased 4,00,000 (4,00,000 – 1,00,000 – 1,03,125)
To Expenses (2,25,000 + 25,000 – 15,000 + By Contractee A/c 49,21,875
3,75,000 – 25,000 + 15,000 + 10,000) 6,10,000
To Estimated profit 10,21,125
52,48,750 52,48,750

Question 24. [MAY 07,NOV 2015(similar), STUDY MATERIAL]

AKP Builders Ltd. commenced a contract on April 1, 2005. The total contract was for ₹ 5,00,000. Actual expenditure for the period
April 1, 2005 to March 31, 2006 and estimated expenditure for April 1, 2006 to December 31, 2006 are given below:

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Particulars 2005-06 (Actuals) (₹ ) 2006-07 (9 months) (Estimated) (₹ )

Material Issued 90,000 85,750
Labour: Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 -
Sundry Expenses: Paid 7,250 6,875
Prepaid at the end 625 -
Establishment charges 14,625 -
A part of the material was unsuitable and was sold for ₹ 18,125 (Cost being ₹ 15,000) and a part of plant was scrapped and disposed
of for ₹ 2,875. The value of plant at site on 31 March, 2006 was ₹ 7,750 and the value of material at site was ₹ 4,250. Cash received
on account to date was ₹ 1,75,000, representing 80% of the work certified. The cost of work uncertified was value at ₹ 27,375.
The contractor estimated further expenditure that would be incurred in completion of the contract:
st
 The contract would be completed by 31 December, 2006.
 A further sum of ₹ 31,250 would have to be spent on the plant and the residual value of the plant on the completion of the
contract would be ₹ 3,750.
 Establishment charges would cost the same amount per month as in the previous year.
 ₹ 10,800 would be sufficient to provide for contingencies.
Required:
Prepare Contract Account and calculate estimated total profit on this contract.

Solution 24:
AKP Builders Ltd.
Contract Account (2005-06)
Particulars ₹ Particulars ₹
To Materials issued 90,000 By Material sold 18,125
To Labour 75,000 By Plant sold 2,875
Add: Outstanding 6,250 81,250 By Plant at site 7,750
To Plant 25,000 By Material at site 4,250
To Sundry Expenses 7,250 By Work-in-progress
Less: Prepaid 625 6,625 Work certified 2,18,750
To Establishment charges 14,625 Work uncertified 27,375 2,46,125
To Profit & Loss A/c (Profit on sale of material) 3,125
To Costing P&L A/c (Notional profit) 58,500
2,79,125 2,79,125

Calculation of Estimated Profit

Particulars ₹ ₹
Material consumed (90,000 + 3,125 – 18,125) 75,000
Add: Further consumption 85,750 1,60,750
(+) Plant used (25,000 – 2,875) 22,125
Add: Further plant introduced 31,250
Less: Closing balance of Plant 3,750 49,625
(+) Establishment charges 14,625
Add: Further charges for nine month (14,625 × 9/12) 10,969 25,594
(+) Sundry expenses 6,625
Add: Further expenses 6,875
Add: Prepaid expenses 625 14,125
(+) Labour cost 81,250
Add: Further cost (87,325 – 6,250) 81,075

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Add: Outstanding 8,300 1,70,625

(+) Reserve for contingencies 10,800
(+) Estimated profit (Balancing figure) 68,481
Contract Price 5,00,000

Question 25. [NOV 15]

st
PVK Constructions commenced a contract on 1 April, 2014. Total contract value was ₹ 100 lakhs. The contract is expected to be
st st st
completed by 31 December 2016. Actual expenditure during the period 1 April, 2014 to 31 March 2015 and estimated expenditure
st st
for the period 1 April 2015 to 31 December 2016 are as follows:
Particulars Actual (₹ ) Estimated (₹ )
st st st st
1 April 2014 to 31 March 2015 1 April 2015 to 31 December 2016
Material issued 15,30,000 21,00,000
Direct wages paid 10,12,500 12,25,000
Direct wages outstanding 80,000 1,15,000
Plant purchased 7,50,000 -
Expenses paid 3,25,000 5,40,000
Prepaid expenses 68,000 -
Site office expenses 3,00,000 -
Part of the material procured for the contract was unsuitable and was sold for ₹ 2,40,000 (cost being ₹ 2,55,000) and a part of plant
st
was scrapped & disposed off for ₹ 80,000. The value of plant at site on 31 March 2015 was ₹ 2,50,000 and the value of material at site
was ₹ 73,000. Cash received on account to date was ₹ 36,00,000, representing 80% of the work certified. The cost of work uncertified
was valued at ₹ 5,40,000.
Estimated further expenditure for completion of contract is as follows:
 An additional amount of ₹ 4,62,500 would have to be spent on the plant and the residual value of the plant on the completion of
the contract would be ₹ 67,500.
 Site office expenses would be the same amount per month as charged in the previous year.
 An amount of ₹ 1,57,500 would have to be incurred towards consultancy charges.
Required:
Prepare contract account and calculate estimated total profit on this contract.

Question 26. [NOV 10]

PQR Construction Ltd. commenced a contract on April 1, 2009. The total contract was for ₹ 27,12,500. Actual expenditure in 2009-10
and estimated expenditure in 2010-11 are given below:
Particulars 2009-10 (Actual) (₹ ) 2010-11 (Estimated) (₹ )
Material issued 4,56,000 8,14,000
Labour : Paid 3,05,000 3,80,000
: Outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses : Paid 1,00,000 1,75,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -
Plant returned to stores (at historical stores) 75,000 1,50,000
(on Dec 31 2010)
Material at site 30,000 75,000
Work-in-progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 -
Cash received 10,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be completed on December 31, 2010.
Required:
(i) Prepare the Contract A/c for the year 2009-10.
(ii) Estimate the profit on the contract.

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Solution 26:
PQR Construction Ltd.
Contract A/c
(April 1, 2009 to March 31, 2010)
Particulars Amount (₹ ) Particulars Amount (₹ )
To Materials Issued 4,56,000 By Plant returned to Stores 60,000
To Labour By Materials at Site 30,000
Paid 3,05,000 By Work-in-Progress
(+) Outstanding 24,000 3,29,000 Certified 12,75,000
To Plant Purchased 2,25,000 Uncertified 40,000 13,15,000
To Expenses By Plant at Site 1,20,000
Paid 1,00,000
(-) Prepaid (22,500) 77,500
To Costing P&L A/c (Notional Profit) 4,37,500
15,25,000 15,25,000
PQR Construction Ltd.
Contract A/c
(April 1, 2009 to December 31, 2010)
(For Computing estimated profit)
Particulars Amount (₹ ) Particulars Amount (₹ )
To Materials Issued (4,56,000 + 8,14,000) 12,70,000 By Material at Site 75,000
To Labour Cost (Paid & Outstanding) By Plant returned Stores on 31.3.2010 60,000
(3,05,000 + 24,000 + 3,56,000 + 37,500) 7,22,500 By Plant returned Stores on 31.12.2010 1,02,000
To Plant purchased 2,25,000 By Contractee A/c 27,12,500
To Expenses (77,500 + 1,97,500 + 25,000) 3,00,000
To Estimated Profit 4,32,000
29,49,500 29,49,500
Working Notes:
1. Value of the Plant returned to Stores on 31.03.2010
Historical Cost of the Plant returned ₹ 75,000
Less: Depreciation @ 20% on WDV for one year ₹ 15,000
₹ 60,000

2. Value of Plant at Site 31.03.2010

Historical Cost of Plant at Site ₹ 1,50,000
Less: Depreciation @ 20% on WDV for one year ₹ 30,000
₹ 1,20,000

3. Value of Plant returned to Stores on 31.12.2010

Value of Plant (WDV) on 31.03.2010 ₹ 1,20,000
Less: Depreciation @ 20% of WDV for a period of 9 months ₹ 18,000
₹ 1,02,000

4. Expenses Paid for the year 2009-10

Total expenses paid ₹ 1,00,000
Less: Prepaid at the end ₹ 22,500
₹ 77,500

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 Miscellaneous Theory

 Types of Contracts
Question 27. [RTP, NOV 96, NOV 00, MAY 08, NOV 08, NOV 09]
What is meant by Cost plus Contract? What are the advantages and disadvantages?

Solution 27:
Under Cost plus Contract, the contract price is ascertained by adding a percentage of profit to the total cost of the work. Such type of
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 a fixed percentage of profit. There is no risk of incurring any loss on the contract.
(b) It is useful especially 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 to ascertain the veracity of the cost of the contract.

Disadvantages:
(a) The contractor may not have any inducement to avoid wastages and effect economy in production to reduce cost.
(b) Actual Cost of Contract may not be known to the Contractee till its completion.

Question 28.
What is Fixed Price Contract?

Solution 28:
A Fixed Price Contract is one where the Contract Price is fixed in advance at the time of entering into the agreement.

 Items of Income and Expenditure in a Contract

Question 29. [MAY 07]
What is (a) Progress Payment and (b) Retention Money?

Solution 29:
(a) Progress Payment/Cash Received: When the Contract is running or in progress, then payments are received by the Contractor on
the basis of architect’s certificate and the terms of the Contract. Such payments are called the Progress Payment or Cash
Received.
But payments are not equal to the value of work certified, a small percentage of the amount due is retained and balance is paid
to the Contractor.
(b) Retention Money: Contractee retains some amount (10% to 20%) to be paid, after sometime, when it is ensured that there is no
fault in the work carried out by contractor. If any deficiency or defect is noticed in the work, it is to be rectified by the contractor
before the release of the retention money. Retention money provides a safeguard against the risk of loss due to faulty
workmanship.

 Job Costing and Contract Costing

Question 30. [MAY 05]
Distinguish between Job Costing and Contract Costing?

Solution 30:
Job Costing: It is method of costing which is used when the work is undertaken as per the customer’s special requirements. It is
applied in printing press, hardware, ship-building, heavy machinery, foundry and other similar work.
Contract Costing: Contract or terminal costing, as it is termed, is one form of application of the principles of job costing. In fact a bigger
job is referred to as a contract. Contract costing is usually adopted by building contractors engaged in the task of executing Civil
Contracts.

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Process Costing BY: CA Nitin Guru

Chapter- 10
Process Costing
 Meaning
Question 1.
What is Process Costing?

Solution:
(1) Process Costing is a method of Costing used in industries where the material has to pass through two or more processes for
being converted into a final product.
(2) It is method of Cost Accounting whereby costs are charged to processes or operations and averaged over units produced.
(3) Such type of costing method is useful in the manufacturing of products like steel, paper, medicines soap, chemicals, rubber,
vegetable oil, paints, varnish etc. where the production process is continuous and the output of one process becomes the input
of the process till completion.

 Preparation of Process Accounts

Process I Account
Particulars Units Rate Amount Particulars Units Rate Amount
Direct Material - - - Normal wastage (1) (2) (3)
Direct Labour - Abnormal loss (a) (b)* (c)
Factory Overheads - Process II A/c *

Notes:
1) If accidental Losses occur
It is credited to Process A/c, just like Abnormal Loss but without units if only amount is mentioned.
2) Packages and Empties
If there are some empties which can be sold then normal scrap value of packages and Empties shall be credited to Process A/c.
3) Sales at the end of Process
The sales value is credited to Process A/c and profit is debited in Process A/c and transferred to costing P/L A/c.
4) Cost of Raw Material at the end of Process
It should be credited in P/L A/C at same price at which it entered the Process A/c.
5) Cost of Raw Material Opening Balance
It is debited in Process A/c at a price at which given or at a price of issue from previous Process.

Process II Account
Particulars Units Rate Amount Particulars Units Rate Amount
By Opening Raw Material - * - By Costing P & L A/c (Accidental Loss) -
By Process I A/c - * - By Empties - Price Scrap -
By Costing P & L A/c - - - By Sale Proceeds - Given -
By Closing Stock of Raw Material - * -

 Practical Problems
Question 2. [STUDY MATERIAL]
A product passes through process-I and process- II. Materials issued to process-I amounted to 40,000, wages 30,000 and
manufacturing overheads were 27,000. Normal loss anticipated was 5% of input. 4,750 units of output were produced and transferred
out from process-I. There were no opening stocks. Input raw material issued to process-I were 5,000 units. Scrap has no realisable
value.
You are required to prepare process-I account, value of normal loss and units transferred to process-II.

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Question 3. [STUDY MATERIAL]

A product passes through process-I and process- II. Materials issued to process-I amounted to 40,000, wages 30,000 and
manufacturing overheads were 27,000. Normal loss anticipated was 5% of input. 4,750 units of output were produced and transferred
out from process-I. There were no opening stocks. Input raw material issued to process-I were 5,000 units. Scrap has realisable value
of 2 per unit.
You are required to prepare process-I account, value of normal loss and units transferred to process-II.

Question 4. [STUDY MATERIAL]

A product passes through process-I and process- II. Materials issued to process-I amounted to 40,000, wages 30,000 and
manufacturing overheads were 27,000. Normal loss anticipated was 5% of input. 4,550 units of output were produced and transferred
out from process-I. There were no opening stocks. Input raw material issued to process-I were 5,000 units. Scrap has realisable value
of 2 per unit.
You are required to prepare process-I account, value of normal loss and units transferred to process-II.

Question 5. [STUDY MATERIAL]

A product passes through process-I and process- II. Materials issued to process-I amounted to 40,000, wages 30,000 and
manufacturing overheads were 27,000. Normal loss anticipated was 5% of input. 4,850 units of output were produced and transferred
out from process-I. There were no opening stocks. Input raw material issued to process-I were 5,000 units. Scrap has realisable value
of 2 per unit.
You are required to prepare process-I account, value of normal loss and units transferred to process-II.

Question 6. [STUDY MATERIAL]

A product passes through three processes A, B and C. The normal loss of each process is as follows: Process A – 3%, Process B – 5% and
Process C – 8%.
Loss of Process A was sold at 25 paise per unit, that of B at 50 paise per unit and that of C at Re. 1.00 per unit. 10,000 units were
introduced to Process A at Re. 1.00 per unit. The other expenses were as follows:
A (Rs.) B (Rs.) C (Rs.)
Materials 1,000 1,500 500
Labour 5,000 8,000 6,500
Direct Expenses 1,050 1,188 2,009
Actual Output (in units) 9,500 9,100 8,100
Prepare the Process Accounts, assuming that there was no opening or closing stocks.

Question 7. [NOV 08]

A product passes from Process I & Process II. Materials issued to Process I amounted to 40,000, Labour 30,000 & Manufacturing
Overheads were 27,000. Normal Loss was 3% of input as estimated. But 500 more units of output of Process I were lost due to
carelessness of worke Only 4,350 units of output were transferred to Process II. There were no Opening Stocks. Input Raw Material
issued to Process I were 5,000 units.
You are required to show Process I Account.

 Process Account with Normal Loss A/c, Abnormal Loss A/c and Abnormal Gain A/c
Normal Loss Account
Particulars Qty Amount Particulars Qty Amount
To Process I - - By Bank (Scrap Realisation) - -
To Process II - - By Abnormal Gain - -

Abnormal Loss Account

Particulars Qty Amount Particulars Qty Amount
To Process I - - By Bank - -
By Costing Profit & Loss A/c - -

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Abnormal Gain Account

Particulars Qty Amount Particulars Qty Amount
To Normal Loss A/c - - By Process II - -
To Costing Profit and Loss A/c - -

Question 8. [Study Material, NOV 07]

RST Limited processes Product Z through two distinct processes I and II. On completion, it is transferred to Finished Stock. From the
following information for the year, prepare Process I, Process II and Finished Stock A/c.
Particulars Process I Process II
Raw Materials used 7,500 units -
Raw Materials Cost per unit 60 -
Transfer to next Process/Finished Stock 7,050 units 6,525 units
Normal Loss (on Inputs) 5% 10%
Direct Wages 1,35,750 1,29,250
Direct Expenses 60% of Direct Wages 65% of Direct Wages
Manufacturing Overheads 20% of Direct Wages 15% of Direct Wages
Realisable Value of Scrap per unit 12.50 37.50
6,000 units of Finished Goods were sold at a profit of 15% on Cost. Assume that there was no Opening or Closing Stock of WIP.

Question 9. [MAY 08, MAY 93 (SIMILAR), RTP (SIMILAR)]

JK Ltd produces a Product AZE, which passes through two processes, viz, Process I and Process II. The output of each process is treated
as the Raw Material of the next process to which it is transferred and output of the Process II is transferred to finished stock. The
following data related to December:
Particulars Process I Process II
25,000 units introduced at a cost of 2,00,000 -
Material Consumed 1,92,000 96,020
Direct Labour 2,24,000 1,28,000
Manufacturing Expenses 1,40,000 60,000
Normal Wastage of Input 10% 10%
Scrap Value of Normal Wastage (per unit) 9.90 8.60
Output in Units 22,000 20,000
Prepare – (a) Process I and Process II A/c, and (b) Abnormal Loss/Gain Account as the case may be, for each process.

Question 10. [MAY 10]

A Toothpowder Manufacturer produces bulk quantities of Toothpowder from two Raw Materials A and B. Material A is introduced
into Process I from which the output goes to Process II where Material B is introduced. During March, the Company purchased 80,000
kg of Material A which was introduced into Process I. Production details of Process I & Costs are:
Material A purchased 80,000 kg at 6 per kg
Processing Cost (excluding Labour) 63 hours at 30 per hour
Labour Cost 80 per hour
Standard Yield 90 percent of Input
General Overhead recovered at 125 percentage of Labour Cost
Waste from this process sold at 1.50 per kg
Actual Output from this process was 70,000 kg, which was transferred to Process II.
The Company used in Process II, 70,000 kg of output of Process I together with 30,000 kg of Material B purchased. The production
details of Process II and Costs are:
Material B purchased 30,000 kg at 2 per kg
Processing Cost (excluding Labour) 45 hours at 20 per hour

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Labour Cost 40 per hour

Standard Yield 95 percent of Input
General Overhead recovered at 50 percentage of Labour Cost
Waste from this process sold at 1.00 per kg
Actual Output of Process II was 96,000 kg which was transferred to Finished Stock.
There was an inquiry for a quantity of 1,700 kg of specially prepared waste material from Process I. This material would have to be
specially processed and packed incurring the following cost – Processing – 0.90 per kg, Packaging – 0.40 per kg.
This specially prepared waste incurs no process loss and could be entirely sold at 3.20 per kg.
You are required to:
1. Record the information in the Process Cost Accounts, before the inquiry was received and show the Overall Profit or Loss
transferred to the Profit and Loss Account from the Abnormal Gains or Losses in processing.
2. Advise the Management on whether or not they should produce 1,700 kg of specially processed waste material from Process I,
and the effect on the overall results of the Company.

 Process Account and Journal Entries to show the Loss of Spoilt units
Question 11.
Fifty units are introduced into a process at a cost of 50. The total additional expenditure incurred by the process is 32. Of the units
introduced 10 per cent are normally spoiled in the course of manufacture; these possess a scrap value of Re. 0.20 each. Owing to an
accident only 40 units are produced.
You are required to:
(i) Prepare a Process Account and
(ii) Give journal entries to show how the loss arising out of spoilt units should be treated.

 More than One Process and Computation of Selling Price

Question 12. [NOV 02]
A product passes through two processes. The output of Process I becomes the input for Process II and the output of Process II is
transferred to the Warehouse. The quantity of Raw Materials introduced into Process I is 20,000 kg at 10 per kg. The cost and output
data for the month under review are as below:
Particulars Process I Process II
Direct Materials 60,000 40,000
Direct Labour 40,000 30,000
Production Overheads 39,000 40,250
Normal Loss 8% 5%
Output 18,000 kg 17,400 kg
Loss realisation per unit 2.00 3.00
The Company’s policy is to fix the Selling Price of the end product in such a way as to yield a profit of 20% on Selling Price. You are
required to –
1. Prepare the Process Accounts
2. Determine the Selling Price per unit of the end product.

 Process A/c with Process Stock A/c

 When we make process Stock A/c, we may use FIFO or WAM to find the value of Closing Stock.
(I) FIFO
Process I Account
Particulars Units Rate Amount Particulars Units Rate Amount

Process I Stock A/c (A) (B) (C )

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Process II Stock Account
Particulars Units Rate Amount Particulars Units Rate Amount
Opening Stock - Given - Process II A/c  (Bal Figure)
Process I A/c (A) (B) (C) Closing Stock  (B)* 

Here (B)* is calculated by:

(B) Ratio = (Total Expenses – Normal Loss Scrap Sale)
= (Units – Normal Loss Units)
** See here Stock transferred to next process is through Balancing figure.

(II) WAM (Weighted Average Method)

Process I Account
Particulars Units Rate Amount Particulars Units Rate Amount

Process I Stock A/c (A) (B) (C )

Process I Stock Account

Particulars Units Rate Amount Particulars Units Rate Amount

Opening Stock Process II A/c 
Process I A/c (A) (B) (C ) Closing Stock 
Total unit Total Cost

Step 1: Find Weighted Average Price = =

Step 2: Apply same rate to both Closing Stock and Transfer to Process i.e. Process II A/c in this case.

 WAC Method of Stock Valuation

Question 13. [RTP]
The product manufacture by Alkali Ltd passes through three processes I, II and III. The following costs have been incurred for the
month of April.
Details Process I Process II Process III
Material Consumed 40,000 15,000 10,000
Direct Wages 45,000 20,000 20,000
Direct Expenses 41,000 4,500 5,010
Total 1,26,000 39,500 35,010
Output (units) 3,900 3,850 3,200
Finished Process Stock (units)
st
(1) 1 April 600 550 800
th
(2) 30 April 500 800 Nil
st
Stock Valuation on 1 April ( per unit) 49 62 74
Percentage of Wastage 2% 5% 10%
Net Realisable Value of wastage per unit 27 32.50 42.00
4,000 units of Raw Materials were introduced in Process I at a cost of 80,000. Stocks are valued and transferred to subsequent process
at Weighted Average Cost. The percentage of wastage is computed on the number of units entering the process concerned. Prepare –
(i) Process Accounts and Process Stock Accounts
(ii) Normal Wastage Account
(iii) Abnormal Wastage/Effective Gain Account.

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 Inter Process Transfer and Profit

Question 14. [NOV 12, NOV 13]
What is inter-process profit? State its advantages and disadvantages.

Solution:
The output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The
difference between cost and the transfer price is known as inter-process profits.
Advantages:
· It helps in the computation of costs at shorter intervals, which is usually a week, a fortnight or a month.
· It ensures a closer control over production and costs.
· Controls can be exercised through standard costing technique and it is possible to evaluate the
performance of every process.
Disadvantages:
· When costs are recorded at the end of the period, it is not possible to exercise control over costs.
· It is difficult to apportion total cost among joint products and bye-products.
· There is also the difficulty of ascertaining the value of closing stock where output of one process is transferred to another
process at market price.
·

 Mark up on Opening Stock- Stock Valuation at Prime Cost

Question 15. [NOV 08, May 2017(similar)]
A Product passes through three Processes ‘X’, ‘Y’, ‘Z’. The output of Process ‘X’ and ‘Y’ is transferred to next Process at Cost plus 20%
each on Transfer Price and the output of Process Z is transferred to Finished Stock at a profit of 25% on Transfer Price.
st
The following information is available in respect of the year ending 31 March:
Particulars Process X Process Y Process Z Finished Stock
Opening Stock 15,000 27,000 40,000 45,000
Material Stock 80,000 65,000 50,000 -
Wages 1,25,000 1,08,000 92,000 -
Manufacturing Overheads 96,000 72,000 66,500 -
Closing Stock 20,000 32,000 39,000 50,000
Inter-Process Profit included in Opening Stock Nil 4,000 10,000 20,000
Stock in Process is valued at Prime Cost. Finished Stock is valued at the price at which it is received from Process ‘Z’. Sales of the
Finished Stock during the period was 14,00,000.
Required:
(a) Prepare Process Accounts and Finished Stock Account showing profit element at each stage.
(b) Show the Profit and Loss Account.
(c) Show the relevant items in the Balance Sheet.

 Inter Process Profits and Statement of Profit

Question 16. [MAY 93,MAY 12 (SIMILAR), MAY 14]
A product passes through three Process A, B and C. The details of expenses incurred on the three processes during the year were as
under:
Process A B C
Units issued/introduced @ 100 per unit 10,000
Sundry Materials 10,000 15,000 5,000
Labour 30,000 80,000 65,000
Direct Expenses 6,000 18,150 27,200
Selling price per unit of output 120 165 250
Management expenses during the year were 80,000 and selling expenses were 50,000. These are not allocable to the processes.
Actual output of the three processes was: A: 9,300 units; B: 5,400 units; C: 2,100 units.

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Two-thirds of the output of Process A and one-half of the output Process B and was passed on the next process and the balance was
sold. The entire output of Process C was sold.
The normal loss of the three processes, calculated on the input of every process, was:
Process A 5%, B 15% and C 20%. The loss of Process A was sold at 2 per unit that of B at 5 per unit and of Process C at 10 per unit.
Prepare the three Process Accounts and the Statement of Profit.

 Inter Process Profits – Valuation at Prime Cost

Question 17. [STUDY MATERIAL, MAY 10]
Pharma Limited produces product ‘Glucodin’ which passes through two processes before it is completed and transferred to Finished
Stock. The following data relates to March –
Particulars Process – I Process – II Finished Stock
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% Profit on the transferred price, whereas output of Process II is Finished Stock at
20% on Transfer Price. Stock-in-Process 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 28,00,000.
You are required to prepare Process-I Account, Process-II Account, and Finished Stock Account, showing the profit element at each
stage.

 Operation Costing and Processes

Question 18.
Write short note on Operation Costing [MAY 96, MAY 02]
Operation Costing is defined as Refinement of Process Costing Explain it. [MAY 07]

Solution:
(1) It is concerned with the determination of the cost of each operation rather than the process.
(2) In those industries where a process consists of distinct operations, the method of costing applied or used is called operation
costing.
(3) Operation costing offers better scope for control. It facilitates the computation of unit operation cost at the end of each
operation by dividing the total operation cost by total output units.

 Reverse Working on Input Quantity

Question 19. [NOV 96]
th
Product KLIM passes through 5 operations. The output of the 5 Operation becomes the Finished Product. The Input, Rejection,
Output and Labour and Overheads of each Operation for a period are as under –
Operation Input (Units) Rejection (Units) Output (Units) Labour & OH (Rs.)
1 21,600 5,400 16,200 1,94,400
2 20,250 1,350 18,900 1,41,750
3 18,900 1,350 17,550 2,45,700
4 23,400 1,800 21,600 1,40,400
5 17,280 2,880 14,400 86,400
You are required to:
1. Determine the Input required in each operation for one unit of Final Output.
2. Calculate the Labour and Overhead Cost at each operation for one unit of Final Output, and the Total Labour and Overhead Cost
of all operations for one unit of Final Output.

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 Quantity Reconciliation
Question 20. [STUDY MATERIAL]
In a manufacturing unit, raw materials passes through four Process I, II, III and IV and the output of each process is the input of the
subsequent processes. The loss in the four processes I, II, III and IV are respectively 25%, 20%, 20% and 16 2/3% of the input. If the end
product at the end of Process IV is 40,000 kg what is the quantity of raw material required to be fed at the beginning of Process I and
the cost of same at 50 per kg. Also find out the effect of increase or decrease in the material cost of the end product for variation of
every rupee in the cost of raw material.

 Determination of Unit Costs and Inventory Valuation

Question 21. [MAY 03]
RST Ltd manufactures Plastic Moulded Chair. Three models of moulded chairs, all variation of the same design are Standard, Deluxe
and Executive. The Company uses an Operation Costing system.
RST Ltd has Extrusion, Form, Trim and Finish Operations. Plastic Sheets are produced by the Extrusion Operation. During the Forming
Operation, the Plastic Sheets are moulded into Chair Seats and the legs are added. The Standard Model is sold after this operation.
During the Trim Operation, the arms are added to the Deluxe and Executive Models, and the chair edges are smoothed. Only the
Executive Model enters the Finish Operation, in which padding is added. All of the units produced receive the same steps within each
operation.
In April, units of production and Direct Material Cost incurred are as follows:
Model Units Produced Extrusion Materials Form Materials Trim Materials Finish Materials
Standard Model 10,500 1,26,000 42,000 0 0
Deluxe Model 5,250 63,000 21,000 15,750 0
Executive Model 3,500 42,000 14,000 10,500 21,000
Total 19,250 2,31,000 77,000 26,250 21,000
The total Conversion Costs for the month of April, are:
Operation Total Conversion Costs
Extrusion Operation 6,06,375
Form Operation 2,97,000
Trim Operation 1,55,250
Finish Operation 94,500
Required:
1. For each product produced by RST Ltd during April, determine the Unit Cost and the Total Cost.
2. Now consider the following information for May. All unit costs in May are identical to the April unit costs calculated as above in
(1). At the end of May, 1,500 units of the Deluxe Model remain in Work–in–Progress. These units are 100% complete as to
Materials and 65% complete in the Trim Operation. Determine the cost of the Deluxe Model Work–in–Progress inventory at the
end of May.

 Purifying Process A/c and Royalty Payable A/c

Question 22. [MAY 96]
The product manufacture by Alkali Ltd passes through three processes I, II and III. The following costs have been incurred for the
month of April.
Details Process I Process II Process III
Material Consumed 40,000 15,000 10,000
Direct Wages 45,000 20,000 20,000
Direct Expenses 41,000 4,500 5,010
Total 1,26,000 39,500 35,010
Output (units) 3,900 3,850 3,200
Finished Process Stock (units)

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st
(1) 1 April 600 550 800
th
(2) 30 April 500 800 Nil
st
Stock Valuation on 1 April ( per unit) 49 62 74
Percentage of Wastage 2% 5% 10%
Net Realisable Value of wastage per unit 27 32.50 42.00
4,000 units of Raw Materials were introduced in Process I at a cost of 80,000. Stocks are valued and transferred to subsequent process
at Weighted Average Cost. The percentage of wastage is computed on the number of units entering the process concerned.
Prepare:
(a) Process Accounts and Process Stock Accounts
(b) Normal Wastage Account
(c) Abnormal Wastage/Effective Gain Account.

 Equivalent Production and Valuation of WIP

Question 23. [NOV 02, NOV 13]
Write a short note on Equivalent Production.

Solution:
Equivalent production means converting the incomplete production unit into their equivalent completed units.
Equivalent completed units = {Actual number of units in the process of manufacture} × {Percentage of work completed}

Question 24. [NOV 02]

Outline the need for valuation of WIP in processes. What are the bases of valuation of WIP in process?

Solution:
I. Need for valuation of WIP:
(a) When all units introduced into a process are fully completed and transferred to the next process,
Average Cost per unit =

(b) When all units introduced into a process are not fully completed, i.e. when there are units lying as Closing Work-in-Progress,
the cost incurred during a period represents the cost of – (i) completing the Opening Work-in-progress, (ii) work done on
completed units, and (iii) part work on Closing Work-in-Progress.
(c) So, to ascertain the cost of each completed unit, it is necessary to ascertain the cost of WIP in the beginning and at the end of
the process.

II. Bases of Valuation of WIP:

(a) Based on Actuals: on actual basis, i.e. materials used on the unfinished units and the actual amount of labour expenses
involved.
(b) Based on Equivalent Production: Based on converting partly finished units into equivalent finished units.
III. Methods of Valuation: WIP in processes may be valued in any of the following methods-
(a) First-in-First Out (FIFO) Method.
(b) Last-in-First Out (LIFO) Method.
(c) Weighted Average Cost (WAC) Method.

Question 25. [NOV 02]

Explain briefly the procedure of valuation of WIP.

Solution:
The valuation of work-in-process can be made in the following three ways, depending upon the assumptions made regarding the flow
of costs:
1. First-in-first out (FIFO) method
2. Last-in-first out (LIFO) method
3. 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:

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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 this 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.

 First – In – First Out Method (FIFO)

In FIFO: Let us assume opening WIP had 100% material and 60% Labour and Overheads.
Statement of Equivalent Production
Input Particulars Output Material Labour and Overheads
% Units % Units
P Opening WIP P - - 40% 0.4 P
 Put & Processed *(A) 100% *(A) 100% (P)
Normal loss (B) - - - -
Closing WIP (C ) 100% (C ) 60% 0.6 (C )
Abnormal Loss (D) 100% (D) 100% (D)
(-) Abnormal Gain (E) 100% -(E) 100% -(E)
X Y
Statement for Calculating Cost per Unit (C.P.U)
Type of Cost Amount Equivalent unit Cost Per unit (C.P.U)
Material M X M
Labour & Overheads N Y L
Cost per unit of Finished Goods
Here, * = (Actual finished = Opening WIP) = Put & Processed in current
(M) = Material Cost incurred in current period – Scrap Sale of Normal Loss
(L) = Labour Cost incurred in current period.
Note: When we follow FIFO to evaluate cost of WIP, we do not add cost of material and labour of opening WIP here, while calculating
C.P.U.

Statement of Apportionment of Cost

(I) Value of Opening WIP (Now completed) (Prior Cost)
(+) Material = - × (M) -
(+) Labour & O/H = 0.4P × L 
Cost of P finished goods P

(II) Value of Put & Processed Units

Material = A × M 
Labour & O/H = A × L 
Cost of Put and Processed finished goods PP
**Cost of Total Finished Goods to be shown in Process A/c is P + PP

(III) Valuation of Closing WIP

Material = C × M 
Labour & O/H = 0.6C × L 

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To be shown in Cr. Side of Process A/c C

(IV) Valuation of Abnormal Loss

Material = D × M 
Labour & O/H = D × L 
To be credited in Process A/c D
Note: Abnormal losses always have 100% degree of Completion.
Normal Loss degree of completion is always Nil in equivalent unit statement.

Question 26. [RTP]

The following data have been collected for a Process:
 Opening Stock Nil
 Input Units 2,800 Units
 Cost of Input 16,695
 Output to Finished Goods 2,000 units
 Closing Stock (70% Complete) 450 units
 Process Loss 350 units
Normal Loss is 10%. Compute Equivalent Production and find the cost of output and Abnormal Loss. Prepare Process A/c.

 FIFO – First Process

Question 27. [RTP, MAY 90, Nov 2014(similar)]
The following data are available in respect of a manufacturing concern for a particulars period –
 Opening Stock of Work-in-Progress: 800 units at a Total Cost of 4,000.
Degree of Completion:
Materials 100%
Labour 60%
Overheads 60%
 Input of Materials at a Total Cost of 36,800 for 9,200 units.
 Direct Wages incurred 16,740.
 Production Overheads 8,370.
 Units scrapped 1,200 units.
Degree of Completion:
Materials 100%
Labour 80%
Overheads 80%
 Closing Work-in-Progress: 900 units.
Degree of Completion:
Materials 100%
Labour 70%
Overheads 70%
 7,900 units were completed and transferred to the next process.
 Normal Loss is 8% of the Total Input (Opening Stock plus units put in)
 Scrap Value is 4 per unit.
You are required to:
1. Prepare a Statement of Equivalent Production showing the Cost per Equivalent Unit for each element.
2. Compute the cost of units transferred to the next process, Abnormal Loss and Closing Work in Progress using the FIFO method.
3. Prepare Process Account.

Question 28. [NOV 10]

Following information is available regarding Process A for the month of October.
Production Records:
(a) Opening Work-in-Progress (Materials 100% complete, and 25% complete for Labour and Overhead) 40,000 units
(b) Units introduced 1,80,000 units

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(c) Units completed 1,50,000 units
st
(d) Units in Process on 31 October (Materials 100% complete, 50% complete for Labour and Overhead) 70,000 units

Cost Records:
Opening Work-in-Progress:
Materials 1,00,000
Labour 25,000
Overheads 45,000
Cost incurred during the month:
Materials 6,60,000
Labour 5,55,000
Overheads 9,25,000
Assume that FIFO Method is used for WIP Inventory Valuation. Required:
(i) Statement of Equivalent Production
(ii) Statement showing Cost for each element
(iii) Statement of Apportionment of Cost
(iv) Process ‘A’ Account.

Question 29. [RTP, MAY 90 (SIMILAR),NOV 11 (SIMILAR), NOV 14]

The following data are available in respect of Process I for the month of October:
Opening Work-in-Progress 2,250 units at 11,250
Degree of Completion:
Materials 100%
Labour 60%
Overheads 60%
Input of Materials 22,750 units at 88,500
Direct Wages 20,500
Production Overheads 41,000
Units Scrapped 3,000 Units
Degree of Completion:
Materials 100%
Labour 70%
Overheads 70%
Closing Work-in-Progress 2,500 units
Degree of Completion:
Materials 100%
Labour 80%
Overheads 80%
Units transferred to the next process: 19,500 units
Normal Process Loss is 10% of Total Input (Opening Stock plus units put in). Scrap Value is 3.00 per unit. The Company follows FIFO
method of inventory valuation.
You are required to:
1. Prepare Statement of Equivalent Production,
2. Prepare Statement of Cost per Equivalent Unit for each element and Cost of Abnormal Loss, Closing Work in Progress and units
transferred to next process, and
3. Prepare Process Accounts.

 FIFO – Subsequent Process

Question 30. [MAY 98]
The following data relate to Process Q:
1. Opening Work-in-Progress 4,000 units.
Degree of completion:
Materials 100% 24,000

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Labour 60% 14,400
Overheads 60% 7,200

2. Received during April,1998 from Process P:

40,000 units at a cost of 1,71,000

3. Expenses incurred in Process Q during the month:

Materials 79,000
Labour 1,38,230
Overheads 69,120

4. Closing Work-in-Progress 3,000 units

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

5. Units scrapped 4,000 units

Degree of completion:
Materials 100%
Labour & Overheads 80%

6. Normal Loss 5% of current input.

7. Spoiled goods realized 1.50 each on sale.
8. Completed units are transferred to Warehouse 37,000 units.
Prepare:
(i) Equivalent Units Statement,
(ii) Statement of Cost per Equivalent Unit and Total Costs,
(iii) Process Q Account, and
(iv) Any other account necessary.

Question 31. [NOV 09, MAY 98 (SIMILAR),MAY 13(SIMILAR), NOV 15]

XP Ltd furnishes you the following information relating to Process II.
 Opening Work-in-Progress – Nil
 Units introduced 42,000 units @ 12
 Expenses debited to the Process:
Particulars Amount (Rs.)
Direct Material 61,530
Labour 88,820
Overheads 1,76,400
 Normal Loss in the Process = 2% of input.
 Closing Work-in-Progress – 1,200 units
Degree of completion –
Materials 100%
Labour 50%
Overhead 40%
 Finished output – 39,500 units
 Degree of completion of Abnormal Loss:
Materials 100%
Labour 80%
Overhead 60%
 Units scrapped as Normal Loss were sold at 4.50 per unit.
 All the units of Abnormal Loss were sold at 9 per unit.
Prepare:
(i) Statement of Equivalent Production.

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(ii) Statement showing the Cost of Finished Goods, Abnormal Loss & Closing Work-in-Progress.
(iii) Process II Account and Abnormal Loss Account.
Question 32. [NOV 05]
From the following information for the month ending October, prepare Process Cost Account for Process III. Use First-in-First-Out
(FIFO) Method to value Equivalent Production.
Direct Materials added in Process III (Opening WIP) 2,000 units at 25,750 (Materials 80%, Labour and Overhead 60%)
Transfer from Process II 53,000 units at 4,11,500
Transfer to Process IV 48,000 units
Transfer Stock of Process III 5,000 units (Materials 70% Labour and Overhead 50%)
Units scrapped 2,000 units (Materials 100%, Labour and Overhead 70%)
Direct Materials added in Process III 1,97,600
Direct Wages 97,600
Production Overheads 48,800
Normal Loss in the process was 5% of production and scrap was sold at 3 per unit.

Question 33. [NOV 03]

From the following information for the month of October 2003, prepare Process III Cost Accounts.
Opening WIP in Process III 1,800 units at 27,000
Transfer from Process II 47,700 units at 5,36,625
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 1,77,840
Direct Wages 87,840
Production Overheads 43,920
Degree of completion
Particulars 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 6.75 per unit.

 Weighted Average Cost Method (WAC)

In WAM: Let us assume opening WIP had 100% material and 60% Labour and Overheads.
Input Particulars Output Material Labour and Overheads
% Units % Units
P+ Put & Processed (P) + (A) 100% (P) + (A) 100% (P) + (A)
Normal loss (B) - - - -
Closing WIP (C ) 100% (C ) 60% 0.6 (C )
Abnormal loss (D) 100% (D) 100% (D)
- Abnormal Gain (E) 100% -(E) 100% -(E)
X Y

Statement for Calculating Cost per Unit

Type of Cost Amount Equivalent Units C.P.U
Material M+P ÷X M
Labour and Overheads L+P ÷Y L

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(1) Finished Goods (already include opening WIP)
(2) M + P = Material Cost of Current Period – Scrap of Normal Loss + Material Cost of opening WIP.
(3) L + P = Labour Cost of Current Period + Labour Cost of opening WIP.

Statement of Apportionment of Cost

(I) Valuation of finished goods
Material = {(P) + (A)} units × M 
Labour & O/H = ((P) + (A) ) units × L 
To shown in Credit side of Process A/c

(II) Value of Closing WIP

Material = (C ) × M 
Labour & O/H = 0.6 (C ) × L 
To be shown in Credit side of Process A/c 

(III) Valuation of Abnormal Loss

Material = (D) × M 
Labour & O/H = (D) × L 

Notes:
(1) Here, there is no separate Valuation of opening WIP
(2) Value of finished Stock should be cost or net realizable value (NRV) whichever is less.
(3) Revised Formula for Cost per unit:
= Total Cost – Normal loss Scrap value – Scrap value of Empties – Accidental Abnormal loss – NRV of By-Product
(Total units – Normal loss units – By Product units)

 WAC – First Process

Question 34. [Study Material(similar),NOV 07, MAY 99 (SIMILAR)]
ABC Ltd. manufactures a Product ‘ZX’ by using the process namely RT. For the month of May, 2007, the following data is available:
Particulars Process RT
Material introduced (units) 16,000
Transfer to next process (units) 14,400
Work in Process:
At the beginning of the month (units) (4/5 completed) 4,000
At the end of the month (units) ( 2/3 completed) 3,000
Cost Records:
Work-in-Process at the beginning of the month
Materials 30,000
Conversion Cost 29,200
Cost during the month: Materials 1,20,000
Conversion Cost 1,60,800
Normal spoiled units are 10% of goods finished output transferred to next process. Defects in these units are identified in their
finished state. Material for the product is put in the process at the beginning of the cycle of operation, whereas Labour & other
Indirect Cost flow evenly over the year. It has no realizable value for spoiled units.
Required:
(a) Statement of Equivalent Production (Average Cost Method);
(b) Statement of Cost & Distribution of Cost;
(c) Process Accounts.

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Question 35. [Study Material(similar),MAY 07]

Following details are related to the work done in Process ‘A’ of XYZ Company during the month of March, 2007:
Opening Work-in-Progress (2,000 units)
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process 'A' (38,000 units) 14,80,000
Direct Labour 3,59,000
Overheads 10,77,000
Units scrapped: 3,000 units
Degree of completion:
Materials 100%
Labour and Overheads 80%
Closing Work-in-Progress: 2,000 units
Degree of completion:
Materials 100%
Labour and Overheads 80%
Units finished and transferred to Process ‘B’: 35,000
Normal Loss: 5% of total input including Opening Work-in-Progress
Scrapped units fetch 20 per piece.
You are required to prepare:
(a) Statement of Equivalent Production ;
(b) Statement of Cost;
(c) Statement of Distribution of Cost; and
(d) Process ‘A’ Account, Normal and Abnormal Loss Accounts.

 WAC – Subsequent Process

Question 36. [RTP, MAY 01, Nov 2015(similar)]
The following information is given in respect of Process No. 3 for the month of January, 2001
1. Opening Stock – 2,000 units made-up of:
Direct Materials – I 12,350
Direct Materials – II 13,200
Direct Labour 17,500
Overheads 11,000
2. Transferred from Process No. 2: 20,000 units at 6.00 per unit.
3. Transferred to Process No. 4: 17,000 units
4. Cost uncured in Process No. 3:
Direct Materials 30,000
Direct Labour 60,000
Overheads 60,000
5. Scrap: 1,000 units – Direct Materials 100%, Direct Labour 60%, Overheads 40%
6. Normal Loss 10% of production. Scrapped units realized 4 per unit.
7. Closing Stock: 4,000 units – Degree of completion: Direct Materials 80%, Direct Labour 60% and Overheads 40%.
Prepare Process No. 3 Account using Average Cost Method, along with necessary supporting statements.

Question 37. [Nov 2011]

The following details are available of Process X for August 2011:
(1) Opening work-in-progress 8,000 units

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Degree of completion and cost:
Material (100%) 63,900
Labour (60%) 10,800
Overheads (60%) 5,400
(2) Input 1,82,000 units at 7,56,900
(3) Labour paid 3,28,000
(4) Over heads incurred 1,64,000
(5) Units scrapped 14,000
Degree of completion:
Material 100%
Labour and overhead 80%
(6) Closing work-in-process 18000 units
Degree of completion:
Material 100%
Labour and overhead 70%
(7) 1,58,000 units were completed and transferred to next process.
(8) Normal loss is 8% of total input including opening work-in-process
(9) Scrap value is 8 per unit to be adjusted in direct material cost

You are required to compute, assuming that average method of inventory is used:
(i) Equivalent production, and
(ii) Cost per unit

 Miscellaneous Problems- Equivalent Production

 First and Subsequent Process – Determination of Sale Price
Question 38. [NOV 91]
A Company manufactures a product which involves two consecutive processes viz. Pressing & Polishing. For the month of October, the
following information is available:
Particulars Pressing Polishing
Opening Stock - -
Input of units in process 1,200 1,000
Units completed 1,000 500
Units under process at the end of October 200 500
Materials Cost 96,000 8,000
Conversion Cost 3,36,000 54,000
For incomplete units in process, charge Materials Cost at 100% and Conversion Cost 60% in Pressing Process and 50% in Polishing
Process. Prepare a statement and calculate the Selling Price per unit which will result in 25% Profit on Sales.

 Equivalent Production – 2 Processes

Question 39. [Study Material(similar),MAY 06]
A Company produces a component, which passes through two processes. During the month of April, materials for 40,000 components
were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100%
complete as to Materials Cost and 50% complete as to Labour and Overheads Cost. The Process I Costs incurred were as follows:
Particulars Amount (Rs.)
Direct Materials 15,000
Direct Wages 18,000
Factory Overheads 12,000

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Of those transferred to Process II, 28,000 units were completed and transferred to Finished Goods Stores. There was a normal loss
with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the Process with 100% complete as to
Materials and 25% complete as regard to Wages and Overheads.
No further process materials costs occur after introduction at the first process, until the end of the second process, when protective
packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

Particulars Amount (Rs.)

Packing Materials 4,000
Direct Wages 3,500
Factory Overheads 4,500
Required:
(i) Prepare Statement of Equivalent Production, Cost per Unit & Process I Account.
(ii) Prepare Statement of Equivalent Production, Cost per Unit & Process II Account.

 Process Costing and further Processing Decision

Question 40. [NOV 06]
A Chemical Company carries on production operation in two processes. The material first passes through Process I, where Product A is
produced. The following data are given for the month just ended:
Quantity Particulars Cost Particulars
Material Input Quantity 2,00,000 kgs Material Input Costs 75,000
Opening WIP Quantity 40,000 kgs Processing Costs 1,02,000
(Materials 100% and Conversion 50% complete) Opening WIP Costs: 32,000
Work Completed Quantity 1,60,000 kgs (Materials 20,000 + Processing Costs 12,000)
Closing WIP Quantity 30,000 kgs
rd
(Materials 100% and Conversion 2/3 complete)
Normal Process Loss in quantity may be assumed to be 20% of Material Input. It has no realizable value. Any quantity of Product A can
be sold at 1.60 per kg. Alternatively, it can be transferred to Process II for further processing and then sold as ‘’Product AX’’ for 2.00
per kg. Further materials are added in Process II, which yield two kgs of ‘’Product AX’’ for every kg of Product A of Process I.
Of the 1,60,000 kgs per month of work completed in Process I, 40,000 kgs are sold as Product A and the balance 1,20,000 kgs are
passed through Process II for sale as ‘’Product AX’’. Process II has facilities to handle upto 1,60,000 kgs of Product A per month, if
required. The monthly costs incurred in Process II (other than the cost of Product A) are –
Cost Element For 1,20,000 kgs of Product A For 1,60,00 kgs of Product A
Materials 1,32,000 1,76,000
Processing Costs 1,20,000 1,40,000
Required:
1. Determine using the Weighted Average Cost Method, the cost per kg of Product A in Process I and the value of both completed
work and Closing WIP for the month just ended.
2. Is it worthwhile processing 1,20,000 kgs of Product A further?
3. Calculate the minimum acceptable Selling Price per kg if a potential buyer could be found for the additional output of ‘’Product
AX’’ that could be produced with the remaining Product A Quantity.

 Profit Statement Under Absorption Costing – Equivalent Production

Question 41. [RTP]
A new Subsidiary of a Group of Companies was established for manufacture and sale of Product ‘’Super’’. During the first year of
operations, 90,000 units were sold at 20 per unit. At the end of the year, the Closing Stocks were 8,000 units in Finished Goods Store
and 4,000 units in Work–in–Progress, which were complete as regards material content but only half complete as to Labour and
Overheads. Assume no Opening Stocks.
The WIP Account had been debited during the year with the following costs:
 Direct Materials 7,14,000
 Variable Overheads 1,00,000

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 Direct Labour 4,00,000
 Fixed Overheads 3,50,000
Selling and Administration Costs for the year were as under –
Particulars Variable Cost per unit sold Fixed Costs
Selling 1.50 2,00,000
Administration 0.10 50,000
The Accountants of the Subsidiary Company had prepared a Profit Statement on the absorption costing principle, which showed a
profit of 11,000.
You are required to:
1. Prepare a Statement showing the equivalent units produced and the cost of production of one unit of product ‘’Super’’ by
element of cost and in total;
2. Prepare a Profit Statement on Absorption Costing Principles, which agrees with the Accountant’s Statement.

 Miscellaneous Theory

 Process Losses and their treatment

Question 42.
What is meant by Process Loss? How is it analysed?
Explain the meaning & treatment of Normal Process Loss. [RTP, NOV 98, MAY 09]
Explain the meaning & treatment of Abnormal Loss and Abnormal Gain in process. [RTP, MAY 95, NOV 98, MAY 09, NOV 09]

Solution:
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.
(i) 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.

Treatment in Cost Accounts

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 unit should be credited to the process account.

(ii) Abnormal process loss

It is defined as the loss in excess of the pre-determined loss (Normal Process loss). This type of loss may occur due to the
carelessness of workers, a bad plant design or operation, Sabotage etc.

Treatment in Cost Accounts

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 arises. Cost of abnormal process loss is not treated as a part of the cost of the product but
is debited to costing profit and loss account.

(iii) Abnormal gain

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.

Treatment in Cost Accounts

The process account under which abnormal gain arises is debited with the abnormal gain and credited to Abnormal gain
account which will be closed by transferring to the Costing Profit and loss account. The cost of abnormal gain is computed on
the basis of normal production.

Question 43. [NOV 95]

‘’The value of Scrap generated in a process should be credited to the Process A/c’’ Do you agree with this statement.

Solution:

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Value of all scrap is not always fully Credited to the Process A/c, because the scrap value of Normal Loss is credit to the Process
Account but the scrap vale of Abnormal Loss is Credited to Abnormal Loss Account.

Question 44. [NOV 2018]

A Company manufacturing chemical solution that passes through a number of processes uses FIFO method to value Work-in-Process
and Finished Goods. At the end of month of September, a fire occurred in the factory and some papers containing records of the
process 'operations for the month were destroyed. The Company desires to prepare process accounts for the month during which the
fire occurred. Some information could be gathered as to operating activities as under:
• Opening Work-in-Process at the beginning of the month of 1,100 litres - 40% complete for labour and 60% complete for Overheads.
Opening Work-in-Process was valued at 48,260.
• Closing Work-in-Process at the end of the month was 220 litres, 40% complete for Labour and 30% complete for Overheads.
• Normal loss is 10% of input and total losses during the month were 2,200 litres partly due to firm, damage. Assume degree of
completion of abnormal losses is 100%.
• Output sent to Finished Goods Warehouse was 5,900 litres.
• Losses have a scrap value of 20 per litre.
• All Raw Materials are added at the commencement of the process.
• The Cost per equivalent Unit (litre) is 53 for the month consisting :
Particulars
Raw material 35
Labour 8
Overheads 10
Total 53

You are required to :

(i) Calculate the quantity (in litres) of Raw Material input during the month.
(ii) Calculate the quantity (in litres) of Normal Loss and Abnormal loss/Gain experienced in the month.
(iii) Calculate the values of Raw Materials, Labour and Overheads added to the process during the month.
(iv) Prepare the Process Account for the month.

Question 45. [MAY 2018]

Alpha Ltd. Is engaged in the production of a product A which passes through three different processes- Process P, Process Q and
Process R. the following data relating to cost and output is obtained from the books of accounts for the month of April,2017:
Particulars Process P Process Q Process R
Direct material 38,000 42,500 42,880
Direct labour 30,000 40,000 50,000

Production overheads of 90,000 were recovered as percentage of direct labour.

10,000 kg of raw material @ 5 per kg was issued to process P. There was no stock of materials or work in progress. The entire output
of each process passes directly to the next process and finally to warehouse. There is normal wastage, in processing, of 10%. The scrap
value of wastage is Re.1 per kg. The output of each process transferred to next process and finally to warehouse are as under:
Process P = 9,000 kg
Process Q= 8,200 kg
Process R= 7,300 kg

The company fixes selling price of the end product in such a way so as to yield a profit of 25% on selling proce.

Prepare Process P, Q, R accounts. Also, calculate selling price per unit of end product.

Question 46. [STUDY MATERIAL]

A product passes through three processes. The output of each process is treated as raw material of the next process to which it is
transferred and output of the third process is transferred to finished stock.
Particulars Process-I (Rs.) Process-II (Rs.) Process-III (Rs.)
Materials used 40,000 20,000 10,000
Labour 6,000 4,000 1,000

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Manufacturing overhead 10,000 10,000 15,000

10,000 units have been issued to the process-I and after processing, the output of each process is as under:
Process Output Normal loss
Process-I 9,750 units 2%
Process-II 9,400 units 5%
Process-III 8,000 units 10%
No stock of raw materials or of work-in-progress was left at the end. Calculate the cost of finished goods.

Question 47. [MAY 2014, NOV 2014(Similar)]

M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz. Process-A and Process-B. The details for the year
ending 31st March, 2014 are as follows:
Particulars Process A Process B
40,000 units introduced at a cost of 3,60,000 -
Materials consumed 2,42,000 2,25,000
Direct wages 2,58,000 1,90,000
Manufacturing exp. 1,96,000 1,23,720
Output in units 37,000 27,000
Normal wastage of input 5% 10%
Scrap value (per unit) 15 20
Selling price (per unit) 37 61

Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The entire output of Process- B was
sold.
(b) Indirect expenses for the year was 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.

Required:
(i) Prepare Process-A and Process-B Account.
(ii) Prepare Profit & Loss Account showing the net profit I net loss for the year.

Question 48. [MAY 2012]

A product passes through two processes A and B. During the year 2011, the input to process A of basic raw material was 8,000 units @
Rs. 9 per unit. Other information for the year is as follows:
Particulars Process A Process B
Output units 7,500 4,800
Normal loss (% to input) 5% 10%
Scrap value per unit (Rs.) 2 10
Direct wages (Rs.) 12,000 24,000
Direct materials (Rs.) 6,000 5,000
Selling price per unit (Rs.) 15 25

Total overheads 17,400 were recovered as percentage of direct wages. Selling expenses were 5,000. There are not allocated to the
processes. 2/3 of the output of Process A was passed on to the next process and the balance was sold. The entire output of Process B
was sold. Prepare Process A and B Accounts.

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Chapter 11
Joint Products and By Products
 JOINT PRODUCTS

 Introduction

Question 1. [RTP]
What do you mean by (a) Joint Products? (b) Co Products?

Solution 1:
(a) Joint Products: Two or more products of equal importance, produced, simultaneously from the same process, with
each having a significant relative sale value 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.

(b) Co-Products: Co-products may be defined as two or more products which are contemporary but do not emerge
necessarily from the same material in the same process. For instance, wheat and gram produced in two separate
farms with separate processing of cultivation, are the co-products. Similarly timber boards made from different
trees are co-products.

 Methods of Joint Cost Apportionment

I. Physical Quantities/ Weight/ Output Method

Joint Product Unit/Output Share in Joint Cost (J.C)

A (A) × J.C

B (B) × J.C

C (C ) × J.C

(A) + (B) + (C )

 Practical Problems

Question 2. [STUDY MATERIAL]

Naresh Manufacturing Company produces the following products using 5,000 tons of Coal at a cost of ₹ 15 per ton, into a
common process: Coke – 3,500 Tons, Tar – 1,200 Tons, Sulphate of Ammonia – 52 Tons, Benzol – 48 Tons.
200 Tons of the material is lost in process as waste and air evaporation. Labour and Overheads for the process are ₹
15,000 and ₹ 6,000 respectively. Apportion Joint Costs using physical units method among the products.

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Solution 2:
Statement showing Joint Cost
Joint Product Weight/Output (In Tonnes) Share in Joint Costs

Coke 3,500 × 96,000 = 70,000

Tar 1,200 × 96,000 = 24,000

Sulphate of Ammonia 52 × 96,000 = 1,040

Benzol 48 × 96,000 = 960

4,800 96,000

II. Market Value Basis at Split off Point Method

Joint Product Sale value of Production Share in Joint Cost (J.C)

A Units × M.V = (A) × J.C

B Units × M.V = (B) × J.C

C Units × M.V = (C ) × J.C

(A) + (B) + (C )

 Practical Problems

Question 3. [NOV 06]

Ganesh & Co. processes a Raw Material in its Department I to Produce three products, viz, A, B and X at the same split-
off stage. During a period 1,80,000 kgs of raw materials were processed in Department I at a total cost of ₹ 12,88,000 and
the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A and B were further
processed in Department II at a cost of ₹ 1,80,000 and ₹ 150,000 respectively.
X was further processed in Department III at a cost of ₹ 1,08,000. There is no waste in further processing. The details of
sales affected during the period were as under –
Particulars Product A Product B Product X
Quantity Sold (Kgs) 17,000 5,000 44,000
Sales Value (₹) 12,24,000 2,50,000 7,92,000
There were no Opening Stocks. If these products were sold at split-off stage, the Selling Prices of A, B and X would have
been ₹ 50, ₹ 40 and ₹ 10 per kg respectively. Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Prepare a statement showing the cost per kg of each product indicating joint cost, further processing cost and total
cost separately.
(iii) Prepare a statement showing the product-wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be further processed or not.

Solution 3:
(i) Statement of Apportionment of Joint Cost
Joint Product Sales Value at split off Share in Joint Cost
A 18,000 × 50 = 9,00,000 9,00,000/18,40,000 × 12,88,000 = 6,30,000

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B 10,000 × 40 = 4,00,000 4,00,000/18,40,000 × 12,88,000 = 2,80,000

X 54,000 × 10 = 5,40,000 5,40,000/18,40,000 × 12,88,000 = 3,78,000
18,40,000 12,88,000

(ii) Statement showing Cost

Particulars Joint Products (₹)
A B C
Per Unit Total Per Unit Total Per Unit Total
Production (In Kgs.) 18,000 - 10,000 - 54,000
Joint Costs 35 6,30,000 28 2,80,000 7 3,78,000
Further Processing Cost 10 1,80,000 15 1,50,000 2 1,08,000
Total Cost 45 8,10,000 43 4,30,000 9 4,86,000

(iii) Profitability Statement for the Period

Particulars Joint Products (₹) Total (₹)
A B C
Sale Units (Kg.) (A) 17,000 5,000 44,000 -
Total Cost/Kg. (₹) 45 43 9 -
Sale Value 12,24,000 2,50,000 7,92,000 22,66,000
Less: Total Cost (A) × (B) (7,65,000) (2,15,000) (3,96,000) (13,76,000)
Profit 4,59,000 35,000 3,96,000 8,90,000

(iv) Statement of Profit (Had the products been sold at Split-off point)
Particulars Joint Products (₹) Total (₹)
A B C
Sale units (Kg.) (A) 17,000 5,000 44,000 -
Sale Price/Kg. at split-off point (B) 50 40 10 -
Sale Value of units sold at split-off point (A) × (B) 8,50,000 2,00,000 4,40,000 14,90,000
Less: Share of Joint Cost @ ₹ 35, ₹ 28 & ₹ 7 per unit respectively (5,95,000) (1,40,000) (3,08,000) (10,43,000)
Profit 2,55,000 60,000 1,32,000 4,47,000
Comparing the profit as per above statement & the profit as per statement prepared in point no. (ii) above
The profit can be maximized if: ₹
Product ‘A’ is sold after processing, thus profit = 4,59,000
Product ‘B’ is sold at split-off point, thus profit = 60,000
Product ‘X’ is sold after processing, thus profit = 3,96,000
Total Profit = 9,15,000

III. Net Realisable Value Method

Joint Product Net Realizable Value Share in Joint Cost (J.C)

A (A) = (units × NRV) × Joint Cost

B (B) = (units × NRV) × Joint Cost

(A) + (B)

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IV. Constant GP Margin Method

In this method, we follow following steps:-
Step 1: Calculate the total sales value of all the joint products (even if some closing stock is also remaining, take it into
consideration).

Step 2: Subtract the Total Cost (Total Joint Cost + Total further processing cost) and get Gross Profit.

 Gross Profit % i.e. × 100

 Now follow revere cost method and obtain share in the joint cost.
Total Sales Value of All Joint Products xxx
(-) Total Cost (Total joint cost + further processing cost xxx
Gross Profit xxx

Particulars A B C

(-) Gross Profit (we have to calculate it) (-) (-) (-)
(-) Selling and Distribution o/H (-) (-) (-)
(-) Office and Administrative o/H (-) (-) (-)
(-) Further processing Cost (-) (-) (-)
Share in Joint Cost

 Practical Problems

Question 4. [MAY 03]

ABC Ltd operates a simple chemical process to convert a single material into three separate items, referred to here as X,
Y and Z. All three end products are separated simultaneously at a single split-off point.
Product X and Y are ready for sale immediately upon split-off without further processing or any other additional costs.
Product Z, however, is processed further before being sold. There is no available market price for Z at the split-off point.
The Selling Prices quoted here are expected to remain the same in the coming year. During the year, the Selling Prices of
the items and the total quantities sold were –
X – 186 tons sold at ₹ 1,500 per ton, Y – 527 tons sold for ₹ 1,125 per ton, Z – 736 tons sold for ₹ 750 per ton.
The Total Joint Manufacturing Costs for the year were ₹ 6,25,000. An additional ₹ 3,10,000 was spent to finish Product Z.
There were no opening inventories of X, Y and Z. At the end of the year, the following inventories of complete units were
on hand – X – 180 tons, Y – 60 tons, Z – 25 tons. There was no opening or Closing Work-in-Progress.
1. Compute the cost of inventories of X, Y and Z for Balance Sheet purposes, and Cost of Goods Sold for Income
Statement purposes, using –
(a) Net Realizable Value (NRV) Method of Joint Cost Allocation.
(b) Constant Gross Margin Percentage NRV Method of Joint Cost Allocation.
2. Compare the Gross Margin Percentages for X, Y and Z, using the two methods given above.

Solution 4:
1. (a) Net Realizable Value Method
Statement showing Apportionment of Joint Cost

Joint Product Net Realizable Value Share in Joint Cost (J.C.) (₹)

X ₹ 1,500 × 366 tonnes = ₹ 5,49,000 × 6,25,000 = 2,33,398

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Y ₹ 1,125 × 587 tonnes = ₹ 6,60,375 × 6,25,000 = 2,80,748

Z (₹ 750 × 761 tonnes) – ₹ 3,10,000 = ₹ 2,60,750 × 6,25,000 = 1,10,854

14,70,125 6,25,000
Working Notes:
Calculation of Total Production Quantity
Particulars Product 'X' Product 'Y' Product 'Z'
Sale Quantity 186 527 736
Add: Closing Stock 180 60 25
366 587 761

Statement showing Cost of Inventory and Cost of Goods Sold

Particulars Product 'X' Product 'Y' Product 'Z'

Joint Cost 2,33,398 2,80,748 1,10,854
Add: Further Processing Cost - - 3,10,000
Total Cost 2,33,398 2,80,748 4,20,854

Cost of Inventory ( × Closing Stock Units) 1,14,786 28,697 13,826

Cost of Goods Sold ( × Sales Units) 1,18,612 2,52,051 4,07,028

(b) Constant Gross Margin Percentage NRV Method

Particulars Amount (₹)
Total Sale Value of All Joint Products 17,80,125
Less: Total Cost (Total Joint Cost + Further Processing Cost) 9,35,000
Gross Profit 8,45,125

Gross Profit % = × 100 = 47.48%

Working Notes:
Particulars Amount (₹)
Sales Value of X (1,500 × 366) 5,49,000
Sales Value of Y (1,125 × 587) 6,60,375
Sales Value of Z (750 × 761) 5,70,750
Total Sales Value 17,80,125

Statement showing Apportionment of Joint Cost

Particulars Product 'X' Product 'Y' Product 'Z'
Sales 5,49,000 6,60,375 5,70,750
Less: Gross Profit (47.48%) (2,60,641) (3,13,517) (2,70,967)
Less: Further Processing Cost - - (3,10,000)
Share in Joint Cost 2,88,359 3,46,858 (10,217)

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Statement showing Cost of Inventory and Cost of Goods Sold

Particulars Product 'X' Product 'Y' Product 'Z'

Joint Cost 2,88,359 3,46,858 (10,217)
Add: Further Processing Cost - - 3,10,000
Total Cost 2,88,359 3,46,858 2,99,783

Cost of Inventory ( × Closing Stock Units) 1,41,817 35,454 9,848

Cost of Goods Sold ( × Sales Units) 1,46,542 3,11,404 2,89,935

2. Gross Margin Percentage under Net Realizable Value Method

Particulars Product 'X' Product 'Y' Product 'Z'
Sales 186 × 1,500 = 2,79,000 527 × 1,125 = 5,92,875 736 × 750 = 5,52,000
Less: Cost of Goods Sold (1,18,612) (2,52,051) (4,07,028)
Gross Profit/Margin 1,60,388 3,40,824 1,44,972
Gross Margin % ( × 100) 57.49% 57.49% 26.26%

Gross Margin Percentage under Gross Margin Percentage Method

Particulars Product 'X' Product 'Y' Product 'Z'
Sales 2,79,000 5,92,875 5,52,000
Less: Cost of Goods Sold (1,46,542) (3,11,404) (2,89,935)
Gross Profit/Margin 1,32,458 2,81,471 2,62,065

Gross Margin % ( × 100) 47.48% 47.48% 47.48%

Question 5. [MAY 98]

Two Products P and Q are obtained in a crude form and require further processing at a cost of ₹ 5 for P and ₹ 4 for Q per
unit before sale. Assuming a net margin of 25% on cost, their Sale Prices are fixed at ₹ 13.75 and ₹ 8.75 per unit
respectively. During this period, the Joint Cost was ₹ 88,000 and the output were 8,000 units of P and 6,000 units of Q.
You are required to ascertain the Joint Cost per unit.

Solution 5:
Statement of Joint Cost
Joint Products Net Realizable Value Share in Joint Cost
P 8,000 × 6 = 48,000 48,000/66,000 × 88,000 = 64,000
Q 6,000 × 3 = 18,000 18,000/66,000 × 88,000 = 24,000
66,000 88,000

Working Notes:
Computation of Net Realizable Value
Particulars P Q
Sale Price 13.75 8.75
Less: Profit (1/5 on Sale Price) (2.75) (1.75)
Total Cost 11.00 7.00
Less: Further Processing Cost (5.00) (4.00)
Estimated NRV 6.00 3.00

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V. Marginal Contribution Method

Here the joint processing cost is divided into two parts:
(i) Fixed Cost
(ii) Variable Cost
 Variable Cost shall be apportioned on the basis of physical quantity
 Then we find the contribution and fixed cost is divided in the ratio of this contribution.

Product Output Sales Value (1) Variable Cost (2) Contribution (1) - (2) Fixed Cost

A (A) AS × V.C = AV AS – AV = AC × Fixed Cost

B (B) BS × V.C = BV BS – BV = B C × Fixed Cost

(A) + (B) AC + BC

 Practical Problems

Question 6. [STUDY MATERIAL]

Apportion the Joint Cost on suitable basis and obtain Profit/Loss for each of the Joint Products, from the following data –
Sales: Product A – 100 kg at ₹ 60 per kg, and Product B – 120 kg at ₹ 30 per kg.
Total Costs: Marginal Costs ₹ 4,400 and Fixed Cost ₹ 3,900.

Solution 6:
Statement of Apportionment of Cost
Product Output Sales Value (₹) (1) Variable Cost (₹) (2) Contribution (₹) (1) – (2) Fixed Cost (₹)

A 100 100 × 60 = 6,000 × 4,400 = 2,000 4,000 × 3,900 = 3,000

B 120 120 × 30 = 3,600 × 4,400 = 2,400 1,200 × 3,900 = 900

200 9,600 4,400 5,200 3,900

Statement of Profit
Particulars Product ‘A’ (₹) Product ‘B’ (₹) Total (₹)
Contribution 5,200 4,000 1,200
Less: Fixed Cost (3,900) (3,000) (900)
1,300 1,000 300

VI. Market Value/ Sale Value after further Processing Method

Share in Joint Cost

Joint Product Market Value after further processing (J.C)
(Units × M.V after processing cost) =
A (A) × J.C
(Units × M.V after processing cost) =
B (B) × J.C

(A) + (B)

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VII. Survey Method/ Weightage Output Method

In this method weights are given by the management to each product and then the weight physical output is used to
divide the cost.
Joint Share in Joint
Product Weight/Output Weights Weighted output Cost

A (A) 3 (3A) × J.C

B (B) 2 (2B) × J.C

(3A) + (2B)

 Various Methods of Joint Cost Apportionment and Further Processing Decisions

 Physical Unit Method, Sales at Split off Point method, and Net Realisable Value Method

Question 7. [RTP]
A Pharmaceutical Company purchases a Raw Material, which is then processed to yield three chemicals: Anarol, Estyl and
Betryl. In October the Company purchased 10,000 gallons of the Raw Material at a cost of ₹ 12,50,000 and incurred
additional Joint conversion costs of ₹ 7,50,000. The sales and production information for the month are as follows –
Product Gallons Produced Price at split off (Per Gallon) Further Processing Cost Eventual Sales Price
Anarol 2,000 ₹ 350 - -
Estyl 3,000 ₹ 240 - -
Betryl 5,000 ₹ 200 ₹ 30 ₹ 360
Anarol and Estyl are sold to other pharmaceutical companies at the split off point. Betryl can be sold at the split-off point
or processed further and packaged for sale as an asthma medication.
Required:
1. Allocate the Joint Cost to the three Products using – (a) Physical Units Method, (b) Sales-Value at Split-Off Method,
and (c) Net Realizable Value Method.
2. Suppose that half of October production of Estyl could be purified and mixed with all of the Anarol to produce a
Veterinary Grade Anaesthetic. All further processing costs amount to ₹ 2,25,000. The Selling Price of the Veterinary
Grade Anarol is ₹ 650 per gallon. Should the pharmaceutical Company further process the Anarol into Anaesthetic?
Assume that the resultant quantity of Veterinary Grade Anarol produced is 2,000 gallons only.

Solution 7:
Joint Cost = Raw Material + Additional Joint Cost
= ₹ 12,50,000 + ₹ 7,50,000 = ₹ 20,00,000

1. (a) Physical Units Method

Joint Product Units/Output Share in Joint Cost
Anarol 2,000 2,000/10,000 × 20,00,000 = 4,00,000
Estyl 3,000 3,000/10,000 × 20,00,000 = 6,00,000
Betryl 5,000 5,000/10,000 × 20,00,000 = 10,00,000
10,000 20,00,000

(b) Sale Value at split off Method

Joint Product Sales Value of Production Share in Joint Cost
Anarol 2,000 × 350 = 7,00,000 7,00,000/24,20,000 × 20,00,000 = 5,78,512
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Estyl 3,000 × 240 = 7,20,000 7,20,000/24,20,000 × 20,00,000 = 5,95,041

Betryl 5,000 × 200 = 10,00,000 10,00,000/24,20,000 × 20,00,000 = 8,26,446
24,20,000 20,00,000

(c) Net Realizable Value Method

Joint Product Net Realizable Value Share in Joint Cost
Anarol 2,000 × 350 = 7,00,000 7,00,000/30,70,000 × 20,00,000 = 4,56,026
Estyl 3,000 × 240 = 7,20,000 7,20,000/30,70,000 × 20,00,000 = 4,69,055
Betryl 5,000 × 330 = 16,50,000 16,50,000/30,70,000 × 20,00,000 = 10,74,919
30,70,000 20,00,000

Working Notes:
Net Realizable Value = Sales Price – Further Processing Cost
= ₹ 360 – ₹ 30 = ₹ 330

2. Further Processing Decision

Statement showing Profit/Loss on Further Processing
Amount
Particulars (₹)
Sales Value after further Processing (2,000 gallons ×
650) 13,00,000
Less: Sales Value at split off (2,000 Anarol × ₹ 350) + (1,500 Estyl × ₹ 240) 10,60,000
Additional Sales Revenue due to further Processing 2,40,000
Less: Additional Processing Costs 2,25,000
Net Benefit in further Processing 15,000
Decision: There is Profit of ₹ 15,000 due to further Processing. So, Company may carry out further Processing.

Question 8. [MAY 00, STUDY MATERIAL]

Inorganic Chemicals purchases salt and processes it into more refined products such as Caustic Soda, Chlorine and PVC
(Polyvinyl Chloride). In the month of April, Inorganic Chemicals purchased Salt for ₹ 40,000. Conversion cost of ₹ 60,000
were incurred upto the split off point, at which time two saleable products were produced. Chlorine can be further
processed into PVC. The April Production and Sales information is as follows:
Particulars Production (Tonnes) Sales Quantity (Tonnes) Sales Price (Per Tonne)
Caustic Soda 1,200 1,200 ₹ 50
Chlorine 800 - -
PVC 500 500 ₹ 200
All 800 tonnes of Chlorine were further processed, at an incremental cost of ₹ 20,000 to yield 500 tonnes of PVC. There
were no beginning or ending inventories of Caustic Soda, Chlorine or PVC in April, 2000.
There is an active market for Chlorine. Inorganic Chemicals could have sold all its April production of Chlorine at ₹ 75 per
tonne.
Required:
(i) To calculate how the Joint Cost of ₹ 1,00,000 would be apportioned between Caustic Soda and Chlorine under each
of following methods:
(a) Sales value at split off,
(b) Physical measure (method), and
(c) Estimated Net Realizable Value.

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(ii) Lifetime Swimming Pool Products offers to purchase 800 tonnes of Chlorine in May, 2000 at ₹ 75 per tonne. This
sale of Chloride would mean that no PVC would be produced in May, 2000. How the acceptance of this offer for the
month of May would affect Operating Income?

Solution 8:
(i) (a) Statement showing Apportionment of Joint Cost (Sales Value at Split-off Method)
Joint Production S.P. per unit at Split-off Sales Value of
Products (Tonnes) Point Production Share in Joint Costs
Caustic 60,000/ 1,20,000 × 1,00,000 =
Soda 1,200 50 60,000 50,000
60,000/ 1,20,000 × 1,00,000 =
Chlorine 800 75 60,000 50,000
1,20,000 1,00,000

(b) Statement showing Apportionment of Joint Cost (Physical Measure Method)

Joint Products Production (Tonnes) Share in Joint Costs
Caustic Soda 1,200 1,200/2,000 × 1,00,000 = 60,000
Chlorine 800 800/2,000 × 1,00,000 = 40,000
2,000 1,00,000

(c) Statement showing Apportionment of Joint Cost (Net Realizable Value Method)
Joint Sales Value after Further Further Processing Estimated Net Realizable Share in Joint
Products Processing Costs Value Costs
Caustic
Soda 60,000 - 60,000 42,857
Chlorine 1,00,000 20,000 80,000 57,143

(ii) Statement showing Evaluation of Proposal of Life Time Swimming Pool Products
Particulars Amount (₹)
Incremental Gains:
Saving of further Processing Costs 20,000
Total Incremental Gains (A) 20,000
Incremental Costs:
Loss of Additional Sales Value (i.e. ₹ 1,00,000 – ₹ 60,000) 40,000
Total Incremental Gains (B) 40,000
Net Incremental Gain/(Loss) (A) – (B) (20,000)
Conclusion: It is advised to reject the proposal of Life Time Swimming Pool.

 By Products

Question 9. [RTP]
What do you mean by “By-Products”?

Solution 9:
By-Products: 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 form the main product. By-products
emerges as a result of processing operation of another product or they are produced from the scrap or waste of
materials 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.

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Examples of by-products are molasses in the manufacture of sugar, tar, ammonia and benzole obtained on carbonization
of coal and glycerine obtained in the manufacture of soap.

TREATMENT OF BY PRODUCTS
 The NRV of the By-Product is  If NRV of By – Product is of a  The share of By – Product in the
credited to Process A/c or Main negligible value or its value can’t be Joint Cost of Processing shall be
Product A/c determined at the time of ascertained in accordance with
Production. Reverse Cost Method and the sale
 The treatment might be similar to shall be credited to Process or
normal loss units treatment  The sale proceeds of By – Product Main Product A/c.
shall be credited to Costing P/L A/C
as Miscellaneous Income.
NRV = Estimated Sale value noted further Processing cost – Estimated selling & Distribution Expenses.

 Reverse Cost Method

st
1 APPROACH: If both are main products.
 Here we subtract profits, Selling and Distribution expenses / O/H, Office and Administrative O/H and further
processing cost from the sale value to obtain a residual figure and the Joint Cost is divided on the basis of this only.
Particulars A B
Sales - -
(-) Profit (-) (-)
(-) Selling and Distribution O/H (-) (-)
(-) Office Administration O /H (-) (-)
(-) Further processing cost Residual
figure (A) (B)

Joint cost is divided in this ratio.

nd
2 APPROACH: If By-Product is also given:
 We make reverse cost table only for By-Products and subtract this J.C from total joint cost to get the joint Cost’s
share of the main product.
A (Main
Particulars Product) B (By-Product)
Sales - -
(-) Profit (-) (-)
(-) Selling and Distribution
O/H (-) (-)
(-) Office and Admin. O/H (-) (-)
(-) Further Processing Cost (-) (-)
Share of By - Product in J.C (A) (B)


Total Joint Cost
=
(-) Share of B
= (B)
Share of A
=

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 Practical Problems

Question 10. [RTP]

XY Ltd. manufactures Product A which yields two By-Products B and C. The actual joint expenses of manufacture for a
period were ₹ 8,000.
It was estimated that the profit on each product as a percentage of sales would 30%, 25% and 15% respectively.
Subsequent expenses were as follows:
Particulars A (₹) B (₹) C (₹)
Materials 100 75 25
Direct Wages 200 125 50
Overheads 150 125 75
Total 450 325 150
Sales 6,000 4,000 2,500
Prepare a statement showing the apportionment of the joint expenses of manufacture over the different products. Also
presume that selling expenses are apportioned over the products as a percentage to sales.

Solution 10:
Product A (₹) B (₹) C (₹) Total (₹)
Nature Main Product By-Product By-Product
Sales Value 6,000 4,000 2,500 12,500
Less: Profit Margin (30%, 25% and 15% respectively) (1,800) (1,000) (375) (3,175)
Cost of Sales 4,200 3,000 2,125 9,325
Less: Selling & Distribution Overheads (192) (128) (80) (Bal. Figure) (400)
Cost of Production 4,008 2,872 2,045 8,925
Less: Further Processing Costs (450) (325) (150) (925)
(Bal. Figure)
Share of By-Product in Joint Cost 3,558 2,547 1,895 8,000

Share of Main Product (A) in Joint Product

Total Joint Cost = ₹ 8,000
Less: Share of B = (₹ 2,547)
Less: Share of C = (₹ 1,895)
Share of A (Main Product) = ₹ 3,558

Working Notes:
Percentage of Total Selling & Distribution Overheads to Total Sales = = 3.2% of Sales

Question 11. [INTER (ADAPTED)]

In the course of manufacture of the main product ‘P’, by-products ‘A’ and ‘B’ also emerge. The joint expenses of
manufacture amount to ₹ 1,19,550. All the three products are processed further after separation and sold as per details
given:
Main Product By-Products
P A B
Sales ₹ 90,000 ₹ 60,000 ₹ 40,000
Costs incurred after separation ₹ 6,000 ₹ 5,000 ₹ 4,000
Profit as percentage on Sales % 25 20 15

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Total fixed selling expenses are 10% of total cost of sales which are apportioned to the three products in the ratio of 20 :
40 : 40.
(i) Prepare a statement showing the apportionment of joint costs to the main product and the two by-products.
(ii) If the by-product A is not subjected to further processing and is sold at the point of separation, for which there is a
market, at ₹ 58,500 without incurring any selling expenses, would you advise its disposal at this stage? Show the
workings.

Solution 11:
(i) Statement showing the Apportionment of Joint Cost
Particulars Main Product By Products Total (₹)
P (₹) A (₹) B (₹)
Sales 90,000 60,000 40,000 1,90,000
Less: Profit (22,500) (12,000) (6,000) (40,500)
Cost of Sales 67,500 48,000 34,000 1,49,500
Less: Selling Expenses (10% of ₹ 1,49,500)
(apportioned in the ratio of 2 : 4 : 4) (2,990) (5,980) (5,980) (14,950)
Cost of Production 64,510 42,020 28,020 1,34,550
Less: Cost after separation (6,000) (5,000) (4,000) (15,000)
Share of Joint Cost 58,510 37,020 24,020 1,19,550

(ii) Statement showing Evaluation of Proposal

Particulars Sales at split off stage (₹) Sales after further processing (₹)
Sales 58,500 60,000
Less: Cost (37,020) (42,020)
Profit 21,480 17,980
Decision: Product A should be disposed at split off point.

Question 12. [MAY 2013, MAY 2015, NOV 17]

A company manufactures one main product (M 1) and two by-products B1 and B2 for the month of January 2013,
following details are available.
Total Cost upto Separation Point ₹ 2,12,400
M1 B1 B2

Cost after separation - 35,000 24,000

No. of units produced 4,000 1,800 3,000
Selling price per units 100 40 30
Estimated net profit as parentage to sales value - 20% 30%
Estimated selling expenses as percentage to sales value 20% 15% 15%

There are no beginning or closing inventories.

Prepare statement showing:
I. Allocation of joint cost; and
II. Product wise and overall profitability of the company for January 2013.

Question 13. [May 16]

A factory producing article A also produces a by-product B which is further processed into finished product. The joint cost
of manufacture is given below:
Material - ₹ 5,000

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Labour - ₹ 3,000
Overhead - ₹ 2,000
Total - ₹ 10,000

Subsequent cost in ₹ are given below:

A B
Material 3,000 1,500
Labour 1,400 1,000
Overheads 600 500
5,000 3,000
Selling prices are A ₹ 16,000; B ₹ 8,000
Estimated profit on selling prices is 25% for A and 20% for B.
Assume that selling and distribution expenses are in proportion of sales prices. Show how you would apportion joint
costs of manufacture and prepare a statement showing cost of production of A and B.

Question 14. [May 19]

A factory is engaged in the production of chemical Bomex and in the course of its manufacture, a by-product Cromex is
produced which after further processing has a commercial value. For the month of April 2019, the following are the
summarised cost data:
Particulars Joint Expenses (₹) Separate Expenses (₹)
Bomex Cromex
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling price per unit 100 40
Estimated profit per unit of 5
sale of Cromex
Number of units produced 2,000 units 2,000 units

The factory uses net realisable value method for apportionment of joint cost to by-products.
You are required to prepare statements showing :
(i) Joint cost allocable to Cromex.
(ii) Product wise and overall profitability of the factory for April 2019.

Question 15. [MAY 02]

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 the month are as under:

Cost of Raw Materials introduced in Department P ₹ 12,68,800

Direct Wages Department ₹
P 3,84,000
Q 96,000
R 64,000
S 36,000
Factory Overheads of ₹ 4,64,000 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:
Products Output Sold (Kg.) Selling Price per Kg. (₹)
A 44,000 32
B 40,000 24

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C 20,000 16
There are 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 ₹ 20, ₹ 22 and ₹ 10 each per kg. respectively for A, B and C.
Required:
(i) Prepare a statement showing the apportionment of Joint Costs to Joint Products.
(ii) Present 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 of the Company?
(iv) Calculate the product-wise and total profit arising from your recommendation in (iii) above.

Solution 15:
Statement showing Total Joint Cost & Further Processing Cost
Particulars Joint Cost Further Processing Cost (₹)
Product 'A' Product 'B' Product 'C'
Department Department Department Department
'P' 'Q' 'R' 'S'
Cost of Raw Materials (₹) (A) 12,68,800 - - -
Direct Wages (₹) (B) 3,84,000 96,000 64,000 36,000
Factory Overheads of ₹ 4,64,000 (384 : 94 : 64 : 36)
(C) 3,07,200 76,800 51,200 28,800
Total (A) + (B) + (C) (₹) 19,60,000 1,72,800 1,15,200 64,800

(i) Statement of apportionment of Joint Costs to Joint Products

Joint Product Sales Value at split off Share in Joint Cost
A 44,000 × 20 = 8,80,000 8,80,000/19,60,000 × 19,60,000 = 8,80,000
B 40,000 × 22 = 8,80,000 8,80,000/19,60,000 × 19,60,000 = 8,80,000
C 20,000 × 10 = 2,00,000 2,00,000/19,60,000 × 19,60,000 = 2,00,000
19,60,000
Note: Share in Joint Cost has been arrived at by considering the sales value at split off point.

(ii) Statement of Profit as per Company’s Current Policy:

Particulars Products (₹) Total (₹)
'A' 'B' 'C'
Units Sold (A) 44,000 40,000 20,000 -
Selling Price/Unit after Further Processing (B) 32 24 16 -
Sale Value of Products after processing further (A) × (B) 14,08,000 9,60,000 3,20,000 26,88,000
Less: Share of Joint Cost (8,80,000) (8,80,000) (2,00,000) (19,60,000)
Less: Further Processing Cost (1,72,800) (1,15,200) (64,800) (3,52,800)
Profit/(Loss) 3,55,200 (35,200) 55,200 3,75,200

(iii) Evaluation of Further Processing Decisions of Product ‘A’, ‘B’ & ‘C’
Particulars Joint Product (₹)
'A' 'B' 'C'
Output (Kgs.) 44,000 40,000 20,000
Sale Price/Kg after Further Processing 32 24 16
Less: Sale Value of Products after processing further (20) (22) (10)
Increase in Sale Price/Kg due to further processing 12 2 6

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Increase in Sale Value of Products due to further processing (Output × Increase in 1,20,00
Sale Price) 5,28,000 80,000 0
(1,72,80 (1,15,20 (64,800
Less: Further Processing Cost 0) 0) )
Profit/(Loss) in Further Processing 3,55,200 (35,200) 55,200
Conclusion:
Product ‘A’ and ‘C’ should be further processed as it results in an increase in profit by ₹ 3,55,200 & ₹ 55,200 respectively,
whereas Product ‘B’ should be sold at split off point because it is not profitable as it results in a loss of ₹ 35,200 due to
further processing.

(iv) Statement of Profit based on above recommendation

Particulars Products (₹) Total (₹)
'A' 'B' 'C'
Recommended Point of Sale After Processing After Processing After Processing -
Output (Kgs.) (A) 44,000 40,000 20,000 -
Applicable Sale Price/Kg (₹) (B) 32 22 16 -
Sale Value of Output (A) × (B) 14,08,000 8,80,000 3,20,000 26,08,000
Less: Share of Joint Cost (8,80,000) (8,80,000) (2,00,000) (19,60,000)
Less: Further Processing Cost (1,72,800) (N.A.) (64,800) (2,37,600)
Profit/(Loss) 3,55,200 Nil 55,200 4,10,400

Question 16. [MAY 07]

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-off stage or can be processed further at
Department B and sold as Product AR. The input-output ratio of Department B is 100 : 90. Department B is created to
process Product P only and to make it Product AR.
 Selling Prices per kg. are – Product P ₹ 85, Product Q ₹ 290 and Product AR ₹ 115.
 Production will be taken up in the next month.
 Raw Materials 8,00,000 kgs, Purchase Price ₹ 80 per kg.
 Monthly Expenses of the Department are given below –

Particulars Department A (₹ In Lakhs) Department B (₹ In Lakhs)

Direct Material 35 5
Direct Labour 30 9
Variable Overheads 45 18
Fixed Overheads 40 32
Total 150 64

 Selling Expenses for Product P ₹ 24.60 Lakhs, Product Q ₹ 21.60 Lakhs and Product AR ₹ 16.80 Lakhs.
Required:
1. Prepare a statement showing the apportionment of Joint Costs.
2. State whether it is advisable to produce Product AR or not.

Solution 16:
Calculation of Joint Cost
Particulars Amount (₹)
Raw Material (8,00,000 × 80) 6,40,00,000
Direct Material of Department A 35,00,000

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Direct Labour of Department A 30,00,000

Variable Overheads of Department A 45,00,000
Fixed Overheads of Department A 40,00,000
Total Joint Costs 7,90,00,000

Computation of Input and Output Quantities

Particulars Department A Department B
Input 8,00,000 kg 4,76,000 kg
Less: Normal Loss 15% = 1,20,000 kg 10% = 47,600 kg
Output 6,80,000 kg 4,28,400 kg
Ratio of Output Product P 70% = 4,76,000 kg Product AR = 4,28,400 kg
Product Q 30% = 2,04,000 kg

1. Apportionment of Joint Cost under different Methods

(i) Weight/Output Method
Joint Product Units/Output Share in Joint Cost
P 4,76,000 4,76,000/6,80,000 × 7,90,00,000 = 5,53,00,000
Q 2,04,000 2,04,000/6,80,000 × 7,90,00,000 = 2,37,00,000
6,80,000 7,90,00,000

(ii) Market Value at Split off Point Method

Joint Product Sales Value of Production Share in Joint Cost
P 4,76,000 × 85 = 4,04,60,000 4,04,60,000/9,96,20,000 × 7,90,00,000 = 3,20,85,324
Q 2,04,000 × 290 = 5,91,60,000 5,91,60,000/9,96,20,000 × 7,90,00,000 = 4,69,14,676
9,96,20,000 7,90,00,000

(iii) NRV after further Processing Method

Joint Product NRV after Processing Cost Share in Joint Cost
P 4,11,86,000 4,11,86,000/9,81,86,000 × 7,90,00,000 = 3,31,38,000
Q 5,70,00,000 5,70,00,000/9,81,86,000 × 7,90,00,000 = 4,58,62,000
9,81,86,000 7,90,00,000

Working Notes:
Calculation of NRV after Further Processing
Particulars P Q
Sale Price per unit after further
processing ₹ 115 ₹ 290
(4,76,000 × 90% × 115) = ₹ (2,04,000 × 290) = ₹
Sale Value after further processing 4,92,66,000 5,91,60,000
Less: Selling Expenses ₹ 16,80,000 ₹ 21,60,000
Less: Further Processing Cost ₹ 64,00,000 -
Estimated NRV at Split-off ₹ 4,11,86,000 ₹ 5,70,00,000

2. Further Processing Decision, i.e. Product P into Product AR

Amount
Particulars (₹)
Sale Value of AR (4,28,400 kg × ₹ 4,92,66,00
115) 0

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Less: Sale Value of P (4,76,000 kg × ₹ 4,04,60,00

85) 0
Additional Revenue from Sale of Product AR 88,06,000
Add: Savings in Selling Expenses, i.e. Benefit (₹ 24,60,000 – ₹
16,80,000) 7,80,000
Total Benefit 95,86,000
Less: Additional Production Costs of AR in Department B 64,00,000
Net Additional Benefit in Further Processing 31,86,000
Conclusion: It is advisable to further process Product P into Product AR.

Question 17. [NOV 99]

The Sunshine Oil Company purchases crude vegetable oil. It does refining of the same. The refining process results in four
products produced at the split off point – M, N, O and P.
Product O is fully processed at the split off point. Products M, N and P can be individually further refined into ‘Super M’,
‘Super N’ and ‘Super P’. In the most recent month (October, 1999), the output at the split off point was:
Product M 3,00,000 gallons
Product N 1,00,000 gallons
Product O 50,000 gallons
Product P 50,000 gallons
The Joint Cost of purchasing the crude vegetable oil and processing it were ₹ 40,00,000.
Sunshine had no beginning or ending inventories. Sales of Product O in October were ₹ 20,00,000. Total output of
Products M, N and P was further refined and the sold. Data relating to October, 1999 are as follows:
Products Further Processing Costs to make Super Products Sales
‘Super M’ ₹ 80,00,000 ₹ 1,20,00,000
‘Super N’ ₹ 32,00,000 ₹ 40,00,000
‘Super P’ ₹ 36,00,000 ₹ 48,00,000
Sunshine had the option of selling Products M, N and P at the split off point. This alternative would have yielded the
following sales for the October, 1999 production:
Product M ₹ 20,00,000
Product N ₹ 12,00,000
Product P ₹ 28,00,000
You are required to answer:
1. How the Joint Cost of ₹ 40,00,000 would be allocated between each product under each of the following methods –
(a) Sales value at split off;
(b) Physical output (gallons) and
(c) Estimated Net Realizable Value.
2. Could Sunshine have increased its October, 1999 operating profits by making different decisions about the further
refining of Product M, N or P? Show the effect of the change you recommend on operating profits.

Solution 17:
1. (a) Statement of Distribution of Joint Cost at split off point
Joint Product Sale Value at split off Share in Joint Cost
M 20,00,000 20,00,000/80,00,000 × 40,00,000 = 10,00,000
N 12,00,000 12,00,000/80,00,000 × 40,00,000 = 6,00,000
O 20,00,000 20,00,000/80,00,000 × 40,00,000 = 10,00,000
P 28,00,000 28,00,000/80,00,000 × 40,00,000 = 14,00,000
80,00,000 40,00,000

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(b) Statement of Distribution of Joint Cost according to Physical output

Joint Product Output/Weight Share in Joint Cost
M 3,00,000 3,00,000/5,00,000 × 40,00,000 = 24,00,000
N 1,00,000 1,00,000/5,00,000 × 40,00,000 = 8,00,000
O 50,000 50,000/5,00,000 × 40,00,000 = 4,00,000
P 50,000 50,000/5,00,000 × 40,00,000 = 4,00,000
5,00,000 40,00,000

(c) Statement of Distribution of Joint Cost at Net Realizable Value

Joint Product Net Realizable Value Share in Joint Cost
M (1,20,00,000 – 80,00,000) = 4,00,000 40,00,000/80,00,000 × 40,00,000 = 20,00,000
N (40,00,000 – 32,00,000) = 8,00,000 8,00,000/80,00,000 × 40,00,000 = 4,00,000
O (20,00,000 – 0) = 20,00,000 20,00,000/80,00,000 × 40,00,000 = 10,00,000
P (48,00,000 – 36,00,000) = 12,00,000 12,00,000/80,00,000 × 40,00,000 = 6,00,000
80,00,000 40,00,000

2. Statement of Decision for further processing or not

Product Sale Value at split off point Net Realizable Value Decision
M 20,00,000 40,00,000 Further Processing is better
N 12,00,000 8,00,000 No further Processing
P 28,00,000 12,00,000 No further Processing
Note: Further Processing of N and P will reduce the operating profits of the company by ₹ 20,00,000, therefore, they
should be sold at split off point.

 Sales at Split off Method

Question 18. [NOV 92]

A Company’s Plant processes 1,50,000 kgs of Raw Material in a month to produce two Products, ‘P’ and ‘Q’. The Cost of
Raw Material is ₹ 12 per kg. The Process costs per month are –
Particulars Amount (₹)
Direct Material 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
The Loss in Process is 5% of input and the output ratio of P and Q which emerge simultaneously is 1 : 2. The Selling Prices
of the two Products at the point of split off are: P ₹ 12 per kg. and Q ₹ 20 per kg. A proposal is available to Process P
further by mixing it with other purchased materials. The entire current output of the Plant can be so processed further to
obtain a new Product ‘S’. The price per kg. of S is ₹ 15 and each kg of output of S will require one kilogram of input P. The
cost of Processing of P into S (including other materials) is ₹ 1,85,000 per month.
You are required to prepare a statement showing the monthly profitability based both on the existing manufacturing
operations and on further processing. Will you recommend further processing?

Solution 18:
Statement showing Monthly Profitability
For Existing Manufacturing Operations For Processing of P into S
Particulars P Q Total S Q Total
Sales Quantity (Kgs.) (A) 47,500 95000 142500 47500 95000 142500
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Sales Price per kg (B) ₹ 12 ₹ 20 ₹ 15 ₹ 20

Sales Revenue (A) × (B) ₹ 5,70,000 ₹ 19,00,000 ₹ 24,70,000 ₹ 7,12,500 ₹ 19,00,000 ₹ 26,12,500
(-) Processing Cost ₹ 5,10,000 ₹ 17,00,000 ₹ 22,10,000 ₹ 6,95,000 ₹ 17,00,000 ₹ 15,95,000
Profit ₹ 60,000 ₹ 2,00,000 ₹ 2,60,000 ₹ 17,500 ₹ 2,00,000 ₹ 2,17,500
Conclusion: Further processing of P is not recommended as it results in a lower profit of P.

Working Notes:
1. Cost of Products S = Joint Cost of P + Cost of processing P into S = 5,10,000 + 1,85,000 = ₹ 6,95,000.

2. Computation of Input and Output Decisions

Particulars Quantity
Input 1,50,000 Kg
(-) Normal Loss (5%) 7,500 Kg
Output 1,42,500 Kg
Ratio of Output = 1:2
Output of P = × 1,42,500 Kg = 47,500 Kg
Output of Q = × 1,42,500 Kg = 95,000 Kg.

3. Calculation of Joint Cost

Particulars Amount (₹)
Raw Material Cost (1,50,000 × 12) 18,00,000
Direct Material 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
Total Joint Costs 22,10,000

4. Statement showing Apportionment of Joint Cost (Sale Value at split off Method)
Joint Product Sales Value of Production Share in Joint Cost
P 47,500 × 12 = 5,70,000 5,70,000/24,70,000 × 22,10,000 = 5,10,000
Q 95,000 × 20 = 19,00,000 19,00,000/24,70,000 × 22,10,000 = 17,00,000
24,70,000 22,10,000

Question 19. [MAY 05]

A Company produces two Joint Products X and Y, from the same basic material. The processing is completed in three
Departments I, II and III.
Materials are mixed in Department I. At the end of this process, X and Y get separated. After separation, X is completed
in the Department II and Y is finished is Department III. During a period, 2,00,000 kgs of Raw Material were processed in
Department I, at a Total Cost of ₹ 8,75,000, and the resultant 60% becomes X and 30% becomes Y and 10% normally lost
in processing.
th
In Department II 1/6 of the quantity received from Department I is lost in processing. X is further processed in
Department II at a cost of ₹ 1,80,000.
In Department III further new material added to the material received from Department I and weight mixture is doubled,
there is no quantity loss in the Department and Further Processing Cost (with Material Cost) is ₹ 1,50,000.
The details of Sales during the year are:

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Particulars Product X Product Y

Quantity sold (kgs) 90,000 1,15,000
Sales Price per kg (₹) 10 4
There were no Opening Stocks. If these products were sold at split-off-point, the Selling Price of X and Y would be ₹ 8 and
₹ 4 per kg respectively.
Required:
1. Prepare a Statement showing the apportionment of Joint Cost to X and Y in proportion of Sales Value at split off
point.
2. Prepare a Statement showing the cost per kg of each product indicating Joint Cost, Further Processing Cost and
Total Cost separately.
3. Prepare a Statement showing the product wise Profit for the year.
4. On the basis of Profits before and after further processing of Products X and Y, give your comment whether the
products should be further processed or not.

Solution 19:
Calculation of quantity produced
Particulars Department I Department II Department III
Input (Kg) 2,00,000 1,20,000 60,000
Weight Lost or added (20,000) (20,000) 60,000
1,80,000 1,00,000 1,20,000
Production of X 1,20,000 1,00,000
Production of Y 60,000 1,20,000

(i) Statement of Apportionment of Joint Cost

Joint Product Sales Value at split off Share in Joint Cost
X 1,20,000 × 8 = 9,60,000 9,60,000/12,00,000 × 8,75,000 = 7,00,000
Y 60,000 × 4 = 2,40,000 2,40,000/12,00,000 × 8,75,000 = 1,75,000
12,00,000 8,75,000

(ii) Statement of Cost per Kg

Particulars Product X Product Y
Share in Joint Cost (₹) 7,00,000 1,75,000
Output (kg) 1,00,000 1,20,000
Cost per kg (₹) (Joint Cost) 7.00 1.458
Further Processing Cost per kg (₹) 1.80 1.250
Total Cost per kg (₹) 8.80 2.708

(iii) Statement of Profit

Particulars Product X (₹) Product Y (₹)
Sales @ ₹ 10, ₹ 4 (For Product X and Y) 9,00,000 4,60,000
Add: Closing Stock (kg) (At full cost) 88,000 13,540
Value of Production 9,88,000 4,73,540
Less: Share in Joint Cost 7,00,000 1,75,000
Further Processing 1,80,000 1,50,000
Profit 1,08,000 1,48,540

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Working Notes:
Particulars Product X Product Y
Output (kg) 1,00,000 1,20,000
Sales (kg) 90,000 1,15,000
Closing Stock 10,000 5,000

(iv) Profitability Statement, before and after processing

Particulars Product X (Before) (₹) Product X (After) (₹) Product Y (Before) (₹) Product Y (After) (₹)
Sales Value 9,60,000 2,40,000
Share in Joint Costs 7,00,000 1,75,000
Profit 2,60,000 1,08,000 65,000 1,48,540
Conclusion: Product X should be sold at split off point and Product Y after processing because of higher profitability.

Question 20. [MAY 04]

JKL Limited produces two products – J and K, together with a By-Product L, from a single main process called Process l.
Product J is sold at the point of separation at ₹ 55 per kg, whereas Product K is sold for ₹ 77 per kg, after further
processing into Product K2. By-Product L is sold without further processing for ₹ 19.25 per kg.
Process l is closely monitored by a team of chemists, who planned the output per 1,000 kg of input materials as follows –
Product J – 500 kg, Product K – 350 kg, Product L – 100 kg, Toxic Waste – 50 kg.
The toxic waste is disposed at a cost of ₹ 16.50 per kg and arises at the end of processing.
Process II which is used for further processing of Product K into K2 has the following cost structure –
Fixed Costs ₹ 2,64,000 per week,
Variable Costs ₹ 16.50 per kg. processed
The following actual data relate to the first week of the month –
Process I
Opening Work-in-Progress Nil
Material Input 40,000 kg costing ₹ 6,60,000
Direct Labour ₹ 4,40,000
Variable Overheads ₹ 1,76,000
Fixed Overheads ₹ 2,64,000

Outputs from Process I: Product J 19,200 kg.

Product K 14,400 kg.
Product L 4,000 kg.
Toxic Waste 2,400 kg.
Closing Work-in-Progress Nil

Opening Work-in-Progress Nil

14,400
Input of Product K kg.
13,200
Output of Product K2 kg.
Closing Work-in-Progress (50% converted and conversion costs were incurred in accordance with the planned
cost structure 1,200 kg.
Required:
1. Prepare Process I Account for the first week of the month using the Final Sales Value Method. Attribute the pre-
separation costs to Joint Products.
2. Prepare the Toxic Waste Account and Process II Account for the first week of the month.

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3. Comment on the method used by JKL Ltd to attribute the pre-separation costs to Joint Products.
4. Advise the management of JKL Limited whether or not, on purely financial grounds, it should continue to Process
Product K into K2 –
(a) If Product K could be sold at the point of separation for ₹ 47.30 per kg. and
(b) If the 60% of the weekly Fixed Costs of Process II were avoided by not processing product K further.

Question 21. [MAY 94]

A company operates a chemical process which produces four Products K, L, M & N from a basic Raw Material. The
company’s budget for a month is as under:
₹
Raw Materials Consumption 17,520
Initial Processing Wages 16,240
Initial Processing Overheads 16,240
Product Production Sales Additional Processing Costs after split-off
K 16,000 1,09,600 28,800
L 200 5,600 -
M 2,000 30,000 16,000
N 360 21,600 6,000
The company presently intends to sell Product L at the point of split off without further processing. The remaining
products, K, M & N are to be further processed and sold. However, the management has been advised that it would be
possible to sell all the four products at the split-off point without further processing and if this course was adopted, the
selling prices would be as under:
Product Selling Price per kg. (₹)
K 4
L 28
M 8
N 40
The Joint Costs are to be apportioned on the basis of the sales value realization at the point of split-off.
Required:
(i) Prepare the statement showing the apportionment of Joint Costs.
(ii) Prepare a statement showing the product wise and total budgeted profit or loss based on the proposal to sell
product L at the split-off point and products K, M and N after further processing.
(iii) Prepare a statement to show the product wise and total profit or loss if the alternative strategy to sell all the
products at split-off stage was adopted.
(iv) Recommend any other alternative which in your opinion can increase the total profit further. Calculate the total
profit as also the product wise profit or loss, based on your recommendation.

Solution 21:
Calculation of Total Joint Cost
Particulars Amount (₹)
Raw Materials Consumed 17,520
Initial Processing Wages 16,240
Initial Processing Overheads 16,240
50,000

(i) Statement showing Apportionment of Joint Costs

Joint Product Sales Value at split off Share in Joint Cost
K 16,000 × 4 = 64,000 64,000/1,00,000 × 50,000 = 32,000

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L 200 × 28 = 5,600 5,600/1,00,000 × 50,000 = 2,800

M 200 × 8 = 16,000 16,000/1,00,000 × 50,000 = 8,000
N 360 × 40 = 14,400 14,400/1,00,000 × 50,000 = 7,200
1,00,000 50,000

(ii) Statement of Profit/Loss by selling all products after further processing except that Product ‘L’ is to be sold at
spilt-off point
Particulars Joint Products (₹) Total (₹)
K L M N
Sales Value 1,09,600 5,600 30,000 21,600 1,66,800
Less: Share of Joint Cost (32,000) (2,800) (8,000) (7,200) (50,000)
77,600 2,800 22,000 14,400 1,16,800
Less: Processing Cost (22,800) - (16,000) (6,600) (51,400)
Profit 48,800 2,800 6,000 7,800 65,400

(iii) Statement of Profit of all Products are sold at split-off point

Particulars Joint Products (₹) Total (₹)
K L M N
Sales Value 64,000 5,600 16,000 14,400 1,00,000
Less: Share of Joint Cost (32,000) (2,800) (8,000) (7,200) (50,000)
Profit 32,000 2,800 8,000 7,200 50,000

(iv) Statement showing the alternative to increase the Total Profit

Products Profit (₹) Recommendation
Sale of Split-off Sale of further processing Point of Sale Profit (₹)
K 32,000 48,800 After Processing 48,800
L 2,800 2,800 At split-off 2,800
M 8,000 6,000 At split-off 8,000
N 7,200 7,800 After Processing 7,800
50,000 65,400 67,400

Hence, it would be advisable to sell:

Product K After Processing
Product L At split-off
Product M At split-off
Product N After Processing

 Multiple Processing – Further Processing Decision

Question 22. [NOV 94]

A Company processes a Raw Material into five products. In Process 1, products AXE and BXE are produced in the ratio of
1 : 1. Product AXE then passes on to Process 2 where it is processed into CXE and DXE. Product BXE is used in Process 3 to
produce the product EXE.

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Product AXE yields products CXE and DXE in the ratio of 7 : 3 CXE is processed further in Process 4 after which it is sold ₹
18 per unit. DXE may be sold immediately at ₹ 14.40 per unit or it may be processed further in Process 5 after which it
can be sold for ₹ 20.80 per unit.
EXE is processed in Process 6 where normal spoilage of 5% occurs. The spoiled units are disposed of at a price of ₹ 2 per
unit. EXE sells at ₹ 15.20 per unit.
The costs incurred during a period are as under:
Process Output (Units) Costs (₹)
1 1,00,000 5,41,500
2 50,000 1,50,000
3 50,000 1,08,000
4 35,000 1,30,000
5 15,000 1,00,000
6 47,500 97,000
The output of Process 6 represents good units. The process costs are variable costs.
Required:
1. State with supporting calculations whether the Product DXE should be processed in Process 5 or not.
2. Prepare a statement showing Apportionment of Joint Costs to Products AXE and BXE & Products CXE and DXE.
3. Prepare a statement of Profit for the period based on your decision at (1) above.

Solution 22:
1.

Process IV
Product
Input 35,000 units
CXE
S.P. = 18 p.u
Product AXE 35,000 units
Process II
Input = 50,000 units Sell
Product S.P. = 14.40 p.u.
DXE
Process I 15,000 units Process IV
Input = 1,00,000 units S.P. = 20.80 p.u

Product EXE
47,5000 units @ 15.20
p.u
Product BXE Product
Process IV
Input = 50,000 EXE
Input 50,000 units Normal Spoilage
units 50,000 units
25,000 units
NRV = 2 p.u

Further Processing Decision (for Product DXE)

Particulars Amount (₹)
Additional Revenue from further processing (₹ 20.80 – ₹ 14.40) × 15,000 units 96,000
Less: Further Processing Costs in Process 5 (1,00,000)
Loss in Further Processing (4,000)
Hence, Product DXE should not be processed further.

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2. Computation of NRV for Apportionment Purposes

Particulars Product 'CXE' (₹) Product 'DXE' (₹) Product 'EXE' (₹)
Final Sale Value 35,000 × 18 = 6,30,000 15,000 × 14.4 = 2,16,000 47,500 × 15.2 = 7,22,000
Less: Previous Process Costs (Process 4) 1,30,000 - (Process 6) 92,000
Balance NRV of Previous Stage 5,00,000 2,16,000 6,30,000
7,16,000
Less: Previous Process Costs (Process 2) 1,50,000 (Process 3) 1,08,000
Balance NRV at Earlier Stage 5,66,000 5,22,000
Working Notes:
Process 6 Costs = Gross Costs ₹ 97,000 – NRV of Normal Loss (2,500 × ₹ 2) = ₹ 92,000

Statement of Apportionment of Joint Cost between Products ‘AXE’ and ‘BXE’

Product NRV (₹) Share in Joint Cost (₹)

AXE 5,66,000 × 5,41,500 = 2,81,700

BXE 5,22,000 × 5,41,500 = 2,59,800

10,88,000 5,41,500

Statement of Apportionment of Joint Cost between Products ‘CXE’ and ‘DXE’

Product NRV (₹) Share in Joint Cost (₹)

CXE 5,00,000 × 4,31,700 = 3,01,466

DXE 2,16,000 × 4,31,700 = 1,30,234

7,16,000 7,16,000

Working Notes:
Joint Cost = AXE’s share of costs + Process 2 costs
= ₹ 2,81,700 + ₹ 1,50,000 = ₹ 4,31,700

3. Statement of Overall Profits

Particulars Amount (₹)
Total Sales Revenue (6,30,000 + 2,16,000 + 7,22,000) 15,68,000
Less: Total Processing Costs: (1 + 2 + 3 + 4 + 6) only (Since process 5 is not carried out)
(5,41,500 + 1,50,000 + 1,08,000 + 1,30,000 + 92,000 Net of NRV) (10,21,500)
Overall Net Profit 5,46,500

 Physical Unit Method, Sales at Split off Point method, Net Realisable Value Method and
Constant Gross Profit Margin Method

Question 23. [NOV 04]

Pokemon 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.

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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, 2004 are:
 Cocoa Beans Processed 7,500 pounds
 Cost of processing Cocoa Beans to the split off point (including purchase of beans) ₹ 7,12,500
Particulars Production Sales Selling Price
Chocolate Powder 3,000 pounds 3,000 pounds ₹ 190 per pound
Milk Chocolate 5,100 pounds 5,100 pounds ₹ 237.50 per pound
The October, 2004 separable costs of processing Chocolate-Powder Liquor into Chocolate Powder are ₹ 3,02,812.50. The
October, 2004 separable costs of processing Milk-Chocolate Liquid Base into Milk-Chocolate are ₹ 6,23,437.50.
Pokemon fully processes both of its intermediate products into Chocolate Powder or Milk-Chocolate. There is an active
market for these intermediate products. In October, 2004, Pokemon could have sold the Chocolate Powder Liquor Base
for ₹ 997.50 a gallon and the Milk-Chocolate Liquor Base for ₹ 1,235 a gallon.
Required:
(i) Calculate how the Joint Cost of ₹ 7,12,500 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 Realizable Value (NRV),
(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 requirement (i)?
(iii) Could Pokemon have increased its operating income by a change in its decision to fully process both of its
intermediate products? Show your computations.

Solution 23:

(i) (a) Statement of Distribution of Joint Cost ( Sales Value Split off Point Method)
Product Sales Value × Units Share in Joint Cost
Chocolate Powder – Liquor Base 300 × 997.50 = 2,99,250 2,99,250/8,55,000 × 7,12,500 = 2,49,375
Milk Powder – Liquor Base 450 × 1,235 = 5,55,750 5,55,750/8,55,000 × 7,12,500 = 4,63,125
8,55,000 7,12,500

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(b) Statement showing Distribution of Joint Cost (Physical Measure Method)

Product Physical Output Share in Joint Cost
Chocolate Powder – Liquor Base 300 300/750 × 7,12,500 = 2,85,000
Milk Powder – Liquor Base 450 450/750 × 7,12,500 = 4,27,500
750 7,12,500

(c) Statement showing Distribution of Joint Cost (Net Realizable Value Method)
Product Net Realizable Value Share in Joint Cost
Chocolate Powder – Liquor 2,67,187.50/8,55,000 × 7,12,500 =
Base (3,000 × 190) – 3,02,812.50 = 2,67,187.50 2,22,656
(5,100 × 237.50) – 6,23,437.50 = 5,87,812.50/8,55,000 × 7,12,500 =
Milk Powder – Liquor Base 5,87,812.50 4,89,844
8,55,000 7,12,500

(d) Statement showing Distribution of Joint Cost (Gross-Margin Percentage Method)

Particulars Chocolate Powder – Liquor Base Milk Powder – Liquor Base
Sales Value 5,70,000 12,11,250
Less: Profit 8% (45,600) (96,900)
Less: Further Processing Cost (3,02,812.50) (6,23,437.50)
Share in Joint Cost 2,21,587.50 4,90,912.50
Total Sales (3,000 × 190 + 5,100 × 237.50) = 17,81,250
Less: Total Cost (7,12,500 + 3,02,812.50 + 6,23,437.50) = 16,38,750
Gross Profit = 1,42,500
Gross Profit Ratio = × 100 = 8%

(ii) Statement showing decision of further processing or not

Particulars NRV Sales Value at split off Decision
Chocolate Powder – Liquor Base 2,67,187.50 2,99,250 Sale at split off point
Milk Chocolate – Liquor Base 5,87,812.50 5,55,750 Sale at NRV or after further processing
If the Company sells Chocolate Powder – Liquor Base at split off point, the net gain from the decision will be:
2,99,250 – 2,67,187.50 = 32,062.50

Question 24. [MAY 88]

The yield of a certain Process is 80% towards Main-Product, 15% towards and 5% towards Normal Loss. The material put
in process (5,000 units) cost ₹ 23.75 per unit and all other Overhead Charges are ₹ 14,250. Of the Overheads, Power Cost
accounted for 33.33%. It is ascertained that power Cost is chargeable in the ratio 10:9 between Main and By- Product.
Prepare a statement showing the cost of the By – Product.

Solution 24:
1. Yield Analysis for Input = 5,000 kgs
Particulars Main Product By Product Normal Loss Total
% of Yield 80% 15% 5% 100%
Input Quantity of 5,000 kgs apportioned in above 4,000 kgs 75 kgs 250 kgs 5,000 kgs
ratio

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2. Cost Apportionment Statement

Particulars Main By Product Total
Product
Cost of Materials (5,000 kgs x ₹ 23.75 per kg = ₹ 1,18,750) apportioned ₹ 1,00,000 ₹ 18,750 ₹ 1,18,750
in quantity ratio i.e. 4,000 : 750
rd
Other Overheads (excluding power), i.e. 2/3 of ₹ 14,250 = ₹ 9,500, ₹ 8,000 ₹ 1,500 ₹ 9,500
apportioned in quantity ratio i.e. 4,000 : 750
rd
Power Cost i.e. 1/3 of ₹ 14,250 = ₹ 4,750, apportioned in given ratio i.e. ₹ 2,500 ₹ 2,250 ₹ 4,750
10:9
Total Costs ₹ 1,10,500 ₹ 22,500 Rs 1,33,000

Question 25. [RTP]

Distinguish between Joint Products and By Products?

Solution 25:
Distinction between Joint-Product and By-Product
a) Joint Products are of equal importance whereas by-products are of small economic value.
b) Joint products are produced simultaneously but the by-products are produced incidentally in addition to the main
products.

 Joint Cost Apportionment

Question 26. [MAY 09]

How is joint costs apportionment done using Average Unit Cost?

Solution 26:
Average unit cost method: Under this method, total process cost (upto the point of separation) is divided by total units
of joint products produced. On division average cost per unit of production is obtained.
Average unit cost = Total process cost (upto the point of separation)/Total units of joint product produced.
 This is a simple method. This effect of application of this method is that all joint products will have uniform cost per
unit
 If this method is used as the basis for price fixation, then all the products may have more or less the same price.
 Under this method customers of high quality items are benefitted as they have to pay less price on their purchase.

Question 27.
A Company has Joint cost of ₹1, 00,000 and it produces two main products A and B and one BY- Product C as 1000kg,
2000kg and 500kg respectively.
 The Sale prices are ₹ 200, ₹ 500 and ₹ 5/kg respectively.
 In addition to this product C also has packing cost of ₹ 1/kg.
 Use physical output method to distribute Joint cost.

Question 28. [Study Material]

Sun-moon Ltd. produces and sells the following products:
Products Units Selling price at split off Selling price after further
point (₹) processing (₹)
A 2,00,000 17 25
B 30,000 13 17
C 25,000 8 12
D 20,000 10 -
E 75,000 14 20

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Raw material costs ₹35,90,000 and other manufacturing expenses cost ₹ 5,47,000 in the manufacturing process which
are absorbed on the products on the basis of their ‘Net realisable value’. The further processing costs of A, B, C and E are
₹12,50,000; ₹1,50,000; ₹ 50,000 and ₹ 1,50,000 respectively. Fixed costs are ₹ 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 A, B, C and E 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.

 Mix Concept - Joint & By Product + Process Costing

Question 29. [Nov 06]

A Chemical Company carries on production operation in two processes. The material first pass through Process I, where
Product ‘A’ is produced.
Following data are given for the month just ended:
Material input quantity - 2,00,000 kgs.
Opening work-in-progress quantity
(Material 100% and conversion 50% complete) - 40,000 kgs.
Work completed quantity - 1,60,000 kgs.
Closing work-in-progress quantity
(Material 100% and conversion two-third complete) - 30,000 kgs.
Material input cost - ₹ 75,000
Processing cost - ₹ 1,02,000
Opening work-in-progress cost
Material cost - ₹ 20,000
Processing cost - ₹ 12,000
Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value.
Any quantity of Product ‘A’ can be sold for ₹ 1.60 per kg.

Alternatively, it can be transferred to Process II for further processing and then sold as Product ‘AX’ for ₹ 2 per kg.
Further materials are added in Process II, which yield two kgs. of product ‘AX’ for every kg. of Product ‘A’ of Process I.

Of the 1,60,000 kgs. per month of work completed in Process I, 40,000 kgs are sold as Product ‘A’ and 1,20,000 kgs. are
passed through Process II for sale as Product ‘AX’. Process II has facilities to handle upto 1,60,000 kgs. of Product ‘A’ per
month, if required.
The monthly costs incurred in Process II (other than the cost of Product ‘A’) are:
1,20,000 kgs. of Product ‘A’ input (₹) 1,60,000 kgs. of Product ‘A’ input (₹)
Materials cost 1,32,000 1,76,000
Processing costs 1,20,000 1,40,000

Required:
(i) Determine, using the weighted average cost method, the cost per kg. of Product ‘A’ in Process I and value of
both work completed and closing work-in-progress for the month just ended.

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(ii) Is it worthwhile processing 1,20,000 kgs. of Product ‘A’ further?

Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for additional output of
Product ‘AX’ that could be produced with the remaining Product ‘A’ quantity.

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Chapter 12
Service Costing
 Introduction

Question 1. [NOV 09,NOV 12]

What is meant by Operating Costing?

Solution 1:
It is a method of ascertaining costs of providing or operating a service. This method of costing is applied by those
undertakings which provide services rather than production of commodities. This costing method is usually made use of
by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres,
schools, etc.

Question 2. [NOV 09]

How are cost units determined in the rendering of service?

Solution 2:
For computing the operating cost, it is necessary to decide first, about the unit for which the cost is to be computed, this
may often require the study of some technical and operating data, for finding out the factors which have a bearing on
cost. The cost units actually used in the following service undertakings are as below:
Service industry Unit of cost (examples)
Transport Services Passenger- km., (In public transportation)
Quintal- km., or Ton- km. (In goods carriage)
Electricity Supply service Kilowatt- hour (kWh)
Supply service Cubic metre, per kg., per litre.
Hospital Patient per day, room per day or per bed, per operation
etc.
Canteen Per item, per meal etc.
Cinema Per ticket.
Hotels Guest Days or Room Days
Bank or Financial Institutions Per transaction, per services (e.g. per letter of credit, per
application, per project etc.)
Educational Institutes Per course, per student, per batch, per lecture etc.
IT & ITES Cost per project, per module etc.
Insurance Per policy, Per claim, Per TPA etc.

 Practical Problems

 Computation of Passenger – Km

Question 3. [NOV 07]

Calculate total Passenger Kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8, distance covered 20
kilometres (one side), capacity of bus 40 passengers, normally 80% of capacity utilization.

Solution 3:
Passenger kms. = (6 Buses × 25 days × 8 trips × 2 round × 20 kms × 40 passengers × 80% capacity utilization)
= 15,36,000

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 Absolute and Commercial Tonne – Kms

 Absolute and Commercial Tonne Kilometres

 Absolute Tonne Kms = Actual Distance1 × Actual Weight1 + Actual Distance2 × Actual Weight2 + Actual
Distance3 × Actual Weight3
 Commercial Tonne Kms = Average of Weight × Total Distance

Question 4. [RTP, NOV 06]

Briefly explain Absolute and Commercial Ton Kms.

Solution 4:
(i) Absolute (Weighted Average) tonnes-kms.
Absolute tonnes-kms., are the sum total of tonne-kms., arrived at by multiplying various distances by respective
load quantities carried.
(ii) Commercial (Simple Average) tonnes-kms.
Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load quantity.

 Practical Problems

Question 5. [MAY 95, NOV 99, Study Material]

A Lorry starts with a load of 20 tonnes of goods from Station A. It unloads 8 tonnes at Station B and rest of goods at
station C. It reaches back directly to Station A after getting reloaded with 16 tonnes of goods at Station C. The distance
between A to B, B to C and then from C to A are 80 kms, 120 kms and 160 kms respectively. Compute ‘Absolute Tonne-
Kms’ and ‘Commercial Tonne-Kms’.

Solution 5:
1. Absolute Tonne-Km
= A to B + B to C + C to A
= (20 MT × 80 km) + (12 MT × 120 km) + (16 MT × 160 km)
= 1,600 + 1,440 + 2,560 = 5,600 Tonne-Kilometres.

2. Commercial Tonne-Km
= Average Load × Total distance travelled
=( Tonnes) × (80 + 120 + 160) Kilometres
= 16 Tonnes × 360 Kms = 5,760 Tonne-Kilometres.

Question 6. [MAY 09]

A Lorry starts with a load of 24 tonnes of goods from Station A. It unloads 10 tonnes at Station B and rest of goods at
Station C. It reaches back directly to Station A after getting reloaded with 18 tonnes of goods at Station C. The distance
between A to B, B to C and then from C to A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute Tonne-
Kms’ and ‘Commercial Tonne-Kms’.

Solution 6:
1. Absolute Tonne-Km
= A to B + B to C + C to A
= (24 MT × 270 km) + (14 MT × 150 km) + (18 MT × 325 km)
= 6,480 + 2,100 + 5,850 = 14,430 Tonne-Kilometres.

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2. Commercial Tonne-Km
= Average Load × Total distance travelled
=( Tonnes) × (270 + 150 + 325) Kms
= 18.67 Tonnes × 745 Kms = 13,907 Tonne-Kilometres.

 Operating Cost Sheet

Question 7. [MAY 86]

How is the Operating Cost Sheet prepared?

Solution 7:
For preparing a Cost Sheet under Operating cost, costs are usually accumulated for a specified period viz., a month, a
quarter, or a year etc.
All of the accumulated costs should be classified under the following three heads:
1. Fixed Costs or Standing Charges
2. Variable Costs or Running Charges
3. Semi-Variable Costs or Maintenance Costs.
Notes:
 In the absence of information about semi-variable costs, the costs may be shown under two heads only, i.e. Fixed
and Variable.
 Under Operating Costing, the per unit cost of service may be calculated by dividing the total cost for the period by
the total units of service in the period.
 Treatment of Depreciation and Interest – Depreciation if related to effluxion of time, may be treated as fixed. If it is
related to the activity level, it may be treated as variable.
 If information about interest is explicitly given, it may be treated as fixed cost.

 Practical Problems

 Cost Classification – Cost per Passenger – Km

Question 8. [STUDY MATERIAL]

AXA Passenger Transport Company is running 5 buses between two towns, which are 40 kms apart. Seating capacity of
each bus is 40 passengers. Following details are available from their books, for the month of April 20X9:
(₹ )
Salary of Drivers, Cleaners and Conductors 24,000
Salary to Supervisor 10,000
Diesel and other Oil 40,000
Repairs and Maintenance 8,000
Tax and Insurance 16,000
Depreciation 26,000
Interest 20,000
1,44,000

Actual passengers carried were 75% of the seating capacity. All the four buses run on all days for the month. Each bus
made one round trip per day. CALCULATE cost per passenger – Kilometer.

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Solution 8:
Working Note:
Total Passenger Kilometres =
Number of Buses × Distance × Seating Capacity × Used Capacity × Number of days in the month × Number of trips
= 5 Buses × 40 kms. × 40 Seats × 75% × 30 Days × 2 Single trips (1 Round Trip)
= 3,60,000 Passenger-Kms.
Cost per Passenger-Km = Total costs ÷ Total Passenger Kilometers
Statement of Cost per Passenger – Km
Particulars Cost Per Month Cost per Passenger – Km
A. Standing Charges:
Wages of Drivers, Cleaners and 24,000
Conductors
Salary to Supervisor 10,000
Tax and Insurance 16,000
Depreciation 26,000
Interest 20,000
Total Standing Charges 96,000 0.267
B. Running Charges
Diesel and other Oil 40,000 0.111
C. Maintenance Charges
Repairs and Maintenance 8,000 0.022
Total 1,44,000 0.400

Cost per Passenger-Km = ₹ 0.40

 Cost per Absolute Tonne – Km and Profit

Question 9. [MAY 97, STUDY MATERIAL]

Global Transport Ltd charges ₹ 90 per ton for its 6 tons truck lorry load from City ‘A’ to City ‘B’. The charges for the
return journey are ₹ 84 per ton. No concession or reduction in these rates is made for any delivery of goods at
intermediate station ‘C’.
In January, the truck made 12 outward journeys for City ‘B’ with full load out of which 2 tons were unloaded twice in the
way at City ‘C’. The truck carried a load of 8 tons in its return journey for 5 times but once caught by police and ₹ 1,200
was paid as fine. For the remaining trips the truck carried full load out of which all the goods on load were unloaded once
at City ‘C’. The distance from City ‘A’ to City ’C’ and City ‘B’ are 140 kms and 300 kms respectively.
Annual Fixed Costs and Maintenance Charges are ₹ 60,000 and ₹ 12,000 respectively. Running Charges spent during
January are ₹ 2944. Find out the cost per Absolute Tonne-Km and the profit for January.

Solution 9:
1. Computation of Absolute Tonne-Km for January
(a) Onward Journey: = (A to B) × 10 times + (A to C & C to B) × 2 times
= (10 trips × 300 km × 6 MT) + (2 trips × 140 km × 6 MT) + (2 trips × 160 km × 4 MT)
= 18,000 + 1,680 + 1,280 = 20,960 Tonne-Kms.

(b) Return Journey: = B to A (Full Load) + B to A (Overload) + B to C

= (6 trips × 300 km × 6 MT) + (5 trips × 300 km × 8 MT) + (1 trip × 160 km × 6 MT)
= 10,800 + 12,000 + 960 = 23,760 Tonne-Kms.

(c) Total Total Absolute Tonne-Kms

= Onward + Return
= 20,960 + 23,760 = 44,720 Tonne-Kms

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2. Statement of Operating Costs for January

Particulars Rs.
Fixed Costs apportioned (Rs. 6,00,000 × ) 50,000
Maintenance Costs average monthly (Rs. 1,20,000 × ) 10,000
Variable Costs for the month (Actuals) 29,440
Total Costs for January 89,440
Cost per Absolute Tonne-Km =
2

3. Statement of Revenue and Profits for January

Particulars Rs.
Revenues: A to B (12 trips × 6 MT × Rs. 900) 64,800
B to A (6 trips × 6 MT × Rs. 840) 30,240
(5 trips × 8 MT × Rs. 840) 33,600
B to C (1 trip × 6 MT × Rs. 840) 5,040
Gross Revenue 1,33,680
Less: Operating Costs (Rs. 89,440 + Abnormal Costs Fine Rs. 12,000) 1,01,440
Net profit for the month 32,240

 Cost Recovery – Full and Half Fare tickets – Equivalent Production Concept

Question 10. [STUDY MATERIAL, MAY 81]

SMC is a public school having five buses each plying in different directions for the transport of its school students. In view
of a 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 the 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 8 kms. The school works 25 days in a month and remains closed for
vacation in May, June and December. Bus fee, however, is payable by the students for all 12 months in a year.
The details of expenses for a year are as under:
Driver's Salary ₹ 4,500 per month per driver
Cleaner's salary ₹ 3,500 per month
(Salary payable for all 12 months)
(One cleaner employed for all the five buses)
License fee, taxes etc. ₹ 8,600 per bus per annum
Insurance ₹ 10,000 per bus per annum
Repairs & maintenance ₹ 35,000 per bus per annum
Purchase price of the bus ₹ 15,00,000 each
Life of each bus - 12 years
Scrap value of buses at the end of life ₹ 3,00,000
Diesel cost ₹ 45.00 per litre
Each bus given an average mileage of 4 kilometer per litre of diesel. Seating capacity of each bus is 50 students. The
seating capacity is fully occupied during the whole year.
Students picked up and dropped within a range upto 4 kilometers of distance from the school are charged half fare and
fifty per cent of the students travelling in each trip are in this category. Ignore interest. Since the charges are to be based
on average cost you are required to:

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(i) Prepare a statement showing the expenses of operating a single bus and the fleet of five busses for a year.
(ii) Work out the average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 Kilometers from the school and
(b) Students coming from a distance from a distance beyond 4 kilometers from the school.

Solution 10:
(i) SMC Public School Operating Cost Statement
Particulars Rate (₹ ) Per Bus per annum Fleet of 5 buses p.a.
No. Amount (₹ ) No. Amount (₹ )
Standing Charges
Driver's salary 4500 p.m 1 54,000 5 2,70,000
Cleaner's salary 3500 p.m. 1/5 8400 1 42,000
Licence fee, taxes etc. 8600 p.a 8600 43,000
Insurance 10,000 p.a. 10,000 50,000
Depreciation 1,00,000 p.a 1,00,000 5,00,000
Maintenance Charges
Repairs & maintenance 35,000 p.a. 35,000 1,75,000
Operating Charges
Diesel (Working Note 1) - 1,62,000 8,10,000
Total Cost 3,78,000 18,90,000
Cost per month 31,500 1,57,500

(ii) No. of students on half fee basis 150 750

(A) Cost per student (half fee) ₹ 210 210
(B) Cost per student (full fee) ₹ 420 420

Working Notes:
1. Calculation of diesel cost per bus
Number of trips of 8 km. each/day 8
Distance travelled p.a. (May, June and December being vacation)
(8 round trips x 8 kms. x 25 days × 9 months) 14,400 km.
Mileage (4
K.m./Litre)
Diesel required
(14,400/4) 3,600 litres
Cost of Diesel (3,600 litres × ₹
45 per) ₹ 1,62,000 p.a. per bus

2. Calculation of number of students per bus

Bus capacity 50 students
Half fare (50% i.e.) 25 students
Full fare (50% i.e.) 25 students
Full fare students as equivalent to half fare Students i.e. 50 students
Total number of half fare students per trip 75 students
Total number of half fare students in two trips 150 students
On full fare basis number of students in two trips 75 students

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 Preparation of Cost Sheet

Question 11. [STUDY MATERIAL]

From the following data pertaining to the year 1997-98 prepare a cost sheet showing the cost of electricity generated per
k.w.h. by Chambal Thermal Power Station.
Total units generated 10,00,000 k.w.h
₹
Operating labour 50,000
Repairs & maintenance 50,000
Lubricants, spares and stores 40,000
Plant supervision 30,000
Administration overheads 20,000
Coal consumed per kwh for the year is 2.5 k.g. @ ₹ 0.02 per kg. Depreciation charges @ 5% on capital cost of ₹ 2,00,000.

 Fare Computation for Passenger Transport Services

Question 12. [May 10, May 15, Nov 16]

A Transport Company has been given a 40 kilometer long route to run 5 buses. The cost of each bus is ₹ 6,50,000. The
buses will make 3 round trips per day carrying on an average 80% passengers of their seating capacity. The seating
capacity of each bus is 40 passengers. The buses will run on an average 25 days in a month. The other information for a
year are given below:
Garage Rent ₹ 4,000 per month
Annual Repairs and Maintenance ₹ 22,500 each bus
Salaries of 5 Drivers ₹ 3,000 each per month
Wages of 5 Conductors ₹ 1,200 per each month
Manager's Salary ₹ 7,500 per month
Road Tax, Permit Fee, etc. ₹ 5,000 for a quarter
Office Expenses ₹ 2,000 per month
Cost of Diesel per litre ₹ 33
Kilometres run per litre for each bus 6 kilometres
Annual Depreciation 15% of cost
Annual Insurance 3% of cost
Calculate the Bus Fare to be charged from each passenger per kilometer, if the Company wants to earn a profit of 33.33%
on Takings (Total Receipts from Passengers).

Question 13. [MAY 94]

Mr. X owns a bus which runs according to the following schedule –
Route Distance one-way No. of days run each month Seating Occupancy
Delhi to Chandigarh and back, the same day 250 kms 8 90%
Delhi to Agra and back, the same day 210 kms 10 85%
Delhi to Jaipur and back, the same day 270 kms 6 100%

OTHER DETAILS
Cost of the Bus ₹ 12,00,000 Diesel Consumption – 4 kms. per litre at ₹ 56 per Litre.
Salary of the Driver ₹ 24,000 p.m. Lubricant Oil (other than Diesel and Oil) ₹ 10 per 100 kms.
Salary of the Conductor ₹ 21,000 p.m. Permit Fee ₹ 315 p.m.
Salary of the part-time Accountant ₹ 5,000 p.m. Repairs and Maintenance ₹ 1,000 p.m.

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Insurance of the Bus ₹ 4,800 p.a. Depreciation of the Bus @ 20% p.a.
Road Tax ₹ 15,915 p.a. Seating capacity of the Bus 50 persons
Passenger Tax is 20% of the Total Takings. Calculate the Bus Fare to be charged from each passenger to earn a profit of
30% on Total Takings. The fares are to be indicated per passenger for the journeys – (1) Delhi to Chandigarh, (2) Delhi to
Agra, and (3) Delhi to Jaipur.

Question 14. [STUDY MATERIAL]

ABC Transport Company has given a route 40 kilometers long to run bus.
a) The bus costs the company a sum of ₹ 20,00,000
b) It has been insured at 1.5% p.a. and
c) The annual tax will amount to ₹ 20,000
d) Garage rent is ₹ 20,000 per month.
e) Annual repairs will be ₹ 2,04,000
f) The bus is likely to last for 5 years
g) The driver’s salary will be ₹ 30,000 per month and the conductor’s salary will be ₹ 25,000 per month in addition
to 10% of takings as commission [To be shared by the driver and conductor equally].
h) Cost of stationery will be ₹ 1,000 per month.
i) Manager-cum-accountant’s salary is ₹ 17,000 per month.
j) Petrol and oil will be ₹ 500 per 100 kilometers.
k) The bus will make 3 up and down trips carrying on an average 40 passengers on each trip.
l) The bus will run on an average 25 days in a month.
Assuming 15% profit on takings, CALCULATE the bus fare to be charged from each passenger.

Solution 14:
Working Note:
(1) Total Kilometres run per annum:
= Number of Buses × Distance × Number of days in the Month × Number of trips × 12 months
= 1 Bus × 40 kms × 25 Days × 6 Single trips (3 Round Trips) × 12 months = 72,000 kms.

(2) Total Passenger Kilometres per annum:

Total Kilometres run per annum × Seating Capacity
= 72,000 Kms × 40 Seats = 28,80,000 Passenger-Kms.
(3) Petrol & oil Consumption per annum:
Total Kilometres run per annum × Petrol Consumption per KM
= 72,000 Kms × (₹ 500 / 100 Kms) = ₹ 3,60,000

Statement of Cost per Passenger – Km

Particulars Per Annum Per Passenger -
Kilometer
A. Standing Charges:
Insurance @ 1.5% on ₹ 20,00,000 30,000
Annual Tax 20,000
Garage rent (₹ 20,000 × 12) 2,40,000
Depreciation 4,00,000
Salary of Driver (fixed part) 3,60,000
Salary of Conductor (fixed part) 3,00,000
Stationary 12,000
Manager-cum-accountant’s salary 2,04,000
Total Standing Charges 15,66,000 0.5438
B. Running Charges:
Diesel and other Oil (WN-3) 3,60,000

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Commission to Driver* (10% × ₹ 28,40,000 × 1/2) 1,42,000

Commission to Conductor* (10% × ₹ 28,40,000 × 1,42,000
1/2)
Total Running Charges 6,44,000 0.2236
C. Maintenance Charges:
Repairs 2,04,000 0.0708
Grand Total (A+B+C) 24,14,000 0.8382
Profit (15% × ₹ 28,40,000) 4,26,000 0.1479
Fare per Passenger Kilometer 0.9861

*Total takings = Standing Charges + (Running cost + Commission on takings) + Maintenance cost + Profit
Let Takings = X
Or, X = 15,66,000 + (3,60,000 + 0.1X) + 2,04,000 + 0.15X
Or, X – 0.25X = 21,30,000
Or, X = 28,40,000

 Computation of Cost per Tonne – Km

Question 15. [NOV 00 (ADAPTED)]

Iron Ore is transported from two mines – ‘A’ and ‘B’ and unloaded at plots in a Railway Station. A is at a distance of 10
km and B is at a distance of 15 km from the railhead plots. A fleet of lorries of 5 tonnes carrying capacity is used for the
transport of ore from the mines. Records reveal that the lorries average speed of 30 km. per hour when running and
regularly take 10 minutes to unload at the rail head. At Mine ‘A’, loading time average is 30 minutes per load while at
Mine ‘B’ loading time averages 20 minutes per load.
Driver’s Wages, Depreciation, Insurance and Taxes are found to cost ₹ 9 per hour operated. Fuel, Oil, Tyres, Repairs and
Maintenance cost ₹ 1.20 per km.
Draw up a statement showing the cost per Tonne-Kilometer of carrying Iron Ore from each Mine.

Solution 15:
Operating Cost Sheet
Particulars Mine A Mine B
Distance (km) 10 15
Ton Kilometers (Distance × Weight) 50 75
Time per trip (minutes)
Loading time 30 20
Unloading Time 10 10
Running Time 40 60
Total (minutes) 80 90
₹ ₹
Driver's wages, depreciation, insurance & taxes 12.00 13.50
Fuel, oil, tyres, repairs etc. 24.00 36.00
36.00 49.50
Cost per ton km. 36/50 = ₹ 0.72 49.50/75 = ₹ 0.66

Working Notes:
1. Driver wages etc. are ₹ 9 per hour
For Mine A = ₹ 9 × = ₹ 12

2. Fuel, oil etc. per km. = ₹ 1.20

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For Mine A for 20 km. of return journey

= 20 km × ₹ 1.20 = ₹ 24
For Mine B = 30 km × ₹ 1.20 = ₹ 36

 Fare per Passenger - Km

Question 16. [RTP, MAY 15]

Rounders Co. has obtained a licence to ply a mini-bus between stations A and B covering a distance of 25 km. The mini-
bus will make 8 round trips 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 ₹ 6,00,000. It has a life of 10 years with a
salvage value of ₹ 10,000 at the end of its useful life. The details of the operating expenses are as under:
Insurance ₹ 12,000 per annum Driver’s Salary ₹ 3,000 per month
Garage Rent ₹ 2,000 per quarter Conductor's Salary ₹ 2,000 per month
Road Tax ₹ 3,000 per annum Tyres and Tubes ₹ 3,000 per quarter
Repairs ₹ 4,000 per quarter Diesel ₹ 12 per litre
Administration ₹ 1,000 per month Oil and Sundries ₹ 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 takings. The Company
requires a profit of 20% on total 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.

Solution 16:
Annual Cost Sheet
Particulars Rs.
Standing Charges:
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
Running Charges:
Depreciation {Rs. 6,00,000 – Rs. 10,000/10 years} 59,000
Diesel 3,60,000
Oil & Sundries {Rs. 20/100 Kms. × 1,20,000} 24,000
Total Standing and Running Costs 5,66,000

Cost per passenger km = = Rs. 0.262

Profit 20% of Revenue (Total Taking)

Passenger Tax 20% of Revenue (Total Taking)
Total 40%
Revenue (Taking) 100%
So, Cost (per passenger km. 60%) = Rs. 0.262
Or Fare per passenger Km. = × 100 = Rs. 0.4367

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Fare for 25 km = 25 km × Rs. 0.4367 = Rs. 10.92

Working Notes:
(i) Computation of Km run = 25 Km. × 2 × 8 trips × 25 days × 12 months = 1,20,000 Km.
(ii) Diesel = × Rs. 12 = Rs. 3,60,000
(iii) Computation of passenger Km. = 1,20,000 Km. × 30 passengers × = 21,60,000 passenger kilometer.

 Decision Making on Mode of Transport

Question 17. [STUDY MATERIAL, MAY 93]

A Company is considering three alternative proposals for conveyance facilities for its sales personnel who have to do
considerable travelling, approximately 20,000 kilometers every year. The proposals are as follows:
(i) Purchase and maintain its own fleet of cars. The average cost of a car is ₹ 6,00,000.
(ii) Allow the Executive use his own car and reimburse expenses at the rate of ₹ 10 per kilometer and also bear
insurance costs.
(iii) Hire cars from an agency at ₹ 1,80,000 per year per car. The company will have to bear costs of petrol taxes and
tyres.
The following further details are available:
Petrol ₹ 6 per km.
Repairs and Maintenance ₹ 0.20 per km.
Tyre Re. 0.12 per km.
Insurance Re. 1,200 per car per annum
Taxes ₹ 800 per car per annum.
Life of the car 5 years with annual mileage of 20,000 km.
Resale value ₹ 80,000 at the end of the fifth year
Work out the relative costs of three proposals and rank them.

 Service Costing and Decision Making - Airlines

Question 18. [RTP]

Always Best-Carriers (ABC) Airways owns a single jet aircraft and operates between Bangalore and New Delhi. Flights
leave Bangalore on Mondays and Thursdays and depart from New Delhi on Wednesdays and Saturday. ABC cannot
afford any more flights between Bangalore and New Delhi. An analyst has collection the following information:
Seating Capacity per Plane 360
Average passengers per flight 100
Flights per week 4
Flights per year 208
Average one-way fare ₹ 10,000
Variable Fuel Costs ₹ 1,40,000 per flight
Food Service to passengers (not charged to passengers) ₹ 400 per passenger
Commission paid by ABC to Travel Agents – All booking through agents only 8% of fare
Fixed Expenses to each flight –
Annual Lease Costs ₹ 5,30,000 per flight
Ground Services, i.e. Maintenance, Check-in, Baggage Handling, etc. ₹ 70,000 per flight
Salaries of Flight Crew ₹ 40,000 per flight
For the sake of simplicity, assume that fuel costs are unaffected by the actual number of passengers on a flight.
Required:

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1. What is the Operating Income that ABC makes on each one-way flight between Bangalore and New Delhi?
2. ABC’s Market Research Department indicates that lowering the average one-way fare to ₹ 9,600 will increase the
average number of passengers per flight to 106. Should ABC lower its fare?
3. Travel India, a Tour Operator, approaches ABC to charter its jet aircraft twice each month, first to take Travel India
International tourists from Bangalore to New Delhi and then bring them back from New Delhi to Bangalore. If ABC
accepts the offer, it can only 184 (208 minus 24) of its own flights each year. The terms of the charter are –
(a) For each one-way flight Travel India will Pay ABC ₹ 7,50,000 to charter the plane and to use its flight crew and
ground service staff.
(b) Travel India will pay for fuel costs.
(c) Travel India will pay all food costs.
On purely financial considerations, should ABC accept the offer from Travel India?

Solution 18:
Computation of Operating Income per Flight
Particulars Present Situation Fare Reduction Travel India Offer
Gross Revenue per Flight ₹ 10,000 × 100 ₹ 9,600 × 106 Lumpsum Contract
= 10,00,000 = 10,17,600 ₹ 7,50,000
Less: Variable Costs per Flight
Fuel 1,40,000 1,40,000 Nil
Food to passengers 400 × 100 = 40,000 400 × 106 = 42,400 Nil
Commission at 8% 80,000 81,408 (Direct business) Nil
Contribution per Flight 7,40,000 7,35,792 7,50,000
Less: Fixed Costs per Flight
Annual Lease Costs 5,30,000 5,30,000 5,30,000
Ground Services 70,000 70,000 70,000
Salaries of Flight Crew 40,000 40,000 40,000
Operating Income per Flight 1,00,000 1,13,972 1,10,000

Evaluation of Proposals:
1. Fare Reduction: As there is additional contribution and profit of (₹ 7,53,792 – ₹ 740,000) = ₹ 13,792, ABC Airways
can lower its fare.
2. Travel India Offer: Compared to present situation, Travel India offer given an additional contribution of ₹ 10,000 is
hence acceptable. However, comparing fare reduction proposal and Travel India offer, it is advisable to implement
fare reduction proposal and operate own flights rather than accept Travel India Offer. Extra Contribution in such
case is ₹ 3792 per flight.

 Hospital Costing – Revenue Statement, BEP

Question 19. [MAY 00]

Divine Public Health Hospital runs only an Intensive Care Unit (ICU). For this purpose, it has hired a building at a rent of ₹
10,000 per month. The ICU has undertaken to bear the cost of Repairs and Maintenance Charges.
The ICU consisted of 50 beds and 5 more beds can be safely accommodated, when the situation demands, at a charge of
₹ 5 per bed per day.
During a financial year, it was ascertained that only for 120 days in the year, the ICU had full capacity of 50 patients per
day and for another 80 days, it had on an average 40 beds only occupied per day. The total hire charges for the extra
beds incurred for the whole year amount to ₹ 4000. Expert Doctors from various places and outstations were engaged
and the fees were paid on the basis of the number of patients attended and the time spent by them and on an average, it
worked out to ₹ 20,000 per month during that financial year. The other expenses for the year were as under:
Particulars ₹
4 Supervisors, each at a Salary of ₹ 500 per month
8 Nurses, each at a Salary of ₹ 300 per month

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4 Ward Boys each at a Salary of ₹ 150 per month

Repairs & Maintenance ₹ 7200
Cost of Food supplied to patients ₹ 88,000
Laundry Charges ₹ 56,000
Medicines Supplied ₹ 70,000
Cost of Oxygen, X-Ray, etc. other than directly borne for treatment of Patients ₹ 1,08,000
Janitor & Other Services from them ₹ 25,000
Administration Charges allocated to the ICU ₹ 99,100
The ICU has recovered an overall amount of ₹ 100 per day on an average from each patient. The cost of Janitor and
Other services is variable as it is related to number of patient-days.
Prepare Revenue statement for the above financial year and indicate the profit per patient day made by the ICU. Also
work out the number of patient days required by the unit to break-even.

Solution 19:
Computation of Revenue earned
Particulars Patient Days Collection at ₹ 100
At Full Capacity 50 × 120 = 6,000 6,000 × 100 = 6,00,000
At Partial Capacity 40 × 80 = 3,200 3,200 × 100 = 3,20,000
Hire of beds (Total Hire charges ÷ Hire charge per ₹ 4,000 ÷ 5 = 800 800 × 100 = 80,000
bed)
Total 10,000 10,00,000

Revenue Statement of ICU of Divine public Health Hospital, for the financial year ended……………
Particulars ₹ ₹
Income Received 10,00,000
Less: Variable Expenses
Hire Charges 4,000
Cost of Food 88,000
Laundry Charges 56,000
Medicines 70,000
Janitor 25,000
Cost of Oxygen 1,08,000
Doctor's Fees (20,000 × 12) 2,40,000 5,91,000
Contribution 4,09,000
Less: Fixed Expenses
Rent (10,000 × 12) 1,20,000
Supervisors Salary (4 × 500 × 12) 24,000
Nurses Salary (8 × 300 × 12) 28,800
Ward Boys Salary (4 × 150 × 12) 7,200
Repairs & Maintenance 7,200
Administration Charges 99,100 2,86,300
Profit 1,22,700
Profit per patient Day (₹ 1,22,700 ÷ 10,000 patient days) ₹ 12.27

Contribution per patient Day = = = ₹ 40.90

Break Even Point = = = 7,000 patients.

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Note: Cost of Oxygen may also be regarded as Fixed. In such case, Break Even Number = 7,627 patients.

Question 20. [Study Material]

ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more beds can be added, if
required.
Rent per month - ₹ 75,000
Supervisors – 2 persons – ₹ 25,000 Per month – each
Nurses – 4 persons – ₹ 20,000 per month – each
Ward Boys – 4 persons – ₹ 5,000 per month – each
Doctors paid ₹ 2,50,000 per month – paid on the basis of number of patients attended and the time spent by them

Other expenses for the year are as follows:

Repairs (Fixed) – ₹ 81,000
Food to Patients (Variable) – ₹ 8,80,000
Other services to patients (Variable) – ₹ 3,00,000
Laundry charges (Variable) – ₹ 6,00,000
Medicines (Variable) – ₹ 7,50,000
Other fixed expenses – ₹ 10,80,000
Administration expenses allocated – ₹ 10,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are occupied.
The hospital hired 750 beds at a charge of ₹ 100 per bed per day, to accommodate the flow of patients. However, this
does not exceed more than 5 extra beds over and above the normal capacity of 35 beds on any day.

You are required to –

a) CALCULATE profit per Patient day, if the hospital recovers on an average ₹ 2,000 per day from each patient
b) FIND OUT Breakeven point for the hospital.

Solution 20:
Working Notes:
(1) Calculation of number of Patient days
35 Beds × 150 days = 5,250
25 Beds × 80 days = 2,000
Extra beds = 750
Total = 8,000

Statement of Profitability
Particulars Amount Amount
Income for the year (₹ 2,000 per patient per 1,60,00,000
day × 8,000 patient days)
Variable Costs:
Doctor Fees (₹ 2,50,000 per month × 12) 30,00,000
Food to Patients (Variable) 8,80,000
Other services to patients (Variable) 3,00,000
Laundry charges (Variable) – (₹ ) 6,00,000
Medicines (Variable) – (₹ ) 7,50,000
Bed Hire Charges (₹ 100 × 750 Beds) 75,000
Total Variable costs 56,05,000
Contribution 1,03,95,000

Fixed Costs:
Rent (₹ 75,000 per month × 12) 9,00,000

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Supervisor (2 persons × ₹ 25,000 × 12) 6,00,000

Nurses (4 persons × ₹ 20,000 × 12) 9,60,000
Ward Boys (4 persons × ₹ 5,000 × 12) 2,40,000
Repairs (Fixed) 81,000
Other fixed expenses – (₹ ) 10,80,000
Administration expenses allocated – (₹ ) 10,00,000
Total Fixed Costs 48,61,000
Profit 55,34,000

(1) Calculation of Contribution per Patient day

Total Contribution – ₹ 1,03,95,000
Total Patient days – 8,000
Contribution per Patient day – ₹ 1,03,95,000 / 8,000 = ₹ 1,299.375

(2) Breakeven Point = Fixed Cost / Contribution per Patient day

= ₹ 48,61,000 / ₹ 1,299.375
= 3,741 patient days

 Library Services – Cost and Revenue Analysis

Question 21. [MAY 07]

A Club runs a library for its members. As part of club policy, an annual subsidy of upto ₹ 5 per member including cost of
books may be given from the general funds of the club. The management of the club has provided the following figures
for its library department.
Number of Old Books 50,000
Number of Library members 1,000
Library fee per member per month ₹ 100
Fine for late return of books day Re. 1 per book
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 days
Cost of new books ₹ 300 per book
Number of books purchased per year 1200 books
Cost of maintenance per old book per year ₹ 10

Staff details No. Per Employee Salary per month (₹ )

Librarian 1 10,000
Assistant Librarian 3 7,000
Clerk 1 4,000
You are required to calculate:
(i) The cost of maintaining the library per year excluding the cost of new books;
(ii) The cost incurred per member per month on the library excluding cost of new books; and
(iii) The net income from the library per year.
(iv) If the club follows a policy that all new books must be purchased out of library revenue (a) What is the maximum
number of books that can be purchased per year and (b) How many excess books are being purchased by the library
per year?
Also, comment on the subsidy policy of the club.

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Solution 21:
1. (a) Cost of maintaining the library per Year excluding cost of new books
Particulars Amount (in ₹ )
Cost of maintaining old books [₹ 10 × 50,000 books] 500,000
Librarian's Salary [₹ 10,000 × 12 × 1] 120,000
Assistant Librarian's Salary [₹ 7,000 × 12 × 3] 252,000
Clerk's Salary [₹ 4,000 × 1 × 12] 48,000
Total Cost per annum 920,000

(b) Total Cost per Month = ₹ 9,20,000 × = ₹ 76,667

Cost per member per month = = ₹ 76.67

(c) Net Income of the Library per Annum

Particulars Amount (in ₹ )
Revenues
Library fees [100 × 1,000 Members × 12 months] 1,200,000
Fine for Late return of goods [500 Books × 12 months × 5 Days × Re. 1] 30,000
Subsidy from Club [₹ 5 × 1,000 members] 5,000
Total Revenue (A) 1,235,000
Cost
Cost excluding cost of new books 920,000
Cost of new books [₹ 300 × 1,200 Books] 360,000
Total Cost (B) 1,280,000
Net Income/ (Loss) (A) – (B) (45,000)

2. If the Policy is that all new books must be purchased out of Library revenue
(a) Maximum no. Of books that can be purchased =

= = 1,050 Books
(b) Excess Books that can be purchased by the Library per year = 1,200 – 1,050 = 150 Books

3. Comment on the Subsidy Policy

(a) The Library department loss will increase by ₹ 8,000, if the subsidy was not made available. Subsidy is only
0.40% of the Library total revenue.
(b) New Books can be added every year by redefining the subsidy policy so as to provide sufficient funds, and there
is no loss from library activities as such.

 Hotel Service – Various Types of Rooms – Rent to be collected

Question 22. [Study Material]

A lodging home is being run in a small hill station with 100 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 20X7. [Assume a month to be of 30 days].
(i) Occupancy during the season is 80% while in the off- season it is 40% only.

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(ii) Total investment in the home is ₹ 200 lakhs of which 80% relate to buildings and balance for furniture and
equipment.
(iii) Expenses:
 Staff salary [Excluding room attendants] : ₹ 5,50,000
 Repairs to building : ₹ 2,61,000
 Laundry charges : ₹ 80, 000
 Interior : ₹ 1,75,000
 Miscellaneous expenses : ₹ 1,90,800
(iv) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on straight-line
basis.
(v) Room attendants are paid ₹ 10 per room day on the basis of occupancy of the rooms in a month.
(vi) Monthly lighting charges are ₹ 120 per room, except in four months in winter when it is ₹ 30 per room.
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.

Solution 22:
Working Notes:
(i) Total Room days in a year
Season Occupancy (Room-days) Equivalent Full Room charge days
Season – 80% Occupancy 100 Rooms × 80% × 6 months × 30 14,400 Room Days × 100% = 14,400
days in a month = 14,400 Room Days
Off-season – 40% Occupancy 100 Rooms × 40% × 6 months × 30 7,200 Room Days × 50% = 3,600
days in a month = 7,200 Room Days
Total Room Days 14,400 + 7,200 = 21,600 Room Days 18,000 Full Room days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is ₹ 120 per month and during winter season of 4 months it is
₹ 30 per month. Further it is also given that peak season is 6 months and off season is 6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off season. Hence, the non-
winter season of 8 months include – Peak season of 6 months and Off season of 2 months.

Accordingly, the lighting charges are calculated as follows:

Season Occupancy (Room-days)
Season & Non-winter – 80% Occupancy 100 Rooms × 80% × 6 months × ₹ 120 per
month = ₹ 57,600
Off- season & Non-winter – 40% 100 Rooms × 40% × 2 months × ₹ 120 per
Occupancy (8 – 6 months) month = ₹ 9,600
Off- season & -winter – 40% Occupancy 100 Rooms × 40% × 4 months × ₹ 30 per
months) month = ₹ 4,800
Total Lighting charges ₹ 57,600+ 9,600 + 4,800 = ₹ 72,000

Statement of total cost:

Particulars (₹ )
Staff salary 5,50,000
Repairs to building 2,61,000
Laundry & Linen 80,000
Interior 1,75,000
Sundries Expenses 1,90,800
Depreciation on Building (₹ 200 Lakhs × 80% × 5%) 8,00,000
Depreciation on Furniture & Equipment (₹ 200 Lakhs × 20% × 6,00,000
15%)
Room attendant’s wages (₹ 10 per Room Day for 21,600 Room 2,16,000

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Days)
Lighting charges 72,000
Total cost 29,44,800
Add: Profit Margin (20% on Room rent or 25% on Cost) 7,36,200
Total Rent to be charged 36,81,000

Calculation of Room Rent per day:

Total Cost / Equivalent Full Room days = ₹ 36,81,000/ 18,000 = ₹ 204.50
Room Rent during Season – ₹ 204.50
Room Rent during Off season = ₹ 204.50 × 50% = ₹ 102.25

Question 23. [May 2019 - Old]

Following are the information given by owner of M/s Moonlight Co. running a hotel at Manali. You are requested to
advise him regarding the rent to be charged from his customer per day so that he is able to earn 20% profit on cost other
than interest.
(i) Staff salaries - ₹ 4,00,000
(ii) The room attendant's salary is ₹ 10 per day. The salary is paid on daily basis and the services of room attendant
are needed only when the room is occupied. There is one room attendant for one room.
(iii) Lighting, heating and power:
a) The normal lighting expenses for a room if it is occupied for the whole month is ₹ 250.
b) Power is used only in winter and normal charge per month if occupied for a room is ₹ 100.
(iv) Repairs to building ₹ 50,000 per annum.
(v) Linen etc. ₹ 24,000 per annum.
(vi) Sundries ₹ 70,770 per annum.
(vii) Interior decoration and furnishing ₹ 50,000 per annum.
(viii) Cost of building ₹ 20,00,000, rate of depreciation 5%.
(ix) Other equipments ₹ 5,00,000, rate of depreciation 10%.
(x) Interest @ 5% may be charged on its investment of ₹ 25,00,000 in the building and equipment
(xi) There are 200 rooms in the hotel and 90% of the rooms are normally occupied in summer and 40% of the rooms
are occupied in winter. You may assume that period of summer and winter is six months each. Normal days in a
month may be assumed to be 30.

Question 24. [Study Material]

Following are the data pertaining to Infotech Pvt. Ltd, for the year 20X8-X9
Particulars Amount (₹ )
Salary to Software Engineers (5 persons) 15,00,000
Salary to Project Leaders (2 persons) 9,00,000
Salary to Project Manager 6,00,000
Repairs & maintenance 3,00,000
Administration overheads 12,00,000

The company executes a Project XYZ, the details of the same as are as follows:
Project duration – 6 months
One Project Leader and three Software Engineers were involved for the entire duration of the project, whereas Project
Manager spends 2 months’ efforts, during the execution of the project.
Travel expenses incurred for the project – ₹ 1,87,500
Two Laptops were purchased at a cost of ₹ 50,000 each, for use in the project and the life of the same is estimated to be
2 years.
PREPARE Project cost sheet.

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Solution 24:
Working notes:
(1) Calculation of Cost per month and Overhead absorption rate
Particulars Total Per Annum (₹ ) Per person per annum (₹ ) Per person per month (₹ )
Salary to Software Engineer 15,00,000 3,00,000 25,000
(5 Persons)
Salary to Project Leaders (2 9,00,000 4,50,000 37,500
persons)
Salary to Project Manager 6,00,000 6,00,000 50,000
Total 30,00,000 1,12,500

(2) Total Overhead = Repairs & maintenance + Administration overheads

= ₹ 3,00,000 + ₹ 12,00,000 = ₹ 15,00,000

(3) Calculation of Overhead absorption rate

= Total Overhead / Total Salary = ₹ 15,00,000 / ₹ 30,00,000 = 50%

Project cost sheet

Particulars (₹ )
Salary Cost:
Salary of Software Engineers (3 × ₹ 25,000 × 6 months) 4,50,000
Salary of Project Leader (₹ 37,500 ×6 months) 2,25,000
Salary of Project Manager (₹ 50,000 × 2 months) 1,00,000
Total Salary 7,75,000
Overheads (50% of Salary) 3,87,500
Travel Expenses 1,87,500
Depreciation on Laptops (₹ 1,00,000 / 2 years × 6 months) 25,000
Total Project Cost 13,75,000

Question 25. [Study Material]

BHG Toll Plaza Ltd built a 60 km. long highway and now operates a toll plaza to collect tolls from passing vehicles using
the same. The company has invested ₹ 600 crore to build the road and has estimated that a total of 60 crore vehicles will
be using the highway during the 10 years toll collection tenure. Toll Operating and Maintenance cost for the month of
April 20X9 are as follows:
(i) Salary to –
 Collection Personnel (3 Shifts and 4 persons per shift) - ₹ 150 per day per person
 Supervisor (2 Shifts and 1 person per shift) - ₹ 250 per day per person
 Security Personnel (3 Shifts and 2 persons per shift) - ₹ 150 per day per person
 Toll Booth Manager (2 Shifts and 1 person per shift) - ₹ 400 per day per person
(ii) Electricity – ₹ 80,000
(iii) Telephone – ₹ 40,000
(iv) Maintenance cost – ₹ 30 Lacs
(v) The company needs 25% profit over total cost to cover interest and other costs.

Required:
(i) CALCULATE cost per kilometer.
(ii) CALCULATE the toll rate per vehicle (assume there is only type of vehicle).

Solution 25:
Statement of cost
Particulars (₹ )

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A. Apportionment of capital cost ( x ) 5,00,00,000

B. Operating Cost
Salary to Collection Personnel (3 Shifts × 4 persons per shift × 30 days × ₹ 150 per day) 54,000
Salary to Supervisor (2 Shifts × 1 persons per shift × 30 days × ₹ 250 per day) 15,000
Salary to Security Personnel (3 Shifts × 2 persons per shift × 30 days × ₹ 150 per day) 27,000
Salary to Toll Booth Manager (2 Shifts × 1 persons per shift × 30 days × ₹ 400 per day) 24,000
Electricity 80,000
Telephone 40,000
2,40,000
C. Maintenance cost 30,00,000
Total (A + B + C) 5,32,40,000

(i) Calculation of cost per kilometer:

= = = ₹ 8,87,333.33

(ii) Calculation of toll rate per vehicle:

= = = ₹ 13.31

Working:
No. of vehicles using the highway per month

x = x = 50 lakhs

Question 26. [Study Material]

The loan department of a bank performs several functions in addition to home loan application processing task. It is
estimated that 25% of the overhead costs of loan department are applicable to the processing of home-loan application.
The following information is given concerning the processing of a loan application:

Direct professional labor:

Particulars (₹ )
Loan processor monthly salary: 2,40,000
(4 employees @ ₹ 60,000 each)
Loan department overhead costs (monthly)
Chief loan officer’s salary 75,000
Telephone expenses 7,500
Depreciation Building 28,000
Legal advice 24,000
Advertising 40,000
Miscellaneous 6,500
Total overhead costs 1,81,000

You are required to COMPUTE the cost of processing home loan application on the assumption that five hundred home
loan applications are processed each month.

Solution 26:
Statement showing computation of the cost of processing a typical home loan application
Particulars (₹ )
Direct professional labour cost 2,40,000
(4 employees @ ₹ 60,000 each)
Service overhead cost (25% of ₹ 1,81,000) 45,250
Total processing cost per month 2,85,250

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No. of applications processed per month 500

Total processing cost per home loan application 570.5

Question 27. [Study Material]

From the following data pertaining to the year 20X8-X9 PREPARE a cost statement showing the cost of electricity
generated per kWh by Chambal Thermal Power Station. Total units generated 10,00,000 kWh
Particulars (₹ )
Operating labour 15,00,000
Repairs & maintenance 5,00,000
Lubricants, spares and stores 4,00,000
Plant supervision 3,00,000
Administrative overheads 20,00,000
5 kWh. of electricity generated per kg of coal consumed @ ₹ 4.25 per kg. Depreciation charges @ 5% on capital cost of ₹
2,00,00,000.

Question 28. [May 2018 - Old]

A company wants to outsource the operations of its canteen to a contractor. The company will provide space for
cooking, free electricity and furniture in the canteen. The contractor will have to provide lunch to 300 workers of which
180 are vegetarian (Veg) and the rest are non-vegetarian (Non-Veg). In the case of non-veg meals, there will be a non-veg
item in addition to the veg items. A contractor who is interested in the contract has analysed the cost likely to be
incurred. His analysis is given below:
 Cereals - ₹ 8 per plate
 Veg items - ₹ 5 per plate
 Non-veg items - ₹ 15 per plate
 Spices - ₹ 1 per plate
 Cooking oil - ₹ 4 per plate
 One cook - Salary ₹ 13,000 per month
 Three helpers - Salary ₹ 7,000 per month per head
 Fuel - Two commercial cylinders per month, price ₹ 1,000 each.
On an average, the canteen will remain open for 25 days in a month. The contractor wants to charge the non-veg meals
at 1.50 times of the veg meals.
You are required to calculate:
(i) The price per meal (veg and non-veg separately) that contractor should quote if he wants a profit of 20% on his
takings.
(ii) The price per meal (separately for veg and non-veg) that a worker will be required to pay if the company
provides 60% subsidy for meals out of welfare fund.

Question 29. [May 2018 - New]

A group of 'Health Care Services' has decided to establish a Critical Care Unit in a metro city with an investment of ₹ 85
lakhs in hospital equipments. The unit's capacity shall be of 50 beds and 10 more beds, if required, can be added. Other
information for a year are as under:
(₹)
Building Rent 2,25,000 per month
Manager Salary (Number of Manager-03) 50,000 per month to each one
Nurses Salary (Number of Nurses-24) 18,000 per month to each Nurse
Ward boy’s Salary (Number of ward boys’ -24) 9,000 per month per person
Doctor’s payment (Paid on the basis of number of patients 5,50,000 per month
attended and time spent by them)
Food and laundry services (variable) 39,53,000
Medicines to patients (variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year

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Depreciation on equipments 15% per annum on original cost

It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were occupied and for 60 days 20
beds were occupied. The hospital hired 250 beds at a charge of ₹ 950 per bed to accommodate the flow of patients.
However, this never exceeded the normal capacity of 50 beds on any day. Find out:
(i) Profit per patient day, if hospital charges on an average ₹ 2,500 per day from each patient.
(ii) Break even point per patient day (Make calculation on annual basis)

Question 30. [May 2019 - New]

(a) X Ltd. distributes' its goods to a regional dealer using single lorry. The dealer premises are 40 kms away by road. The
capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the outward journey and
empty on return journey. The following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ₹ 60 per litre
Engine Oil ₹ 200 per week
Driver's Wages (fixed) ₹ 2,500 per week
Repairs ₹ 600 per week
Garage Rent ₹ 800 per week
Cost of Lorry (excluding cost of tyres) ₹ 9,50,000
Life of Lorry 1,60,000 kms
Insurance ₹ 18,200 per annum
Cost of Tyres ₹ 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ₹ 1,50,000
Vehicle License Cost ₹ 7,800 per annum
Other Overhead Cost ₹ 41,600 per annum
The lorry operates on a 5 day week.
Required:
(i) A statement to show the total cost of operating the vehicle for the four week period analysed into Running cost and
Fixed cost
(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year).

 Commercial Tonne Km and Freightage

Question 31.
A Transport Undertaking maintains a fleet of Lorries for carrying goods from Kolkata to Haldia, 100 kms off. Each Lorry
which operates for 25 days on an average in a month, starts every day from Kolkata with a load of 4 tonnes and returns
with a load of 2 tonnes.
1. Calculate the Commercial Tonne-Kms, and the Cost per Commercial Tonne-Km, when the total monthly charges for
a Lorry are ₹ 90,000.
2. What Rate per Tonne should the undertaking charge if it plans to earn a Gross Profit of 20% on the Freightage?

Question 32. [NOV 08]

A Transport Company has 20 vehicles, which capacities are as follows –
No. of Vehicles 5 6 7 2
Capacity per Vehicle 9 Tonne 12 Tonne 15 Tonne 20 Tonne
The Company provides goods transport service between Station ‘A’ to Station ‘B’. Distance between these Stations is 200
kilometers. Each Vehicle makes one trip per day an average. Vehicles are loaded with an average of 90% of capacity at

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the time of departure from Station ‘A’ to Station ‘B’ and at the time of return back loaded with 70% of capacity. 10% of
vehicles are laid up for repairs every day.

The following information relate to October –

Salary of Transport Manager ₹ 30,000 Cost of Diesel per litre ₹ 35
Salary of 30 Drivers ₹ 4,000 each Driver Kilometres run per litre each vehicle 5 km
Wages of 25 Helpers ₹ 2,000 each Helper Lubricant, Oil, etc. ₹ 23,500
Wages of 20 Labourers ₹ 1,500 each Labourer Cost of replacement of Tyres, Tubes, etc. ₹ 1,25,000
Consumable Stores ₹ 45,000 Garage Rent (Annual) ₹ 90,000
Insurance (Annual) ₹ 24,000 Transport Technical Service Charges ₹ 10,000
Road Licence (Annual) ₹ 60,000 Electricity and Gas Charges ₹ 5,000
Depreciation of Vehicles ₹ 2,00,000
There is a Workshop attached to the Transport Department which repairs these vehicles and other vehicles also. 40% of
Transport Manager’s Salary is debited to the Workshop. The Transport Department is charged ₹ 28,000 for the service
rendered by the Workshop during October. During October, operation was 25 days.
Required:
 Calculate per Ton-Km Operating Cost.
 Find out the freight to be charged per ton-km, if the Company earned a profit of 25% on Freight.

 Cost Recovery from Students – Differential collection of Tickets Fares

Question 33. [MAY 04]

EPS 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 km. 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 are as under –

Driver's Salary payable for all the 12 months ₹ 5,000 per month per Driver
Cleaner's Salary payable for all the 12 months (One Cleaner employed for every 5 ₹ 3,000 per month per
buses) Cleaner
Licence Fees, Taxes, etc. ₹ 2,300 per bus per annum
Insurance Premium ₹ 15,600 per bus per annum
Repairs and Maintenance ₹ 16,400 per bus per annum
Purchase Price of the Bus ₹ 16,50,000 each
Life of the Bus 16 years
Scrap Value ₹ 1,50,000
Diesel Cost ₹ 18.50 per litre
Each bus gives an average of 10 km 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 the range of Distance from Percentage of Students availing this
the School Bus Fee facility
25% of
4 Km full 15%
8 Km 50% of 30%

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full
16 Km Full 55%
Ignore interest. Since the bus fees has to be based on Average Cost, you are required to –
1. Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year.
2. Work out Average Cost per student per month in respect of –
(a) Students coming from a distance of upto 4 km from the school;
(b) Students coming from a distance of upto 8 km from the school; and
(c) Students coming from a distance of upto 16 km from the school.

 Computation of Freight Rates

Question 34. [NOV 01]
Efficient Transport Company has a fleet of three trucks of 10 tonnes capacity each plying in different directions for
transport of customers goods. The trucks run loaded with goods and return empty. The distance travelled, number of
trips made and the load carried per day by each truck are as under –
Truck No. One way Distance Km. No. of trips per day Load carried per trip/ day tonnes
1 16 4 6
2 40 2 9
3 30 3 8

The analysis of maintenance cost and the total distance travelled during the last two years is as under –
Year Total distance travelled Maintenance Cost
1 1,60,200 kms ₹ 46,050
2 1,56,700 kms ₹ 45,175
The following are the details of expenses for the year under review –
 Diesel : ₹ 10 per litre. Each Truck gives 4 km per litre of diesel on an average.
 Driver’s Salary : ₹ 2,000 per month.
 License and Taxes : ₹ 5,000 per annum per Truck.
 Insurance : ₹ 5,000 per annum for all the three vehicles.
 Purchase Price per truck : ₹ 3,00,000. Life is 10 years. Scrap Value at the end of life is ₹ 10,000.
 General Overhead : ₹ 11,084 per annum.
 Oil and sundries : ₹ 25 per 100 km run.
The vehicles operate 24 days per month on an average. Required:
1. Prepare an Annual Cost Statement covering the fleet of three vehicles.
2. Calculate the cost per km. run.
3. Determine the freight rate per tonne km. to yield a profit of 10% on freight.

Fare Computation for Passenger Transport Services

Question 35. [MAY 89]

Shankar has been promised a contract to run a car on a 20 km long route for the Chief Executive of a Firm. He buys a
luxury car costing ₹ 15 Lakhs. The annual cost of insurance and taxes are ₹ 45,000 and ₹ 9,000 respectively. He has to
pay ₹ 5,000 per month for a garage where he keeps the car when it is not in use. The annual repair costs are estimated
to be ₹ 40,000.
The Car is estimated to have a life of 10 years at the end of which the scrap value is likely to be ₹ 5 Lakhs. He hires a
driver who will be paid ₹ 3,000 p.m. plus 10% of the takings as commission. Other incidental expenses are estimated at ₹
2,000 p.m.
Petrol, Oil and Consumables will cost ₹ 1,000 per 100 km. The car will make 4 round trips each day. Assuming that a
profit of 15% on takings is desired and that the car will be on the road for 25 days on an average per month, what should
be the charge per round trip?

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Question 36. [NOV 13]

The following information relates to a bus operator:
Cost of the bus ₹ 18,00,000
Insurance charges 3%
Manager-cum accountant’s salary ₹ 8,000 p.m.
Annual tax ₹ 50,000
Garage rent ₹ 2,500 p.m.
Annual repair & maintenance ₹ 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ₹ 1,20,000
Driver’s salary ₹ 15,000 p.m.
Conductor’s salary ₹ 12,000 p.m.
Stationery ₹ 500 p.m.
Engine oil, lubricants (for 1,200 kms.) ₹ 2,500
Diesel & oil (for 10 kms.) ₹ 52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long

The bus will make 3 round trips for carrying on the average 40 passengers in each trip. Assume 15% profit on collections.
The bus will work on the average 25 days in a month. Calculate fare for passenger – km.

 Fare to be Charged – Cost per Tonne – km

Question 37. [RTP (ADAPTED)]

The Union Transport Company supplies the following details in respect of a 5-Tonne truck:
Cost of Truck (depreciated on SLM) ₹ 6,75,000
Estimated Life 10 years
Scrap Value after ten years ₹ 36,000
Diesel, Oil, Grease etc. ₹ 112.50 per trip each way
Repairs and Maintenance ₹ 3,750 per month
Driver’s Wages ₹ 3,750 per month
Cleaner’s Wages ₹ 1,875 per month
Annual Insurance Premium ₹ 23,100
Road Tax and other charges ₹ 12,000 per year
General Supervision Charges ₹ 36,000 per year
The truck makes one trip daily and carries goods to and from the city covering a distance of 25 kms each way. On the
outward trip, freight is available to the extent of full capacity and on return 20% of capacity.
Assume that the Truck runs on an average 25 days a month, work out the –
1. Operating Cost per truck per month and per Tonne-Km.
2. Rate per tonne per trip that the Company should charge if a profit of 50% on Freightage is to be earned.

 Decision Making on Mode of Transport

Question 38. [RTP (ADAPTED)]

Which One Co. presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from
the yard located 6 km away to factory is ₹ 50 per tonne.
The total Coal to be handled in a month is 24,000 Tonnes. The company is considering proposal to buy its own truck and
has the option of buying either a 10 Tonne capacity or a 8 Tonne capacity truck. The following information is available:

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Particulars 10 tonne capacity Truck 8 Tonne capacity Truck

Purchase Price ₹ 10,00,000 ₹ 8,50,000
Life (Years) 5 5
Scrap Value at the end of 5 year Nil Nil
Km. per litre of Diesel & Oil 3 4
Repairs & Maintenance p.a. per truck ₹ 60,000 ₹ 48,000
Other Fixed Expenses p.a. ₹ 60,000 ₹ 36,000

 Each truck will daily make 5 trips (to and fro) on an average for 24 days in a month.
 Cost of Diesel & Oils is ₹ 45 per litre.
 Salary of Drivers will be ₹ 6,000 per month – Two drivers will be required for a Truck.
 Other Staff Expenses ₹ 1,08,000 p.a.
Prepare a comparative Cost Sheet on the basis of above data showing transport cost per tonne of operating 10 tonne and
8 tonne Truck at full capacity utilization. Also give your conclusions.

Solution 38:
Statement of Operating Costs per month
Particulars 10 MT Truck 8 MT Truck
Driver's Salary 2,40,000 3,00,000
Depreciation 3,33,340 3,54,175
Diesel 4,32,000 4,05,000
Repairs & Maintenance ₹ 60,000 × × 20 trucks = 1,00,000 ₹ 48,000 × × 25 trucks = 1,00,000

Other Fixed Expenses ₹ 60,000 × = 5,000 ₹ 36,000 × = 3,000

Staff Expenses ₹ 1,08,000 × = 9,000 ₹ 1,08,000 × = 9,000

Total 11,19,340 11,71,175
Quantity handled 24,000 MT 24,000 MT
Cost per MT ₹ 46.64 ₹ 48.80
Decision: Between 10 MT and 8 MT Truck, 10 MT Truck is more economical. Hence, the Company should switch over
from existing carrier at ₹ 50 per MT to own fleet of 10 MT trucks at ₹ 46.64 per MT.

Working Notes on Cost Items:

Particulars 10-MT Truck 8-MT Truck
Number of trips per truck per month 5 trips × 24 days = 120 trips 5 trips × 24 days = 120 trips
Coal quantity required to be brought 24,000 MT 24,000 MT
Quantity per trip 120 trips × 10 = 1,200 MT 120 trips × 8 = 960 MT
Number of Trucks required (24,000/1,200) 20 trucks 25 trucks
Number of Drivers required (20 × 2) 40 Drivers 50 Drivers
Driver's Salary ₹ 6,000 (20 × ₹ 6,000} ₹ 2,40,000 ₹ 3,00,000
Depreciation per truck per month ₹ 16,667 ₹ 14,167
Depreciation for 20 and 25 trucks ₹ 3,33,340 ₹ 3,54,175
Kilometres covered per truck per month = 5 trips 2 ways 24 days 6 kms = 1,440 kms
Kilometres covered by 20 and 25 trucks 1,440 × 20 = 28,800 kms 1,440 × 25 = 36,000 kms
Diesel Cost × ₹ 45 = ₹ 4,32,000 × ₹ 45 = ₹ 4,05,000

Note: Depreciation per truck per month is calculated as under:

10-MT Truck: × = 16,667. 8-MT Truck: × = 14,167.

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 Cost Per Ton – Mile

Question 39. [MAY 86]]

A chemical factory runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, whose depots are
situated at a distance of 12 and 8 miles from the factor site. Transportation of furnace oil is made by the Company’s own
tanker lorries of 5 Tons capacity each Onward trips are made only on full load and the lorries return empty. The filling-in-
time takes an average 40 minutes for Indian Oil and 30 minutes for Bharat Petroleum. But the emptying time in the
factory is only 40 minutes for all. From the records available, it is seen that the average speed of the company’s lorries
works out to 24 miles per hour. The varying operating charges average 60 paise per mile covered and fixed charges given
an incidence of ₹ 7.50 per hour of operation. Calculate the cost per ton-mile for each source.

 Service Costing and Decision Making - Airlines

Question 40. [MAY 05]

In order to develop tourism, ABCL Airlines has been given permit to operate three flights in a week between X and Y
cities (both sides). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is estimated at 60%
throughout the year of 52 weeks. The one-way fare is ₹ 7,200. The costs of operation of the flights are –
Fuel Cost (Variable) ₹ 96,000 per flight
Food served on board on non-chargeable basis ₹ 125 per passenger
Commission 5% of fare applicable for all booking
Fixed Costs: Aircraft Lease ₹ 3,50,000 per flight
Landing Charges ₹ 72,000 per flight
1. Calculate the Net Operating Income per Flight.
2. The Airline expects that that is occupancy will Increase to 108 passengers per flight if the fare is reduced is reduced
to ₹ 6,720. Advise whether this proposal should be implemented or not.
3.
Solution 40:
1.
Particulars Present Situation Fare Reduction Proposal
Number of Passengers 160 × 60% = 96 Given = 108
Gross Revenue per Flight 96 × 7,200 = 6,91,200 108 x 6,720 = 7,25,760
Less: Variable Costs per Flight
Fuel 96,000 96,000
Food to passengers 96 × 125 = 12,000 108 × 125 = 13,500
Commission at 5% of Gross Revenue 34,560 36,288
Contribution per Flight 5,48,640 5,79,972
Less: Fixed Costs per Flight
Aircraft Lease 3,50,000 3,50,000
Landing Charges 72,000 72,000
Net Operating Income per Flight 1,26,640 1,57,972
2. Decision: The Fare Reduction Proposal (and consequent increase in the number of passengers) will increase the
Operating Income per Flight by ₹ 1,57,972 – ₹ 1,26,640 = ₹ 31,332. Hence, the proposal is worthwhile.

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 Nursing Home – Room Rent to be Charged

Question 41. [RTP]

Curers & Healers Inc. hire a building to run a Nursing Home. The building has 4,000 square feet of area consisting of 20
rooms of 120 square feet each. The rest is General Area. The monthly rent has been agreed at ₹ 10 per square foot.
Lighting and Heating expenses are ₹ 40,000 per month. The Staff would consist of – (a) Two Doctors at ₹ 30,000 per
month each, (b) Six Nurses at ₹ 9,000 per month each, and (c) Four General Helpers at ₹ 6,000 per month each.
rd
It is expected that 80% of the rooms will always remain occupied. If a Margin of 1/3 on Takings is desired to cover other
expenses, ascertain the Rent to be charged assuming a month of 30 days.

Solution 41:
Particulars ₹
Rent (4,000 square feet × ₹ 10) 40,000
Lighting and Heating 40,000
Staff Salary (Doctors: ₹ 30,000 × 2 persons) 60,000
(Nurses: ₹ 9,000 × 6 persons) 54,000
(General Helpers: ₹ 6,000 × 4 persons) 24,000
Total of above Costs 2,18,000
rd
Add: Margin (1/3 on Taking = ½ on Cost) 1,09,000
Desired Takings 3,27,000
Room-days per month (20 rooms × 80% occupancy × 30 days = 480 room-days)

Rent to be charged per room-day 681.25

 Hotel Service – Various Types of Rooms – Rent to be collected

Question 42. [MAY 07, Study Material]

A Company runs a Holiday Home. For this purpose, it has hired a building at a rent of ₹ 10,000 per month along with 5%
of total taking. It has three types of suites for its customers, viz., Single Room, Double Rooms and Triple Rooms.
Following information is given:
Type of Suite Number Occupancy Percentage
Single Room 100 100%
Double Rooms 50 80%
Triple Rooms 30 60%
The rent of Double Rooms Suite is to be fixed at 2.5 times of the Single Room Suite and that of Triple Rooms Suite as
twice of the Double Rooms Suite. The other expenses for the year are as follows:

Staff Salaries ₹ 14,25,000 Repairs and Renovation ₹ 1,23,500

Room Attendants’ Wages ₹ 4,50,000 Laundry Charges ₹ 80,500
Lighting, Heating and Power ₹ 2,15,000 Interior Decoration ₹ 74,000
Sundries ₹ 1,53,000
Provide Profit at 20% on total taking and assume 360 days in a year. Find room rent for each type of room.

 Ascertainment of Cost Per Student – Service Costing

Question 43. [RTP]

A Professional Institute has organized a correspondence course for the benefit of its students who have to undergo two
levels of education – Inter and Final, the latter being open only to those who pass the former. The number of students

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involved per annum is 12,500 and 5,000 for Inter and Final Levels respectively. The Fixed Expenses for two courses taken
together are:

Salaries Rent, Lighting etc. ₹ 2,45,000

– Academic ₹ 13,44,000 Postage, Telephone, etc. ₹ 1,75,000
– General ₹ 3,15,000 Stationery ₹ 1,96,000

The following further details are available:

Particulars Inter Final
Number of Study papers 100 125
Number of pages per Study Paper 50 60
Cost per Page (paise) 8 10
Packing and Forwarding per set ₹ 125 ₹ 200
Number of annual papers to be submitted 8 10
Cost of correcting and forwarding one answer paper ₹ 50 ₹ 50
Ascertain the cost of imparting tuition per student for the two courses. [Note: Apportion all Fixed Costs on the basis of
number of students.]

Solution 43:
Statement of Operating Cost per student
Particulars Inter Final
Variable Costs: Study Materials 100 × 50 × ₹ 0.08 = ₹ 400 125 × 60 × ₹ 0.10 = ₹ 750
Packing & Forwarding ₹ 125 ₹ 200
Valuation 8 × ₹ 50 = ₹ 400 10 × ₹ 50 = ₹ 500
Fixed Cost (See WN 1 below) ₹ 130 ₹ 130
Total ₹ 1,055 ₹ 1,580
Working Notes:
Average Fixed Cost per student = = ₹ 130

 Miscellaneous Theory

 Operation Cost and Operating Cost

Question 44. [NOV 86, NOV 91]

Distinguish between Operation Cost and Operating Cost.
Solution 44:
Operation Cost Operating Cost
 When output is converted from one form to another it is  Total Cost of providing a service or utility is called
called Operating
an operation. Operation Cost is the Cost of each
Operation. Cost.
 Operation has tangible, measurable and homogeneous
output.  Output is not tangible as only services are provided.
 Costs are divided into Direct Materials, Direct Labour,  Costs are divided into Fixed or Standing Charges, Variable
Direct or
Running Charges and Semi-Variable or Maintenance
Expenses and Production Overheads. Charges.
 Operation Cost per unit is determined by dividing the  Cost of rendering the service is ascertained rather than
Total Cost of
Operation Cost by Total Output. Manufacturing a Product.

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Chapter-13
Standard Costing
 Meaning
Question 1. [NOV 75, NOV 15]
What is meant by Standard Costing and outline the steps involved therein.

Solution:
Standard Costing refers to ‘’the preparation and use of Standard Costs, their comparison with Actual Costs and the Analysis of
Variances to their causes and points of incidence.’’
Steps:
(a) Setting up of Standards,
(b) Ascertainment of Actual Costs,
(c) Comparison of Actual and Standard costs to determine Variances, and
(d) Investigation of variances and taking appropriate action thereon wherever necessary.

Source Table
Standard for Actual Actual Revised Quantity
Particulars
Qty/hrs Rate Amount Qty/hrs Rate Amount × Standard for Actual Output

Material
Labour
Variable O/H
Notes:
1) If we have more than one type of input like Material A, Material B etc. and a single Variance is given it means the sum of
individual variances. (So, we see the net variance).
2) For calculating labour variance multiply No. of labour with hours to be used in hours column.

 TYPES OF VARIANCES
A) COST VARIANCE
B) SALES VARIANCE

(A) COST VARIANCES

Cost
Variances

Direct Material Direct Labour Variable O/H Fixed O/H

Variance Variance Variance Variance

I. Direct Material Variances

Mix Variance
Quantity
Usage/Variance
Direct Material Yield or Revised
Cost Variance Usage Variance
Price Variance

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(1) Direct Material Cost Variance = (Standard material cost for actual output produced – Actual cost of material used)
= (Standard Quantity for actual output × Standard Price) – (Actual Quantity × Actual Price)
(2) Direct Material Price Variance = (Standard Price – Actual Price) × Actual Quantity

(3) Direct Material Usage / Quantity Variance = (Standard Quantity for actual output – Actual Quantity) × Standard Price

(4) Direct Material Mix Variance = (Revised Standard Quantity – Actual Quantity) × Standard Price

Revised Standard Quantity = Standard Quantity for Actual Output ×

Or
Revised Standard Quantity = Standard Quantity for Total Actual Mix

(5) Direct Material Yield Variance = (Standard Quantity for actual output – Revised Standard Quantity) × Standard Price

 Basics
Question 2. [RTP, NOV 75, STUDY MATERIAL]
A manufacturing concern which has adopted Standard Costing furnishes the following information:
Standard Quantity of Materials for 70 kg of Finished Products 100 kg.
Standard Price of Materials Rs. 1 per kg.
Actual Output 2,10,000 kg.
Materials used 2,80,000 kg.
Actual Cost of Materials Rs. 2,52,000
Calculate – (a) Materials Usage Variance, (b) Material Price Variance and (c) Material Cost Variance.

Question 3. [NOV 08]

UV Ltd. presents the following information for November, 2008:
Budgeted Production of Product P = 200 units.
Standard Consumption of Raw Materials = 2 kg. per unit of P.
Standard Price of Material A = Rs. 6 per kg.
Actually, 250 units of P were produced and Material A was purchased at Rs. 8 per kg and consumed at 1.8 Kg per unit of P.
Calculate the Material Cost Variances.

Question 4. [MAY 13]

Following are the details of the product Phomex for the month of April 2013:
Standard quantity of material required per unit 5kg
Actual output 1,000 units
Actual cost of materials used Rs. 7,14,000
Material price variance Rs. 51,000 (Fav)
Actual price per kg of material is found to be less than standard price per kg of material by Rs. 10. You are required to
calculate:
(i) Actual quantity and Actual price of materials used.
(ii) Material Usage Variance
(iii) Material Cost Variance

 All Material Variances

Question 5. [STUDY MATERIAL]
J.K. Ltd. manufactures NXE by mixing three raw materials. For every batch of 100 kgs. of NXE, 125 kgs. of raw materials are used.
In April, 2008, 60 batches were prepared to produce an output of 5,600 kgs. of NXE. The standard and actual particulars for April,
2008 are as follows:
Standard Actual Quantity of Raw Materials Purchased

Raw Materials Mix Price per kg. Mix Price per kg.
% Rs. % Rs. Kg.

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A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate all variances.

Question 6. [STUDY MATERIAL (ADAPTED),NOV 2017(similar),MAY 2018(similar)]

Gemini Chemical Industries provide the following information from their records:
For making 10 kgs. of GEMCO, the standard material requirements is:
Material Quantity (Kgs.) Rate per kg. (Rs.)
A 8 6.00
B 4 4.00

During April 1988, 1,000 kg of GEMCO were produced. The actual consumption of materials is as under:
Material Quantity Rate per kg. (Rs.)
A 750 7.00
B 500 5.00
Calculate:
(a) Material Cost Variance
(b) Material Price Variance
(c) Material Usage Variance
(d) Material Mix Variance
(e) Material Yield Variance.

 Cost of Actual Quantity – Stock Valuation

Question 7. [MAY 80, NOV 91]
Eskay Ltd. produces an article by blending two basic raw materials. The following standards have been set up for raw materials:
Material Standard Mix Standard Price per kg.
A 40% Rs. 4.00
B 60% Rs. 3.00

The standard loss in processing is 15%. During September, 1990, the company produced 1,700 kg. of finished output.
The position of stock and purchases for the month of September, 1990 is as under:
Material Stock on 1.9.90 Stock on 30.9.90 Purchased during September, 90
Kg. Kg. Kg. Cost (Rs.)
A 35 5 800 3,400
B 40 50 1,200 3,000
Calculate the following variances:
(a) Material price variance
(b) Material usage variance
(c) Material yield variance
(d) Material mix variance
(e) Total material cost variance.
Assume first in first out method for the issue of material. The opening stock is to be valued at standard price.

 Computation of Missing Data – Reverse Working

Question 8. [NOV 94]

Compute the missing data indicated by the Question Marks from the following:
Particulars A B
Standard Price/Unit Rs. 12 Rs. 15

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Actual Price/Unit Rs. 15 Rs. 20

Standard Input (kgs.) 50 ?
Actual Input (Kgs.) ? 70
Material Price Variance ? ?
Material Usage Variance ? Rs. 300 (Adverse)
Material Cost Variance ? ?
Material mix variance for both products together was Rs. 45 Adverse.

Question 9. [MAY 09]

Following details relating to product X during the month of April, 2009 are available:
Standard cost per unit of X:
Materials: 50 kg @ Rs. 40/kg
Actual production: 100 units
Actual material cost: Rs. 42/kg
Material price variance: Rs. 9,800 (Adverse)
Material usage variance: Rs. 4,000 (Favourable)
Calculate the actual quantity of material used during the month April, 2009.

Question 10.
One Kilogram of Product ‘K’ requires two chemicals A and B. The following were the details of Product ‘K’ for the month of June
2007:
(a) Standard Mix Chemical ‘A’ 50% and chemical ‘B’ 50%.
(b) Standard Price per kilogram of Chemical ‘A’ Rs. 12 and Chemical ‘B’ Rs. 15.
(c) Actual Quantity of Chemical ‘B’ 70 kilograms.
(d) Actual Price per kilogram of Chemical ‘A’ Rs. 15.
(e) Standard Normal Loss 10% of Total Input.
(f) Materials Cost Variance total Rs. 650 adverse.
(g) Materials Yield Variance total Rs. 135 adverse.
(h) Actual Output is 90 kg.
You are required to calculate:
(1) Material Mix Variance
(2) Material Usage Variance
(3) Material Price Variance
(4) Actual Loss of Actual Input
(5) Actual Input of Chemical ‘A’
(6) Actual Price per kilogram of Chemical ‘B’.

II. Direct Labour Variances

Rate Variance
Mix or Gang
Variance
Direct Labour Time or Efficiency
Cost Variance Variance
Yield Variance
Idle Time
Variance

(1) Direct Labour Cost Variance = (Standard labour cost for actual output produced – Actual Cost of labour paid for)
= (Standard hours for actual output × Standard Rate) – (Actual hours × Actual Rate)

(2) Direct Labour Rate Variances = (Standard Rate – Actual Rate) × Actual Hours paid for

(3) Direct Labour Efficiency / Time Variance = (Standard hours for actual output – Actual hours worked) × Standard Rate

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(4) Direct Labour Mix Variance = (Revised standard hrs for actual hrs worked – Actual hrs worked) × Standard Rate

(5) Direct Labour Yield Variance = (Actual Output – Standard output for actual) × Standard cost per unit of output
= (Standard hours for actual – Revised standard hours) × Standard Rate
Revised Standard Hours = Standard Hours for Actual output ×

(6) Idle Time Variance = Idle Time in hours × Standard Rate

 Labour Cost Variances – Various Groups and Idle Time

Question 11. [STUDY MATERIAL (ADAPTED),MAY 2019(similar)]
100 skilled workmen, 40 semi-skilled workmen and 60 unskilled workmen were to work for 30 weeks to get a contract job
completed. The standard weekly wages were Rs. 60, Rs. 36 and Rs. 24 respectively. The job was actually completed in 32 weeks by
80 skilled, 50 semi-skilled and 70 unskilled workmen who were paid Rs. 65, Rs. 40 and Rs. 20 respectively as weekly wages. Find
out the labour cost variance, labour rate variance, labour mix variance and labour efficiency variance.

Question 12.
A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at standard hourly rates of Rs. 1.25,
Re. 0.80 and Re. 0.70 respectively. In a normal working week of 40 hours the gang is expected to produce 1,000 units of output.
In a certain week, the gang consisted of 13 men, 4 women and 3 boys. Actual wages were paid at the rates of Rs. 1.20, Re. 0.85
and Re. 0.65 respectively. Two hours were lost due to abnormal idle time and 960 units of output were produced. Calculate
various Labour Variances.

Question 13. [NOV 12]

The standard labour employment and the actual labour engaged in a 40 hours week for a job are as under:
Standard Actual

Category of
No. of Wage Rate Per Hour No. of Wage Rate Per Hour
Workers
Workers Rs. Workers Rs.

Skilled 65 45 50 50
Semi-skilled 20 30 30 35
Unskilled 15 15 20 10

Standard output : 2000 units; Actual output : 1800 units; Abnormal Idle time 2 hours in the week. Calculate:
(i) Labour Cost Variance
(ii) Labour Efficiency Variance
(iii) Labour Idle Time Variance.

Question 14. [MAY 97]

The standard output of Product ‘EXE’ is 25 units per hour in manufacturing department of a company employing 100 workers. The
standard wage rate per labour hour is Rs. 6.
In a 42 hour week, the department produced 1,040 units of ‘EXE’ despite 5% of the time paid was lost due to an abnormal reason.
The hourly wage rate actually paid were Rs. 6.20, Rs. 6 and Rs. 5.70 respectively to 10, 30 and 60 of the workers. Compute labour
cost, rate, efficiency & idle time variances.

Question 15. [MAY 2019]

Following information relates to labour of KAY PEE Ltd.:
Particulars Skilled Semi-skilled Unskilled Total
Number of workers in standard 12 8 5 25
gang
Standard rate per hour(Rs.) 75 50 40 -
Number of workers in actual gang 25

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Actual rate per hour (Rs.) 80 48 42

The standard output of gang was 12 units per hour of the product M. The gang was engaged for 200 hours during the month of
March 2019 out of which 20 hours were lost due to machine breakdown and 2,295 units of product M were produced. The actual
number of skilled workers was 2 times the semi-skilled workers. Total labour mix variance was Rs.10,800 (A).

You are required to calculate the following:

(i) Actual number of workers in each category.
(ii) Labour rate variance.
(iii) Labour yield variance.
(iv) Labour efficiency variance

III. Variable Overhead Variances

Expenditure / Spending Variance

Variable O/H
Variance
Efficiency Variance

(1) Variable O/H Cost Variances = (Standard Variable Overheads Cost for Actual Output – Actual Variable
Overheads)
= (Standard hours for actual output × Standard Rate) – (Actual hours × Actual Rate)
(2) Variable O/H Expenditure Variances = (Standard Overheads absorption Rate – Actual Rate) × Actual Hours
(3) Variable O/H Efficiency Variances = (Standard hours for actual output – Actual hours) Standard Variable O/H Rate

 Practical Problems
Question 16. [NOV 97]
The following data is given:
Budget Actual
Production (in units) 400 360
Man hours to produce above 8,000 7,000
Variable overheads (in Rs.) 10,000 9,150
The standard time to produce one unit of the product is 20 hours.
Calculate variable overhead variances.
Question 17. [STUDY MATERIAL]
From the following information of G Ltd., CALCULATE (i) Variable Overhead Cost Variance; (ii) Variable Overhead Expenditure
Variance and (iii) Variable Overhead Efficiency Variance:
Budgeted production 6,000 units
Budgeted variable overhead Rs. 1,20,000
Standard time for one unit of output 2 hours
Actual production 5,900 units
Actual overhead incurred Rs. 1,22,000
Actual hours worked 11,600 hours

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IV. Fixed Overhead Variances

Expenditure
Variance
Fixed O/H Efficiency
Variance Variance
Volume Calendar
Variance Variance
Capacity
Variance
Capacity
Variance

(1) Fixed O/H Cost Variance = (Standard Fixed Overheads Cost for Actual Output – Actual Fixed Overheads)
= (Standard hours for actual output × Standard Rate) – (Actual hours × Actual Rate)

(2) Fixed O/H Expenditure Variance = Budgeted fixed overheads – Actual fixed overhead

(3) Fixed O/H Volume Variance = (Standard Hours for Actual Output × Standard Rate) – Budgeted O/H

(4) Fixed O/H Efficiency Variance = (Standard hours for actual output – Actual hours) × Standard Rate

(5) Fixed O/H Capacity Variance = (Actual hours – Budgeted hours) × Standard Rate

(6) Fixed O/H Calendar Variance = (Possible hours – Budgeted hours) × Standard rate
Possible hours = (Standard working hours per day × Actual number of working
days)

(7) Fixed O/H Revised Capacity Variances = (Actual hours – Possible hours) × Standard rate

 Practical Problems
Question 18. [MAY 98, STUDY MATERIAL]
A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fixed overheads are
budgeted at Rs. 1,44,000 per month. The standard time required to manufacture one unit of product is 4 hours.
In April, 1998, the company worked 24 days of 840 machine hours per day and produced 5,305 units of output. The actual fixed
overheads were Rs. 1,42,000.
Compute:
(i) Cost Variance
(ii) Efficiency Variance
(iii) Capacity Variance
(iv) Calendar Variance
(v) Expense Variance
(vi) Volume Variance
(vii) Total fixed overheads Variance.

Question 19. [NOV 81, STUDY MATERIAL, NOV 2018(similar)]

S. LTD. has furnished you the following data:
Particulars Budget Actual
Number of working days 25 27
Production in units 20,000 22,000
Fixed overheads Rs. 30,000 Rs. 31,000
Budgeted fixed overhead rate is Rs. 1 per hour. During the year, the actual hours worked were 31,500. Calculate the following
variances:
1. Fixed Overhead Cost Variance
2. Fixed Overhead Expenditure Variance
3. Fixed Overhead Volume Variance
4. Fixed Overhead Efficiency Variance
5. Fixed Overhead Capacity Variance

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6. Fixed Overhead Calendar Variance
7. Fixed Overhead Revised Capacity Variance.

Question 20. [MAY 14]

XYZ Co. Ltd. provides the following information:
Particulars Standard Actual
Production 4,000 units 3,800 units
Working Days 20 21
Fixed Overhead Rs. 40,000 Rs. 39,000
Variable Overhead Rs. 12,000 Rs. 12,000

You are required to calculate the following overhead variances:

a) Variable Overhead Variance
b) Fixed Overhead Variance
(i) Expenditure variance
(ii) Volume variance

Question 21. [study material]

The overhead expense budget for a factory producing to a capacity of 200 units per month is as follows:

Description of overhead Fixed cost per unit Variable cost per Total cost per unit
in Rs. unit in Rs. in Rs.
Power and fuel 1,000 500 1,500
Repair and maintenance 500 250 750
Printing and stationery 500 250 750
Other overheads 1,000 500 1,500
3,000 1,500 4,500

The factory has actually produced only 100 units in a particular month. Details of overheads actually incurred have been provided
by the accounts department and are as follows:
Description of overhead Actual cost (Rs)
Power and fuel 4,00,000
Repair and maintenance 2,00,000
Printing and stationery 1,75,000
Other overheads 3,75,000

You are required to CALCULATE the Overhead volume variance and the overhead expense variances.

Question 22. [study material]

The following information was obtained from the records of a manufacturing unit using standard costing system:
Particulars Standard Actual
Production 4,000 units 3,800 units
Working Days 20 21
Machine hours 8,000 hours 7,800 hours
Fixed Overhead Rs. 4,00,000 Rs. 3,90,000
Variable Overhead Rs. 1,20,000 Rs. 1,20,000
You are required to CALCULATE the following overhead variance:
(a) Variable overhead variances
(b) Fixed overhead variances

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 Variable and Fixed Overhead Variances

Question 23. [MAY 76]
In a Factory, the standard units of production for the year was fixed at 1,20,000 units. Actual Production during April was 8,000
units. Each month has 20 working days. During the month of April, there was one statutory holiday. The estimated and actual
Overheads were as follows:
Overheads Estimated Actual
Fixed 12,000 1,190
Variable 6,000 480
Semi Variable 1,800 192
Semi-Variable Charges include 60% expenses of fixed nature and 40% of variable nature.
Calculate the Expenditure, Volume and Calendar variances.

Question 24. [MAY 12, MAY 15]

SJ Ltd. has furnished the following information:
Standard overhead absorption rate per unit 20
Standard rate per hour 4
Budgeted production 15,000 units
Actual production 15,560 units
Actual overheads were 2,95,000 out of which 62,500 fixed.
Actual hours 74,000
Overheads are based on the following flexible budget

Production (units) 8,000 10,000 14,000

Total Overheads ( ) 1,80,000 2,10,000 2,70,000

You are required to calculate the following overhead variances (on hour’s basis) with appropriate workings:

(i) Variable overhead efficiency and expenditure variance

(ii) Fixed overhead efficiency and capacity variance.

Question 25. [Study material]

The following data has been collected from the cost records of a unit for computing the various fixed overhead variances for a
period:
Number of budgeted working days = 25
Budgeted man-hours per day = 6,000
Output (budgeted) per man-hour (in units) = 1
Fixed overhead cost as budgeted = Rs.1,50,000
Actual number of working days = 27
Actual man-hours per day = 6,300
Actual output per man-hour (in-units) = 0.9
Actual fixed overhead incurred = Rs.1,56,000

CALCULATE fixed overhead variances:

(a) Expenditure Variance
(b) Volume Variance,
(c) Fixed Cost Variance.

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 All Variances

 Practical Problems

 Material And Labour Cost Variances

Question 26.
Sun Ltd turns out only one article, the prime cost standards for which have been established as follows:
Particulars Per Completed Piece
Material 5 lbs. @ Rs. 4.20 Rs. 21
Labour 3 Hour @ Rs. 3.00 Rs. 9
The Production schedule for the month of July 1998 required completion of 5,000 pieces. However 5,120 pieces were actually
completed.
Purchases for the month of July 1998 amount to 30,000 lbs. of material at the total invoice price of Rs. 1,35,000. Production
records for the month of July, 1998 showed the following actual results:
Material requisitioned and used 25,700 lbs
Direct labour 3 hours 15,150 hours Rs. 48,480
Calculate appropriate Material and Labour Variances.

Question 27. [Study material, NOV 09]

The following standards have been set to manufacture a product:
Particulars Amount (Rs.)
Direct Materials:
2 units of A @ Rs. 4 per unit 8.00
3 units of B @ Rs. 3 per unit 9.00
15 units of C @ Rs. 1 per unit 15.00
32.00
Direct Labour: 3 hours @ 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 at Rs. 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 the standard rate. Calculate Materials Cost, Price and Usage Variances and Labour
Cost, Rate and Efficiency Variances.

Question 28. [STUDY MATERIAL, NOV 2009]

The following information is available from the cost records of Vatika & Co. For the month of August, 2009:
Material Purchased 24,000 kg Rs. 1,05,600
Material Consumed 22,800 kg
Actual Wages paid for 5,940 hours Rs. 29,700
Unit Produced 2160 units.
Standard Rates and Prices are:
Direct Material Rate is Rs. 4.00 per unit.
Direct Labour Rate is Rs. 4.00 per hour
Standard Input is 10 kg. for one unit
Standard requirement is 2.5 hours per unit.
Calculate all Material and Labour Variances for the month of August, 2009.

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Question 29. [MAY 96]
From the particulars given below, compute: Material Price Variance, Material Usage Variance, Labour Rate Variance, Idle Time
Variance and Labour Efficiency Variance with full working details:
1 tonne of Material Input yields a standard output of 1,00,000 units. The standard price of Material is Rs. 20 per kg. Number of
employees engaged is 200. The Standard wage rate per employee per day is Rs. 6. The standard daily output per employee is 100
units. The actual quantity of material used is 10 tonnes and the actual price paid is Rs. 21 per kg. Actual Output obtained is
9,00,000 units. Actual number of days worked is 50 and actual rate of wages paid is Rs. 6.50 per day. Idle time paid for and
included in above time is ½ day.

 Contract Costing Escalation Claim – Material And Labour Variances

Question 30. [MAY 10]
SB Constructions Limited has entered into a big contract at a an agreed price of Rs. 1,50,00,000 subject to an Escalation Clause for
material and labour as spent out on the contract and corresponding actual are as follows:
Material Standard Actual
Quantity (tonnes) Rate per tonne Quantity (tonnes) Rate per tonne
A 3,000 Rs. 1,000 3,400 Rs. 1100
B 2,400 Rs. 800 2,300 Rs. 700
C 500 Rs. 4,000 600 Rs. 3,900
D 100 Rs. 30,000 90 Rs. 31,500
Labour Hours Hourly Rate Hours Hourly Rate
L1 60,000 Rs. 15 56,000 Rs. 18
L1 40,000 Rs. 30 38,000 Rs. 35
Required:
1. Give your analysis of admissible Escalation Claim, and determine the Final Contract Price Payable.
2. Prepare the Contract Account, if the all expenses other than Material and Labour related to the Contract are Rs. 13,45,000.
3. Calculate the following variances and verify them –
 Material Cost Variance
 Material Price Variance
 Material Usage Variance
 Labour Cost Variance
 Labour Rate Variance
 Labour Efficiency Variance.

 Material, Labour And Fixed Overhead Variances

Question 31. [NOV 07]
KPR 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 June, 2007 required completion of 40,000 units. However 40,960 units were completed
during the month without opening and closing work-in-progress inventories.
Purchases during the month of June, 2007, 2,25,000 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 2,05,600 kgs.
Direct labour 1,21,200 hours; Cost incurred Rs. 3,87,840
Total Factory Overhead Cost incurred Rs. 1,00,000

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Sales 40,000 units
Selling price to be so fixed as to allow a mark-up of 20 percent 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) Prepare Income Statement for June, 2007 showing actual gross margin.
(iv) 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.

Question 32. [MAY 93, NOV 2016(similar)]

The following information is available from the cost records of a Company for February, 1993:
Materials purchased: 20,000 pieces Rs. 88,000
Materials consumed: 19,000 pieces
Actual wages paid for 4,950 hours Rs. 24,750
Factory Overheads Incurred Rs. 44,000
Factory Overheads Budgeted Rs. 40,000
Units produced 1,800
Standard Rates and prices are:
Direct Material Rates Rs. 4 per piece.
Standard Input 10 pieces per unit.
Direct Labour Rate Rs. 4 per hour.
Standard requirement 2.5 hours per unit.
Overhead Rs. 8 per labour hour.
Required:
(a) Show the Standard Cost Card.
(b) Compute all material, labour and overhead variances for February, 1993.

 Computation Of All Variances

Question 33. [MAY 02]
The budgeted production of a company is 20,000 units per month. The Standard cost Sheet is as under:
Direct Materials 1.5 kg @ Rs. 6 per kg
Direct Labour 6 hours @ Rs. 5 per hour
Variable Overheads 6 hours @ Rs. 4 per hour
Fixed Overheads Rs. 3 per unit
Selling Price Rs. 72 per unit
The following are the actual details for the month:
 Actual Production and Sales 18,750 units.
 Direct Materials consumed 29,860 kg at Rs. 5.25 kg.
 Direct Labour hours worked 1,18,125 hours at Rs. 6 per hour.
 Actual Overheads were Rs. 5,65,000 out of which a sum of Rs. 40,000 was fixed.
 There is no change in the selling price.

Calculate:
(i) Direct Materials Usage and Price Variances
(ii) Direct Labour Efficiency and Rate Variances
(iii) Variable Overheads Efficiency and Expense Variances
(iv) Fixed Overheads Volume and Expense Variances
(v) Sales Volume Variance in Sales Value and Gross Margin.

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Question 34. [NOV 13]
SP Limited produces a product ‘Tempex’ which is sold in a 10kg packet. The standard cost card per packet of ‘Tempex’ are as
follows:
Rs.
Direct material 10kg @ Rs.45 per kg 450
Direct labour 8 hours @ Rs.50 per hour 400
Variable overhead 8 hours @ Rs.10 per hour 80
Fixed overhead 200
1,130
Budgeted production for the third quarter of the year was 10,000 kg. Actual output is 9,000 kg.
Actual costs for this quarter are as follows:
Rs.
Direct material 8,900 kg @ Rs.46 per kg 4,09,400
Direct labour 7,000 hours @ Rs.52 per hour 3,64,000
Variable overhead incurred 72,500
Fixed overhead incurred 1,92,000
You are required to calculate:
(i) Material usage variance
(ii) Material price variance
(iii) Material cost variance
(iv) Labour efficiency variance
(v) Labour rate variance
(vi) Labour cost variance
(vii) Variable overhead cost variance
(viii) Fixed overhead cost variance

 Cost Variances And WIP Valuation – WAC Method

Question 35. [RTP, NOV 96, MAY 00]
A company manufacturing two products uses standard costing system. The following data relating to October, 1996 have been
furnished to you.
Particulars Product A (Rs.) Product B (Rs.)
Standard Cost Per Unit:
Direct Materials 2 4
Direct Wages 8 6
Fixed Overheads 16 12
26 22
Units processed/in process:
Beginning of the month: All materials applied and 50% complete in respect of Labour and Overheads 4000 12,000
End of the month: All materials applied and 80% complete in respect of Labour Overheads 8,000 12,000
Units competed and transferred to warehouse during the month 16,000 20,000
The following were the actual costs recorded during the month:
Direct materials purchased at standard price amount to Rs. 2,00,000 and the actual cost of which is Rs. 2,20,000, Direct materials
used for consumption at standard price amount to Rs. 1,75,000. Direct wages for actual hours worked at standard wage rates
were Rs. 4 20,000 and at actual wage rates were Rs. 4,12,000. Fixed overheads budgeted were Rs. 8,25,000 and the actual fixed
aver heads incurred were Rs. 8,50,000.
Required to:
Calculate the following for the month of October, 1996:
(i) Direct materials price variance at the point of consumption and at the point of purchase.
(ii) Direct materials usage variance.
(iii) Direct wages rate and efficiency variances
(iv) Fixed overheads volume and expenditure variances.
(v) Standard cost to work-in-process at the end of the month.

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 Budget v/s Actual – All Variances

Question 36. [NOV 01, MAY 08]
th
TQM Ltd. has furnished the following information for the month ending 30 June, 2007:
Particulars Master Budget Actual Variance
Units Produced and sold 80,000 72,000
Sales (Rs.) 3,20,000 2,80,000 40,000 (A)
Direct Material (Rs.) 80,000 73,600 6,400 (F)
Direct Wages (Rs.) 1,20,000 1,04,800 15,200 (F)
Variable Overheads (Rs.) 40,000 37,600 2,400 (F)
Fixed Overhead (Rs.) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200
The Standard costs of the products are as follows:
Particulars Per unit (In Rs.)
Direct Materials (1 kg. at the rate of Re. 1 per kg.) 1.00
Direct Wages (1 hour at the rate of Rs. 1.50) 1.50
Variable Overheads (1 hour at the rate of Re. 0.50 ) 0.50
Actual results for the month showed that 78,400 kg. of material were used and 70,400 labour hours were recorded.
Required:
(i) Prepare Flexible Budget for the month and compare with actual results.
(ii) Calculate Material, Labour, Sales Price, Variable Overhead and Fixed Overhead Expenditure Variances and Sales Volume
(Profit) Variance.

 Reverse Working – All Variances

 Direct Computation based on Variances

Question 37. [NOV 90]
JS Ltd uses a full standard cost system with Raw Materials Inventory carried at standard. The following data was taken from the
st
Company’s records for the year ended 31 December – (in Rs. 000s)
Opening Raw Materials Inventory 300 Actual Overhead Cost incurred 875
Opening Raw Materials Inventory 250 Overheads Cost Variance 45 F
Net Purchases 410 Opening Work-in Progress Inventory 120
Material Price Variance 10A Closing Work-in-Progress Inventory 140
Material Usage Variance 20 A Opening Finished Goods Inventory 360
Direct Labour Cost (Actual) 900 Cost of Goods Sold reported 2240
Direct Labour Cost at Standard 840 ‘F’ denotes Favourable 'A' denotes Adverse.
Compute the following –
1. Raw Materials Purchases at Standard
2. Raw Materials Consumed at Standard
3. Raw Materials Consumed at Actual
4. Labour Cost Variance
5. Standard Overhead Costs
6. Total Manufacturing Cost at Standard
7. Cost of Goods Manufactured
8. Cost of Products Sold to Customers
9. Closing Finished Goods Inventory

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 Material, Labour and Fixed Overheads

Question 38. [NOV 95]
A.S. Ltd. operates a system of standard costing in respect of one of its products which is manufactured within a single cost centre,
the following information is available:
For one unit of product the standard material input is 20 litres at a standard price of Rs. 2 per litre. The standard wage rate is Rs. 6
per hour and 5 hours are allowed to produce one unit. Fixed production overhead is absorbed at the rate of 100% of direct wages
cost.
During the month just ended the following occurred:
Actual price paid for material purchased Rs. 1.95 per litre
Total direct wages cost was Rs. 1,56,000
Fixed production overhead incurred was Rs. 1,58,000
Variances Favourable (Rs.) Adverse (Rs.)
Direct Material Price 8,000 -
Direct Material Usage - 5,000
Direct Labour Usage - 5,760
Direct Labour Efficiency 2,760 -
Fixed Production Overhead Expenditure - 8,000

Calculate the following for the month:

(i) Budgeted output in units.
(ii) Number of litres purchased.
(iii) Number of litres used above standard allowed.
(iv) Actual units produced.
(v) Actual hours worked.
(vi) Actual wage rate per hour.

Question 39. [MAY 99 (ADAPTED)]

The details regarding a food products manufactured by ABC Co. for the last one week are as follows:
Particulars Amount (Rs.)
Standard Cost (For one unit)
Direct Materials 10 units @ Rs. 1.50 15
Direct Wages 5 hours @ Rs. 8 40
Production Overheads 5 hours @ Rs. 10 50
105
Actual (For whole activity)
Direct Materials Rs. 6,435
Direct Wages Rs. 16,324
Analysis of Variances:
Direct Materials
Price Rs. 585 (A)
Usage Rs. 375 (F)
Direct Wages (Labour)
Rate Rs. 636 (F)
Efficiency Rs. 360 (A)
Production Overheads
Expenditure Rs. 400 (F)
Volume Rs. 750 (F)
You are required to calculate: (i) Actual output units; (ii) Actual price of material per unit; (iii) Actual wage rate per labour hour;
(iv) The amount of production overhead incurred and (v) The production overhead efficiency variance

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Question 40. [NOV 11]

Game Ltd. has furnished the following standard cost data per’ unit of production:

* Material 10 kg @ 10 per kg.

* Labour 6 hours @ 5.50 per hour
* Variable overhead 6 hours @ 10 per hour.
* Fixed overhead 4,50,000 per month (Based on a normal volume of 30,000 labour hours.)

The actual cost data for the month of August 2011 are as follows:

* Material used 50,000 kg at a cost of 5,25,000.

* Labour paid 1,55,000 for 31,000 hours worked
* Variable overheads 2,93,000
* Fixed overheads 4,70,000
* Actual production 4,800 units.
Calculate:
(i) Material cost variance.
(ii) Labour cost variance.
(iii) Fixed overhead cost variance.
(iv) Variable overhead cost variance.

 Miscellaneous Theory
Question 41.
What is Standard Cost? Is it same as Estimated Cost?

Solution:
It is thus a measure in quantities, hours and value of the factors of production.
There are three main parts of standard costs:
(a) Direct material
(b) Direct Labour
(c) Overhead expenses.

Question 42.
How is cost Variances disposed of in a standard Costing System? Explain.

Solution:
The following are the various methods to dispose of cost variances:-
(a) Write off all variances to profit and loss account or cost of sales every month.
(b) Distribute the variance pro-rata to cost of sales, work-in-progress and finished good stocks.
(c) Write off quantity variance to profit and loss account but the price variances may be spread over cost of sales, work-in-
progress and finished goods stocks. The reason behind apportioning price variances to inventories and cost of sales is that
they represent cost although they are described as variance.

Question 43. [STUDY MATERIAL]

The standard cost of a chemical mixture is as follows:
40% material A at Rs. 20 per kg.
60% material B at Rs. 30 per kg.
A standard loss of 10% of input is expected in production. The cost records for a period showed the following usage:
90 kg material A at a cost of Rs. 18 per kg.
110 kg material B at a cost of Rs. 34 per kg.
The quantity produced was 182 kg. of good product.
CALCULATE all material variances.

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Question 44. [NOV 2010]
Compute the sales variances (total, price and volume) from the following figures:
Product Budgeted quantity Budgeted price per unit (Rs.) Actual quantity Actual price per unit
(Rs.)
P 4000 25 4800 30
Q 3000 50 2800 45
R 2000 75 2400 70
S 1000 100 800 105

Question 45. [MAY 2012]

SJ Ltd. has furnished the following information:
Standard overhead absorption rate per unit Rs.20
Standard rate per hour Rs.4
Budgeted production 15,000 units
Actual production 15,560 units
Actual overheads were Rs.2,95,000 out of which Rs.62,500 fixed.
Actual hours 74,000

Overheads are based on the following flexible budget

Production (units) 8,000 10,000 14,000
Total overheads (Rs.) 1,80,000 2,10,000 2,70,000

You are required to calculate the following overhead variances (on hour’s basis) with appropriate workings:
(i) Variable overhead efficiency and expenditure variance
(ii) Fixed overhead efficiency and capacity variance.

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Chapter 14
MARGINAL COSTING
Question 1. [NOV 74, MAY 78]
What is Marginal Costing?

Solution 1:
The ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating
between fixed costs and variable costs.
It is a decision making technique which involves the following steps:
(a) Total Cost Ascertainment.
(b) Classification of Costs into Fixed and Variable.
(c) Analysis and decision making using such information.

Question 2. [NOV 76, MAY 10]

Explain the Concepts of Variable Cost and Fixed Cost, in the context of Marginal Costing?

Solution 2:
Variable Cost: It changes or varies proportionately with output. It is incurred only when production takes place and
assumed to remain constant at all levels of output. It is included in Inventory Valuation. Example: Raw Material, Labour,
Power, Royalty etc.
Variable Cost = Direct Material + Direct Labour + Direct Expenses + Variable Production Overhead + Variable Selling and
Distribution Overhead

Fixed Cost: It remains constant for a given period of time, irrespective of level of output during that period. It is incurred
even at zero level of output. Fixed cost per unit values inversely with changes in the level of output. It is not included in
Inventory Valuation. Example: Rent, Salary, Insurance etc.
Fixed Cost = Fixed Production Overhead + Administrative Overhead + Fixed Selling & Distribution Overhead

 Basic Marginal costing equation is:

Sales ----
Less: Variable Cost ----
Contribution ----
Less: Fixed Costs ----
Profit ----

 Decision Questions or Questions where ranges have to be made:

In these types of Questions we generally have two options where any one option has low Fixed Cost but more
Variable Cost whereas the other option has more Fixed Cost but less Variable Cost.

Step 1: Calculate Contribution per unit from both the options.

Step 2: Decision Level of Sales = = ‘A’

Ranges Decisions
Less than ‘A’ Select the option having low Fixed Cost (F.C.)

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Equal to ‘A’ Select any of the options

Greater than ‘A’ Select the option having more Fixed Cost (F.C.)

‘A’ is the level of activity where both of the options provide us with equal profit.
 Concept of Semi-Variable Cost
Semi-Variable Cost means the cost which remains fixed upto a certain level but then it varies after a certain level.
For example: The supervision charges of 100 students are ₹ 1,000. Then again the supervision charges for 101 to 200
students are ₹ 1,000 more. Then this type of cost is called Semi-Variable Cost (S.V.C.)
Step 1: Calculate the Break-Even Sales in unit.
Step 2: Calculate the extra Semi-Variable Cost incurred because of non-accurate Break-Even Point (BEP).
Step 3: Now, calculate the additional units to be sold to recover that extra Fixed Cost. (While calculating this we
divide the cost with contribution per unit without Fixed Cost and Semi-Variable Cost).

Question 3. [MAY 75]

What is Contribution?

Solution 3:
(1) Contribution or the contributory margin is the difference between sales value and the marginal cost.
(2) The contribution concept is based on the theory that the profit and fixed expenses of a business is a ‘joint cost’
which cannot be equitably apportioned to different segments of the business.

 Formulae
Contribution = Sales – Variable (Marginal) Cost
Contribution (per unit) = Selling Price – Variable (or marginal) cost per unit
Contribution = Fixed Costs + Profit (– Loss)

Question 4. [RTP, MAY 75]

Write a short note on Profit Volume Ratio.

Solution 4:
(1) Profit Volume Ratio is also termed as contribution to Sales Ratio.
(2) It establishes the relationship between the Contribution and the sales value.

Importance of P/V Ratio

(1) A higher P/V Ratio implies that the rate of growth of contribution is faster than that of sales.
(2) It is an indicator of the profitability of the business.

Improvement is P/V Ratio

(1) By increasing Selling Price.
(2) By reducing Variable Cost.
(3) By increasing the share of products with higher P/V ratio in overall sales mix.

 Formulae
 P/V Ratio = × 100

 P/V Ratio = × 100

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 P/V Ratio = × 100

 P/V Ratio = × 100

 Following can be calculated with the help of P/V Ratio

(1) Break-Even Point (BEP):
Break-Even Point =

(2) Contribution:
Contribution = Sales × P/V Ratio

(3) Margin of Safety:

Margin of Safety =

(4) Variable Cost of any sales Volume:

Variable Cost = Sales (1 – P/V Ratio)

(5) Profit or Loss on Sale Volume:

Profit = (Sales × P/V Ratio) – Fixed Cost

(6) Profit from the figures of Profit/Volume Ratio and Margin of Safety:
Profit = P/V Ratio × (Sales – Break-Even Sales)
= P/V Ratio × Margin of Safety

(7) Additional Sales required to meet out the increased expenditure:

Additional Sales Required =

(8) Sales Value to obtain Desired Profits:

Desired Sales =

Question 5. [MAY 75]

Write brief note on Break-Even Point?

Solution 5:
Break-Even Point is the where total Contribution is equal to the fixed costs. At this level, there is neither a loss or nor a
profit to the firm.

Assumptions of Break Even Analysis

(1) All costs can be easily classified into fixed and variable Components.
(2) Prices of output and input remain unchanged.
(3) Both revenue and cost functions are linear over the range of activity under consideration.
(4) Productivity of the factors of production will remain same.
(5) The state of technology and the process of production will not change.
(6) The company manufactures a single product.
(7) In case of multiproduct company, the sales mix will remain unchanged.

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Importance of Break Even Point
Level of Sales Profit / Loss
Less than BEP Losses
Equal to BEP No Profit, No Loss
More than BEP Profit

 Formulae
(i) Sales Revenue at Break-Even Point = Fixed Costs + Variable Costs

(ii) The Break-Even Point in units of sale

Break-Even Point (units of sale) =

(iii) The Break-even Point of sales

(a) Break-Even Point (BEP) (in units) =

(b) BEP (in Sales Value) = =

Question 6. [MAY 89 (ADAPTED), NOV 99 (ADAPTED)]

What is Break Even Chart? What are its limitations?

Solution 6:
Break Even Chart: A mathematical or graphical representation, showing approximate profit or loss of an enterprise at
different levels of activity within a limited Range.
It depicts the following:
(1) Profitability
(2) Break Even Point
(3) Relationship between marginal cost, fixed cost and contribution
(4) Margin of Safety
(5) Angle of Incidence.

Limitations
(1) Break Even chart assumes that costs behave in linear fashion which is not true because costs do not vary in direct
proportion
(2) It may not always be possible to segregate semi variable costs into fixed and variable components.
(3) Sales revenue may not remain constant at different sales levels.
(4) Business Conditions cannot always be static.
(5) It ignores capital Employed in business, which is one of the important factors in the determination of profitability
and returns.

Question 7. [MAY 01, MAY 08]

What is Cash Break Even Point?

Solution 7:
 Cash Break Even Point is the level of activity where there is neither a cash profit nor a cash loss.
 It is calculated only with those fixed costs which are payable in cash i.e. depreciation and other non cash fixed costs
are excluded.

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 Formulae
 Cash Break Even Point =

Question 8. [MAY 12]

What is Angle of Incidence?

Solution 8:
This angle is formed by the intersection of sales line and total cost line at the break-even point. This angle shows the rate
at which profits are being earned once the break-even point has been reached. The wider the angle the greater is the
rate of earning profits. A large angle of incidence with a high margin of safety indicates extremely favourable position.

Question 9. [RTP, MAY 75, MAY 95, NOV 01, NOV 13]
What is Margin of Safety?

Solution 9:
 Margin of Safety can be defined as the difference between the expected level of sales and break even sales.
 The larger the margin of safety, the higher is the chances of making profits.

Improvement in Margin of Safety

(1) Increase the Selling price, provided the demand is inelastic so as to absorb the increased prices.
(2) Reduced Fixed Costs.
(3) Reduce Variable Costs.
(4) Increase the sales volume provided capacity is available.
(5) Substitute or introduction of a product mix such that more profitable lines are introduced.

 Formulae
 Margin of Safety = Total Sales – Sales at BEP
 Margin of Safety ratio = × 100

 Following can be calculated with the help of Margin of Safety

Profit = P/V Ratio × Margin of Safety Ratio × Sales
Total Sales = BEP + Margin of Safety = = +

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Question 10.
How are sales to earn desired profits computed?

Solution 10:
Sales to earn desired profits can be computed as follows:
 Desired contribution = Fixed Cost + Target Profit

 Desired Sales (in ₹) =

Desired Sales (in Units) =

Question 11. [MAY 98, NOV 00, MAY 10]

What do you understand by key factory?

Solution 11:
(1) Key factor or Limiting factor is a factor which at a particular time or over a period limits the activities of an
undertaking.
(2) It may be the level of demand for the products or services or it may be the shortage of one or more of the
productive resources.
(3) It is also called critical factor or Budget Factor.
(4) Examples of Key Factors or Limiting Factors are:
(a) Shortage of raw material.
(b) Shortage of labour.
(c) Plant capacity available.
(d) Sales capacity available.
(e) Cash availability.

 Formulae
 Profitability =

 How to solve Key Factor Questions

Key Factor means a factor which is available in limited supply so we should try to utilize that factor in such a
manner so that we are able to generate contribution in a maximum manner.
 First find contribution from each alternative. (Preferable if we can calculate per unit).
 Now, divide the contribution by the key factor used. (Example: Land Acres or hours).
 Now, give ranking to each alternative.
 Now, use the key factor for rank I up to the extent it is possible.
 Then use the remaining key factors for Rank II and then Rank II.

Question 12. [MAY 02]

Distinguish between Indifferences Point and Break-Even Point?

Solution 12:
Indifference Point Break-Even Point
 The level of Sales at which Total Costs and Profits of  The level of Sales at which the Total Contribution equals
two options are equal. Fixed Costs. There is neither a Profit nor a Loss to the

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Firm.

 It is the level at which Total Cost under two  It is activity level at which the Total Revenue from a
alternatives are equal. product or product mix is equal to its Total Cost.
 Indifference Point (In ₹) =  Break Even Point (In ₹) =
 Used to choose between two alternative options for  Used for planning of Profit.
achieving the same objective.

Question 13. [NOV 00]

What is Differential Cost?

Solution 13:
It may be defined as ‘’the increase or decrease in total cost or the change in specific elements of cost that result from any
variation in operations’’. It represents an increase or decrease in total cost resulting out of:
(a) Producing or distributing a few more less of the products;
(b) A change in the method of production or of distribution;
(c) An addition or deletion of a product or a territory; and
(d) Selection of an additional sales channel.
Differential Cost, thus includes fixed and semi-variable expenses. It is the difference between the total costs of two
alternatives.

Question 14. [MAY 94, MAY 97, MAY 99, MAY 00]
Distinguish between Marginal Costing and Differential Costing?

Solution 14:
1. Differential cost analysis is possible in both absorption costing and marginal costing.
2. 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 fact whether they are fixed or variable are considered whereas in the case of marginal costing only variable
costs are taken into account.
3. Marginal costs may be incorporated in the accounting system whereas differential costs are worked out separately
as analysis statements.
4. In marginal costing margin of contribution and contribution ratio are the main yardsticks for performance
evaluation and for decision making. In differential costs analysis, differential costs are compared with the
incremental or decremental revenues as the case may be, and then arrive at a decision.

Question 15. [NOV 99]

Discuss the relationship between angle of incidence, Breakeven Level and Margin of Safety?

Solution 15:
1. If the break-even point is low and angle of incidence is large. The margin of safety is large and the business enjoys
financial stability. A low break-even point indicates that the business enjoys financial stability. A low break-even
point indicates that the business could be run profitability even if there is a fall in sales, unless the sales are very
low.
2. If the break-even point is low and angle of incidence is small, the conclusions are the same as in 1 above except that
the rate of profit earning capacity is not as high as in 1.
3. If the break-even point is high and angle of incidence is small. The margin of safety is low. The business is very
vulnerable, even a small reduction in activity may result in a loss.

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4. If the break-even point is high and angle of incidence is large. This shows that the margin of safety is low. The
business is likely to incur losses through a small reduction in activity. However, after the break-even point, the
business makes the profit at a high rate.

Question 16. [MAY 01]

What is Cost-Volume-Profit-Analysis? What are its objectives?

Solution 16:
(1) Cost Volume Profit (CVP) analysis is the analysis of three variables cost, volume and profit.
(2) Such an analysis explores the relationship between costs, revenue, activity levels and the resulting profit.
(3) It aims at measuring variations in cost and volume.

Objectives of Cost-Volume-Profit analysis:

(i) It aims at measuring variations in cost with volume
(ii) It enables business managers to fulfil the objective of profit planning.
(iii) It facilitates in making short-run tactical decisions such as acceptance of special order; shift working; choice of sales
mix etc.

Question 17. [MAY 03]

Explain, how Cost Volume Profit (CVP) based sensitivity analysis can help managers cope with uncertainty.
OR
State the assumptions of Cost-Volume-Profit-Analysis.

Solution 17:
Sensitivity analysis focuses on how a result will be changed if the original estimates or the underlying assumptions
change.
The use of spreadsheet packages has enabled managers to develop CVP computerized models. Managers can now
consider alternative plans by keying the information into a computer, which can quickly show changes both graphically
and numerically. Thus managers can study various combinations of changes in selling prices, fixed costs, variable costs
and product mix, and can react quickly without waiting for formal reports from the accountant.

The assumptions underlying Cost-Profit-Volume-Analysis are as follows:

(i) All costs can be segregated into fixed and variable elements.
(ii) Variable costs vary in proportion to output and fixed costs remain constant.
(iii) The behavior of total revenues and total costs is linear in relation to output units within the relevant range.
(iv) Costs and revenues are influenced only by volume.
(v) The analysis either covers a single product or assumes that a given sales mix of product will remain constant as the
level of total units sold changes.
(vi) All revenues and costs can be added and compared without taking into account the time value of money.
(vii) Profits are calculated on variable cost basis.
(viii) The analysis applies only to short-term horizon.

Question 18. [MAY 01]

What are the limitations of Marginal Costing?

Solution 18:
1. Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the expenses into fixed and
variable category. Most of the expenses are neither totally variable nor wholly fixed.

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2. Contribution of a product itself is not guide for optimum profitability unless it is linked with the key factor.

3. Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price; which will result
in loss or low profits. Hence, sales staff should be cautioned while giving marginal cost.

4. Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large contracts, while
valuing the work-in-progress. In order to show the correct position fixed overheads have to be included in work-in-
progress.

5. Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs are not necessarily
true in a realistic situation. For example, the assumption that fixed cost will remain static throughout is not correct.
Fixed cost may change from one period to another etc.

Question 19. [MAY 78]

What are the important factors to be considered in Marginal Costing decision?

Solution 19:
In Marginal Costing decisions, the following factors are to be considered:
(1) Contribution: If there is No Contribution or Negative Contribution, the proposal is not acceptable.
(2) Incremental Contribution: Where additional quantities can be sold only at reduced prices, Incremental Contribution
will be more effective in decision making.
(3) Non-Cost Factors: Non-Cost Factors should also be considered, wherever applicable.
(4) Specific Fixed Cost, if any: The additional Fixed Overhead, if any, should be taken into account.
(5) Capacity: Whether acceptance of the incremental order, or additional product line is within the Firm’s capacity or
whether Key Factor comes into play, should be analysed.
(6) CVP Analysis: The effect of increase in volume on Profits, and the rate of earning additional Profits, should be
analyzed.

Question 20. [MAY 98, MAY 00]

Indicate five instances when you will permit to fix a price, which is less than Marginal Cost of product?

Solution 20:
It may be justifiable to sell at a price below marginal cost for a limited period under the following circumstances:
(i) Where materials are of perishable nature
(ii) Where stocks have been accumulated large quantities and the market prices have fallen.
(iii) To popularize a new product.
(iv) Where such reduction, enables the firm to boost the sale of other products having larger profit margin.
(v) To capture foreign markets
(vi) To obviate shut down costs
(vii) To certain future market.

Question 21. [MAY 01, NOV 13]

What are the important decision making areas where Marginal Costing technique is used?

Solution 21:
Some of the important decision making areas where marginal costing technique is used by these concerns are:
1. Fixation of selling price
(i) Under normal circumstances
(ii) For special market (export market) or for a special customer

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(iii) During recession
(iv) At marginal cost or below marginal cost.
2. Decision relating to the most profitable product mix
(i) Selection of optimal product mix
(ii) Substitution of one product with another
(iii) Discontinuing or dropping of a product line
3. Decision relating to make or buy
4. Shut down or continue or determination of output level in period of recession or depression.
5. Retaining or replacing a machine
6. Selling in the home or in the export market
7. Change vs. Status quo
8. Expanding or Contracting
9. Decision relating to price-mix.

Question 22. [RTP, NOV 74, NOV 00]

Distinguish between Marginal Costing and Absorption Costing?

Solution 22:
Marginal Costing Absorption Costing
 Only variable costs are considered for product costing  Both fixed and variable costs are considered for
and inventory valuation. product costing and inventory valuation.
 Fixed costs are charged to the cost of production.
Each product bears a reasonable share of fixed cost
 Fixed costs are regarded as period costs. The Profitability and thus the profitability of a product is influenced by
of different products is judged by their P/V ratio. the apportionment of fixed costs.
 Cost data are presented in conventional pattern. Net
 Cost data presented highlight the total contribution of profit of each product is determined after subtracting
each product. fixed cost along with their variable costs.
 The difference in the magnitude of opening stock and
 The difference in the magnitude of opening stock and closing stock affects the unit cost of production due
closing stock does not affect the unit cost of production. to the impact of related fixed cost.
 In case of absorption costing the cost per unit
 In case of marginal costing the cost per unit remains the reduces, as the production increases as it is fixed cost
same, irrespective of the production as it is valued at which reduces, whereas, the variable cost remains
variable cost the same per unit.

Question 23. [Study Material]

Wonder Ltd. manufactures a single product, ZEST. The following figures relate to ZEST for a one-year period:
Activity level 50% 100%
Sales and production (units) 400 800
(₹) (₹)
Sales 8,00,000 16,00,000
Production costs:
- Variable 3,20,000 6,40,000
- Fixed 1,60,000 1,60,000
Selling and distribution costs:
- Variable 1,60,000 3,20,000
- Fixed 2,40,000 2,40,000

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The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year, and actual fixed
costs are the same as budgeted. There were no stocks of ZEST at the beginning of the year. In the first quarter, 220 units
were produced and 160 units were sold. Required:
(a) COMPUTE the fixed production costs absorbed by ZEST if absorption costing is used?
(b) CALCULATE the under/over-recovery of overheads during the period?
(c) CALCULATE the profit using absorption costing?
(d) CALCULATE the profit using marginal costing?

Question 24. [Study Material]

MNP Ltd sold 2,75,000 units of its product at ₹ 37.50 per unit. Variable costs are ₹ 17.50 per unit (manufacturing costs of
₹ 14 and selling cost ₹ 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amounting to ₹
35,00,000 (including depreciation of ₹ 15,00,000). There is no beginning or ending inventories.
Required: COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.

Question 25. [Study Material]

You are given the following particulars
CALCULATE:
(a) Break-even point
(b) Sales to earn a profit of ₹ 20,000
i. Fixed cost ₹ 1,50,000
ii. Variable cost ₹ 15 per unit
iii. Selling price is ₹ 30 per unit

Question 26. [Study Material]

A company has a P/V ratio of 40%. COMPUTE by what percentage must sales be increased to offset: 20% reduction in
selling price?

Question 27. [Study Material]

PQR Ltd. has furnished the following data for the two years:
20X3 20X4
Sales ₹ 8,00,000 ?
Profit/Volume Ratio (P/V ratio) 50% 37.5%
Margin of Safety sales as a % of total 40% 21.875%
sales
There has been substantial savings in the fixed cost in the year 20X4 due to the restructuring process. The company could
maintain its sales quantity level of 20X3 in 20X4 by reducing selling price.
You are required to CALCULATE the following:
(i) Sales for 20X4 in Value,
(ii) Fixed cost for 20X4,
(iii) Break-even sales for 20X4 in Value.

Question 28. [Study Material]

You are given the following data for the year 20X7 of Rio Co. Ltd:
Variable cost 60,000 60%
Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
FIND OUT (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also DRAW a break-even chart showing
contribution and profit.

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Question 29. [Study Material]
PREPARE a profit graph for products A, B and C and find break-even point from the following data:
Products A B C Total
Sales (₹) 7,500 7,500 3,750 18,750
Variable cost (₹) 1,500 5,250 4,500 11,250
Fixed cost (₹) - - - 5,000

Question 30. [Study Material]

A company earned a profit of ₹ 30,000 during the year 20X4. If the marginal cost and selling price of the product are ₹ 8
and ₹ 10 per unit respectively, FIND OUT the amount of margin of safety.

Question 31. [Study Material]

A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio of 40%. Its fixed costs amount to ₹
5 lakhs. CALCULATE the following:
i. Break-even sales
ii. Total sales
iii. Total variable cost
iv. Current profit
v. New ‘margin of safety’ if the sales volume is increased by 7 ½ %.

Solution 31:
(i) Break-Even Sales × P/V Ratio = Fixed Cost
Break-Even Sales × 40% = ₹ 5,00,000
Break-Even Sales = ₹ 12,50,000

(ii) Total Sales = Break-Even Sales + Margin of Safety

Total Sales = ₹ 12,50,000 + 0.375 Total Sales
Total Sales – 0.375 Total Sales = ₹ 12,50,000
Total Sales = ₹ 20,00,000

(iii) Contribution to Sales Ratio = 40%

Therefore, Variable Cost to Sales Ratio = 60%
Variable Cost = 60% of Sales
= 60% of ₹ 20,00,000
Variable Cost = ₹ 12,00,000

(iv) Current Profit = Sales – (Variable Cost + Fixed Cost)

= ₹ 20,00,000 – (12,00,000 + 5,00,000)
= ₹ 3,00,000

(v) If Sales Value is increased by 7 ½ %

New Sales Value = ₹ 20,00,000 × 1.075
= ₹ 21,50,000
New Margin of Safety = New Sales Value – Break-Even Sales
= ₹ 21,50,000 – ₹ 12,50,000
= ₹ 9,00,000

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Question 32. [Study Material]
By noting “P/V will increase or P/V will decrease or P/V will not change”, as the case may be, STATE how the following
independent situations will affect the P/V ratio:
(i) An increase in the physical sales volume;
(ii) An increase in the fixed cost;
(iii) A decrease in the variable cost per unit;
(iv) A decrease in the contribution margin;
(v) An increase in selling price per unit;
(vi) A decrease in the fixed cost;
(vii) A 10% increase in both selling price and variable cost per unit;
(viii) A 10% increase in the selling price per unit and 10% decrease in the physical sales volume;
(ix) A 50% increase in the variable cost per unit and 50% decrease in the fixed cost.
(x) An increase in the angle of incidence.

Question 33. [Study Material]

A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at the beginning of each
year. Relevant information about the products for the next year is given below.
X Y Z
Selling Price ( ₹ / unit) 10 12 12
Variable Costs ( ₹ / unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs ( ₹) 30,000
Required:
COMPUTE the opportunity costs for each of the products.

Question 34. [Study Material]

M.K. Ltd. manufactures and sells a single product X whose selling price is ₹ 40 per unit and the variable cost is ₹ 16 per
unit.
(i) If the Fixed Costs for this year are ₹ 4,80,000 and the annual sales are at 60% margin of safety, CALCULATE the rate of
net return on sales, assuming an income tax level of 40%
(ii) For the next year, it is proposed to add another product line Y whose selling price would be ₹ 50 per unit and the
variable cost ₹ 10 per unit. The total fixed costs are estimated at ₹ 6,66,600. The sales mix of X : Y would be 7 : 3.
DETERMINE at what level of sales next year, would M.K. Ltd. break even? Give separately for both X and Y the break-
even sales in rupee and quantities.

Question 35. [Study Material]

X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates production of any
one spare part for a particular period of time. The following are the cost and other information for the production of the
two different spare parts A and B:
Part A Part B
Per unit 1.6 kgs 1.6 kgs
Alloy usage 0.6 hrs 0.25 hrs
Machine Time: Machine A 0.5 hrs 0.55 hrs
Machine Time: Machine B 145 115
Target Price ( ₹) Machine A 4,000 hrs
Total hours available Machine B 4,500 hrs
Alloy available is 13,000 kgs. @ ₹ 12.50 per kg.
Variable overheads per machine hours - Machine A: ₹ 80; Machine B: ₹ 100

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Required
(i) IDENTIFY the spare part which will optimize contribution at the offered price.
(ii) If Y Ltd. reduces target price by 10% and offers ₹ 60 per hour of unutilized machine hour, CALCULATE the total
contribution from the spare part identified above?

Question 36. [Study Material]

The profit for the year of R.J. Ltd. works out to 12.5% of the capital employed and the relevant figures are as under:
Sales - ₹ 5,00,000
Direct Materials₹ - 2,50,000
Direct Labour - ₹ 1,00,000
Variable Overheads - ₹ 40,000
Capital Employed - ₹ 4,00,000
The new Sales Manager who has joined the company recently estimates for next year a profit of about 23% on capital
employed, provided the volume of sales is increased by 10% and simultaneously there is an increase in Selling Price of 4%
and an overall cost reduction in all the elements of cost by 2%.
Required
FIND OUT by computing in detail the cost and profit for next year, whether the proposal of Sales Manager can be
adopted.

Question 37. [Study Material]

XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilisation is reckoned as 90%. Standard
variable production costs are ₹11 per unit. The fixed costs are ₹3,60,000 per year. Variable selling costs are ₹3 per unit
and fixed selling costs are ₹2,70,000 per year. The unit selling price is ₹20.
In the year just ended on 30th June, 20X4, the production was 1,60,000 units and sales were 1,50,000 units. The closing
inventory on 30th June was 20,000 units. The actual variable production costs for the year were ₹ 35,000 higher than the
standard.
(i) CALCULATE the profit for the year
(a) by absorption costing method and
(b) by marginal costing method.
(ii) EXPLAIN the difference in the profits.

Question 38. [Study Material]

An Indian soft drink company is planning to establish a subsidiary company in Bhutan to produce mineral water. Based
on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produced the following estimates for
the Bhutanese subsidiary:
Total annual costs Percent of Total Annual Cost
which is variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%
The Bhutanese production will be sold by manufacturer’s representatives who will receive a commission of 8% of the
sale price. No portion of the Indian office expenses is to be allocated to the Bhutanese subsidiary.
You are required to
(i) COMPUTE the sale price per bottle to enable the management to realize an estimated 10% profit on sale proceeds in
Bhutan.
(ii) CALCULATE the break-even point in rupees sales as also in number of bottles for the Bhutanese subsidiary on the
assumption that the sale price is ₹ 14 per bottle.

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Question 39. [Study Material]4
If P/V ratio is 60% and the Marginal cost of the product is ₹ 20. CALCULATE the selling price?

Question 40. [Study Material]

The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity sales. Find the capacity
sales when fixed costs are ₹ 90,000. Also COMPUTE profit at 75% of the capacity sales.

Question 41. [May 99, Study Material]

(i) DETERMINE profit, when sales = ₹ 2,00,000; Fixed cost = ₹ 40,000; BEP = ₹ 1,60,000
(ii) DETERMINE profit, when sales = ₹ 20,000; Fixed cost = ₹ 10,000; BEP = ₹ 40,000

Solution 41:
(i) BEP =

₹ 1,60,000 =
P/V Ratio = 25%
Particulars Amount (₹)
Sales 2,00,000
Less: Variable Cost at 75% (1,50,000)
Contribution 50,000
Less: Fixed Cost (40,000)
Profit 10,000

(ii) BEP =

₹ 40,000 =

P/V Ratio = 50%

Sales = = = ₹ 60,000

Question 42. [Study Material]

A company has three factories situated in north, east and south with its Head Office in Mumbai. The management has
received the following summary report on the operations of each factory for a period: (₹ in '000)
Sales Profit
Actual Over/(Under) Actual Over/(Under) Budget
Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
CALCULATE for each factory and for the company as a whole for the period : (i) the fixed costs. (ii) break-even sales.

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Solution 42:
Calculation of P/V Ratio (₹ ‘000)
North Sales Profit
Actual 1,100 135
Add: Under budgeted 400 180
Budgeted 1,500 315
P/V Ratio = = × 100 = × 100 = 45%

East Sales (₹ ‘000) Profit (₹ ‘000)

Actual 1,450 210
Less: Over budgeted 150 90
Budgeted 1,300 120
P/V ratio = × 100 = 60%

South Sales (₹ ‘000) Profit (₹ ‘000)

Actual 1,200 330
Add: Under budgeted 200 110
Budgeted 1,400 440
P/V ratio = × 100 = 55%

Calculation of Fixed Cost

Fixed Cost = (Actual Sales × P/V Ratio) – Profit
North = (1,100 × 45%) – 135 = ₹ 360
East = (1,450 × 60%) – 210 = ₹ 660
South = (1,200 × 55%) – 330 = ₹ 330
Total Fixed Cost ₹ 1,350

Calculation of Break-Even Sales (In ₹ ‘000)

B.E. Sales =

North = = ₹ 800

East = = ₹ 1,100

South = = ₹ 600
Total ₹ 2,500

Question 43. [Nov 96 (Adapted), Study Material]

A company sells its product at ₹ 15 per unit. In a period, if it produces and sells 8,000 units, it incurs a loss of ₹ 5 per unit.
If the volume is raised to 20,000 units, it earns a profit of ₹ 4 per unit.
(a) Calculate break-even point both in terms of rupees as well as in units.
(b) Calculate Contribution per unit.
(c) Compute Margin of Safety and Profit if the volume is 27,500 units.
(d) Irrespective of the level of Production if minimum Fixed Costs are ₹ 75,000, find out Shut Down Point.

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Solution 43:
Marginal Cost Statement
Particulars Situation I (8,000 units) Situation II (20,000 units)
Per Unit Amount (₹) Per Unit Amount (₹)
Sales 15 1,20,000 15 3,00,000
Less: Variables Cost (Sales – Contribution) 5 40,000 5 1,00,000
Contribution at 66.67% 10 80,000 10 2,00,000
Less: Fixed Cost (Contribution – Profit) 1,20,000 1,20,000
Profit/(Loss) 8,000 × ₹ 5 (40,000) 20,000 × ₹ 4 = 80,000

Working Notes:
1. PV Ratio = × 100 = = = 66.67%
2.
(a) Break Even Point (in ₹) = = = ₹ 1,80,000.

(b) Break Even Quantity = = = 12,000 units.

3. Margin of Safety and Profit if Sales Volume is 27,500 units:

Margin of Safety (units) = Total Sales – Break Even Sales = 27,500 – 12,000 = 15,500 units.
Margin of Safety (in ₹) = 15,500 units × ₹ 15 per unit = ₹ 2,32,500.
Profit = Contribution earned out of MOS Sales = (₹ 2,32,500 × 66.67%) = ₹ 1,55,000.
4.

(a) Shut Down Point (₹) = = = ₹ 67,500

(b) Shut Down Point (Quantity) = = = 4,500 units.

Question 44. [Study Material]

The product mix of a Gama Ltd. is as under:
Products
M N
Units 54,000 18,000
Selling price ₹ 7.50 ₹ 15.00
Variable cost ₹ 6.00 ₹ 4.50
FIND the break-even points in units, if the company discontinues product ‘M’ and replace with product ‘O’. The quantity
of product ‘O’ is 9,000 units and its selling price and variable costs respectively are ₹ 18 and ₹ 9. Fixed Cost is ₹ 15,000.

Question 45. [Study Material]

Mr. X has ₹ 2,00,000 investments in his business firm. He wants a 15 per cent return on his money. From an analysis of
recent cost figures, he finds that his variable cost of operating is 60 per cent of sales, his fixed costs are ₹ 80,000 per year.
Show COMPUTATIONS to answer the following questions:
(i) What sales volume must be obtained to break even?
(ii) What sales volume must be obtained to get 15 per cent return on investment?
(iii) Mr. X estimates that even if he closed the doors of his business, he would incur ₹ 25,000 as expenses per year. At
what sales would he be better off by locking his business up?

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Question 46. [Study Material]
An automobile manufacturing company produces different models of Cars. The budget in respect of model 007 for the
month of March, 20X9 is as under:
Budgeted Output 40,000 units
₹ in lakhs ₹ in lakhs
Net Realisation 2,10,000
Variable Costs:
Materials 79,200
Labour 15,600
Direct expenses 37,200 1,32,000
Specific Fixed Costs 27,000
Allocated Fixed Cost 33,750 60,750
Total cost 1,92,750
Profit 17,250
Sales 2,10,000
CALCULATE:
(i) Profit with 10 percent increase in selling price with a 10 percent reduction in sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10 percent rise in material costs, at the originally
budgeted selling price per unit.

Question 47. [Study Material]

You are given the following data:
Sales Profits
Year 20X8 ₹ 1,20,000 8,000
Year 20X9 ₹ 1,40,000 13,000
FIND OUT –
(i) P/V ratio,
(ii) B.E. Point,
(iii) Profit when sales are ₹1,80,000,
(iv) Sales required earn a profit of ₹12,000,
(v) Margin of safety in year 20X9.

Question 48. [Study Material]

A single product company sells its product at ₹ 60 per unit. In 20X8, the company operated at a margin of safety of 40%.
The fixed costs amounted to ₹ 3,60,000 and the variable cost ratio to sales was 80%. In 20X9, it is estimated that the
variable cost will go up by 10% and the fixed cost will increase by 5%.
(i) FIND the selling price required to be fixed in 20X9 to earn the same P/V ratio as in 20X8.
(ii) Assuming the same selling price of ₹ 60 per unit in 20X9, FIND the number of units required to be produced and sold
to earn the same profit as in 20X8.

Question 49. [Study Material]

A company has made a profit of ₹ 50,000 during the year 20X8-X9. If the selling price and marginal cost of the product
are ₹ 15 and ₹ 12 per unit respectively, FIND OUT the amount of margin of safety.

Question 50. [Study Material]

(a) If margin of safety is ₹ 2,40,000 (40% of sales) and P/V ratio is 30% of AB Ltd,
CALCULATE its (1) Break even sales, and (2) Amount of profit on sales of ₹9,00,000.

(b) X Ltd. has earned a contribution of ₹2,00,000 and net profit of ₹1,50,000 of sales of ₹ 8,00,000. What is its margin of
safety?

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Question 51. [Study Material]
A company had incurred fixed expenses of ₹ 4,50,000, with sales of ₹ 15,00,000 and earned a profit of ₹ 3,00,000 during
the first half year. In the second half, it suffered a loss of ₹ 1,50,000.
CALCULATE:
(i) The profit-volume ratio, break-even point and margin of safety for the first half year.
(ii) Expected sales volume for the second half year assuming that selling price and fixed expenses remained unchanged
during the second half year.
(iii) The break-even point and margin of safety for the whole year.

Solution 51:
Marginal Cost Statement
Particulars First Half (₹) Second Half (₹) Total for the year (₹)
Sales 15,00,000 6,00,000 21,00,000
(Balancing Figure)
Less: Variable Costs (Balancing Figure) 7,50,000 3,00,000 10,50,000
Contribution 7,50,000 3,00,000 10,50,000
Less: Fixed Costs 4,50,000 4,50,000 9,00,000
Profit/(Loss) 3,00,000 (Loss) = (1,50,000) 1,50,000

PVR = = 50% Same as I Half = 50% Same as I Half = 50%

BES = = 9,00,000 = 18,00,000

MOS = Total Sales – 15,00,000 – ₹ 9,00,000 = 21,00,000 – 18,00,000 =
BES 6,00,000 3,00,000
Working Notes:
Since PVR = 50%, Sales Value of Second Half will be = = ₹ 6,00,000.

Question 52. [Study Material]

The following information is given by Star Ltd.:
Margin of Safety ₹ 1,87,500
Total Cost ₹ 1,93,750
Margin of Safety 3,750 units
Break-even Sales 1,250 units
Required:
CALCULATE
1. Profit,
2. P/V Ratio,
3. BEP Sales (in ₹) and
4. Fixed Cost.

Question 53. [Study Material]

(a) You are given the following data for the coming year for a factory
Budgeted output 8,00,000 units
Fixed expenses ₹40,00,000
Variable expenses per unit ₹ 100
Selling price per unit ₹ 200
DRAW a break-even chart showing the break-even point.

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Marginal Costing BY: CA NITIN GURU
(b) If price is reduced to ₹ 180, what will be the new break-even point?

Question 54. [Study Material]

The following are cost data for three alternative ways of processing the clerical work for cases brought before the LC
Court System:
A B C
Manual (₹) Semi automatic (₹) Fully automatic (₹)
Monthly fixed costs:
Occupancy 15,000 15,000 15,000
Maintenance contract - 5,000 10,000
Equipment lease - 25,000 1,00,000
Unit variable costs (per
report):
Supplies 40 80 20
Labour ₹200 (5 hr × ₹40) ₹60 (1 hr × ₹60) ₹20 (0.25 hr × ₹80)
Required
(i) CALCULATE cost indifference points. Interpret your results.
(ii) If the present case load is 600 cases and it is expected to go up to 850 cases in near future, SELECT most appropriate
on cost considerations?

Question 55. [Study Material]

XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that the unit contribution
of Y is one fifth less than the unit contribution of X, that the total of F 1 and F2 is ₹1,50,000, that the BEP of X is 1,800
units (for BEP of X, F2 is not considered) and that 3,000 units is the indifference point between X and Y.(i.e. X and
Y make equal profits at 3,000 unit volume, considering their respective fixed costs). There is no inventory buildup as
whatever is produced is sold
Required FIND OUT the values F1 and F2 and units contributions of X and Y.

Question 56. [MAY 08]

A Company has Fixed Cost of ₹ 90,000, Sales ₹ 3,00,000 and Profit of ₹ 60,000.
Required:
(i) Sales volume if in the next period, the Company suffered a loss of ₹ 30,000.
(ii) What is the Margin of Safety for a profit of ₹ 90,000?

Solution 56:
(1) Required Sales if Loss is ₹ 30,000
=

= = ₹ 1,20,000

Working Notes
P/V Ratio = × 100

= × 100

= × 100 = 50%

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(2) Margin of Safety =

= = ₹ 1,80,000

Question 57. [MAY 09]

Product Z has a Profit-Volume Ratio of 28%. Fixed Operating Costs directly attributable to Product Z during the Quarter II
of the financial year 2009-10 will be ₹ 2,80,000.
Calculate the Sales Revenue required to achieve a quarterly profit of ₹ 70,000.

Solution 57:
P/V ratio = 28%
Quarterly Fixed Cost = ₹ 2,80,000
Desired Profit = ₹ 70,000

Sales revenue required to achieve Desired Profit =

= = ₹ 12,50,00

Question 58. [NOV 08]

PQ Ltd. reports the following cost structure at two capacity levels:
Particulars 2,000 Units (100% capacity) 1,500 Units
Production Overhead I ₹ 3 per unit ₹ 4 per unit
Production Overhead II ₹ 2 per unit ₹ 2 per unit
If the Selling Price, reduced by Direct Material and Labour is ₹ 8 per unit, what would be its Break-Even Point?

Solution 58:
Computation of Break Even Point in units

Break Even Quantity =

=
Break Even Quantity = 1,000 units

Working Notes:
(1)
Particulars 2,000 Units 1,500 Units
Production Overhead I [2,000 × 3] = 6,000 [1,500 × 4] = 6,000
Production Overhead II [2,000 × 2] = 4,000 [1,500 × 2] = 3,000
Production Overhead I is Fixed Cost in nature as total amount is constant at both levels.
Production Overhead II is Variable Cost in nature as total amount varies proportionately at two levels and amount per
unit remains constant at both levels.

(2) Contribution = Selling Price – Variable Cost

= ₹8–₹2
= ₹ 6 per unit

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Question 59. [MAY 09]
Following information is available for the first and second quarter of the year 2008-09 of ABC Limited:
Quarter Production (In Units) Semi-Variable Cost (₹)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
You are required to segregate the Semi-Variable Cost and calculate:
(a) Variable Cost per unit; and
(b) Total Fixed Cost.

Solution 59:
Particulars Production (Units) Semi Variable Cost (₹)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
Difference 6,000 30,000

Variable Cost per Unit =

= = ₹ 5 per units
Total Fixed Cost = Semi Variable Cost – (Production × Variable Cost per Unit)
Total Fixed Cost in Quarter I = 2,80,000 – (36,000 × 5)
= 2,80,000 – 1,80,000 = ₹ 1,00,000

Total Fixed Cost in Quarter II = 3,10,000 – (42,000 × 5)

= 3,10,000 – 2,10,000 = ₹ 1,00,000

Question 60. [NOV 10]

MNP Ltd sold 2,75,000 units of its product at ₹ 37.50 per unit. Variable costs are ₹ 17.50 per unit (Manufacturing Costs of
₹ 14 and Selling Costs ₹ 3.50 per unit. Fixed Costs are incurred uniformly throughout the year and amount to ₹ 35,00,000
(including Depreciation of ₹ 15,00,000). There is no beginning or ending inventories.
Required:
(i) Estimate Break-Even Sales Level Quantity and Cash Break-Even Sales Level Quantity.
(ii) Estimate the P/V Ratio.
(iii) Estimate the number of units that must be sold to earn an Income (EBIT) of ₹ 2,50,000.
(iv) Estimate the Sales Level to achieve an After-Tax Income (PAT) of ₹ 2,50,000. Assume 40% Corporate Income Tax
Rate.

Solution 60:

(i) Break-Even Sales Quantity =

= = 1,75,000 units

Cash Break-Even Sales Quantity =

= = 1,00,000 units

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(ii) P/V Ratio = × 100

= × 100 = 53.33%

(iii) No. of units that must be sold to earn an Income (EBIT) of ₹ 2,50,000
=

= = 1,87,500 units

(iv) After Tax Income (PAT) = ₹ 2,50,000

Tax rate = 40%
Desired level of Profit before tax = × 100 = ₹ 4,16,667

Estimate Sales Level =

= = ₹ 73,43,750

Question 61 [NOV 98]

The Profit Volume Ratio of X Ltd. is 50% and the Margin of Safety is 40%. You are required to calculate the Net Profit if
the Sales Volume is ₹ 1,00,000.

Solution 61:
Sales = ₹ 1,00,000
Margin of Safety = ₹ 40,000
Break Even Sales = ₹ 60,000
Break Even Sales = Fixed Cost/ P/V ratio or Fixed Cost = ₹ 30,000
If P/V ratio is 50%, Variable Cost Ratio is 50% of Sales.
Particulars Amount (₹)
Sales 1,00,000
Less: Variable Cost 50% 50,000
Contribution 50,000
Less: Fixed Cost 30,000
Profit 20,000

Question 62 [NOV 11]

The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for 5,00,000. You are
required to calculate:
(i) Break-even point, and
(ii) Sales in units to earn a profit of 10% on sales

Question 63. [MAY 01]

Fill in the blanks for each of the following independent situations:
Particulars A B C D E
Selling Price per unit - ₹ 50 ₹ 20 - ₹ 30
Variable Cost as % of Selling Price 60 - 75 75 -

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No. of units sold 10,000 4,000 - 6,000 5,000

Marginal Contribution ₹ 20,000 ₹ 80,000 - ₹ 25,000 ₹ 50,000
Fixed Costs ₹ 12,000 - ₹ 1,20,000 ₹ 10,000 -
Profit - ₹ 20,000 ₹ 30,000 - ₹ 15,000

Solution 63:
Independent situation Blank space to be filled Figure of blank
A Profit (Loss) ₹ 8,000
Selling Price per unit ₹5
B Fixed Costs ₹ 60,000
Variable Cost as % of Selling Price 60%
C No. of units sold 30,000 units
Marginal Contribution ₹ 1,50,000
D Selling Price per unit ₹ 16.66
Profit (Loss) ₹ 15,000
E Variable cost as % of Selling Price 66.66%
Fixed Costs ₹ 35,000

Working Notes:
Situations A B C D E

= ₹ 16.67
= ₹ 5 p.u.
Selling Price per unit ₹ 50 p.u. ₹ 20 p.u. p.u. ₹ 30 p.u.

= 60% = 66.67%
Variable Cost as % of SP 60% 75% 75%
Variable Cost per unit SP – SP – SP – Contribution
[Selling Price × Variable SP – Contribution Contribution = 20 × 75% = Contribution = =
Cost %] = ₹ 3 p.u. ₹ 30 p.u. ₹ 15 p.u. ₹ 12.00 p.u. ₹ 20 p.u.
Contribution per unit
[Selling Price – Variable SP p.u. – VC
Cost] =₹2 = p.u. = = =
20 – 15 = ₹ 5
p.u.
₹ 20 p.u. p.u. ₹ 4.17 p.u. ₹ 10 p.u.
No. of units sold 10,000 units 4,000 units = 6,000 units 5,000 units

30,000 units
Marginal Contribution
[No. of units Sold × FC + Profit =
Contribution] Rs, 20,000 ₹ 80,000 ₹ 1,50,000 ₹ 25,000 ₹ 50,000
Contribution –
Profit = ₹ Contribution –
Fixed Costs ₹ 12,000 60,000 ₹ 1,20,000 ₹ 10,000 Profit = ₹ 35,000
Profit / (Loss)
[Marginal Contribution – Contribution – FC Contribution –
Fixed Costs] = ₹ 8,000 ₹ 20,000 ₹ 30,000 FC = ₹ 15,000 ₹ 15,000

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Question 64. [NOV 15]
A company gives the following information:
Margin of Safety = 3, 75,000
Total Cost = 3,87,500
Margin of Safety (Qty.) = 15000 units
Break Even Sales in Units = 5000units
You are required to calculate :
(i) Selling price per units
(ii) Profit
(iii) Profit/ Volume Ratio
(iv) Break Even Sales (in Rupees)
(v) Fixed Cost

Question 65 [MAY 13, MAY 15]

MFN Limited started is operation in 2011 with the total production capacity of 2,00,000 units. The following data for
two years is made available to you:

2011 2012
Sales units 80,000 1,20,000
Total cost (₹) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is expected to continue in 2013 as well. Selling
price is ₹ 40 per unit. You are required to calculate
I. Break-Even Point (in units)
II. Profit at 75% of the total capacity in 2013.

Question 66 [NOV 14]

st
ZED Ltd. sells its product at ₹30 per unit. During the quarter ending on 31 March 2014, it produced & sold 16,000 units
and suffered a loss of ₹ 10 per unit. If the volume of sales is raised to 40,000 units, it can earn a profit of ₹8 per unit. You
are required to calculate:
(i) Break Even Point in Rupees
(ii) Profit if the sale volume is 50,000 units
(iii) Minimum level of production where the company needs not to close the production if unavoidable fixed cost is
₹1,50,000.

Question 67. [MAY 10]

Following information is available for the years 1 and 2 of PIX Limited:
Particulars Year 1 Year 2
Sales ₹ 32,00,000 ₹ 57,00,000
Profit/(Loss) (₹ 3,00,000) ₹ 7,00,000
Calculate – (a) PV Ratio, (b) Total Fixed Cost, and (c) Sales required to earn a Profit of ₹ 12,00,000.

Solution 67:
(a) PV Ratio = × 100 = = = 40%

(b) Fixed Costs = ₹ 15,80,000

(c) Sales required to earn a Profit of ₹ 12,00,000 = =

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= = ₹ 69,50,000
Working Notes:
Marginal Cost Statement
Particulars First Half (₹) Second Half (₹)
Sales 32,00,000 57,00,000
Less: Variable Costs (Sales – Contribution) 19,20,000 34,20,000
Contribution (At 20%) 12,80,000 22,80,000
Less: Fixed Costs (Contribution – Profit) 15,80,000 15,80,000
Profit (3,00,000) 7,00,000

Question 68. [MAY 14]

SHA Limited provides the following trading results:
Year Sale (₹) Profit
2012 – 13 25,00,000 10% of sale
2013 – 14 20,00,000 8% of sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is ₹ 30,00,000
(iv) Sale, when desired profit is ₹ 4,75,000
Margin of safety at a profit of ₹2,70,000

Question 69 [NOV 83]

The following data relate to a manufacturing Company –
1. Plant Capacity: 4,00,000 units per annum. Present Utilization: 40%
2. Actuals for the year were as under –
(a) Selling Price ₹ 50 per unit
(b) Materials Cost ₹ 20 per unit
(c) Variable Manufacturing Costs ₹ 15 per unit
(d) Fixed Costs ₹ 27 Lakhs
In order to improve capacity utilization, the following proposals are considered –
Reduce Selling Price by 10% and spend additionally ₹ 3 Lakhs on Sales Promotion.
Required: How many units should be made in order to earn a Profit of ₹ 5 Lakhs?

Solution 69:
Revised Selling Price [₹ 50 – 10%] ₹ 45 per unit
Less: Variable Cost [Materials ₹ 20 + Variable Manufacturing Cost ₹ 15] ₹ 35 per unit
Contribution ₹ 10 per unit
Revised Fixed Costs [₹ 27 Lakhs + Additional Promotion ₹ 3 Lakhs] ₹ 30 Lakhs
Desired Total Contribution [Fixed Costs ₹ 30 Lakhs + Profit ₹ 5 Lakhs] ₹ 35 Lakhs
No. of units required to earn above Contribution [₹ 35,00,000/₹ 10] 3,50,000 units

Question 70 [NOV 12]

st
The following figures are related to LM Limited for the year ending 31 March, 2012: Sales – 24,000 units @ ₹ 200 per
unit; P/V Ratio 25% and Break-even Point 50% of sales.
You are required to calculate:

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(i) Fixed cost for the year
(ii) Profit earned for the year
(iii) Units to be sold to earn a target net profit of ₹11, 00,000 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.

Question 71. [MAY 85 (ADAPTED)]

G Ltd produces a product, which has a Variable Cost of Materials – ₹ 40, Labour – ₹ 10 and Overheads of ₹ 4. The Selling
Price is ₹ 90 per unit. Sales for the current year is expected to be 15,000 units and Fixed Overheads are ₹ 1,40,000.
Under a wage agreement, an increase of 10% is payable to all direct workers from the beginning of the forthcoming year,
while Material Cost is expected to increase by 7.5%, Variable Overhead by 5% and Fixed Overhead by 3%.
From the above, you are required to calculate the following –
1. Present PV Ratio, Break-Even Point, Margin of Safety and Profits.
2. Sales required to earn a Profit of ₹ 7,50,000, if the current cost and price structure continues.
3. Revised PV Ratio and profits of forthcoming year if the current sales quantity and price were maintained.
4. New Selling Price if the Current PV Ratio is to be maintained in the forthcoming year.
5. Sales Quantity in the forthcoming year, to yield the same as present profits, if the Sale Price remains ₹ 90.

Solution 71:
Comparison of Present and forthcoming year’s cost structure:
Component of Cost Current Year Change in Cost Forthcoming Year
Materials ₹ 40 (+) 7.5% ₹ 43.00
Labour ₹ 10 (+) 10% ₹ 11.00
Variable Overhead ₹4 (+) 5% ₹ 4.20
Total Variable Costs p.u. ₹ 54 ₹ 58.20
Total Fixed Costs ₹ 1,40,000 (+) 3% ₹ 1,44,200

1. Contribution per unit = Selling Price – Variable Costs = ₹ 90 – ₹ 54 = ₹ 36.00 per unit
Present PV Ratio = × 100 = × 100 = 40%

Present BEP (In ₹) = = = ₹ 3,50,000.

Present BEP = = = 3,889 units.
Present MOS (in ₹) = Total Sales – BES = (15,000 units × ₹ 90) – ₹ 3,50,000 = ₹ 10,00,000.
Present MOS (Quantity) = Total Sales Quantity – BEQ = 15,000 units – 3,889 units = 11,111 units.
Present Profits = Total Contribution – Fixed Costs = (15,000 units × ₹ 36) – ₹ 1,40,000 = ₹ 4,00,000.

2. Sales required to earn a Profit of ₹ 7,50,000 with the current cost and price structure:
Required Sales Value = = = =₹
22,25,000
Required Sales Quantity = = = 24,722 units.

3. Revised Contribution of forthcoming year = Selling Price – Variable Costs = ₹ 90 – ₹ 58.20 = ₹

31.80 per unit.
Revised PV Ratio = × 100 = × 100 = 35.33%.
Revised Profits = Total Contribution – Fixed Costs = (15,000 units × ₹ 31.80) – ₹ 1,44,200 = ₹ 3,32,800

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4. New Selling Price if the Current PV Ratio is to be maintained:

Since Current PV Ratio is 40%, Variable Cost Ratio = 100% - 40% = 60%.
Therefore, the Variable Costs of the forthcoming year constitute 60% of the Selling Price.
Hence Revised Selling Price = = ₹ 97.00

5. Sales Quantity to earn the same profit of current year if SP = ₹ 90

Required Sales Quantity = =

= = 17,113 units.

Question 72. [MAY 01]

A Company manufactures a single product with a capacity of 1,50,000 units per annum. The summarized Profitability
Statement for the year is as under:
Particulars Amount (₹) Amount (₹)
Sales: 1,00,000 units ₹ 15 per unit 15,00,000
Less: Cost of Sales:
Direct Materials 3,00,000
Direct Labour 2,00,000
Production Overhead:
Variable 60,000
Fixed 3,00,000
Administration Overheads (Fixed) 1,50,000
Selling and Distribution Overheads:
Variable 90,000
Fixed 1,50,000 12,50,000
Profit 2,50,000
You are required to evaluate the following options:
(i) What will be the amount of sales required to earn a target profit of 25% on Sales, if the packaging is improved at a
cost of ₹ 1 per unit?
(ii) There is an offer from a large retailer for purchasing 30,000 units per annum, subject to providing a packaging with a
different brand name at a cost of ₹ 2 per unit. However, in this case there will be no Selling and Distribution
Expenses. Also this will not, in any way, affect the Company’s existing business. What will be the break-even price
for this additional offer?
(iii) If an expenditure of ₹ 3,00,000 is made on advertising, the sales would increase from the present level of 1,00,000
units to 1,20,000 units at a price of ₹ 18 per unit. Will that expenditure be justified?
(iv) If the Selling Price is reduced by ₹ 2 per unit, there will be 100% capacity utilization. Will the reduction in Selling
Price be justified?

Solution 72:
1. Let Sale Quantity required = x units.
Sales = ₹ 15x and Profit = 25% of 15x = 3.75x
Profit = Contribution – Fixed Cost.
3.75x = (15x – 7.50x) – 6,00,000 (Including Packing)
3.75x = 6,00,000.
x = 1,60,000 units.

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Sales Quantity required = 1,60,000 units.
[However, this is outside the Firm’s maximum capacity of 1,50,000 units.]

2. Break Even price for additional offer = Variable Cost only (since there are no Fixed Costs)
= (₹ 6.50 – ₹ 0.90) + ₹ 2.00 = ₹ 7.60 per unit.

3. Additional Profit in Situation (3) = ₹ 4,80,000 – ₹ 2,50,000 = ₹ 2,30,000. So, the proposal is justified.

4. Additional Profit in Situation (4) = ₹ 3,75,000 – ₹ 2,50,000 = ₹ 1,25,000. So, the proposal is justified.

Working Notes:
Particulars Present Situation (3) Situation (4)
Per
unit Total
₹ 15 – 2 = ₹
Sales (A) 15.00 ₹ 15,00,000 ₹ 18.00 13.00
Variable Costs:
Material ₹ 3.00 ₹ 3,00,000
Labour ₹ 2.00 ₹ 2,00,000
Production Overhead ₹ 0.60 ₹ 60,000
Selling Overhead ₹ 0.90 ₹ 90,000
Total (B) ₹ 6.50 ₹ 6,50,000 ₹ 6.50 ₹ 6.50
Contribution (A) – (B) ₹ 8.50 ₹ 11.50 ₹ 6.50
1,00,000 1,50,000
Quantity Sold units 1,20,000 units units
Total Contribution [Contribution × Quantity
sold] (C) ₹ 8,50,000 ₹ 13,80,000 ₹ 9,75,000
Fixed Costs:
Production Overhead ₹ 3,00,000
Administrative Overhead ₹ 1,50,000
Selling Overhead ₹ 1,50,000
[6,00,000 + 3,00,000]= ₹
Total Fixed Costs (D) ₹ 6,00,000 9,00,000 ₹ 6,00,000
Profit (C ) – (D) ₹ 2,50,000 ₹ 4,80,000 ₹ 3,75,000

Question 73. [NOV 96]

A Company produces different models of Ceiling Fans. The budget for Model 118 for September is as under –
(₹ In Lakhs)
40,000
Budgeted Output units
Net Realization 700.00
Less: Variable Costs:
Materials 264.00
Labour 52.00
Direct Expenses 124.00 440.00
Specific Fixed Costs
90.00
Allocated Fixed Costs
112.50 202.50

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Total Costs 642.50

Add: Profit 57.50
Sales 700.00
Calculate:
1. Profit with 10% increase in Selling Price with a 10% reduction in Sales Volume.
2. Sales Volume to maintain original profit after a 10% rise in Material Costs, at the originally Budgeted Selling Price
per unit.

Solution 73:
Particulars Original Budget Situation (1) Situation (2)
(40,000 – 10%) = (260 Lakhs ÷ 584) =
Output Quantity (units) 40,000 36,000 44,521
(700 Lakhs ÷ 40,000 units) = ₹ (1,750 + 10%) = ₹
Selling Price p.u. 1,750 1,925 ₹ 1,750
(440 Lakhs ÷ 40,000 units) = ₹
Less: Variable Cost p.u. 1,100 ₹ 1,100 ₹ 1,166
Contribution p.u. ₹ 650 ₹ 825 ₹ 584
Total Contribution (Qty ×
Contribution p.u.) ₹ 260.00 Lakhs ₹ 297.00 Lakhs ₹ 260.00 Lakhs
Less: Fixed Cost ₹ 202.50 Lakhs ₹ 202.50 Lakhs ₹ 202.50 Lakhs
Profit ₹ 57.50 Lakhs ₹ 94.50 Lakhs ₹ 57.50 Lakhs
Working Notes:
Material Cost + 10% = ₹ 660 + 10% = ₹ 726 per unit

Add: Labour & Expenses = ₹ 440 per unit

Revised Total Variable Costs per unit in Situation (2) = ₹ 1,166 per unit

 MARGINAL AND ABSORPTION COSTING SYSTEM

 Marginal Cost Statement

Particulars Product A Product B Product C Total
Sales Revenue Xxx xxx xxx xxx
Less: Variable Costs Xxx xxx xxx xxx
Contribution Xxx xxx xxx xxx
Less: Fixed Costs xxx
Profit xxx
Note: Fixed Cost are subtracted from the pool of Total Contribution, since they are treated as period Costs, and hence
not retable to any product as such. So, Fixed Costs are not apportioned to products.

 Absorption Costing
Particulars Product A Product B Product C Total
Sales Value xxx xxx xxx xxx
Less: Direct Material xxx xxx xxx xxx
Direct Labour xxx xxx xxx xxx
Factory Overheads xxx xxx xxx xxx
Gross Profit xxx xxx xxx xxx
Less: Administration Expenses xx xx xx xx

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Selling & Distribution Expenses xx xx xx xx

Net Profit xx xx xx xx

Question 74. [NOV 09]

Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under:
Direct Material 4 kg at ₹ 4 ₹ 16.00
Direct Labour 3 hours at ₹ 18 ₹ 54.00
Variable Overhead 3 hours at ₹ 4 ₹ 12.00
Fixed Overhead 3 hours at ₹ 6 ₹ 18.00
Total ₹ 100.00

Selling and administrative Costs:

Variable ₹ 20 per unit
Fixed ₹ 7,60,000
During the year, the Company has the following activity:
Units Produced 24,000
Units Sold 21,500
Units Selling Price ₹ 168
Direct Labour Hours worked 72,000
Actual Fixed Overhead was ₹ 48,000 less than the Budgeted Fixed Overhead. Budgeted Variable Overhead was ₹ 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 pre-determine overhead rates.
Required:
(i) Compute the Unit Cost and Total Income under – (a) Absorption Costing and (b) Marginal Costing and also compute
the Under or Over Absorption of Overhead.
(ii) Reconcile the difference between the Total Income under Absorption and Marginal Costing.

Question 75. [NOV 08]

ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The Variable Production Costs are ₹ 40 per
unit and the Variable Selling Expenses are ₹ 12 per sold unit. The budgeted Fixed Production Expenses were ₹ 24,00,000
st
per annum and the Fixed Selling Expenses were ₹ 16,00,000. During the year ended 31 March, 2008, the Company
worked at 80% of its capacity. The operating data for the year are as follows:
Production 3,20,000 units
Sales at ₹ 80 per unit 3,10,000 units
Opening Stock of Finished Goods 40,000 units
Fixed Production Expenses are absorbed on the basis of capacity and Fixed Selling Expenses are recovered on the basis of
period.
st
You are required to prepare Statements of Cost and Profit for the year ending 31 March, 2008:
(i) On the basis of Marginal Costing
(ii) On the basis of Absorption Costing.

Question 76. [NOV 76]

The Budgeted Sales of three Products of a Company are as follows –
Products X Y Z
Budgeted Sales in units 10,000 15,000 20,000
Budgeted Selling Price per unit ₹ 4.00 ₹ 4.00 ₹ 4.00
Budgeted Variable Cost Per Unit ₹ 2.50 ₹ 3.00 ₹ 3.50
Budgeted Fixed Expenses (Total) ₹ 12,000 ₹ 9,000 ₹ 7,500

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Compute for each product – (a) Budgeted Profit, (b) Budgeted Break Even Sales, and (c) Budgeted Margin of Safety in
terms of Sales Value. Also compute overall Profit Volume Ratio, Break-Even Point and Margin of Safety.

Solution 76:
Particulars X Y Z Total
Selling Price per unit ₹ 4.00 ₹ 4.00 ₹ 4.00
Less: Variable Cost per unit ₹ 2.50 ₹ 3.00 ₹ 3.50
Contribution per unit ₹ 1.50 ₹1 ₹ 0.50
10,000 15,000 20,000
Sales Quantity units units units
Total Sales Value (Selling Price per unit × Sales ₹
Quantity) ₹ 40,000 ₹ 60,000 ₹ 80,000 1,80,000
Total Contribution (Contribution per unit × Sales
Quantity) ₹ 15,000 ₹ 15,000 ₹ 10,000 ₹ 40,000
Less: Fixed Cost ₹ 12,000 ₹ 9,000 ₹ 7,500 ₹ 28,500
Profit ₹ 3,000 ₹ 6,000 ₹ 2,500 ₹ 11,500

Profit Volume Ratio ( × 100) 37.50% 25% 12.50% 22.22%

₹
Break-Even Sales
₹ 32,000 ₹ 36,000 ₹ 60,000 1,28,250
Margin of Safety (Total Sales Value – Break-Even Sales) ₹ 8,000 ₹ 24,000 ₹ 20,000 ₹ 51,750

Question 77. [NOV 09]

A Company sells two Products, J and K. The Sales Mix is 4 units of J and 3 units of K. The Contribution Margin per unit are
₹ 40 for J and ₹ 20 for K. Fixed Costs are ₹ 6,16,000 per month. Compute the Break-Even Point.

Solution 77:
Particulars J K
Sales Mix Ratio 4 3
Contribution per unit ₹ 40 20
Ratio of (Sales Mix Ratio × Contribution per unit) ₹ 160 ₹ 60
To achieve BEP, Required Contribution = Fixed Cost, ₹ 6,16,000, to be apportioned in the
above ratio ₹ 4,48,000 ₹ 1,68,000
11,200 8,400
Break Even Quantity (Units per month) = (Fixed Cost/Contribution per Unit) units units
Overall BEQ = 11,200 + 8,400 = 19,600 units.

Question 78. [MAY 99]

Raj Ltd. manufactures three Products X, Y and Z. The unit Selling Prices of these Products are ₹ 100, ₹ 160 and ₹ 75
respectively. The corresponding unit variable costs are ₹ 50, ₹ 80 and ₹ 30. The proportions (quantity wise) in which
these products are manufactured and sold are 20%, 30% and 50% respectively. The total fixed costs are ₹ 14,80,000.
Calculate Overall Break-Even Quantity and the product wise break up of such quantity.

Solution 78:
Total units sold = x
X = 0.2x
Y = 0.3x
Z = 0.5x

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Particulars X Y Z
Contribution per unit (Selling Price – Variable Cost) 50 80 45
Units sold 0.2x 0.3x 0.5x
Overall Contribution (Contribution per unit × Units Sold) 10x 24x 22.5x
Overall Contribution = 10x + 24x + 22.5x
= 56.5x
At BEP = Total Fixed Cost ÷ Total Contribution
14,80,000 = 56.5x
x = 26,195
X Y Z
20% 30% 50%
5,239 7,858 13,098

Question 79. [MAY 92]

A Japanese Company is planning to establish a Subsidiary Company in India to produce a product. Based on the
estimated annual sales of 40,000 units of the Product, following estimates for the Indian Subsidiary are produced:

Particulars Total Annual Costs Percent of Total Annual Cost which is variable
Material ₹ 2,10,000 100%
Labour ₹ 1,50,000 80%
Factory Overheads ₹ 92,000 60%
Administration Expenses ₹ 40,000 35%
The Indian production will be sold by manufacturer’s representatives who will receive a Commission of 8% of the Sale
Price.
No portion of the Japanese Office Expenses is to be allocated to the Indian Subsidiary.
1. Compute the Sale Price per unit, to enable the Management to realize an estimated 10% Profit on sale proceeds in
India.
2. Calculate the BEP in Rupee Sales and in number of units for the Indian Subsidiary on the assumption that the Sale
Price is ₹ 14 per unit.

Solution 79:
1. Computation of Sale Price per bottle
Commission is 8% of Sales Revenue and Profit is 10% of Sales Revenue.
Cost of Sales, i.e. Cost excluding Commission (100% – 18%) = 82% of Sales Revenue
Total Costs excluding Commission (₹ 2,10,000 + ₹ 1,50,000 + ₹ 92,000 + ₹ 40,000) = ₹ 4,92,000
Hence, Desired Total Sales Revenue ( ) = ₹ 6,00,000
Therefore, Sale Price per unit ( ) = ₹ 15 per unit

2. Analysis of Costs into Fixed and Variable

Item Total Costs p.a. Variable Costs p.a. Variable Costs p.u. Fixed Costs p.a.
Material ₹ 2,10,000 100% = ₹ 2,10,000 ₹ 5.25 Nil
Labour ₹ 1,50,000 80% = ₹ 1,20,000 ₹ 3.00 ₹ 30,000
Factory Overhead ₹ 92,000 60% = ₹ 55,200 ₹ 1.38 ₹ 36,800
Administration Overhead ₹ 40,000 35% = ₹ 14,000 ₹ 0.35 ₹ 26,000
Commission ₹ 14 × 8% = ₹ 1.12 Nil
Total ₹ 11.10 ₹ 92,800

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Computation of Break-Even Point (If Selling Price = ₹ 14 per unit)
(a) Contribution per unit = Sale Price per unit – Variable Cost per unit = ₹ 14 – ₹ 11.10 = ₹ 2.90 per unit.
(b) Break Even Quantity = = = 32,000 units.
(c) Break Even Point (in ₹) = BEQ × Sale Price per unit = 32,000 units × ₹ 14 = ₹ 4,48,000.

Question 80. [NOV 89]

Lee Shoe Company sells 5 different styles of Chappals with identical purchase cost and selling prices. The Company is
trying to find out the profitability of opening another store, which will have the following expenses and revenues:
(Information per pair)
Selling Price ₹ 30.00
Variable Production Cost ₹ 19.50
Salesmen’s Commission ₹ 1.50
Total Variable Cost ₹ 21.00
Annual Fixed Expenses are ₹ 3,60,000, made up as Rent ₹ 60,000 Salaries ₹ 2,00,000, Advertising ₹ 80,000 and Other
Fixed Costs ₹ 20,000.
Required:
1. Calculate the annual BEP in units & in value. Compute profit or loss if 35,000 pairs of Chappals are sold.
2. Sales Commission is proposed to be discontinued, but instead a fixed amount of ₹ 90,000 is to be incurred in Fixed
Salaries. A reduction in Selling Price of 5% is also proposed. What will be the BEP in units?
3. It is proposed to pay the Store Manager ₹ 0.50 per pair as further commission. The selling Price is also proposed to
increase by 5%. What would be the BEP in units?
4. Refer to the original data. If the Store Manager were to be paid ₹ 0.30 commission on each pair of chappal sold in
excess of the BEP, what would be the Store’s Net Profit if 50,000 pairs were sold?

Solution 80:
1. Present BEP = 40,000 pairs or ₹ 12,00,000, Loss on Sale of 35,000 pairs = ₹ 45,000
2. BEP (with reduction in Sales Price, no Commission and increase in Fixed Costs) = 50,000 pairs.
3. BEP (with increase in Sale Price, additional Commission) = 36,000 pairs.
4. Net Profit (with additional Commission above BEP) = ₹ 87,000.

Working Notes:
Situation Present Proposal (2) Proposal (3)
Selling Price per pair ₹ 30.00 ₹ 30 – 5% = ₹ 28.50 ₹ 30 + 5% = ₹ 31.50
Less: Variable Cost per pair ₹ 21.00 ₹ 19.50 ₹ 21 + ₹ 0.50 = ₹ 21.50
Contribution per pair ₹ 9.00 ₹ 9.00 ₹ 10.00
Total Fixed Costs ₹ 3,60,000 3,60,000 + 90,000 = ₹ 4,50,000 ₹ 3,60,000

BEQ = 40,000 pairs 50,000 pairs 36,000 pairs

BES = BEQ × Sale Price p.u. ₹ 12,00,000 ₹ 14,25,000 ₹ 11,34,000

Loss if 35,000 units are sold = (Contribution – Fixed Costs) = (₹ 9 × 35,000) – ₹ 3,60,000 = ₹ 45,000.
Profit under Situation (4) BEP Additional Sales Total
Sales Quantity 40,000 pairs (Bal. Figure) 10,000 pairs 50,000 Pairs
Contribution per pair 30 – 21 = ₹ 9 30 – 21 – 0.30 = ₹ 8.70
Total Contribution [Sales Quantity × Contribution per pair] ₹ 3,60,000 ₹ 87,000 ₹ 4,47,000
Less: Fixed Costs ₹ 3,60,000

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Profit ₹ 87,000

Question 81. [NOV 95]

Two Firms A Ltd and B Ltd sell the same type of product in the same market. Their budgeted Profit & Loss Account for the
st
year ending 31 March are as follows –
(In ₹)
Particulars A Ltd B Ltd
Sales 5,00,000 6,00,000
Variable Costs 4,00,000 4,00,000
Fixed Costs 30,000 4,30,000 70,000 4,70,000
Net Profit 70,000 1,30,000
1. Calculate at which Sales Level of both the Firms will earn equal profit.
2. State which Firm is likely to earn greater profits in condition of – (i) Heavy demand for the product, and (ii) Low
demand for the product. Give reasons.

Solution 81:
Particulars A Ltd B Ltd
Sales ₹ 5,00,000 ₹ 6,00,000
Less: Variable Costs (₹ 4,00,000) (₹ 4,00,000)
Contribution ₹ 1,00,000 ₹ 2,00,000
Less: Fixed Costs (₹ 30,000) (₹ 70,000)
Net Profit ₹ 70,000 ₹ 1,30,000
PV Ratio = × 100 20% 33.33%

Break Even Sales = ₹ 1,50,000 ₹ 2,10,000

Indifference Point (Quantity) = = = ₹ 3,00,000 (approx.)

Interpretation and Conclusion:

Sales Demand Nature Firm with higher profits Reason
< ₹ 3,00,000 Low Demand A Ltd Lower Fixed Costs
= ₹ 3,00,000 Indifference Point Either A Ltd or B Ltd Equal Profits
> ₹ 3,00,000 Heavy Demand B Ltd Higher PV Ratio

Question 82. [MAY 93]

A Company currently operating at 80% capacity has the following particulars:
Particulars Amount (₹)
Sales 32,00,000
Direct Materials 10,00,000
Direct Labour 4,00,000
Variable Overheads 2,00,000
Fixed Overheads 13,00,000
An Export Order has been received that would utilize half the capacity of the Factory. The order cannot be spilt, i.e. it has
either to be taken in full executed at 10% below the normal domestic prices, or rejected totally.
The alternatives available to the Management are:
1. Reject the order and continue with the domestic sales only, (as at present), or

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2. Accept the order, spilt capacity between overseas and domestic sales and turn away excess domestic demand, or
3. Increase capacity so as to accept the export order and maintain the present domestic sale by –
(a) Buying an equipment that will increase capacity by 10%. This will result in an increase of ₹ 1,00,000 in Fixed
Costs, and
(b) Work Overtime to meet balance of required capacity. In that case, Labour will be paid at one and a half times
the normal wage rate.
Prepare a Comparative Statement of Profitability and suggest the best alternative.

Solution 82:
Statement of Profitability under different alternatives
Alternatives I II III
Current 100% Capacity Operations, i.e. 50% 130% Capacity Operations, i.e. 80%
Description Operations for for
only at 80% Domestic Sales and 50% for Export Domestic Sales and 50% for Export
Capacity Sales Sales
Sales
Domestic 32,00,000 32,00,000 × = 20,00,000 32,00,000
Export – 18,00,000 18,00,000
Total Sales (A) 32,00,000 38,00,000 50,00,000
Variable Costs:

Direct Materials 10,00,000 10,00,000 × = 12,50,000 10,00,000 × = 16,25,000

Direct Labour 4,00,000 4,00,000 × = 5,00,000 7,00,000

Variable Overhead 2,00,000 2,00,000 × = 2,50,000 2,00,000 × = 3,25,000

Total Variable Cost (B) 16,00,000 20,00,000 26,50,000
Contribution (A) –
(B) 16,00,000 18,00,000 23,50,000
Less: Fixed Overheads 13,00,000 13,00,000 14,00,000
Profit 3,00,000 5,00,000 9,50,000

Suggestion: Alternative III is preferable, due to maximum profits.

Working Notes:

1. (a) Sales Revenue at 100% Capacity (normal prices) = = ₹ 40,00,000

(b) Sales Revenue at 50% Capacity (normal prices) = ₹ 40,00,000 × 50% = ₹ 20,00,000
(c) Export Sales Revenue at 50% Capacity (10% below normal prices) = ₹ 20,00,000 – 10% = ₹ 18,00,000

2. (a) Direct Labour Cost at 100% Capacity (normal rates) = ₹ 4,00,000 × = ₹ 5,00,000

(b) Direct Labour Cost at 110% Capacity (normal rates) = ₹ 5,00,000 × = ₹ 5,50,000

(c) Direct Labour Cost for extra 20% Capacity (1.5 times normal wage rate)= ₹ 5,00,000 × 20% × 1.5= ₹ 1,50,000
(d) Total Direct Labour Cost at 130% Capacity (b + c) = ₹ 5,50,000 + ₹ 1,50,000 = ₹ 7,00,000

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Question 83. [MAY 02]
A Company, which manufactures and sells three products, furnishes the following details for a month:
Products A B C
Number of units budgeted 1,00,000 units 38,000 units 46,000 units
Selling Price per unit ₹ 50 ₹ 80 ₹ 60
Variable Costs per unit ₹ 34 ₹ 52 ₹ 24
It has been proposed that an intensive advertisement campaign involving an expenditure of ₹ 1,20,000 per month and
reduction of Selling Prices will increase the Sales of Product C as under:
 If the Selling Price is reduced to ₹ 55 per unit, the sales will increase to 59,000 units per month.
 If the Selling Price is reduced to ₹ 51 per unit, the sales will increase to 65,000 units per month.
The Fixed Costs of the Company amount to ₹ 34,20,000 per month.
Required:
(a) Calculate the current monthly Break-Even Sales Value of the Company.
(b) Evaluate the two proposals and advise which of the proposals should be implemented.
(c) Calculate the sales units required per month of Product C to justify the expenditure on advertisement in respect of
your decision in (b) above.

Solution 83:
(a) Computation of Present PVR and BES
Production A B C Total
Sale Quantity units 1,00,000 38,000 46,000
Selling Price per unit ₹ 50 ₹ 80 ₹ 60
Less: Variable Costs per unit ₹ 34 ₹ 52 ₹ 24
Contribution per unit ₹ 16 ₹ 28 ₹ 36
Total Contribution [Contribution p.u. × Units] ₹ 16,00,000 ₹ 10,64,000 ₹ 16,56,000 ₹ 43,20,000
Sales Revenue (Sales Price × Sale Quantity Units) ₹ 50,00,000 ₹ 30,40,000 ₹ 27,60,000 ₹ 1,08,00,000

Overall Profit Volume Ratio = × 100 = = 40%

Overall Monthly Break-Even Sales = = = ₹ 85,50,000

(b) Evaluation of Proposals for Product C

Particulars Proposal I (₹) Proposal II (₹)
Contribution per unit 55 – 24 = ₹ 31 51 – 24 = ₹ 27
Total Contribution for 59,000 and 65,000 units 18,29,000 17,55,000
Add: Contribution from Products A and B 26,64,000 26,64,000
Total Contribution 44,93,000 44,19,000
Less: Additional Advertisement Costs per month 1,20,000 1,20,000
Net Contribution 43,73,000 42,99,000
Conclusion: Hence, Proposal I is more beneficial.

(c) Computation of Sales Units required to justify advertisement expenditure as per Proposal I
Particulars Amount (₹)
Present Contribution of Product C ₹ 16,56,000
Add: Advertisement Cost ₹ 1,20,000
Total Desired Contribution ₹ 17,76,000
Contribution per unit ₹ 31

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No. of sales units required = 57,291 units

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 Budget and Budgetary Control BY: CA NITIN GURU

Chapter 15
Budget and Budgetary Control
BUDGET

Capacity Functional Master Period

wise wise Budget wise

Fixed Flexible Sales Long-term Short Current

Budgets Budgets budget Budgets Budgets Budgets

Production
budget

Plant utilisation
budget

Direct-material usage
budget

Direct-material purchase
budget

Direct-labour (personnel)
budget

Factory overhead
budget

Production cost
budget

Ending-inventory
budget

Cost of goods-sold
budget

Selling and distribution cost

budget
Administration expenses
budget

Research and development cost

budget

Capital expenditure
budget

Cash budget

Question 1. [NOV 90, NOV 00, MAY 09,NOV 11]

What do you understand by the term ‘Budget’?

Solution 1:
A financial and/or quantitative statement prepared and approved prior to a defined period of time of the policy to be
pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and
employment of capital.

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Characteristics of Budget
1. A budget is concerned for a definite future period.
2. A budget is a detailed plan of all the economic activities of a business.
3. Budget is a mean to achieve business objectives and it is not an end in itself.

Question 2. [NOV 00]

What are the objectives of Budgeting/Performance Budgeting?

Solution 2:
The objectives of Budgeting are:
(1) To promote the planning and give direction to every member of the organization.
(2) To direct and co-ordinate business activities and units to achieve the targets.
(3) To facilitate the control process, by comparing actual results with plan, and provide feedback to the employees
about their performance.
(4) To increase the effectiveness with which people and capital are employed.

Question 3. [NOV 75, NOV 76, NOV 78, NOV 89, NOV 96, MAY 02, NOV 11]
Distinguish between Fixed and Flexible Budgets.

Solution 3:
Fixed Budget Flexible Budget
 It does not change with actual volume of activity
achieved.  It can be recasted on the basis of activity level to be
Thus it is known as rigid or inflexible budget. achieved. Thus it is not rigid.
 It operates on one level of activity and under one set of  It consists of various budgets for different levels of
conditions. It assumes that there will be change in the activity.
prevailing conditions, which is unrealistic.
 Here as all costs like – fixed, variable and semi-variable  Here analysis of variance provides useful
are information as
related to only one level of activity so variance analysis
does each cost is analysed according to its behaviour.
not give useful information.
 If the budgeted and actual activity levels differ  Flexible budgeting at different levels of activity,
significantly, facilitates
then the aspects like cost ascertainment and price the ascertainment of cost, fixation of selling price
fixation do and
not give a correct picture. tendering of quotations.
 Comparison of actual performance with budgeted  It provides a meaningful basis of comparison of the
targets will actual
be meaningless specially when there is a difference
between performance with the budgeted targets.
the two activity levels.

Question 4. [NOV 08]

Write short note on Flexible Budgets.

Solution 4:
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.

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Flexible budgeting may be resorted to under following situations:

(i) In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product
accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade may have enough
market if temperature goes below the freezing point.
(iii) In the case of labour intensive industry where the production of the concern is dependent upon the availability of
labour.

Need for flexible budget:

1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry;
2. A company which keeps on introducing new products or makes changes in the design of its products frequently;
3. Industries engaged in make-to-order business like ship building;
4. An industry which is influenced by changes in fashion; and
5. General changes in sales.

Question 5. [NOV 77, NOV 89, NOV 09]

List commonly used functional Budget?

Solution 5:
The various commonly used functional budgets are:
(i) Sales budget
(ii) Production budget
(iii) Plant utilization budget
(iv) Direct-material usage budget
(v) Direct-material purchase budget
(vi) Direct-labour (personnel) budget
(vii) Factory overhead budget
(viii) Production cost budget
(ix) Selling and distribution cost budget
(x) Research and development cost budget, Cash Budget, Capital Expenditure Budget.

Question 6. [NOV 77, RTP]

What are the types of Functional Budget?

Solution 6:
Types of Functional Budget are as follows:
1. Physical Budgets: Those budgets which contain information in terms of physical units about sales, production etc.
For example, quantity of sales, quantity of production, inventories, and manpower budgets are physical budgets.
2. Cost Budgets: Budgets which provide cost information in respect of manufacturing, selling, administration etc. For
example, manufacturing costs, selling costs, administration cost, and research and development cost budgets are
cost budgets.
3. Profit budgets: A budget which enables in the ascertainment of profit. For example, sales budget, profit and loss
budget, etc.
4. Financial Budgets: A budget which facilitates in ascertaining the financial position of a concern. For example, cash
budgets, capital expenditure budget, budgeted balance sheet etc.

Question 7. [NOV 77, NOV 98]

What factors are to be considered in preparing the Sales Budget?

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Solution 7:
A sales forecast, is a projection or estimate of the available customer demand. A forecast reflects the environmental or
competitive situation facing the company whereas the sales budget shows how the management intends to react to this
environmental and competitive situation.
While preparing the sales budget, the following factors are to be taken into consideration:
(1) Past sales volume
(2) General economic and industry conditions
(3) Relative product profitability
(4) Market research studies
(5) Pricing policies
(6) Advertising and other sales promotion efforts
(7) Competition
(8) Production capacity

Question 8. [RTP, NOV 99]

What are the purposes of Plant Utilization Budget?

Solution 8:
Plant utilization budget represents, in terms of working hours , weight or other convenient units of plant facilities
required to carry out the programme laid down in the production budget.
The main purposes of this budget are:
1. To determine the load on each process, cost or groups of machines for the budget period.
2. To indicate the processes or cost centres which are overloaded so that corrective action may be taken such as: (i)
working overtime (ii) sub-contracting (iii) expansion of production facility, etc.
3. To dovetail the sales production budgets where it is not possible to increase the capacity of any of the overloaded
processes.
4. Where surplus capacity is available in any of the processes, to make effort to boost sales to utilize the surplus
capacity.

Question 9. [MAY 75, NOV 80, NOV 90, NOV 97, NOV 13]
What is Budgetary Control? What are its salient features?

Solution 9:
Budgetary Control is the establishment of budgets relating to the responsibilities of executives of a policy and the
continuous comparison of the actual with the budgeted results, either to secure by individual action the objective of the
policy or to provide a basis for its revision.

The salient features of such a system are the following:

1. Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted
for the achievement of these ends.
2. Determining the variety of activities that should be undertaken for the achievement of the objectives.
3. Drawing up a plan or a scheme of operation in respect of each class of activity, in physical as well as monetary terms
for the full budget period and its parts.
4. Laying out a system of comparison of actual performance by each person, section or department with the relevant
budget and determination of causes for the discrepancies, if any.
5. Ensuring that corrective action will be taken where the plan is not being achieved and, if that is not possible, for the
revision of the plan.

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Question 10. [MAY 75, NOV 80, NOV 90]

What are the objectives of Budgetary Control System?

Solution 10:
(1) Portraying with precision the overall aims of the business and determining targets of performance for each section
or department of the business.
(2) Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is
expected of him and how he will be judged.
(3) Providing a basis for the comparison of actual performance with the predetermined targets and investigation of
deviation, if any, of actual performance and expenses from the budgeted figures. This naturally helps in adopting
corrective measures.
(4) Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors
(5) Coordinating the various activities of the business, and centralizing control and yet enabling management to
decentralize responsibility and delegate authority in the overall interest of the business.

Question 11. [MAY 09]

Discuss the components of budgetary Control System?

Solution 11:
Components of budgetary control system are as follows:
The policy of a business for a defined period is represented by the master budget the details of which are given in a
number of individual budgets called functional budgets.
The function budgets are broadly grouped under the following heads:
(a) Physical Budgets – Sales Quantity, Product Quantity, Inventory, Manpower budget.
(b) Cost Budgets – Manufacturing Cost, Administration Cost, Sales & Distribution Cost, R & D Cost.
(c) Profit Budget.

Question 12.
What are the advantages of Budgetary Control System?

Solution 12:
1. The use of budgetary control system enables the management of a business concern to conduct its business
activities in the efficient manner.
2. It is a powerful instrument used by business houses for the control of their expenditure. It in fact provides a
yardstick for measuring and evaluating the performance of individuals and their departments.
3. It reveals the deviations to management, from the budgeted figures after making a comparison with actual figures.
4. Effective utilization of various resources like – men, material, machinery and money-is made possible, as the
production is planned after taking them into account.

Question 13. [NOV 98]

What are the disadvantages of Budgetary Control System?

Solution 13:
1. Based on Estimates: Budgets may or may not be true, as they are based on estimates.
2. Time Factor: Budgets cannot be executed automatically accuracy in budgeting comes through experience.
Management must not expect too much during the development period.
3. Cooperation Required: Staff co-operation is usually not available during budgetary control exercise. The success of
the budgetary control depends upon willing co-operation and teamwork.
4. Expensive: Its implementation is quite expensive. No budgetary programme can be successful unless adequate
arrangements are made for supervision and administration.

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5. Not a substitute for management: Budget is only a managerial tool. It cannot substitute management.

Question 14. [NOV 00]

What is Budget Manual? What matters are included in it?

Solution 14:
Budget Manual is a schedule, document or booklet which shows in written form, the budgeting organization and
procedures. A copy of the manual is given to each departmental head for guidance.

To manual includes the following matters :

(1) Principles, objectives and benefits of Budgetary Control System.
(2) Duties and responsibilities of Operational Executives, Budget Committee and Budget Controller.
(3) Procedure in the form of instructions which is adopted in running the system.
(4) Draft of various reports, persons responsible for the preparation of reports etc.
(5) Budget Periods, follow up procedures etc.

Question 15. [NOV 12, MAY 14]

State the considerations on which capital expenditure budget is prepared.

Solution 15:
Capital Expenditure Budget:
The Capital expenditure budget represents the planned outlay on fixed assets like land, building, plant and machinery,
etc. during the budget period. This budget is subject to strict management control because it entails large amount of
expenditure. The Budget is prepared to cover a long period of years and it projects the capital costs over the period in
which the expenditure is to be incurred and the expected earnings.

The preparation of this budget is based on the following considerations:

· Overhead on production facilities of certain departments as indicated by the plant utilisation budget.

· Future development plans to increase output by expansion of plant facilities.

· Replacement requests from the concerned departments.

· Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of
advertising and sales promotion to absorb increased output, etc.

Question 16. [NOV 93]

X Ltd produces and markets three products – Chairs , Table and Benches. The Company is interested in presenting its
st
budget for the next quarter ending 31 March. It expects to sell 4,200 chairs , 800 tables and 500 benches during the said
period at the Selling Price of ₹ 50, ₹ 85 and ₹ 158 per unit respectively. The following information is made available for
this purpose:
(a) Material and Labour Requirements:
Particulars Rate Chairs Tables Benches
Timber per unit (in cu. ft) ₹ 50 per cu. ft 0.5 1.2 2.5
Upholstery per unit (in sq. yds) ₹ 20 per sq. yd 0.25 - -
Carpenter's time (in minutes per unit) ₹ 6 per hour 45 60 75
Fixer and Finisher's time (in minutes per unit) ₹ 4.80 per hour 15 15 30
Fixing and finishing Materials costs 5% of the cost of timber and upholstery.

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(b) Inventory Levels planned:

Particulars Timber (cu. ft) Upholstery (sq yds) Chairs (nos.) Tables (nos.) Benches (nos.)
Opening 600 400 400 100 50
Closing 650 260 200 300 50

(c) Fixed Overheads would be ₹ 8,000 per month.

Required:
1. Prepare a Production Budget showing quantities to be manufactured.
2. Prepare a Raw Materials Consumption Budget in quantities as well as in rupees.
3. Draw a Direct Wage Cost Budget.
4. Present a statement showing Variable Cost of manufacture per unit of all three products.
5. Find out the Budgeted Net Income for the quarter.

Solution 16:
1. Production Budget
Particulars Chairs Tables Benches
Budgeted Sales Quantity 4,200 units 800 units 500 units
Add: Closing Stock of Finished Goods 200 units 300 units 50 units
Total 4,400 units 1,100 units 550 units
Less: Opening Stock of Finished Goods (400 units) (100 units) (50 units)
Budgeted Production Quantity 4,000 units 1,000 units 500 units

2. Raw Materials Usage and Purchase Budget

Particulars Timber Upholstery
For Chairs (4,000 units) 4,000 × 0.5 = 2,000 cu. ft 4,000 × 0.25 = 1,000 sq yds
For Tables (1,000 units) 1,000 × 1.2 = 1,200 cu. ft -
For Benches (500 units) 500 × 2.5 = 1,250 cu. ft -
Budgeted Raw Material Usage 4,450 cu. ft 1,000 sq yds
Add: Required Closing Stock 650 cu. ft 260 sq yds
Total 5,100 cu. ft 1,260 sq yds
Less: Opening Stock of Raw Material (600 cu. ft) (400 sq yds)
Budgeted Raw Material Purchase 4,500 cu. ft 860 sq yds
Raw Material Purchase Price ₹ 50 per cu. ft ₹ 20 per sq yd
Budgeted RM Purchase Cost (4,500 × 50) ₹ 2,25,000 (860 × 20) = ₹ 17,200
Total Cost of Purchase (Timber + Upholstery) (Excluding Fixing and Finishing Materials) ₹ 2,42,200

3. Direct Wages Cost Budget

Particulars Timber Upholstery
For Chairs (4,000 units) 4,000 × 45/60 = 3,000 hrs 4,000 × 15/60 = 1,000 hrs
For Tables (1,000 units) 1,000 × 60/60 = 1,000 hrs 1,000 × 15/60 = 250 hrs
For Benches (500 units) 500 × 75/60 = 625 hrs 500 × 30/60 = 250 hrs
Budgeted Direct Labour Hours required 4,625 hrs 1,500 hrs
Wage Rate per hour ₹ 6.00 ₹ 4.80
Budgeted Direct Labour Cost (4,625 hours × ₹ 6) ₹ 27,750 (1,500 hours × ₹ 4.80) ₹7,200
Total Direct Labour Cost (₹ 27,750 + ₹ 7,200) ₹ 34,950

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4. Statement of Variable Cost per unit

Particulars Chairs Tables Benches
Materials:
Timber 0.5 × ₹ 50 = ₹ 25.00 1.2 × ₹ 50 = ₹ 60.00 2.5 × ₹ 50 = ₹ 125.00
Upholstery 0.25 × ₹ 20 = ₹ 5.00 - -
Fixing & Finishing 5% of (25 + 5) = ₹ 1.50 5% of ₹ 60 = ₹ 3.00 5% of ₹ 125 = ₹ 6.25
Total (A) ₹ 31.50 ₹ 63.00 ₹ 131.25
Labour:
Carpenter 45/60 × ₹ 6 = ₹ 4.50 60/60 × ₹ 6 = ₹ 6.00 75/60 × ₹ 6 = ₹ 7.50
Fixer & Finisher 15/60 × ₹ 4.80 = ₹ 1.20 15/60 × ₹ 4.80 = ₹ 1.20 30/60 × ₹ 4.80 = ₹ 2.40
Total (B) ₹ 5.70 ₹ 7.20 ₹ 9.90
Total VC (A) + (B) ₹ 37.20 ₹ 70.20 ₹ 141.15

5. Statement of Budgeted Net Income for the quarter

Particulars Chairs Tables Benches Total
Selling Price p.u. ₹ 50.00 ₹ 85.00 ₹ 158.00
(₹ (₹
(-) Variable Cost p.u. (₹ 37.20) 70.20) 141.15)
Contribution p.u. ₹ 12.80 ₹ 14.80 ₹ 16.85
4,200 800
Budgeted Sales Quantity units units 500 units
Budgeted Total Contribution (Contribution × Budgeted Sales
Quantity) ₹ 53,760 ₹ 11,840 ₹ 8,425 ₹ 74,025
(₹
(-) Budgeted Fixed Costs 24,000)
Budgeted Net Income ₹ 50,025

Question 17. [Study Material]

The accountant of manufacturing company provides you the following details for year 20X9:

Particulars (₹) Particulars (₹)

Direct materials 1,75,000 Other variable costs 80,000
Direct wages 1,00,000 Other fixed costs 80,000
Fixed factory overheads 1,00,000 Profit 1,15,000
Variable factory overheads 1,00,000 Sales 7,50,000

During the year, the company manufactured two products A and B and the output and costs were:

Particulars A B
Output (units) 2,00,000 1,00,000
Selling price per unit ₹ 2.00 ₹ 3.50
Direct materials per unit ₹ 0.50 ₹ 0.75
Direct wages per unit ₹ 0.25 ₹ 0.50

Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs have been computed as:
Product A ₹ 0.25 per unit; and B ₹ 0.30 per unit.
During 20X0, it is expected that the demand for product A will fall by 25 % and for B by 50%. It is decided to manufacture
a further product C, the cost for which are estimated as follows:

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Particulars Product C
Output (units) 2,00,000
Selling price per unit ₹ 1.75
Direct materials per unit ₹ 0.40
Direct wages per unit ₹ 0.25

It is anticipated that the other variable costs per unit will be the same as for product A.
PREPARE a budget to present to the management, showing the current position and the position for 20X0 . Comment on
the comparative results.

Question 18. [STUDY MATERIAL, NOV 95, NOV 04]

P Ltd. manufactures two products using one type of material and one grade of labour. Shown below an extract from the
company’s working papers for the next period’s budget:
Particulars Product A Product B
Budgeted Sales 3,600 units 4,800 units
Budgeted Material Consumption per product (Standard Cost = ₹ 12 per kg) 5 kg. 3 kg.
Standard hours allowed per product (Standard rate = ₹ 5 per hour) 5 hours 4 hours
1. Overtime Premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 90 direct
workers
2. Target Productivity Ratio (or Efficiency Ratio) for the productive hours worked by the Direct Workers in actually
manufacturing the products are 80%. In addition, non-productive downtime is budgeted at 20% of the productive
hours worked.
3. There are twelve 5 day weeks in the budget period and it is anticipated that sales and production will occur evenly
throughout the whole period.
4. It is anticipated that stock at the beginning of the period will be:
Product A = 1,020 units; Product B = 2,400 units; Raw Material = 4,300 kgs.
The Target Closing Stock, expressed in terms of anticipated activity during the budget period is:
Product A – 15 days Sales, Product B – 20 days Sales, Raw Material – 10 days consumption.
Prepare the Material Purchase Budget and the Wages Budget for the Direct Workers , for the Budget Period, showing the
quantities and values.

Solution 18:
Production Budget
Particulars Product A Product B
Sales (For 12 × 5 = 60 days) 3,600 units 4,800 units

Add: Closing Stock (For 15 and 20 days) 3,600 × = 900 units 4,800 × = 1,600 units
Total 4,500 units 6,400 units
Less: Opening Stock 1,020 units 2,400 units
Budgeted Production 3,480 units 4,000 units
Raw Materials required per unit 5 kg 3 kg
Budgeted Raw Materials usage 3,480 × 5 = 17,400 kg 4,000 × 3 = 12,000 kg
Direct Labour Hours required per unit 5 hours 4 hours
Standard Hours for budgeted production 3,480 × 5 = 17,400 kg 4,000 × 4 = 16,000 kg

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Material Purchase Budget

Particulars
Budgeted Raw Materials Usage (For 60 days) {17,400 kg + 12,000 kg} 29,400 kg

Add: Closing Stock (For 10 days consumption) {29,400 × } 4,900 kg

Total 34,300 kg
Less: Opening Stock of Raw Materials 4,300 kg
Budgeted Purchases 30,000 kg
Cost of Materials to be purchased at ₹ 12 per kg ₹ 3,60,000

Labour Hours and Cost Budget

Particulars
Standard Hours for Budgeted Production {17,400 hours + 16,000 hours } 33,400 hours

Revised Hours for Production at 80% efficiency 41,750 hours

Add: Non-Productive Downtime {20% of 41,750}

8,350 hours
Hours Required to be worked/paid for 50,100 hours
Less: Normal Working Hours {90 workers × 60 days × 8 hours } 43,200 hours
Balance Overtime Hours required 6,900 hours
Total Wages Payable {(43,200 hours × ₹ 8) + (6,900 hours × ₹ 12)} ₹ 4,28,400

Question 19. [MAY 12]

AK Limited produces and sells a single product. Sales budget for calendar year 2012 by a quarter is as under:

Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000

The year is expected to open with an inventory of 6,000 units of finished product and close with inventory of 8,000
units. Production is customarily scheduled to provide for 70% of the current quarter’s sales demand plus 30% of
the following quarter demand. The budgeted selling price per unit is 40. The standard cost details for one unit of
the product are as follows:

Variable Cost 34.50 per unit

Fixed Overheads 2 hours 30 minutes @ 2 per hour based on a budgeted production volume of 1, 10,000 direct
labour hours for the year. Fixed overheads are evenly distributed through-out the year.

You are required to:

(i) Prepare Quarterly Production Budget for the year.

(ii) In which quarter of the year, company expected to achieve bread-even point

Solution 19:
(i) Production Budget for the year 2012 by Quarters

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I II III IV Total
Sales demand(Unit) 18,000 22,000 25,000 27,000 92,000
I Opening Stock 6,000 7,200 8,100 8,700 30,000
II 70% of Current Quarter’s 12,600 15,400 17,500 18,900 64,400
Demand
III 30% of Following Quarter’s 6,600 7,500 8,100 7,400* 29,600
Demand
IV Total Production(II&III) 19,200 22,900 25,600 26,300 94,000
V Closing Stock (1+IV- Sales) 7,200 8,100 8,700 8,000 32,000

*Balancing Figure

(ii) Break Even Point = Fixed Cost/ PV Ratio

= 220000/13.75% = 1600000 or 40000 units

P/V Ratio = (40 - 34.50 = 5.50)/40 × 100 = 13.75%

(Or, Break Even Point = Fixed Cost/ Contribution = 2,20,000/5.50 = 40,000 Units)
Total sales in the quarter II is 40000 equal to BEP means BEP achieved in II quarter.

Question 20. [STUDY MATERIAL]

A department of Company X attains sale of ₹ 6,00,000 at 80 per cent of its normal capacity and its expenses are given
below:
Particulars ₹
Administration costs:
Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750
Selling costs:
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
Sales office expenses 1 per cent of sales
General expenses 1 per cent of sales
Distribution costs:
Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales
Draw up flexible administration, selling and distribution costs budget, operating at 90 per cent, 100 per cent and 110 per
cent of normal capacity.

Solution 20:
Flexible Budget of Department……of Company ‘X’ (In ₹ )
Expenses Basis Level of activity
80% 90% 100% 110%
Sales 6,00,000 6,75,000 7,50,000 8,25,000
Administration costs:
Office salaries Fixed 90,000 90,000 90,000 90,000
General expenses 2% of sales 12,000 13,500 15,000 16,500
Depreciation Fixed 7,500 7,500 7,500 7,500

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Rates & taxes Fixed 8,750 8,750 8,750 8,750

Total administration costs 1,18,250 1,19,750 1,21,250 1,22,750
Selling costs:
Salaries 8% of sales 48,000 54,000 60,000 66,000
Travelling expenses 2% of sales 12,000 13,500 15,000 16,500
Sales office expenses 1% of sales 6,000 6,750 7,500 8,250
General expenses 1% of sales 6,000 6,750 7,500 8,250
Total selling costs 72,000 81,000 90,000 99,000
Distribution costs:
Wages Fixed 15,000 15,000 15,000 15,000
Rent 1% of sales 6,000 6,750 7,500 8,250
Other expenses 4% of sales 24,000 27,000 30,000 33,000
Total Distribution Cost 45,000 48,750 52,500 56,250
Total Administration, Selling & Distribution Costs 2,35,250 2,49,500 2,63,750 2,78,000

Note: In the absence of information it has been assumed that office salaries, depreciation, rates and taxes and wages
remain the same at 110% level of activity also.

Question 21.
A newly established manufacturing company has an installed capacity to produce 1,00,000 units of a consumer product
annually. However its practical capacity is only 90%. The actual capacity utilization may be substantially lower, as the
firm is new to the market and demand is uncertain. The following budget has been prepared for 90% capacity utilization:
Particulars Cost per unit (₹ )
Direct Materials 12
Direct Labour 8
Direct Expenses 5
Production Overheads (40% variable) 10
Administrative Overheads (100% fixed) 5
Selling and Distribution (50% variable) 6
You are required to prepare budgets at 60%, 70% and 80% levels of capacity utilization giving clearly the unit variable
cost, the unit fixed cost and the total costs under various heads at all the above levels.

Solution 21:
Particulars 90% 60% 70% 80%
Units ₹ 90,000 ₹ 60,000 ₹ 70,000 ₹ 80,000
Direct Material ₹ 12 ₹ 10,80,000 ₹ 7,20,000 ₹ 8,40,000 ₹ 9,60,000
Direct Labour ₹ 8 ₹ 7,20,000 ₹ 4,80,000 ₹ 5,60,000 ₹ 6,40,000
Direct Expenses ₹ 5 ₹ 4,50,000 ₹ 3,00,000 ₹ 3,50,000 ₹ 4,00,000
Variable Production Overhead ₹ 4 ₹ 3,60,000 ₹ 2,40,000 ₹ 2,80,000 ₹ 3,20,000
Variable Selling Overhead ₹ 3 ₹ 2,70,000 ₹ 1,80,000 ₹ 2,10,000 ₹ 2,40,000
Total Variable Cost ₹ 28,80,000 ₹ 19,20,000 ₹ 22,40,000 ₹ 25,60,000
Variable Cost per unit (A) ₹ 32 ₹ 32 ₹ 32 ₹ 32
Fixed Production Overheads ₹ 5,40,000 ₹ 5,40,000 ₹ 5,40,000 ₹ 5,40,000
Fixed Administrative Overheads ₹ 4,50,000 ₹ 4,50,000 ₹ 4,50,000 ₹ 4,50,000
Fixed Selling Overheads ₹ 2,70,000 ₹ 2,70,000 ₹ 2,70,000 ₹ 2,70,000
Total Fixed Cost ₹ 12,60,000 ₹ 12,60,000 ₹ 12,60,000 ₹ 12,60,000
Fixed Cost per unit (B) ₹ 14 ₹ 21 ₹ 18 ₹ 15.75

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Total Cost per unit (A) + (B) ₹ 46 ₹ 53 ₹ 50 ₹ 47.75

Question 22. [Study Material]

A factory which expects to operate 7,000 hours , i.e., at 70% level of activity, furnishes details of expenses as under:

Variable expenses - ₹ 1,260

Semi-variable expenses - ₹ 1,200
Fixed expenses - ₹ 1,800

The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity. PREPARE a
flexible budget for 80, 90 and 100 per cent activities.

Solution 22:
Head of Account Control basis 70% 80% 90% 100%
Budgeted 7,000 8,000 9,000 10,000
(₹ ) (₹ ) (₹ ) (₹ )
Variable expenses V 1,260 1,440 1,620 1,800
Semi-variable SV 1,200 1,200 1,320 1,440
expenses
Fixed expenses F 1,800 1,800 1,800 1,800
Total expenses 4,260 4,440 4,740 5,040
Recovery rate per 0.61 0.55 0.53 0.50
hour

Conclusion:
We notice that the recovery rate at 70% activity is ₹ 0.61 per hour. If in a particular month the factory works 8,000 hours
, it will be incorrect to estimate the allowance as ₹ 4,880 @ ₹ 0.61. The correct allowance will be ₹ 4,440 as shown in the
table. If the actual expenses are ₹ 4,500 for this level of activity, the company has not saved any money but has over-
spent by ₹ 60 (₹ 4,500 – ₹ 4,440).

Question 23. [Study Material]

TQM Ltd. has furnished the following information for the month ending 30th June, 20X9:
Particulars Master Budget Actual Variance
Units produced and sold 80,000 72,000
Sales (₹ ) 3,20,000 2,80,000 40,000 (A)
Direct material (₹ ) 80,000 73,600 6,400 (F)
Direct wages (₹ ) 1,20,000 1,04,800 15,200 (F)
Variable overheads (₹ ) 40,000 37,600 2,400 (F)
Fixed overhead (₹ ) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200

The Standard costs of the products are as follows:

Direct materials (1 kg. at the rate of ₹ 1 per kg.) 1.00
Direct wages (1 hour at the rate of ₹ 1.50) 1.50
Variable overheads (1 hour at the rate of ₹ 0.50) 0.50

Actual results for the month showed that 78,400 kg. of material were used and 70,400 labour hours were recorded.
Required:
(i) PREPARE Flexible budget for the month and compare with actual results.
(ii) CALCULATE Material, Labour, Sales Price, Variable Overhead and Fixed Overhead Expenditure variances and
Sales Volume (Profit) variance.

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Question 24. [NOV 90]

th
On 30 September, the Balance Sheet of Melodies Pvt Ltd, retailers of musical instruments, was as under –
Liabilities ₹ Assets ₹
Equity Shares of ₹ 10 each 20,000 Equipment (Net Block) 15,000
Reserves and Surplus 10,000 Stock 20,000
Trade Creditors 40,000 Trade Debtors 15,000
Short Term Loans 15,000 Balance at Bank 35,000
Total 85,000 Total 85,000

st
The Company is developing a system of forward planning. On 1 October, it supplies the following information.
Month Credit Sales (₹ ) Cash Sales (₹ ) Credit Purchases (₹ )
September (Actual) 15,000 14,000 40,000
October (Budget) 18,000 5,000 23,000
November (Budget) 20,000 6,000 27,000
December (Budget) 25,000 8,000 26,000
All Trade Debtors are allowed one month’s credit and are expected to settle promptly. All Trade Creditors are paid in
the month following delivery.
st
On 1 October, all equipment will be replaced at a cost of ₹ 30,000. ₹ 14,000 was allowed in exchange of the old
equipment and a net payment of ₹ 16,000 will be made. Depreciation will be provided at 10% per annum. Short Term
Loans will be repaid in December. The following expenses will be paid –
 Wages – ₹ 3,000 per month.
 Administration – ₹ 1,500 per month.
 Rent – ₹ 3,600 for the next 12 months (to be paid in October).
Prepare a Cash Budget for the months of October, November and December. Also prepare an income statement for the
st
three months ending 31 December, assuming uniform GP of 25%.

Solution 24:
Cash Budget for the months of October, November and December (In ₹ )
Particulars October November December
Opening Balance 35,000 (9,100) (12,600)
Add: Receipts/Inflows:
Collections from Debtors 15,000 18,000 20,000
Cash Sales 5,000 6,000 8,000
Total Receipts (A) 55,000 14,900 15,400
Payments/Outflows:
Payment to Creditors 40,000 23,000 27,000
Wages 3,000 3,000 3,000
Administration Expenses 1,500 1,500 1,500
Rent Advance 3,600 Nil Nil
Loan Creditors Nil Nil 15,000
Purchase of Equipment 16,000 Nil Nil
Total Payments (B) 64,100 27,500 46,500
Closing Balance (A) – (B) (9,100) (12,600) (31,100)

Income statement for the months October, November and December (In ₹ )
Particulars October November December Total
Sales: Cash Sales 5,000 6,000 8,000 19,000
Credit Sales 18,000 20,000 25,000 63,000
Total Sales 23,000 26,000 33,000 82,000
Less: Cost of Goods Sold of Goods Sold (at 75%) 17,250 19,500 24,750 61,500
(bal.fig)
Gross Profit (at 25%) 5,750 6,500 8,250 20,500
Less: Rent (₹ 3,600 ÷ 12 months) 300 300 300 900
Administration Expenses 1,500 1,500 1,500 4,500

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Depreciation (30,000 × 10%/12) 250 250 250 750

Loss on Sale of Old Equipment 1,000 Nil Nil 1,000
Net Profit 2,700 4,450 6,200 13,350
Note: Cost of Goods Sold includes Wages ₹ 1,500 per month. The balance constitutes Materials Consumed (i.e. Opening
Stock + Purchases – Closing Stock)

Question 25.
Write Short Notes on Budget Ratios. [RTP]
Explain three Control Ratios used for performance evaluation. [NOV 00]

Solution 25:
(1) Efficiency Ratio = x 100

(2) Activity Ratio = x 100

(3) Calendar Ratio = x 100

(4) Standard Capacity Usage Ratio = x 100

(5) Actual Capacity Usage Ratio = x 100

(6) Actual usage of Budgeted capacity Ratio = x 100

Question 26. [NOV 04]

A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires 12 hours In
April, 2004, of 22 effective working days of 8 hours a day, 1,200 units of X and 800 units of Y were produced. The
company employs 100 workers in production department to produce X and Y. The budgeted hours are 1,86,000 for the
year.
Calculate Capacity, Activity and Efficiency ratio and establish their inter-relationship.

Solution 26:
Standard hours produced
Particulars Product X Product Y Total
Output (units) 1,200 800
Hours per unit 8 12
Standard hours 9,600 9,600 19,200
Actual hours worked (100 workers × 8 hours × 22 days) 17,600
Budgeted hours per month (1,86,000/12) 15,500

Capacity Ratio = × 100 = × 100 = 113.55%

Efficiency Ratio = × 100 = × 100 = 109.09%

Activity Ratio = × 100 = × 100 = 123.87%

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Relationship : Activity ratio = Efficiency ratio × Capacity ratio

Or 123.87 =

Question 27. [May 19]

Answer the following:
Following data is available for ABC Ltd.:
Standard working hours - 8 hours per day of 5 days per week
Maximum Capacity - 60 employees
Actual working - 50 employees
Actual hours expected to be worked per four week - 8,000 hours
Standard hours expected to be earned per four week - 9,600·hours
Actual hours worked in the four week period - 7,500 hours
Standard hours earned in the four week period - 8,800 hours
The related period is of four weeks.
CALCULATE the following Ratios :
(i) Efficiency Ratio
(ii) Activity Ratio
(iii) Standard Capacity Usage Ratio
(iv) Actual Capacity Usage Ratio
(v) Actual Usage of Budgeted Capacity Ratio

Solution 27:
1. Efficiency Ratio = x 100 = x 100 = 117.33%

2. Activity Ratio = x 100 = x 100 = 110%

3. Standard Capacity Usage Ratio = x 100 = x 100 = 83.33%

4. Actual Capacity Usage Ratio = x 100 = x 100 = 78.125%

5. Actual usage of Budgeted capacity Ratio = x 100 = x 100 = 93.75%

Working Notes:
1. Maximum Capacity in a budget period = 60 Employees × 8 Hrs. × 5 Days × 4 Weeks = 9,600 Hrs.
2. Budgeted Hours (Hrs) = 50 Employees × 8 Hrs. × 5 Days × 4 Weeks = 8,000 Hrs.
3. Actual Hrs. = 7,500 Hrs. (given)
4. Standard Hrs. for Actual Output = 8,800 Hrs.

Question 28. [MAY 04]

A Company manufactures three products namely A, B and C. The current pattern of sales of A, B and C is in the ratio of 8 :
2 : 1 respectively. The relevant data are as under –
Products A B C
Selling Price per unit ₹ 130 ₹ 230 ₹ 417
Raw Materials per unit 0.50 Kg. 1.2 Kg. 2.5 Kg.
Direct Materials per unit 0.25 kg - -
Skilled Labour Hours per unit 4 6 8

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Semi-Skilled Labour Hours per unit 2 2 3

Variable Overheads per unit ₹ 20 ₹ 40 ₹ 80
Prices of Raw Materials and Direct Materials respectively are ₹ 100 and ₹ 40 per Kg. Wage Rates of Skilled and Semi-
Skilled Labour respectively are ₹ 6 and ₹ 5. Each Operator works 8 hours a day for 25 days in a month.
The position of inventories is as under –
Particulars Raw Materials (units) Direct Materials (units) A (units) B (units) C (units)
Opening 600 400 400 100 50
Closing 650 260 200 300 50
The Fixed Overheads amount to ₹ 2,00,000 per month. The Company desires a profit of ₹ 1,20,000 per month.
Prepare the following for the month –
1. Sales Budget in quantity and value.
2. Production Budget showing the quantity to be manufactured.
3. Purchase Budget Showing the quantity and value.
4. Direct Labour Budget showing the number of workers and wages.

Solution 28:
1. Computation of Budgeted Sales Quantities
Particulars Product A Product B Product C
Selling Price per unit ₹ 130 ₹ 230 ₹ 417
Less: Variable Costs per unit
0.5 × 100 = ₹ 1.2 × 100 = ₹ 2.5 × 100 = ₹
Raw Materials at ₹ 100 per kg 50 120 250
0.25 × 40 = ₹
Direct Materials at ₹ 40 per kg 10 Nil Nil
Skilled Labour at ₹ 6 per hour 4 × 6 = ₹ 24 6 × 6 = ₹ 36 8 × 6 = ₹ 48
Unskilled Labour at ₹ 5 per hour 2 × 5 = ₹ 10 2 × 5 = ₹ 10 3 × 5 = ₹ 15
Variable Overheads ₹ 20 ₹ 40 ₹ 80
Total Variable Costs per unit ₹ 114 ₹ 206 ₹ 393
Contribution per unit ₹ 16 ₹ 24 ₹ 24
Sales Mix Ratio 8 2 1
Total Weighted Contribution (Contribution per unit × Sales
Mix Ratio) 16 × 8 = ₹ 128 24 × 2 = ₹ 48 24 × 1 = ₹ 24
To earn Profit of ₹ 1,20,000, Desired Contribution = Desired
Profit +
Fixed OH = ₹ 1,20,000 + ₹ 2,00,000 = ₹ 3,20,000, to be ₹ 2,04,800 ₹ 76,800 ₹ 38,400
apportioned
in ratio of Total Weighted Contribution
Required Sales Quantity to earn above profit (₹ 2,04,800/₹
16) 12,800 units 3,200 units 1,600 units

2. Sales Budget
Particulars Product A Product B Product C Total
Budgeted Quantity 12,800 units 3,200 units 1,600 units 17,600 units
Budgeted Price ₹ 130 ₹ 230 ₹ 417
Budgeted Sales Value (Budgeted Quantity × Budgeted Price) ₹ 16,64,000 ₹ 7,36,000 ₹ 6,67,200 ₹ 30,67,200

3. Production Budget
Particulars Product A Product B Product C
Budgeted Sales Quantity 12,800 units 3,200 units 1,600 units

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Add: Closing Stock 200 units 300 units 50 units

Total 13,000 units 3,500 units 1,650 units
Less: Opening Stock (400 units) (100 units) (50 units )
Budgeted Production Quantity 12,600 units 3,400 units 1,600 units

4. Raw Material Usage Budget

Particulars Product A Product B Product C Total
Budgeted Production
Raw Material required per unit 12,600 3,400 1,600 17,600
Total Raw Materials Required (Budgeted Prod. × Raw Material units units units units
required per unit ) 0.50 kg 1.20 kg 2.50 kg
Direct Materials required per unit 6,300 kg 4,080 kg 4,000 kg 14,380 kg
Total Direct Materials Required (Budgeted Production × Direct 0.25 kg - -
Materials per unit) 3,150 kg - - 3,150 kg

5. Materials Purchase Budget

Particulars Raw Materials Direct Materials Total
Budgeted Material Usage 14,380 kg 3,150 kg
Add: Closing Stock 650 kg 260 kg
Total 15,030 kg 3,410 kg
Less: Opening Stock (600 kg) (400 kg)
Budgeted Purchase Quantity 14,430 kg 3,010 kg
Price of Materials ₹ 100 per kg ₹ 40 per kg
Cost of Material Purchase ₹ 14,43,000 ₹ 1,20,400 ₹ 15,63,400

6. Direct Labour Budget (Notes: Hours per worker = 25 × 8 = 200)

Particulars Product A Product B Product C Total
12,600 3,400 1,600 17,600
Budgeted Production units units units units
Skilled Labour hours per unit 4 6 8
Total Skilled DLH required (Budgeted Production × Skilled Labour
hours per unit) 50,400 20,400 12,800 83,600
₹ ₹ ₹
Cost of Skilled Labour at ₹ 6 p.h (Total Skilled DLH required × ₹ 6) 3,02,400 1,22,400 ₹ 76,800 5,01,600
Skilled Workers Required = Total Skilled DLH required ÷ 200 252 102 64 418
Semi-Skilled Labour hours per unit 2 2 3
Total Semi-Skilled DLH req. (Total Skilled DLH req. ÷ Semi-Skilled Lab
hrs per unit) 25,200 6,800 4,800 36,800
Cost of Semi-Skilled Labour at ₹ 5 p.h (Total Semi-Skilled DLH ₹ ₹
required × ₹ 5) 1,26,000 ₹ 34,000 ₹ 24,000 1,84,000
Semi-Skilled Workers Required = Total Semi-Skilled DLH required ÷
200 126 34 24 184
Total Lab. Cost = Cost of Skilled Lab. at ₹ 6 p.h + Cost of Semi-Skilled ₹ ₹ ₹
Lab. at ₹ 5 p.h 4,28,400 1,56,400 ₹ 1,00,800 6,85,600
Total Workforce = Skilled Workers Required + Semi-Skilled Workers
Required 378 136 88 602

Question 29. [MAY 13]

Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year 2013 as detailed below:
₹ per unit
Direct Materials 50

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Direct Labour 20
Variable Overhead 15
Direct Expenses 6
Selling Expenses (20% fixed) 15
Factory Expenses (100% fixed) 7
Administration expenses (100% fixed) 4
Distribution expenses (85% variable) 12
Total 129

Prepare an expense budget for the production of 15,000 units and 18,000 units.

Solution 29:
Expense Budget
Particulars 15,000 Unit 18,000 Unit

Direct Material 7,50,000 9,00,000

(15,000 × 50) (18,000 × 50)
Direct Labour 3,00,000 3,60,000
(15,000 × 20) (18,000 × 20)
Variable Overhead 2,25,000 2,70,000
(15,000 × 15) (18,000 × 15)
Direct Expenses 90,000 1,08,000
(15,000 × 6) (18,000 × 6)
Selling Expenses Fixed 60,000 60,000
(20,000 × 3) (20,000 × 3)
Selling Expenses Variable 1,80,000 2,16,000
(15,000 × 12) (18,000 × 12)
Factory Expenses Fixed 1,40,000 1,40,000
(20,000 × 7) (20,000 × 7)
Administration Expenses Fixed 80,000 80,000
(20,000 × 4) (20,000 × 4)
Distribution Expenses Fixed 36,000 36,000
(20,000 × 1.8) (20,000 × 1.8)
Distribution Expenses Variable 1,53,000 1,83,600
(15,000 × 10.20) (18,000 × 10.20)

Total Expenses 20,14,000 23,53,600

Question 30. [Study Material]

Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the year 20X9-X0.
The company’s policy is to hold closing stock of finished goods at 25% of the anticipated volume of sales of the
succeeding month. The following are the estimated data for two products:
Particulars Minimax (MM) Heavyhigh (HH)
Budgeted Production units 1,80,000 1,20,000
(₹) (₹)
Direct material cost per unit 220 280
Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000

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The estimated units to be sold in the first four months of the year 20X9X0 are as under

Particulars April May June July

Minimax 8,000 10,000 12,000 16,000
Heavyhigh 6,000 8,000 9,000 14,000

PREPARE production budget for the first quarter in month wise.

Question 31. [STUDY MATERIAL]

Concorde Ltd. manufactures two products using two types of materials and one grade of labour. Shown below is an
extract from the company’s working papers for the next month’s budget:
Product A Product B
Budgeted sales (in units) 2,400 3,600
Budgeted material
consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed 3 5
per unit of product

Material-X and Material-Y cost ₹ 4 and ₹ 6 per kg and labours are paid ₹ 25 per hour. Overtime premium is 50% and is
payable, if a worker works for more than 40 hours a week. There are 180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers in actually
manufacturing the products is 80%. In addition the non-productive down-time is budgeted at 20% of the productive
hours worked.
There are four 5-days weeks in the budgeted period and it is anticipated that sales and production will occur evenly
throughout the whole period.

It is anticipated that stock at the beginning of the period will be:

Product-A 400 units
Product-B 200 units
Material-X 1,000 kg.
Material-Y 500 kg.

The anticipated closing stocks for budget period are as below:

Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the direct workers, showing the quantities and
values, for the next month.

Question 32.
Prepare a Sales Overhead Budget for the month of January, February and March from the estimates given below:
Advertisement ₹ 2,500
Salaries of the Sales Department ₹ 5,000
Expenses of the Sales Department ₹ 1,500
Counter Salesmen's Salaries and Dearness Allowance ₹ 6,000

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Counter salesmen’s commission is 1% on their sales. Travelling salesmen’s commission at 10% on their sales and
expenses at 5% on their sales. The sales during the period were estimated as follows:
Month Counter Sales Travelling Salesmen's Sales
January ₹ 80,000 ₹ 10,000
February ₹ 1,20,000 ₹ 15,000
March ₹ 1,40,000 ₹ 20,000

Solution 32:
Sales Overhead Budget (For the month January, February and March)
Month January February March
Estimated Sales ₹ 90,000 ₹ 1,35,000 ₹ 1,60,000
Variable Overheads:
Commission to counter salesmen @ 1% on their sales ₹ 800 ₹ 1,200 ₹ 1,400
Travelling salesmen's commission @ 10% on their sales ₹ 1,000 ₹ 1,500 ₹ 2,000
Travelling salesmen's expenses @ 5% on their sales ₹ 500 ₹ 750 ₹ 1,000
Total Variable overheads (A) ₹ 2,300 ₹ 3,450 ₹ 4,400
Fixed Overheads:
Advertisement ₹ 2,500 ₹ 2,500 ₹ 2,500
Salaries of Sales Department ₹ 5,000 ₹ 5,000 ₹ 5,000
Expenses of Sales Department ₹ 1,500 ₹ 1,500 ₹ 1,500
Salaries etc. of counter salesmen ₹ 6,000 ₹ 6,000 ₹ 6,000
Total Fixed Overheads (B) ₹ 15,000 ₹ 15,000 ₹ 15,000
Total Sales Overheads (A) + (B) ₹ 17,300 ₹ 18,450 ₹ 19,400

Question 33. [NOV 04]

Following data is available for DKG and Co:
Standard working hours - 8 hours per day of 5 days per week
Maximum capacity - 50 employees
Actual working - 40 employees
Actual hours expected to be worked per four week - 6,400 hours
Std. hours expected to be earned per four weeks - 8,000 hours
Actual hours worked in the four- week period - 6,000 hours
Standard hours earned in the four- week period - 7,000 hours
The related period is of 4 weeks. In this period there was a one special day holiday due to national event. CALCULATE the
following ratios:
(1) Efficiency Ratio, (2) Activity Ratio, (3) Calendar Ratio, (4) Standard Capacity Usage Ratio, (5) Actual Capacity Usage
Ratio. (6) Actual Usage of Budgeted Capacity Ratio.

Solution 33:
Maximum Capacity in a budget period
= 50 Employees × 8 HRS × 5 Days × 4 Weeks = 8,000 HRS
Budgeted Hours
40 Employees × 8 HRS × 5 Days × 4 Weeks = 6,400 HRS
Actual HRS = 6,000 HRS (given)
Standard HRS for Actual Output = 7,000 HRS
Budget No. of Days = 20 Days = 20 Days (4 Weeks x 5 Days)
Actual No. of Days = 20 – 1 = 19 Days

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1. Efficiency Ratio = x 100 = x 100 = 116.67%

2. Activity Ratio = x 100 = x 100 = 109.375%

3. Calendar Ratio = x 100 = x 100 = 95%

4. Standard Capacity Usage Ratio = x 100 = x 100 = 80%

5. Actual Capacity Usage Ratio = x 100 = x 100 = 75%

6. Actual usage of Budgeted capacity Ratio = x 100 = x 100 = 93.75%

Question 34. [MAY 09, Nov 19]

Following is the sales budget for the first six months of a calendar year in respect of PQR Ltd –
Month Sales (units)
Jan 10,000
Feb 12,000
March 14,000
April 15,000
May 15,000
June 16,000
Finished Goods inventory at the end of each month is expected to be 20% of Budgeted Sales Quantity for the following
st
month. Finished Goods Inventory was 2,700 units on 1 January. There would be no WIP at the end of any month.
Each unit of Finished Product requires Material X: 4 kgs at ₹ 10/kg and Material Y: 6 kgs at ₹ 15/kg.
st
Material on hand on 1 January was 19,000 kgs of Material X and 29,000 kgs of Material Y. Monthly Closing Stocks of
Material is budgeted to be equal to half of the requirements of next month’s production.
Budgeted Direct Labour Hour per unit of finished product is ¾ hour.
Budgeted Direct Labour Cost for the first quarter of the year is ₹ 10,89,000.
st st
Actual data for the 1 quarter ended on 31 March is an under –
 Actual Production Quantity: 40,000 units
 Direct Material Cost (Purchase Cost based on Materials actually issued to production)
Material X: 1,65,000 kgs at ₹ 10.20 per kg
Material Y: 2,38,000 kgs at ₹ 15.10 per kg
 Actual Direct Labour Hours worked: 32,000 hours
 Actual Direct Labour Costs: ₹ 13,12,000
Required:
1. Prepare the following Budgets –
st
(a) Monthly Production Quantity Budget for the 1 Quarter.
(b) Monthly Raw Material Consumption Quantity Budget from January to April.
st
(c) Materials Purchase Quantity Budget for the 1 Quarter.
2. Compute the following Variances –
(a) Material Cost Variance, Material Price Variance, and Material Usage Variance.
(b) Direct Labour Cost Variance, Direct Labour Rate Variance, & Direct Labour Efficiency Variance.

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Solution 34:
1. (a) Production Quantity Budget (In units)
Particulars Jan Feb March April
Budgeted Sales 10,000 12,000 14,000 15,000
Add: Cl. Stock of FG = 20% of next 12,000 × 20% = 14,000 × 20% = 15,000 × 20% = 15,000 × 20% =
month Sales 2,400 2,800 3,000 3,000
Total 12,400 14,800 17,000 18,000
Less: Opening Stock of FG (2,700) (2,400) (2,800) (3,000)
Budgeted Production 9,700 12,400 14,200 15,000
Note: Since Material Consumption is to be calculated till April, Production Budget is also prepared for April.

(b) Raw Material Consumption Quantity Budget

Particulars Jan Feb March April
Budgeted Production 9,700 units 12,400 units 14,200 units 15,000 units
Material X required at 4 kg pu [Budgeted Production × 4 38,800 kg 49,600 kg 56,800 kg 60,000 kg
kg]
Material Y required at 6 kg pu [Budgeted Production × 6 58,200 kg 74,400 kg 85,200 kg 90,000 kg
kg]

(c) Raw Materials Purchase Quantity Budget

Particulars Raw Material X Raw Material Y
Jan Feb March Jan Feb March
Budgeted RM Usage 38,800 kg 49,600 kg 56,800 kg 58,200 kg 74,400 kg 85,200 kg
Add: Closing Stock of RM 49,600 ÷ 2 56,800 ÷ 2 60,000 ÷ 2 74,400 ÷ 2 85,200 ÷ 2 90,000 ÷2 =
= 50% of next month usage = = = = = 45,000 kg
24,800 kg 28,400 kg 30,000 kg 37,200 kg 42,600 kg
Total 63,600 kg 78,000 kg 86,800 kg 95,400 kg 1,17,000 kg 1,30,200 kg
Less: Opening Stock of RM 19,000 kg 24,800 kg 28,400 kg 29,000 kg 37,200 kg 42,600 kg
Budgeted Purchase 44,600 kg 53,200 kg 58,400 kg 66,400 kg 79,800 kg 87,600 kg

2. Calculation of Material Variances

Material Standard for Actual Actual
Quantity Rate Amount (₹ ) Quantity Rate Amount (₹ )
X 40,000 × 4 = 1,60,000 10 16,00,000 1,65,000 10.20 16,83,000
Y 40,000 × 6 = 2,40,000 15 36,00,000 2,38,000 15.10 35,93,800
Total 4,00,000 52,00,000 4,03,000 52,76,800

(a) Material Cost Variance = Standard Cost – Actual Cost

X = ₹ 16,00,000 – ₹ 16,83,000 = ₹ 83,000 (A)
Y = ₹ 36,00,000 – ₹ 35,93,800 = ₹ 6,200 (F)
₹ 76,800 (A)

Material Price Variance = (Standard Rate – Actual Rate) × Actual Quantity

X = (10 – 10.20) × 1,65,000 = ₹ 33,000 (A)
Y = (15 – 15.10) × 2,38,000 = ₹ 23,800 (A)
₹ 56,800 (A)

Material Usage Variance = (Standard quantity for Actual output – Actual Quantity) × Standard Rate
X = (1,60,000 – 1,65,000) × 10 = ₹ 50,000 (A)
Y = (2,40,000 – 2,38,000) × 15 = ₹ 30,000 (F)
₹ 20,000(A)

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Verification:
Direct Material Cost Variance = Direct Material Usage Variance + Direct Material Price Variance
= ₹ 20,000 (A) + ₹ 56,800 (A)
= ₹ 76,800 (A)

(b) Calculation of Labour Variances:

Budgeted output for the quarter = 36,300 units
Budgeted direct labour hours = 36,300 × ¾ hours = 27,225 hours

Standard or Budgeted labour rate per hour =

= = ₹ 40

Standard labour hours for actual output = 40,000 units × ¾ hour

= 30,000 hours
Actual labour hour rate = = ₹ 41

Direct Labour Efficiency Variance = Standard Rate × (Standard hours – Actual hours )
= ₹ 40 × (30,000 – 32,000)
= ₹ 80,000 (A)

Direct Labour Rate Variance = Actual hours × (Standard Rate – Actual Rate)
= 32,000 × (40 – 41)
= ₹ 32,000 (A)
Direct Labour Cost Variance = (Standard rate × Standard hours ) – (Actual rate × Actual hours )
= (40 × 30,000) – (41 × 32,000)
= 12,00,000 – 13,12,000
= 1,12,000 (A)
Verification:
Direct Labour Cost Variance = Direct Labour Efficiency Variance + Direct Labour Rate Variance
= ₹ 80,000 (A) + ₹ 32,000 (A)
= 1,12,000 (A)

Question 35. [Study Material]

Float glass Manufacturing Company requires you to PREPARE the Master budget for the next year from the following
information:
Sales:
Toughened Glass - ₹ 6,00,000
Bent Glass - ₹ 2,00,000
Direct material cost - 60% of sales
Direct wages - 20 workers @ ₹ 150 per month
Factory overheads:
Indirect labour –
Works manager - ₹ 500 per month
Foreman - ₹ 400 per month
Stores and spares - 2.5% on sales
Depreciation on machinery - ₹ 12,600
Light and power - ₹ 3,000
Repairs and maintenance - ₹ 8,000

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Others sundries - 10% on direct wages

Administration, selling and distribution expenses - ₹ 36,000 per year

Solution 35:
Master budget for the year ending
Sales (₹ )
Toughened glass 6,00,000
Bent glass 2,00,000
Total sales 8,00,000
Less: Cost of production:
Direct materials (60% of ₹ 8,00,000) 4,80,000
Direct wages (20 workers × ₹ 150 × 36,000
12months)
Prime Cost 5,16,000
Fixed Factory Overhead:
Works manager’s salary (500 × 12) 6,000
Foreman’s salary (400 × 12) 4,800
Depreciation 12,600
Light and power (assumed fixed) 3,000 26,400
Variable Factory Overhead:
Stores and spares 20,000
Repairs and maintenance 8,000
Sundry expenses 3,600 31,600
Works Cost 5,74,000
Gross Profit (Sales – Works cost) 2,26,000
Less: Adm., selling and distribution 36,000
expenses
Net Profit 1,90,000

Question 36. [MAY 93]

PYE Ltd produces and markets a very popular product called P. The Company is interested in presenting its budget for the
second quarter of the year. The following information is made available for this purpose.
1. It expects to sell 50,000 bags of P during the second quarter at a Selling Price of ₹ 9 per bag.
2. Each bag of P requires 2.5 kgs of Raw Material Q and 7.5 kgs of Raw Material R.
3. Q costs ₹ 1.20 per kg, R costs 20 paise per kg and Empty Bag costs 80 paise each.
4. It requires 9 minutes of direct labour time to produce and fill one bag of P. Labour Cost is ₹ 5 per hour.
5. Variable Manufacturing Costs are ₹ 0.45 per bag. Fixed Manufacturing Costs are ₹ 30,000 per quarter.
6. Variable Selling and Administration Expenses are 5% of Sales, and Fixed Administration and Selling Expenses are ₹
25,000 per quarter.
7. Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of P 15,000 nos. 11,000 nos.
Raw Material Q 32,000 kgs. 26,000 kgs.
Raw Material R 57,000 kgs. 47,000 kgs.
Empty Bags 37,000 nos. 28,000 nos.
Required:
1. Prepare a Production Budget for the quarter.
2. Prepare a Raw Materials Purchase Budget for Q, R and Empty Bags in quantity as well as in rupees.
3. Compute the Budgeted Variable Cost to produce one bag of P.
4. Prepare a statement of Budgeted Net Income for the quarter, and show both per unit and total cost data.

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Solution 36:
1. Production Budget for product P: (in bags)
Budgeted Production = Sales + Desired Closing Stock – Available Opening Stock = 50,000 + 11,000 – 15,000 = 46,000
bags

2. Raw Materials Budget

Particulars Material Q Material R Empty Bags
Raw Materials required 2.5 kgs per bag 7.5 kgs per bag 1 bag
46,000 × 2.5 = 46,000 × 7.5 = 46,000 × 1 = 46,000
Budgeted Usage 1,15,000 kg 3,45,000 kg bags
Add: Desired Closing Stock 26,000 kg 47,000 kg 28,000 bags
Total 1,41,000 kg 3,92,000 kg 74,000 bags
Less: Opening Stock 32,000 kg 57,000 kg 37,000 bags
Budgeted Purchase Quantity 1,09,000 kg 3,35,000 kg 37,000 bags
Purchase Price ₹ 1.20 per kg ₹ 0.20 per kg ₹ 0.80 per bag
Cost of Purchase ₹ 1,30,800 ₹ 67,000 ₹ 29,600
Total Cost of Purchase [Materials (Q + R) +
Empty Bags] ₹ 2,27,400

3. Computation of Variable Manufacturing Costs per bag

Particulars ₹
Direct Materials {Q – 2.5 kgs × ₹ 1.20 per kg}
₹ 3.00
{R – 7.5 kgs × ₹ 0.20 per kg)
₹ 1.50 4.50
Cost of Empty Bag {1 bag × ₹ 0.80} 0.80
Direct Labour {9 minutes × ₹ 5 per hour = × ₹ 5} 0.75
Variable Manufacturing OH 0.45
Total Variable Manufacturing Costs per bag 6.50

4. Budgeted Net Income: (for 50,000 bags sold)

Particulars Par Bag (₹ ) Total (₹ )
Sales Revenue 9.00 4,50,000
Less: Variable Costs: Manufacturing 6.50 3,25,000
Selling & Administration (5% of Sale price) 0.45 22,500
Contribution 2.05 1,02,500
Less: Fixed Costs (Manufacturing + Selling & Administration) 55,000
Budgeted Net Profit 47,500

Question 37. [Nov 2018 - Old]

AB manufacturing Company manufactures two products A and B. Both Products use a common Raw Material "C". The
Raw Material "C" is purchased at the rate of ₹ 45 per kg. from the Market. The Company has made estimates for the year
ended 31st March ,2018 (the budget period) as under:

Products
Particulars
A B
Sales in Units 36,000 16,700
Finished Goods Stock Increase by year- 860 400
end (in Units)

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Post-production Rejection Rate (%) 3 5

Material "C" per completed Unit, net 4 kg 5 kg
of wastage
Material "C" wastage in % 5 4
Additional information available is as under:
• Usage of Raw Material "C" is expected to be at a constant rate over the period.
• Annual cost of holding one unit of Raw Material "C" in Stock is 9% of the Material Cost.
• The cost of placing an order is ₹ 250 per order.

You are required to:

(i) Prepare Functional Budgets for the year ended 31st March, 2018 under the following categories:
(A) Production Budget for Products A and B in Units.
(B) Purchase Budget for Raw Material "C" in kg and value.
(ii) Calculate the Economic Order Quantity (EOQ) in kg for Raw Material "C"

Solution 37:
(i)
(A) Production Budget (in units) for the year ended 31st March 2018
Particulars Product A Product B
Budgeted sales (units) 36,000 16,700
Add: increase in closing stock 860 400
No. of good units to be produced 36,860 17,100
Post production rejection rate 3% 5%
No. of units to be produced 38,000 18,000

(B) Purchase budget (in kgs and value) for Material C

Particulars Product A Product B
No. of units to be produced 38,000 18,000
Usage of Material C per unit of 4 kg. 5 kg.
production
Material needed for production 1,52,000 kg 90,000 kg
Materials to be purchased 1,60,000 kg. 93,750 kg

Total quantity to be purchased 2,53,750 kg

Rate per kg. of Material C ₹ 45
Total purchase price ₹ 1,14,18,750

(ii) Calculation of Economic Order Quantity for Material C

EOQ = = = 5,597 kg. (approx)

Question 38. [MAY 15]

XYZ Limited is drawing a production plan for its two products – Product ‘xml’ and Product ‘yml’ for the year 2015 – 16.
The company’s policy is to maintain closing stock of finished goods at 25% of the anticipated volume of sales of the
succeeding month. The following are the estimated data for the two products:
Particulars xml Yml
Budgeted Production (in units) 2,00,000 1,50,000
Direct Material (per unit) ₹ 220 ₹ 280

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Direct Labour (per unit) ₹ 130 ₹ 120

Direct Manufacturing Expenses ₹ 4,00,000 ₹ 5,00,000
The estimated units to be sold in the first four months of the year 2015 – 16 are as under:
Particulars April May June July
Xml 8,000 10,000 12,000 16,000
Yml 6,000 8,000 9,000 14,000
Prepare:
(i) Production Budget (month wise)
(ii) Production Cost Budget (for the first quarter of the year)

Solution 38:
(i) Production Budget (month wise) for the first quarter of the year 2015 – 16:
Particulars April May June
Product xml
Current month sales 8,000 10,000 12,000
+ Closing stock 2,500 3,000 4,000
(25% of next month) (10,000 x 25%) (12,000 x 25%) (16,000 x 25%)
- Opening stock - (2,500) (3,000)
Production for the month 10,500 10,500 10,500
Product yml
Month sales 6,000 8,000 9,000
+ Closing stock 2,000 2,250 3,500
(25% of next month) (8,000 x 25%) (9,000 x 25%) (14,000 x 25%)
- Opening stock - (2,000) (2,250)
8,000 8,250 10,250

(ii) Production cost budget (for first quarter) of the year 2015 – 16:
Particulars Xml Yml
Total production for the 34,000 26,500
quantity (units) (10,500 + 10,500 + 13,000) (8,000 + 8,250 + 10,250)
Direct material per unit 220 280
Direct labour per unit 130 120
Direct manufacturing exp. 2 (4,00,000 / 2,00,000) 3.33 (5,00,000 / 1,50,000)
Total cost per unit 352 403.33
Total production cost 1,19,68,000 (34,000 x 352) 1,06,88,333 (26,500 x 403.33)

Note:
1) Direct manufacturing expenses given is assumed as for to be budgeted production i.e., 2,00,000 & 1,50,000 for xml
and yml given in the question.
2) There are no opening stock of finished goods at the beginning of the year 2015 – 16.

Question 39. [MAY 95]

A single product Company estimated its sales (in units) for the next year quarter-wise as under –
Quarter 1 30,000 units
Quarter 2 37,500 units
Quarter 3 41,250 units
Quarter 4 45,000 units
The Opening Stock of Finished Goods is 10,000 units and the Company expects to maintain the Closing Stock of Finished
Goods at 16,250 units at the end of the year. The production pattern in each quarter is based on 80% of the Sales of the
current quarter and 20% of the Sales of the next quarter.
The Opening Stock of Raw Materials in the beginning of the year is 10,000 kg and the Closing Stock at the end of the year
is required to be maintained at 5,000 kg. Each unit of finished output requires 2 kg of Raw Materials.

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The Company proposes to purchase the entire annual requirement of Raw Materials in the first three quarters in the
proportion and at the prices given below –
Quarter Purchase of Raw Materials % to total annual requirement in quantity Price per kg
I 30% ₹ 2
II 50% ₹ 3
III 20% ₹ 4
The value of the Opening Stock of Raw Materials in the beginning of the year is ₹ 20,000.
Required: Present the following for the next year, quarter-wise:
1. Production Budget in units.
2. Raw Material Consumption Budget in Quantity.
3. Raw Material Purchase Budget in Quantity and Value.
4. Priced Stores Ledger Card of the Raw Material using First in First Out method.

Question 40. [NOV 14]

RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at a price of ₹
200 per unit. The cost structure at the 50% level of activity is as under:
₹
Direct Material 75 per unit
Direct Wages 25 per unit
Variable overheads 25 per unit
Direct Expenses 15 per unit
Factory Expenses (25% fixed) 20 per unit
Selling & Distribution Exp. (80% variable) 10 per unit
Office & Administration Exp. (100% 5 per unit
fixed)
The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%.
You are required to prepare an Expense budget, on the basis of marginal cost for the company at 50% and 60% level of
activity and find out the profits at respective levels.

Question 41. [MAY 99, Study Material]

Goodluck Ltd is currently operating at 75% of its capacity. In the past two yea₹ , the levels of operations were 55% and
65% respectively. Presently, the production is 75,000 units. The Company is planning for 85% capacity level during next
year. The cost details (amount in ₹ ) are as follows –
Particulars 55% 65% 75%
Direct Materials 11,00,000 13,00,000 15,00,000
Direct Labour 5,50,000 6,50,000 7,50,000
Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative Overheads 1,60,000 1,60,000 1,60,000
Total Costs 24,40,000 28,00,000 31,60,000
Profit is estimated at 20% on Sales. The following increases in costs are expected during the year –
Direct Materials – 8%, Direct Labour – 5%, Variable Factory OH – 5%, Variable Selling OH – 8%, Fixed Factory OH – 10%,
Fixed Selling OH – 15%, Administrative OH – 10%.
Prepare Flexible Budget for the next year at 85% level of capacity. Also ascertain the profit and contribution.

Solution 41:
Statement of Flexible Budget, Profit and Contribution at 85% Capacity Level (85,000 units) (In ₹ )
Particulars Cost based on previous Increase in Cost Total Cost
year
Variable Costs:
Direct Materials 17,00,000 8% of ₹ 17,00,000 18,36,000

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Direct Labour 8,50,000 1,36,000 8,92,500

Variable Factory Overheads 1,70,000 5% of ₹ 8,50,000 1,78,500
Variable Selling Overheads 3,40,000 42,500 3,67,200
5% of ₹ 1,70,000
8,500
8% of ₹ 3,40,000
27,200
Total Variable Costs (A) 32,74,200
Fixed Costs:
Fixed Factory Overheads 2,00,000 10% of ₹ 2,00,000 2,20,000
Fixed Selling Overheads 1,00,000 20,000 1,15,000
Administrative Overheads 1,60,000 15% of ₹ 1,00,000 1,76,000
15,000
10% of ₹ 1,60,000
16,000
Total Fixed Costs (B) 5,11,000
Total Costs (A) + (B) 37,85,200
Add: Profit (20% of sales = 25% on 9,46,300
Costs)
Sales Revenue 47,31,500
Less: Total Variable Costs 32,74,200
Contribution 14,57,300

Working Notes:
Computation of Fixed and Variable OH (In ₹ )
55% (55,000 65% (65,000 75% (75,000 85% (85,000
Capacity in % and unit units) units) units) units)
Direct Materials 11,00,000 13,00,000 15,00,000 17,00,000
Direct Labour 5,50,000 6,50,000 7,50,000 8,50,000
Variable Factory OH
(₹ 3,30,000 – ₹ 3,10,000) ÷ 10,000 units = ₹
2 p.u. 1,10,000 1,30,000 1,50,000 1,70,000
Variable Selling OH
(₹ 3,60,000 – ₹ 3,20,000) ÷ 10,000 units = ₹
4 p.u. 2,20,000 2,60,000 3,00,000 3,40,000
Fixed Factory OH
(Total Factory OH – Variable Factory OH) 2,00,000 2,00,000 2,00,000 2,00,000
Fixed Selling OH
(Total Selling OH – Variable Selling OH) 1,00,000 1,00,000 1,00,000 1,00,000

Question 42. [May 2017 - Old]

You are given the following data of a manufacturing concern:
Particulars (₹)
Variable expenses (at 50% capacity)
Materials 48,00,000
Labour 51,20,000
Others 7,60,000
Semi-variable expenses (at 50% capacity)
Maintenance and repairs 5,00,000
Indirect labour 19,80,000
Sales dept. salaries 5,80,000
Sundry administrative expenses 5,20,000
Fixed expenses:
Wages & salaries 16,80,000

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Rent, rates and taxes 11,20,000

Depreciation 14,00,000
Sundry administrative exp. 17,80,000

The fixed expenses remain constant for all levels of production. Semi-variable expenses remain constant between 45%
and 65% of capacity whereas it increases by 10% between 65% and 80% capacity and by 20% between 80% and 100%
capacity.
Sales at various levels are as under:
Capacity Sales (₹)
75% 2,40,00,000
100% 3,20,00,000

Prepare flexible budget at 75% and 100% capacity.

Question 43. [MAY 02]

The Cost Sheet of a Company based on a budgeted volume of Sales of 3,00,000 units per quarter is as under:
Particulars ₹ per unit
Direct Material 5.00
Direct Labour 2.00
Factory Overheads (50% Fixed) 6.00
rd
Selling and Administration Overheads (1/3 Variable) 3.00
Selling Price 18.00
When the budget was discussed, it was felt that the Company would be able to achieve only a volume of 2,50,000 units
of production and sales per quarter. The Company therefore decided that an aggressive sales promotion campaign
should be launched to achieve the following improved operations:
Proposal I: Sell 4,00,000 units per quarter
 Spending ₹ 2,00,000 on special advertising.
 The factory fixed costs will increase by ₹ 4,00,000 per quarter.

Proposal II: Sell 5,00,000 units per quarter subject to the following conditions –
 An overall price reduction of ₹ 2 per unit is allowed on all sales.
 Variable Selling and Administration Costs will increase by 5%.
 Direct Material Costs will be reduced by 1% due to Purchase price discounts.
 The fixed factory Costs will increase by ₹ 2,00,000 more.
You are required to prepare a flexible Budget at 2,50,000, 4,00,000 and 5,00,000 units of output per quarter and calculate
the Profit at each of the above levels of output.

Solution 43:
Statement of flexible budget and profit per quarter at 2,50,000, 4,00,000 and 5,00,000 units of output levels per
quarter
Particulars Present Proposal I Proposal II
Units (to be sold) 2,50,000 4,00,000 5,00,000
₹ ₹ ₹
Sales revenue (A) 45,00,000 72,00,000 80,00,000
(2,50,000 units × ₹ 18) (4,00,000 units × ₹ 18) (5,00,000 units × ₹ 16)
Variable costs:
Direct materials 12,50,000 20,00,000 24,75,000
(2,50,000 units × ₹ 5) (4,00,000 units × ₹ 5) (5,00,000 units × ₹ 4.95)
Direct labour @ 2/- per unit 5,00,000 8,00,000 10,00,000

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Factory overheads @ 3/- per unit 7,50,000 12,00,000 15,00,000

Selling & Administration overheads 2,50,000 4,00,000 5,25,000
(2,50,000 units × Re. 1) (4,00,000 units × Re. 1) (5,00,000 units × ₹ 1.05)
Total Variable Costs (B) 27,50,000 44,00,000 55,00,000
Contribution (C) = [(A) – (B)] 17,50,000 28,00,000 25,00,000
Fixed Costs:
Factory Overhead 9,00,000 9,00,000 9,00,000
Selling & Administration overheads 6,00,000 6,00,000 6,00,000
Increase in fixed costs - 4,00,000 6,00,000*
Advertisements costs - 2,00,000 -
Total fixed costs (D) 15,00,000 21,00,000 21,00,000
Profit [(C) – (D)] 2,50,000 7,00,000 4,00,000
*Under proposal II the fixed factory costs were increased by ₹ 2,00,000 more over proposal I.

Question 44. [NOV 15]

XY Co. Ltd manufactures two products viz., X and Y and sells them through two divisions, East and West. For the purpose
of Sales Budget to the Budget Committee, following information has been made available for the year 2014-15:

Product Budgeted Sales Actual Sales

East Division West Division East Division West Division

X 400 units at 600 units at 500 units at 700 units at
₹ 9 ₹ 9 ₹ 9 ₹ 9
Y 300 units at 500 units at 200 units at 400 units at
₹ 21 ₹ 21 ₹ 21 ₹ 21

Adequate market studies reveal that product X is popular but under-priced. It is expected that if the price of X is
increased by ₹ 1, it will find a ready market. On the other hand, Y is overpriced and if the price of Y is reduced by ₹ 1, it
will have more demand in the market. The company management has agreed for the aforesaid price changes. On the
basis of these price changes and the reports of salesmen, following estimates have prepared by the Divisional Managers :
Product East Division West Division
X + 10% +5%
With the help of intensive advertisement campaign. Following additional sales (over and above the above mentioned
estimated sales by Divisional Managers ) are possible:
Product East Division West Division
X 60 units 70 units
Y 40 units 50 units
You are required to prepare Sales Budget for 2015-16 after incorporating above estimates and also show the Budgeted
Sales and Actual Sales of 2014-15.

Solution 44:
Statement showing Sales Budget for 2015 – 16:
Division Product X Product Y Total
Qty. Rate (₹ ) Amount (₹ ) Qty. Rate (₹ ) Amount (₹ )
East 500 (1) 10 5,000 400 (3) 20 8,000 13,000
West 700 (2) 10 7,000 600 (4) 20 12,000 19,000
Total 1,200 12,000 1,000 20,000 32,000

Workings:
(1) 400 x 110% + 60 = 500 units

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(2) 600 x 105% + 70 = 700 units

(3) 300 x 120% + 40 = 400 units
(4) 500 x 110% + 50 = 600 units

Statement showing Sales Budget for 2014 – 15:

Division Product X Product Y Total
Qty. Rate (₹ ) Amount (₹ ) Qty. Rate (₹ ) Amount (₹ )
East 400 9 3,600 300 21 6,300 9,900
West 600 9 5,400 500 21 10,500 15,900
Total 1,000 9,000 800 25,800

Statement showing Actual sales for 2014 – 15:

Division Product X Product Y Total
Qty. Rate (₹ ) Amount (₹ ) Qty. Rate (₹ ) Amount (₹ )
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 10,800 6000 12,600 23,400

Question 45. [Study Material]

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.
The Foreman has put in a claim that he should be paid a bonus of ₹ 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 Expenses for a normal Planned for January ( ₹ ) Actual in costs - January (₹ )
month ( ₹ )
Salary for 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. EXPLAIN.

Solution 45:
Indirect manufacturing cost Nature of Expenses for a Planned Expenses as Actual Difference
cost (1) normal month expenses per flexible expenses (₹ ) (6) =
(₹ ) (2) budget (₹ ) (₹ ) (5) (5) - (4)
(4)
Salary of foreman Fixed 1,000 1,000 1,000 1,000 Nil
Indirect labour (WN 1) Variable 720 900 540 600 60
Indirect material (WN 2) Variable 800 1,000 600 700 100
Repair and maintenance (WN 3) Semi - 600 650 550 600 50

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Variable
Power (WN 4) Semi - 800 875 725 740 15
Variable
Tools consumed (WN 5) 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 shows that the concern’s expenses in the month of January have
increased by ₹ 285 as compared to flexible budget. Under such circumstances assuming the expenses are controllable
and based on the financial perspective the Foreman of the company may not be entitled for any performance bonus for
the month of January.

Working notes:
1. Indirect labour cost per unit ₹ 720 / 8,000 ₹ = ₹ 0.09
Indirect labour for 6,000 units = 6,000 × ₹ 0.09 = ₹ 540.

2. Indirect material cost per unit 800 / 8,000 ₹ = ₹ 0.10

Indirect material for 6,000 units = 6,000 × ₹ 0.10 = ₹ 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 = = = ₹ 0.025

For 8,000 units

Total Variable cost of repair and maintenance = ₹ 200
Fixed repair & maintenance cost = ₹ 400
Hence at 6,000 units output level, total cost of repair and maintenance should be
= ₹ 400 + ₹ 0.025 × 6,000 units = ₹ 400 + ₹ 150 = ₹ 550

4. Variable cost of power per unit = = 0.0375

For 8,000 units
Total variable cost of power = ₹ 300
Fixed cost = ₹ 500
Hence, at 6,000 units output level, total cost of power should be
= ₹ 500 + ₹ 0.0375 × 6,000 units = ₹ 500 + ₹ 225 =₹ 725

5. Tools consumed cost for 8,000 units = ₹ 320

Hence, tools consumed cost for 6,000 units = (₹ 320/8,000 units) × 6,000 units
= ₹ 240

Question 46. [NOV 07]

Calculate Efficiency and Capacity ratio from the following figures:
Budgeted Production 80 units
Actual Production 60 units
Standard time per unit 8 hours
Actual hours worked 500

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Solution 46:
Efficiency ratio = × 100

= × 100 = 96%

Capacity ratio = × 100

= × 100 = 78.125%

Question 47. [MAY 00]

The Activity Ratio of a concern is 95.6% whereas the Capacity Ratio is 105%. What is the Efficiency Ratio?

Solution 47:
Activity Ratio/ Volume Ratio = Capacity Ratio × Efficiency Ratio

95.6% = 105% × Efficiency Ratio

Efficiency Ratio = = 91.05%

Question 48. [NOV 09]

Calculate efficiency and activity ratio from the following data:
Capacity ratio = 75%
Budgeted output = 6,000 units
Actual output = 5,000 units
Standard Time per unit = 4 hours

Solution 48:
Capacity Ratio = × 100

75% =

0.75 =

Actual Hours = 18,000 Hours

Efficiency Ratio = × 100

= × 100

= × 100 = 111.11%

Activity Ratio = × 100

= × 100

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= × 100 = 83.33%

Question 49. [Study Material]

A company is engaged in the manufacture of specialised sub-assemblies required for certain electronic equipment. The
company envisages that in the forthcoming month, December, 20X9, the sales will take a pattern in the ratio of 3 : 4 : 2
respectively of sub-assemblies, ACB, MCB and DP.
The following is the schedule of components required for manufacture:
Component requirements
Sub assembly Selling price Base board IC08 IC12 IC26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price (₹ ) 60 20 12 8

The direct labour time and variable overheads required for each of the subassemblies are:
Labour hours Variable overheads
Grade A Grade B
ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (₹ ) 5 4 -

The labourers work 8 hours a day for 25 days a month.

The opening stocks of sub-assemblies and components for December, 20X9 are as under:
Sub - assemblies Components
ACB 800 Base Board 1,600
MCB 1,200 IC08 1,200
DP 2,800 IC12 6,000
IC26 4,000

Fixed overheads amount to ₹ 7,57,200 for the month and a monthly profit target of ₹ 12 lacs has been set.

The company is eager for a reduction of closing inventories for December, 20X9 of sub-assemblies and components by
10% of quantity as compared to the opening stock. PREPARE the following budgets for December 20X9:
a) Sales budget in quantity and value.
b) Production budget in quantity
c) Component usage budget in quantity.
d) Component purchase budget in quantity and value.
e) Manpower budget showing the number of workers and the amount of wages payable.

Solution 49:
1. Statement showing contribution
Sub assemblies ABC (₹ ) MCB (₹ ) DP (₹ ) Total (₹ )
Selling price per unit (p.u.): (A) 520 500 350
Marginal cost p.u.
Components
- Base Board 60 60 60
- IC08 160 40 40
- IC12 48 120 48
- IC26 16 48 64
Labour
- Grade A 40 30 20

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- Grade B 64 48 32
Variable production overhead 36 24 24
Total marginal cost p.u. : (B) 474 370 288
Contribution p.u. : (C ) = (A) - (B) 96 130 62
Sales ratio: (D) 3 4 2
Contribution x sales ratio: [(E) = (C ) x (D)] 288 520 124 932

2. Desired Contribution for the forthcoming month December, 20X9

Particulars (₹ )
Fixed overheads 7,57,200
Desired profit 12,00,000
Desired contribution 19,57,200

3. Sales mix required i.e. number of batches for the forthcoming month December, 20X9
Sales mix required =Desired contribution/contribution × Sales ratio
= ₹ 19,57,200/932 (Refer to Working notes 1 and 2)
= 2,100 batches

Budgets for December, 20X2

(a) Sales budget in quantity and value
Sub-assemblies ACB MCB DP Total
Sales (quantity) 6,300 8,400 4,200
(2,100 x 3:4:2)
(Refer to working note 3)
Selling price p.u. (₹ ) 520 500 350
Sale value (₹ ) 32,76,000 42,00,000 14,70,000 89,46,000

(b) Production budget in quantity

Sub-assemblies ACB MCB DP
Sales 6,300 8,400 4,200
Add: Closing stock 720 1,080 2,520
(Opening stock less 10%)
Total quantity required 7,020 9,480 6,720
Less: Opening stock 800 1,200 2,800
Production 6,220 8,280 3,920

(c) Component usage budget in quantity

Sub-assemblies ACB MCB DP Total
Production 6,220 8,280 3,920 -
Base board (1 each) 6,220 8,280 3,920 18,420
Component IC08 (8:2:2) 49,760 16,560 7,840 74,160
(6,220 x 8) (8,280 x 2) (3,920 x 2)
Component IC12 (4:10:4) 24,880 82,800 15,680 1,23,360
(6,220 x 4) (8,280 x 10) (3,920 x 4)
Component IC26 (2:6:8) 12,440 49,680 31,360 93,480
(6,220 x 2) (8,280 x 6) (3,920 x 8)

(d) Component Purchase budget in quantity and value

Sub-assemblies Base Board IC08 IC12 IC26 Total
Usage in production 18,420 74,160 1,23,360 93,480
Add: Closing stock 1,440 1,080 5,400 3,600
(Opening stock less 10%)
19,860 75,240 1,28,760 97,080

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Less: Opening stock 1,600 1,200 6,000 4,000

Purchase (Quantity) 18,260 74,040 1,22,760 93,080
Purchase price (₹ ) 60 20 12 8
Purchase value (₹ ) 10,95,600 14,80,800 14,73,120 7,44,640 47,94,160

(e) Manpower budget showing the number of workers and the amount of wages payable
Direct labour
Sub- Budgeted Grade A Grade B Total
Assemblies production Hours per Total hours Hours per Total hours
unit unit
ACB 6,220 8 49,760 16 99,520
MCB 8,280 6 49,680 12 99,360
DP 3,920 4 15,680 8 31,360
(A) Total hours 1,15,120 2,30,240
(B) Hours per man per month 200 200
(C) Number of workers per month : (A/B) 576 1,152
(D) Wage rate per month (₹ ) 1,000 800
(E) Wages payable (₹ ) : (C × D) 5,76,000 9,21,600 14,97,600

ZERO BASE BUDGETING

 Zero Budgeting
 Definition
1. Zero- based Budgeting (ZBB) is defined as ‘a method of budgeting which requires each cost element to be specifically
justified, although the activities to which the budget relates are being undertaken for the first time, without approval,
the budget allowance is zero’.
2. ZBB is an activity based budgeting system where budgets are prepared for each activities rather than functional
department.
 Suitability
 ZBB is suitable for both corporate and non-corporate entities.
 Non- corporate entities need to justify the benefits of expenditures on social programmes like mid-day meal,
installation of street lights, provision of drinking water etc.
 In case of Corporate entities, ZBB is best suited for discretionary costs like research and development cost, training
programmes, advertisement etc.
 Stages in Zero-based budgeting:

Identification and Allocation of

Evaluation of Ranking of
Description of Resources
Decision Packages Decision Packages
Decision Packages

1. Identification and description of Decision packages:

Decision packages are the programmes or activities for which decision is required to be taken. The programmes
or activities are described for technical specifications, financial impact in the form of cost benefit analysis and
other issues like environmental, regulatory, social etc.
2. Evaluation of Decision packages:
At this stage, identified decision packages are evaluated against factors like synchronisation with organisational
objectives, availability of funds, regulatory requirement etc.
3. Ranking (Prioritisation) of the Decision packages:
After evaluation of the decision packages, they are ranked on the basis priority of the activities. Because of this
prioritization feature ZBB is also known as Priority-based Budgeting.

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4. Allocation of resources:
After ranking of the decision packages, resources are allocated for decision packages.

 Advantages of Zero Based Budgeting:

1. Systematic Approach
It provides a systematic approach for the evaluation of different activities and ranking them in order of
preference for the allocation of scarce resources.

2. Best possible use of critical functions

It ensures that the various functions undertaken by the organization which are critical for the achievement of its
objectives and are being performed in the best possible way.

3. Cost benefit Analysis

It provides an opportunity to the management to allocate resources for various activities only after having a
thorough cost-benefit-analysis.

4. Elimination of wasteful expenditure

The areas of wasteful expenditure can be easily identified and eliminated.

5. Helpful in achievement of Corporate Objectives

Departmental budgets are closely linked with corporation objectives.
6. Management by Objective
The technique can also be used for the introduction and implementation of the system of ‘management
by objective.’

 Zero based budgeting is superior to traditional budgeting:

The advantages mentioned above make ZBB superior to Traditional Budgeting.

 Limitations of Zero Based Budgeting:

1. Tedious Process
The work involved in the creation of decision-making and their subsequent ranking has to be made on the
basis of new data. This process is very tedious to management.
2. Improper Implementation
The activities selected for the purpose of ZBB are on the basis of the traditional functio nal departments.
So the consideration scheme may not be implemented properly.
 Difference between Traditional Budgeting and Zero- based budgeting
Basis of Difference Traditional Budgeting Zero Based Budgeting
Orientation It is accounting oriented. . Main stress is It is decision oriented. It is very
on previous level of expenditure. rational in nature and requires all
programmes, old and new, to
compete for scarce resources.
Reference First reference is made to past level of Management focuses attention to
spending and then demand for inflation only on decision packages, which
and new programmes. enjoy priority to others.

Inflation of Budget Some managers deliberately inflate The managers, who unnecessarily try
their budget request so that after the to inflate the budget request, are
cuts they still get what they want. likely to be caught and exposed.
Clarity It is less clear and responsive as compared It is more clear and responsive.
to Zero Based Budgeting.

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Responsibility It is for top management to decide why a The responsibility is shifted from top
particular amount should be spent on a management to the manager of decision
particular decision unit. unit.
Approach It makes a routine approach. It makes a very straightforward
approach.

 Performance Budgeting
 Definition
1. A performance budget is one which presents the purposes and objectives for which funds are required, the costs
of the programmes proposed for achieving those objectives, and quantitative data measuring the
accomplishments and work performed under each programme.
2. Performance Budgeting provide a meaningful relationship between estimated inputs and expected outputs as an
integral part of the budgeting system.
3. Thus PB is a technique of presenting budgets for costs and revenues
4. in terms of functions.
5. Programmes and activities are correlating the physical and financial aspect of the individual items comprising the
budget.

 Difference between Traditional Budgeting and Performance Budgeting

Basis Traditional Budgeting Performance Budgeting
Aspect It gives more emphasis on the financial aspect PB aims at establishing a relationship between
than the physical aspects or performances. the inputs and the outputs.

Basis of Budget It is generally prepared with the main basis In the PB emphasis is more on the functions of
towards the objects or items of expenditure the organisation, the programmes to discharge
i.e. it highlights the items of expenditure, these function and the activities which will be
namely, salaries, stores and materials, rates, involved in undertaking these programmes.
rents and taxes and so on.

 Steps in Performance Budgeting:

 According to the Administrative Reforms Commission (ARC) the following steps are the basic ones in PB:
1. Establishing a meaningful functional programme and activity classification of government operations.
2. Bring the system of accounting and financial management in accord with this classification.
3. Evolving suitable norms, yardsticks, work units of performance and units costs, wherever possible under each
programme and activity for their reporting and evaluation.

 The Report of the ARC use the following terms in an integrated sequence:

Functions Programme Activity Project

The team ‘function’ is used in the sense of ‘objective’. For achieving objectives ‘programmes’ will have to be
evolved. In respect of time horizon, it is essentially a replacement of traditional annual fiscal budgeting by a more
output-oriented, but still an annual, exercise.

 For an enterprise that wants to adopt PB, it is thus imperative that:

1. the objectives of the enterprise are spelt out in concrete terms.
2. the objectives are then translated into specific functions, programmes, activities and tasks for different levels
of management within the realities of fiscal, constraints.
3. realistic and acceptable norms, yardsticks or standards and performance indicators should be evolved and
expressed in quantifiable physical units.

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 Budget and Budgetary Control BY: CA NITIN GURU

4. a style of management based upon decentralised responsibility structure should be adopted, and
5. an accounting and reporting system should be developed to facilities monitoring, analysis and review of
actual performance in relation to budgets.

 Performance reporting at various levels of Management

 Report
 A major part of the management accountant’s job consists of preparing reports to provide information for the
purposes of control and planning.

 The important consideration in drawing up of reports and determining their scope are the following:
(a) Significance: Are the facts in the reports reliable? Does it either called for action or demonstrate the effect of
action? It is material enough.
(b) Timeliness: How late could the information be and still be of use? What is the earliest moment at which it
could be used if it were available? How frequently is it required?
(c) Accuracy: How small should be an inaccuracy which does not alter the significance of the information?
(d) Appropriateness: Is the recipient the right person to take any action that is needed? Is there any other
information which is required to support the information to anyone else jointly interested?
(e) Discrimination: Will anything be lost by omitting the item? Will any of the items gain from the omission? Is
the responsibility for suppressing the item acceptable?
(f) Presentation: Is the report clear and unbiased? Is the form of it is suitable to the subject? Is the form of it
suitable to the recipient?

 The following are certain types of reports which are to be prepared and submitted to management regularly at
predetermined time interval:
1. Top Management (Including Board of Directors and financial managers)
(a) Balance Sheet
(b) Profit & Loss Statement
(c) Position of stocks
(d) Disposition of funds or working capital
(e) Capital expenditure & forward commitments together with progress of projects in hands
(f) Cash-flow statements;
(g) Sales, production, and other appropriate statistics

2. Sales Management
(a) Actual sales compared with budgeted sales to measure performance by:
 Products,
 Territories,
 Individual salesmen, and
 Customers.
(b) Standard profit and loss by product:
 For fixing selling prices, and
 To Concentrate on sales of most profitable products.
(c) Selling expenses in relation to budget and sales value analyzed by:
 Products,
 Territories
 Individual salesmen, and
 Customers.
(d) Bad debts and accounts which are slow and difficult in collection.
(e) Status reports on new or doubtful customers.

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3. Production Management
(a) To Buyer: Price variations on purchases analysed by commodities.
(b) To Foreman:
 Operational efficiency for individual operators duly summarized as departmental average;
 Labour utilization report and causes of lost time and controllable time;
 Indirect shop expenses against the standard allowed; and
 Scrap report.
(c) To Works Managers:
 Departmental operating statement
 General works operating statements (Expenses relating to all works expenses not directly
allocable or controllable by departments);
 Plant utilization report;
 Department Scrap report; and
 Material usage report.

4. Special Reports
 These reports may be prepared at the request of general management or at the initiative of the
management accountants. These reports may range over a very wide area.
 Some of the matters in respect of which such reports may be required can be:
(a) Taxation legislation and its effect on profits.
(b) Estimates of the earning capacity of a new project.
(c) Break-even analysis
(d) Replacement of capital equipment.
(e) Special pricing analysis
(f) Make or buy certain components
(g) Statement of surplus available for payment of bonus under the labour appellate tribunal
formula.

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 Unit, Job and Batch Costing BY: CA NITIN GURU

Chapter 16
UNIT, JOB AND BATCH COSTING
 Job Costing

Question 1. [MAY 01]

What is Job Costing?

Solution 1:
According to this method costs are collected and accumulated according to jobs, contracts, products or work orders. Each
job or unit of production is treated as a separate entity for the purpose of costing. Job costing is carried out for the
purpose of ascertaining cost of each job and takes into account the cost of materials, labour and overheads etc.

 Practical Problems

 Job Cost – Revision of Cost and Selling Price

Question 2. [STUDY MATERIAL]

A shop floor supervisor of a small factory presented the following cost for job No.303, to determine the selling price.
Per unit (₹)
Materials 70
Direct wage 18 hours @ ₹2.50 (Department X 8 hours; Department Y 6 hours; Department Z 4 hours) 45
Chargeable expenses 5
120
Add: 33-1/3% for expenses cost 40
160
Analysis of Profit and Loss Account (for the year 2005)
Particulars Amount (₹) Particulars Amount (₹)
Materials used 150,000 Sales less returns 2,50,000
Direct wages:
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
Works cost 200,000
Gross profit c/d 50,000
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000
50,000 50,000

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 Unit, Job and Batch Costing BY: CA NITIN GURU
It is also noted that average hourly rates for the three departments X, Y and Z are similar.
You are required to:
Draw up a job cost sheet.
Calculate the entire revised cost using 2005 actual figures as basis.
Add 20% to total cost determine selling price.

Solution 2:
Job Cost Sheet
Customer Details ___ Job No.___
Date of commencement_____ Date of completion______
Particulars Amount (₹)
Direct materials 70
Direct wages:
Dept. X ₹ 2.50 × 8 hrs. = ₹ 20.00
Dept. Y ₹ 2.50 × 6 hrs. = ₹15.00
Dept. Z ₹ 2.50 × 4 hrs. = ₹10.00 45
Chargeable expenses 5
Prime Cost 120
Overheads:
Dept. X = × 100 = 50% of ₹ 20 = ₹10.00

Dept. Y = × 100 = 75% of ₹ 15 = ₹ 11.25

Dept. Z = × 100 = 25% of ₹10 = ₹ 2.50 23.75

Work Cost 143.75
Selling expenses = × 100 = 10% of work cost 14.28
Total cost 158.13
Profit (20% of total cost) 31.63
Selling price 189.76

 Simultaneous Equation – Estimation of Overhead and Profit of each Job

Question 3. [STUDY MATERIAL]

The following data relate to the manufacture of a standard product during the 4 week ended 28th February 20X9:
Raw Materials Consumed ₹ 4,00,000
Direct Wages ₹ 2,40,000
Machine Hours Worked 3,200 hours
Machine Hour Rate ₹ 40
Office Overheads 10% of works cost
Selling Overheads ₹ 20 per unit
Units produced and sold 10,000 at ₹ 120 each
You are required to FIND OUT the cost per unit and profit for the 4- week ended 28th February 20X9.

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Question 4. [STUDY MATERIAL]
Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and muffins. AC use to
bake atleast 50 units of any item at a time. A customer has given an order for 600 muffins. To process a batch of 50
muffins, the following cost would be incurred:
Direct materials- ₹ 500
Direct wages- ₹ 50
Oven set- up cost ₹ 150
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total production cost of each
batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value.
DETERMINE the selling price for 600 muffins.

Question 5. [STUDY MATERIAL, MAY 95]

In an 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:
Particulars Job 101 (₹) Job 102 (₹)
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.
(iii) Using the above recovery rates fix the selling price of job 103. The additional data being:
Direct materials ₹ 24,000
Direct wages ₹ 20,000
Profit percentage on selling price 12- ½ %

Solution 5:
(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 = ₹ 96,000 + ₹ 42,000F
Job 102 = ₹ 67,500 + ₹ 30,000F
Total Cost of Production of Jobs:
Job 101 = (₹ 96,000 + ₹ 42,000F) + (₹ 96,000 + ₹ 42,000F) A = ₹ 1,51,500
Job 102 = (₹ 67,500 + ₹ 30,000F) + (₹ 67,500 + ₹ 30,000F) A = ₹ 1,06,875
On solving above relations:
F = 0.60 and A = 0.25
Hence, percentage recovery rates of factory overheads and administrative overheads are 60% and 25% respectively.

Working Notes:
Particulars Job 101 (₹) Job 102 (₹)
Total cost of production 1,51,500 1,06,875

(₹ 1,66,650/110%) (₹ 1,28,250/120%)

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(ii) Statement of jobs, showing amount of factory overheads, administrative overheads and profit
Particulars Job 101 (₹) Job 102 (₹)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Prime cost 96,000 67,500
Factory overheads
60% of direct wages 25,200 18,000
Factory cost 1,21,200 85,200
Administrative overheads
25% of factory cost 30,300 21,375
Total cost 1,51,500 1,06,875
Profit (balancing figure) 15,150 21,375
Selling price 1,66,650 1,28,250

(iii) Selling price of Job 103

Particulars Amount (₹)
Direct materials 24,000
Direct wages 20,000
Prime cost 44,000
Factory overheads (60% of Direct Wages) 12,000
Factory cost 56,000
Administrative overheads (25% of Factory Cost) 14,000
Total cost 70,000
Profit margin (balancing figure) 10,000
Selling price ) 80,000

 Selling Price of New Order

Question 6. [NOV 02]

In the current quarter a company has undertaken two jobs. The data relating to these jobs are as under:
Particulars Job 1102 Job 1108
Selling price ₹ 1,07,325 ₹ 1,57,920
Profits as percentage on cost 8% 12%
Direct Materials ₹ 37,500 ₹ 54,000
Direct wages ₹ 30,000 ₹ 42,000
It is the policy of company to charge Factory overheads as percentage on direct wages and selling and Administration
overhead as percentage on Factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of direct materials and direct
wages relating to the new order are ₹ 64,000 and ₹ 50,000 respectively. A profit of 20% on sales is required.
You are required to compute:
(i) The rates of factory overheads and selling and administration overheads to be charged.
(ii) The selling price of the new order.

Solution 6:
(i) Computation of Factory Overhead rates and Selling & Distribution Overhead rates
Let the Factory Overhead recovery rate be X and Selling and Distribution Overheads recovery rates be Y

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 Unit, Job and Batch Costing BY: CA NITIN GURU
Job Cost Sheet
Particulars Job 1102 Job 1108
Direct Materials 37,500 54,000
Direct Wages 30,000 42,000
Prime Cost 67,500 96,000
Add: Factory Overhead 30,000 X 42,000 X
Factory Expenses 67,500 + 30,000 X 96,000 + 42,000 X
Add: Selling & Administrative Expenses (67,500 + 30,000 X)Y (96,000 + 42,000X)Y
Total Cost (67,500 + 30,000 X) (1 + Y) (96,000 + 42,000 X) (1 + Y)

Computation of Total Cost of Job No. 1102 & 1108

Job 1102
Total cost when profit is 8% on cost = 1,07,325/108 × 100
= ₹ 99,375
Job 1108
Total cost when profit is 12% on cost = 1,57,920 × 100/112
= ₹ 1,41,000
Job 1102
67,500 + 30,000 X + 67,500 Y + 30,000 XY = ₹ 99,375
30,000 X + 30,000 XY + 67,500 Y = ₹ 31,875 ………………...(i)
Job 1108
96,000 + 42,000 X + 96,000 Y + 42,000 XY = ₹ 1,41,000
42,000 X + 42,000 XY + 96,000 Y = ₹ 45,000 …………………(ii)
Multiplying equation (i) by 4.2 and equation (ii) by 3, we get
1,26,000 X + 1,26,000 XY + 2,83,500 Y = 1,33,875 ……………………(iii)
1,26,000 X + 1,26,000 XY + 2,88,000 Y = 1,35,000 ……………………(iv)
Solving equation (iii) & (iv), we get
4,500 Y = 1,125
Y = 1,125/4,500 = 0.25
Putting the value of Y in equation no (1), we get
30,000 X + 30,000 X × 0.25 + 67,500 × 0.25 = ₹ 31,875
30,000 X + 7,500 X + 16,875 = ₹ 31,875
37,500 X = 15,000
X = 15,000/37,500 = 0.4
Hence, Factory Overhead Recovery Rate on Direct Wages = 40%
Selling & Administrative Overhead Recovery Rate on Factory Cost = 25%

(ii) Computation of Selling Price of the new order

Amount
Particulars (₹)
Direct Materials 64,000
Direct Wages 50,000
Prime Cost 1,14,000
Factory Overhead (40% × ₹ 50,000) 20,000
Factory Cost 1,34,000
Selling & Administration Overhead (25% × ₹ 1,34,000) 33,500
Total Cost 1,67,500

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Add: Profit
(1,67,500/80 × 20) 41,875
Selling Price 2,09,375

 Preparation of Job Cost Sheet

Question 7. [NOV 89]

st
A Factory, which uses a Job Costing System, provides the following cost data for the year ended 31 March.
Direct Material: ₹ 9,00,000, Direct Wages: ₹ 7,50,000, Profit: ₹ 6,09,000, SOH: ₹ 5,25,000, AOH: ₹ 4,20,000, POH: ₹
4,50,000.
You are required to –
(a) Prepare a Cost Sheet indicating the various components of cost and profit.
(b) For the next year, the factory has received an order for a number of jobs. It is estimated that Direct Materials would
be ₹ 12 Lakhs and Direct Labour would cost ₹ 7.5 Lakhs. What would be the price for these jobs if the Factory
intends to earn the same rate of profit on sales, assuming that the S&D OH has gone up by 15%? (Note: Absorb
Factory Overheads on Direct Wages and Administration Overheads and Selling & Distribution Overheads on Works
Cost).

Solution 7:
Job Cost Sheet
Particulars Last year Relationship Next year
Direct Materials 9,00,000 Actuals 12,00,000
Direct Wages 7,50,000 Actuals 7,50,000
Prime Cost 16,50,000 Actuals 19,50,000

Add: Production Overheads 4,50,000 Absorbed at = 60% on Wages 4,50,000

Factory Cost 21,00,000 24,00,000
Add: Administration Overheads 4,20,000 Absorbed at = 20% on Factory Cost 4,80,000
Cost of Production 25,20,000 28,80,000
Add: Selling & Distribution Taken at = 25% on Factory Cost + 15% 6,00,000 + 15% =
Overheads 5,25,000 thereon 6,90,000
Cost of Sales 30,45,000 35,70,000
Add: Profit 6,09,000 = 20% on Cost of Sales 7,14,000
Sales 36,54,000 42,84,000

 Preparation of Quotation – Department Wise Overhead Estimation

Question 8. [RTP]
A Furniture making business manufactures quality furniture to customers’ order. It has three Production Departments (A,
B and C) which have OH Absorption Rates (per Direct Labour Hour) of ₹ 12.86, ₹ 12.40 and ₹ 14.03 respectively.
Two pieces of furniture are to be manufactured for customers. Direct Costs are as follows –
Particulars Job 1 Job 2
Direct Materials ₹ 154 ₹ 108
Direct Labour: Department A Labour Rate ₹ 7.60 per hour 20 hours 16 hours
Department B Labour Rate ₹ 7.00 per hour 12 hours 10 hours
Department C Labour Rate ₹ 6.80 per hour 10 hours 14 hours

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The Firm quotes prices to customers that reflect a required profit of 25% on Selling Price. Calculate the Total Cost and
Selling Price of each job.

Solution 8:
Job Cost Sheet
Particulars Job 1 Job 2
Direct Materials 154.00 108.00
Direct Labour: Department A 20 hours × ₹ 7.60 = 152.00 16 hours × ₹ 7.60 = 121.60
Department B 12 hours × ₹ 7.00 = 84.00 10 hours × ₹ 7.00 = 70.00
Department C 10 hours × ₹ 6.80 = 68.00 14 hours × ₹ 6.80 = 95.20
Prime Cost 458.00 348.80
Add: Overheads: Department A 20 hours × ₹ 12.86 = 257.20 16 hours × ₹ 12.86 = 205.76
Department B 12 hours × ₹ 12.40 = 148.80 10 hours × ₹ 12.40 = 124.00
Department C 10 hours × ₹ 14.03 = 140.03 14 hours × ₹ 14.03 = 196.42
Total Cost 1,004.03 920.98
th rd
Add: Profit (25% i.e. 1/4 on Price = 1/3 on Cost) 334.68 306.99
Quoted Selling Price 1,338.71 1,227.97

 Estimation of Job Cost

Question 9. [RTP]
From the records of a manufacturing Company, the following budgeted details are available.
Particulars ₹
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 12,000 hours 88,200
Assembly Shop 10,000 hours 51,800 1,40,000
Administrative Overheads 90,000
Selling Overheads 81,000
Distribution Overheads 62,100
The Company follows Absorption Costing method. You are required to prepare –
 Schedule of OH Rates from the data available stating the basis of OH Recovery Rates used under the given
circumstances.
 A cost estimate for the following job based on the overhead rates so computed.
(a) Direct Materials 25 kg at ₹ 16.80 per kg, and 15 kg at ₹ 20.00 per kg
(b) Direct Labour Machine Shop 30 hours, Assembly Shop 42 hours

Solution 9:
Particulars Budget (₹) Recovery Rates New Job (₹)
Direct Materials 1,99,000 (25 kg × ₹ 16.8) + (15 kg × ₹ 20) 720.00
Direct Wages: Machine Shop 63,000 = ₹ 5.25 per hour 30 hours × ₹ 5.25 = 157.50

Assembly Shop 48,000 = ₹ 4.80 per hour 42 hours × ₹ 4.80 = 201.60

Prime Cost 3,10,000 1,079.10
Add: Works Overheads: Machine Shop 88,200 = ₹ 7.35 per hour 30 hours × ₹ 7.35 = 220.50

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Assembly Shop 51,800 = ₹ 5.18 per hour 42 hours × ₹ 5.18 = 217.56

Factory Cost 4,50,000 1,517.16
Add: Administration Overheads 90,000 = 20% on Works Cost 20% × ₹ 1,517.16 = 303.43
Cost of Production 5,40,000 1,820.59
Add: Selling & Distribution Overheads 1,43,100 = 31.8% on Works Cost 31.8% × ₹ 1,517.16 = 482.46
Cost of Sales 6,83,100 2,303.05

 Valuation of Closing WIP based on Absorption Rate

Question 10.
A firm uses job costing and recovers overheads on direct labour. Three jobs were worked on during a period the details
of which are as follows:

Particulars Job 1 (₹) Job 2 (₹) Job 3 (₹)

Opening work-in-progress 8,500 0 46,000
Material in period 17,150 29,025 0
Labour for period 12,500 23,000 4,500
The overheads for the period were exactly as budgeted ₹ 1,40,000 Jobs 1 and 2 are the only incomplete jobs.
You are required to compute the value of closing work-in-progress.

Solution 10:
Total labour cost = ₹ 1,2500 + ₹ 23,000 + ₹ 4,500 = ₹ 40,000
Overhead absorption rate = × 100% = 350% of direct labour cost
Closing work-in-progress valuation
Particulars Job 1 (₹) Job 2 (₹) Job 3 (₹)
Costs given in question 38,150 52,025 90,175
Overhead absorbed 43,750 80,500 1,12,250
2,14,425

 Batch Costing

Question 11.
What is Batch Costing?

Solution 11:
This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas under batch costing, a lot of
similar units which comprises the batch may be used as a cost unit for ascertaining cost. In the case of batch costing
separate cost sheets are maintained for each batch of products by assigning a batch number.

Question 12. [MAY 87, MAY 01]

List the circumstances under which Batch Costing may be adopted.

Solution 12:
Batch Costing may be used in following circumstances:-
(1) Special features like size, colour, taste, etc. are required for garments, pharmaceuticals etc.

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(2) It is not economical to ascertain cost of every unit of output independently, e.g. printing of visiting cards etc.
(3) For production of components, an internal manufacturing order is made.
(4) Annual Requirement of customer is to be made available in uniform quantities over the year.

 Practical Problems

 Different Batch Size – Cost Per Unit

Question 13.
A company manufactures widgets to order and has the following budgeted overheads for the year, based on normal
activity levels.
Department Budgeted overheads (₹) Budgeted Activity (Total Labour Hours)
Welding 6,000 1,500 labour hours
Assembly 10,000 1,000 labour hours
Selling and administrative overheads are 20% of factory cost. An order for 250 widgets type X 128, made as Batch 5997,
incurred the following costs.
Materials ₹ 12,000
Labour 100 hours welding shop at ₹ 10 hour
200 hours assembly shop at ₹ 8 hour
₹ 500 was paid for the hire of special X-ray equipment for testing the welds.
Calculate the cost per unit for Batch 5997.

Solution 13:
The first step is to calculate the overhead absorption rate for the production departments.
Welding = = ₹ 4 per labour hour
Assembly = = ₹ 10 per labour hour
Total cost – Batch No. 5997
Particulars Amount (₹) Amount (₹)
Direct material 12,000
Direct expense 500
Direct labour (100 × 10.00) 1,000
(200 × 8.00) 1,600 2,600
Prime cost 15,100
Overheads (100 × 4) 400
(200 × 10) 2,000 2,400
Factory cost 17,500
Selling & administrative cost (20% of factory cost) 3,500
Total cost 21,000

Cost per unit = = ₹ 84.00

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 Economic Batch Quantity

Question 14. [MAY 00, MAY 01, MAY 07]

What is Economic Batch Quantity? How is it determined?

Solution 14:
Economic Batch Quantity: There is one particular batch size for which both set up and carrying Costs are minimum. This
size is known as economic or optimum batch quantity.

The determination of economic batch quantity involve two types of costs viz.,
(i) Set up Cost (or preparation cost) and
(ii) Carrying cost.
With the increase in the batch size, there is an increase in the carrying cost but set up cost per unit of product is
reduced; this situation is reversed when the batch size is reduced. Thus there is one particular batch size for which
both set up and carrying costs are minimum. This size is known as economic or optimum batch quantity.
The mathematical formula usually used for its determination is as follows:

EBQ = √
Where,
A = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production
Note: If the rate of interest (l) and unit cost of production (C) are given, the following formula should be used for
determining EBQ

EBQ = √

 EBQ and Related Computation

Question 15. [Study Material]

Monthly demand for a product - 500 units
Setting-up cost per batch - ₹ 60
Cost of manufacturing per unit - ₹ 20
Rate of interest - 10% p.a.
DETERMINE economic batch quantity.

Question 16. [Study Material]

M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a steady daily basis. It is
estimated that it costs ₹ 1 as inventory holding cost per bearing per month and that the set up cost per run of bearing
manufacture is ₹ 3,200
(i) DETERMINE the optimum run size of bearing manufacture?
(ii) STATE what would be the interval between two consecutive optimum runs?
(iii) FIND OUT the minimum inventory cost?

Question 17. [Study Material]

A customer has been ordering 90,000 special design metal columns at the rate of 18,000 columns per order during the
past years. The production cost comprises ₹2,120 for material, ₹60 for labour and ₹20 for fixed overheads. It costs ₹1,500
to set up for one run of 18,000 column and inventory carrying cost is 5%.

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(i) FIND the most economic production run.
(ii) CALCULATE the extra cost that company incur due to processing of 18,000 columns in a batch.

Question 18. [similar - Study Material]

Update Ltd has to supply 2,40,000 units of a component “Tazzo” annually for its valued customer Prince. The Company
has been producing 20,000 units per month by having 12 runs per annum. Its new Finance Manager Ram says that the
production should be brought down to 5,000 units per batch and 48 batches should be run per annum. You are required
to advise the Company on the following issues given that the Set up Cost per batch is ₹ 75 per batch and Carrying Cost
per unit is ₹ 1 per annum.
1. What is the Economic Batch Size?
2. Should the Company continue producing 20,000 units per batch or should it adopt Ram’s suggestion?
3. For least cost, how many batches should be run in a year?
4. What will be the total associated cost, i.e. Set-Up Costs and Carrying Costs per annum, if EBQ is adopted?

Solution 18:

1. EBQ = √

EBQ = √
Where,
A = Annual Demand for Finished Product = 2,40,000 units.
S = Set-Up Cost per batch = ₹ 75
C = Carrying Cost per unit of Finished Product per annum = Re. 1.00
On substitution, EBQ = 6,000 units.

2. Comparison of Associated Costs at different Batch Output Levels

Particulars EBQ Existing Policy Ram's suggestion
Batch Quantity 6,000 units 20,000 units 5,000 units
Number of Batches p.a. 2,40,000 ÷ 6,000 = 40 2,40,000 ÷ 20,000 = 12 2,40,000 ÷ 5,000 = 48
Set-up Costs p.a. at ₹ 75 (A) 40 × ₹ 75 = ₹ 3,000 12 × ₹ 75 = ₹ 900 48 × ₹ 75 = ₹ 3,600
Average Inventory ½ × 6,000 = 3,000 units ½ × 20,000 = 10,000 units ½ × 5,000 = 2,500 units
3,000 units × ₹ 1 = ₹ 10,000 units × ₹ 1 = ₹ 2,500 units × ₹ 1 = ₹
Carrying Costs p.a. at ₹ 1 (B) 3,000 10,000 2,500
Associated Costs p.a. (A) +
(B) ₹ 6,000 ₹ 10,900 ₹ 6,100
Observation: Any deviation from EBQ leads to increase in Associated Costs. Hence, the Company should prefer to
operate at 6,000 units per batch.
Note: At EBQ using the above formula, Set-up Costs p.a. = Carrying Costs p.a. = ½ of Associated Costs p.a.

3. Number of Batches p.a. = = = 40 batches per annum. (For least cost).

 Batch Cost Sheet – Cost and Profit Per Batch

Question 19. [MAY 97, Study Material (adapted)]

Aries Ltd. undertakes to supply 1,000 units of a component per month for the month of January, February and March.
Every month a batch order is opened against which materials and labour cost are booked at actual.
Overheads are levied on the basis of labour hours. The selling price is contracted at ₹ 15 per unit.

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 Unit, Job and Batch Costing BY: CA NITIN GURU
From the following data, present the cost and profit per unit of each batch order and the overall position of the order for
3,000 units. Ignore set-up costs.
Months Batch Output Material Cost (₹) Labour Cost (₹)
January 1,250 6,250 5,000
February 1,500 9,000 6,000
March 1,000 5,000 4,000

Labour is paid at the rate of ₹ 4 per hour. The other details are:
Months Overhead (₹) Total Labour Hours
January 12,000 4,000
February 9,000 4,500
March 15,000 5,000

Solution 19:
Particulars January February March
Labour Hours ₹ 5,000 ÷ ₹ 4 = 1,250 ₹ 6,000 ÷ ₹ 4 = 1,500 ₹ 4,000 ÷ ₹ 4 = 1,000
Labour Hour Rate ₹ 12,000 ÷ 4,000 hours = ₹ 3 ₹ 9,000 ÷ 4,500 hours = ₹ 2 ₹ 15,000 ÷ 5,000 hours = ₹ 3

Aries Limited: Statement of Cost and Profit

Particulars Batches
January February March Total
Output in units 1,250 1,500 1,000 3,750
Materials 6,250 9,000 5,000 20,250
Wages 5,000 6,000 4,000 15,000
Overheads based on labour hour rate 3,750 3,000 3,000 9,750
Total cost 15,000 18,000 12,000 45,000
Sales @ ₹ 15 per unit 18,750 22,500 15,000 56,250
Profit 3,750 4,500 3,000 11,250
Cost per unit 12.00 12.00 12.00 12.00
Profit per unit (S.P. – Cost = ₹ 15 – ₹ 12) 3.00 3.00 3.00 3.00

Question 20. [Study Material]

Atharva Pharmacare Limited produced a uniform type of product and has a manufacturing capacity of 3,000 units per
week of 48 hours. From the records of the company, the following data are available relating to output and cost of 3
consecutive weeks
Week number Units manufactured Direct material (₹) Direct wages (₹) Factory overheads
(₹)
1 1,200 9,000 3,600 31,000
2 1,600 12,000 4,800 33,000
3 1,800 13,500 5,400 34,000
Assuming that the company charges a profit of 20% on selling price, FIND OUT the selling price per unit when the weekly
output is 2,000 units

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 Unit, Job and Batch Costing BY: CA NITIN GURU

 Different Batch Sizes – Cost Per unit Computation

Question 21. [NOV 92]

Component Z is made entirely in cost centre 100. Material Cost is 6 paise per component. The Component takes 10
minutes to produce. The Machine Operator is paid 72 paise per hour and the Machine Hour Rate is ₹ 1.50. The setting up
of the machine to produce the Component P takes 2 hours 20 minutes.
On the basis of this information, prepare a Cost-Sheet showing the production and setting up both total and per
component, assuming that a batch of: (a) 10 components, (b) 100 components, & (c) 1,000 components is produced.

Solution 21:
1. Computation of Operators’ Wages and Overheads
Components per batch 10 units 100 units 1,000 units
Time taken in minutes at 10 minutes p.u. 100 min 1,000 min 10,000 min
Operators' Wages at ₹ 0.72 per hour × 0.72 = ₹ 1.20 × 0.72 = ₹ 12.00 × 0.72 = ₹ 120.00

Overhead Expenses at ₹ 1.50 per hour × 1.50 = ₹ 2.50 × 1.50 = ₹ 25.00 × 1.50 = ₹ 250.00

2. Computation of Batch Costs

Batch Size 10 units 100 units 1,000 units
Total p.u. Total p.u. Total p.u.
Set-up Cost:
Machine Operators wages (2 hours 20 min at ₹ 0.72 per hour) 1.68 0.168 1.68 0.0168 1.68 0.00168
Overheads (2 hours 20 min at ₹ 1.50 per hour) 3.50 0.350 3.50 0.0350 3.50 0.00350
Production Cost:
Material Cost at 0.06 p.u. 0.60 0.060 6.00 0.0600 60.00 0.06000
Machine Operators Wages 1.20 0.120 12.00 0.1200 120.00 0.12000
Overheads 2.50 0.250 25.00 0..25 250.00 0.25000
Total Costs 9.48 0.948 48.18 0.4818 435.18 0.43518

 Cost and Profit Per Piece of Batch order – Overall Positions

Question 22. [Study Material]

Wonder Ltd. has a capacity of 120,000 Units per annum as its optimum capacity. The production costs are as under
Direct Material – ₹ 90 per unit
Direct Labour- ₹60 per unit
Overheads:
Fixed: ₹ 30,00,000 per annum
Variable : ₹100 per unit
Semi Variable: ₹ 20,00,000 per annum upto 50% capacity and an extra amount of ₹ 4,00,000 for every 25% increase in
capacity or part thereof.
The production is made to order and not for stocks.
If the production programme of the factory is as indicated below and the management desires a profit of ₹20,00,000 for
the year DETERMINE the average selling price at which each unit should be quoted. First 3 months: 50% capacity
Remaining 9 months: 80% capacity
Ignore Administration, Selling and Distribution overheads.

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 Unit, Job and Batch Costing BY: CA NITIN GURU

 Job Costing and WIP

Question 23. [Nov 85]

th
In a factory following the Job Costing Method, an abstract from WIP on 30 September was prepared as under –
Job No. Materials Direct Labour Hours Labour Cost Factory Overheads applied
115 ₹ 1,325 400 hours ₹ 800 ₹ 640
118 ₹ 810 250 hours ₹ 500 ₹ 400
120 ₹ 765 300 hours ₹ 475 ₹ 380
Total ₹ 2,900 ₹ 1,775 ₹ 1,420

Materials used in October were as follows –

Materials Requisition No. 54 55 56 57 58 59
Job No. 118 118 118 120 121 124
Cost ₹ 300 ₹ 425 ₹ 515 ₹ 665 ₹ 910 ₹ 720

A summary of labour hours deployed during October is as under –

Job No. No. of hours Shop A No. of hours Shop B
115 25 25
118 90 30
120 75 10
121 65 -
124 20 10
Total 275 75
Indirect Labour
Waiting for Material 20 10
Machine Breakdown 10 5
Idle Time 5 6
Overtime Premium 6 5
Total 316 101
A Shop Credit Slip was issued in October, that material issued under Requisition No. 54 was returned back to stores as
being not suitable. A Material Transfer Note issued in October indicated that material issued under Requisition No. 55 for
Job 118 was directed to Job 124.
The hourly rate in Shop A per labour hour is ₹ 3 per hour and at Shop B ₹ 2 per hour. The Factory Overhead is applied at
the same rate as in September. Jobs 115, 118 and 120 were completed in October.
Compute the Factory Cost of the completed jobs. It is the Company practice to put 10% on the Factory Cost to cover AOH
and SOH and invoice the job to the customer on a total cost plus 20% basis. What would be the Invoice Price of these
three jobs?

Solution 23:
1. Factory Cost Statement of completed Jobs
Month Job No. Materials Labour FOH (80% of Labour Cost) Factory Cost
September 115 1,325 800 640 2,765
October 115 - (25 × 3) + (25 × 2) = 125 100 225
Total 1,325 925 740 2,990
September 118 810 500 400 1,710
October 118 515 (90 × 3) + (30 × 2) = 330 264 1,109

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Total 1,325 830 664 2,819

September 120 765 475 380 1,620
October 120 665 (75 × 3) + (10 × 2) = 245 196 1,106
Total 1,430 720 576 2,726

2. Invoice Price of Completed Jobs

Job No. 115 118 120
Factory Cost 2,990.00 2,819.00 2,726.00
Administration & Selling OH at 10% of Factory Cost 299.00 281.90 272.60
Total Cost 3,289.00 3,100.90 2,998.60
Add: Profit at 20% on Cost 657.80 620.18 599.72
Invoice Price 3,946.80 3,721.08 3,598.32

 Department Wise Overhead Estimation – Total Cost Estimation

Question 24. [RTP]

XYZ Ltd manufactures mechanical fittings which pass through three departments – Foundry, Machine Shop and
Assembling. The details of Wages and Production OH for the three Departments are as under –
Particulars Foundry Machine Shop Assembling Total
Direct Wages ₹ 10,000 ₹ 50,000 ₹ 10,000 ₹ 70,000
Production Overhead ₹ 5,000 ₹ 90,000 ₹ 10,000 ₹ 1,05,000

The Factory Cost for manufacturing “K” fitting was estimated as under –
Particulars Per unit (₹)
Materials 16
Labour: Foundry ₹ 2, Machine Shop ₹ 4, Assembling ₹ 2 8
Works Overheads at 150% of Direct Wages (₹ 70,000 ÷ ₹ 1,05,000 = 150%) 12
Factory Cost 36
Identify and correct the conceptual error in the calculation of Factory Cost as shown above.

Solution 24:
In the question, Overheads and Direct Wages are given separately for each department. However, a Blanket Overhead
Rate has been taken into consideration, while computing OH Costs. The use of Blanket Overhead Rate may not given an
accurate measurement of Costs. To arrive at a more realistic measure of Cost Department-wise Overhead Rate are
appropriate. These rates are calculated, i.e. , and the Factory Cost of the product is computed as below –

Particulars Per unit (₹)

Direct Materials 16.00
Direct Labour:
Foundry 2.00
Machine Shop 4.00
Assembling 2.00
Prime Cost 24.00
Add: Overheads:
Foundry { = 50% on Labour Cost of ₹ 2.00} 1.00

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 Unit, Job and Batch Costing BY: CA NITIN GURU

Machine Shop { = 180% on Labour Cost of ₹ 4.00} 7.20

Assembling { = 100% on Labour Cost of ₹ 2.00} 2.00

Total Cost 34.20

 EBQ and Related Computation

Question 25. [Study Material]

A Company has an annual demand from a single customer for 50,000 litres of a paint product. The total demand can be
made up of a range of colour to 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 single load immediately before production of the next colour commences.
The Set up costs are ₹ 100 per set up. The Service is supplied by an outside company as required.
The Holding costs are incurred on rented storage space which costs ₹ 50 per sq. meter per annum. Each square meter can
hold 250 Litres suitably stacked.
You are required to:
(i) CALCULATE the total cost per year where batches may range from 4,000 to 10,000 litres in multiples of 1,000 litres
and hence choose the production batch size which will minimize the cost.
(ii) Use the economic batch size formula to CALCULATE the batch size which will minimise total cost.

Cost and Profit Per Piece of Batch order – Overall Positions

Question 26. [STUDY MATERIAL]

A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six months. Every
month a batch order is opened against which materials and labour hours are booked at actuals. Overheads are levied at
a rate per labour hour. The selling price contracted for is ₹ 8 per piece. From the following data present the cost and
profit per piece of each batch order and overall position of the order for 1,200 pieces.
Month Batch Output Material cost (₹) Direct wages (₹) Direct labour hours
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320

The other details are:

Month Chargeable expenses (₹) Direct labour hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

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 Unit, Job and Batch Costing BY: CA NITIN GURU
Solution 26:
Particulars Jan. (₹) Feb. (₹) March (₹) April (₹) May (₹) June (₹) Total (₹)
Batch output (in units) 210 200 220 180 200 220 1,230
Sale value 1,680 1,600 1,760 1,440 1,600 1,760 9,840
Material cost 650 640 680 630 700 720 4,020
Direct wages 120 140 150 140 150 160 860
Chargeable expenses 600 672 672 621 780 800 4,145
Total cost 1,370 1,452 1,502 1,391 1,630 1,680 9,025
Profit per batch 310 148 258 49 -30 80 815
Total cost per unit 6.52 7.26 6.83 7.73 8.15 7.64 7.34
Profit per unit 1.48 0.74 1.17 0.27 -0.15 0.36 0.66

Overall position of the order for 1,200 units

Sales value of 1,200 units @ ₹ 8 per unit ₹ 9,600
Total cost of 1,200 units @ ₹ 7.34 per unit ₹ 8,808
Profit ₹ 792

 Miscellaneous Theory

Question 27. [NOV 04, MAY 06, MAY 08]

Distinguish between Job-Costing and Batch Costing

Solution 27:
Job Costing and Batch Costing
Accounting to job costing, costs are collected and accumulated according to job. 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 specification.

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.

Question 28.
Distinguish between Job Costing and Process Costing?

Solution 28:
Job Costing Process Costing
A Job is carried out or a product is produced by specific The process of producing the product has a continuous flow
orders. and the
product produced is homogeneous.
Costs are compiled on time basis i.e., for production of a
Costs are determined for each job. given
accounting period for each process or department.
Products lose their individual identity as they are
Each job is separate and independent of other jobs. manufactured in a
continuous flow.
Each job or order has a number and costs are collected
against The unit cost of process is an average cost for the period.

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 Unit, Job and Batch Costing BY: CA NITIN GURU

the same job number.

Costs are computed when a job is completed. The cost Costs are calculated at the end of the cost period. The unit
of a job cost of a
process may be computed by dividing the total cost for the
may be determined by adding all costs against the job. period by
the output of the process during that period.
As production is not continuous and each job may be Process of production is usually standardized and is
different, therefore, quite
so more managerial attention is required for effective
control. stable. Hence control here is comparatively easier.

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CA NITIN GURU
CA Nitin Guru is a Post Graduate in Commerce & Member of The Institute of Chartered
Accountants of India.

 He is a First Class Graduate from Delhi College of Arts and Commerce.

 He is a College Topper & Gold Medalist.
 His areas of specialization are Cost & Management Accounting, Financial Management,
Economics for Finance and Strategic Cost Management & Performance Evaluation.
 At young age, he has amassed vast experience of teaching over 25,000 students.
 His style of teaching, techniques and guidelines for preparing for examination are well accepted & acknowledged by all the
students. His friendly and interactive approach makes him popular amongst the students. CA Nitin Guru is a young &
dynamic teacher.
 He has maintained very high passing rate. He has been a Visiting Faculty to various Professional Institutes & MBA Colleges.

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