CA PANKAJSARAWAGI

Cost Accounting – CMA Inter

(VOLUME – 1)
 COST ACCOUNTING (CMA-INTER) 1
CA PANKAJ SARAWAGI

© CA. Pankaj Sarawagi.

All rights reserved.
No part of this book may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means of electronic, mechanical & photocopying or otherwise,
without the prior permission from the author.

While the Author & publishers have taken all reasonable care in the preparation of
this book to see that there are no errors. However, suggestions from students for
improvement in future editions are welcome.
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PREFACE

We have great pleasure in placing the book on Cost and Management

Accounting in the hands of students. This book gives a complete and overall
prospect about Cost and Management Accounting from examination point of
view and meets the requirements of all levels of students preparing for
CMA/CS/CA examination. The focus continues on equipping the students with
theories, concepts and techniques that can be applied to various spheres of
CMA/CS/CA professional.

The important features of this book are as follows:

❖ It is user friendly and provides information in well-structured manner.

❖ It incorporates latest changes relating to the subject.
❖ It elaborates the concept through practical problems.
❖ Tables and diagrams are used for explaining the key concepts.
❖ Lucid and comprehensive presentation of the complex and advanced
subjects matter will help the students in easy understanding.
❖ The book is comprehensive and even a student who has not studied the
subject earlier can easily understand the concept and system of Cost
Accounting.

There is no denying the fact that improvement is an unending process.

We look forward to the comments, suggestions and criticisms from the readers
for improvement of this book and will be gratefully acknowledged.
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DEDICATED TO
MY FATHER LATE SH. SAJJAN SARAWAGI
AND
MOTHER SMT. USHA SARAWAGI
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STUDENT NAME MARKS

Chesta 100
Chesta 96
AASTHA JUNEJA 95 (35TH RANK)
Sonu Rajarwal 95
Vibhav 92
Dheemant 86
Rupal 85
YASMEEN 84
Vibhav 80
CHARU GUPTA 80
JYOTI GUPTA 80
ANJU 79
Vibhav 78
Rajinder 76
Tamanna 75
Rupal 75
PAWAN SHARMA 75
SONAM GARODIA 75
Naina 74
Kanika 74
Pooja 74
Sanchit 73
Sonika 73
Dheemant 73
SAKSHI 73
Sakshi 72
Arun 72
ROHIT CHAUHAN 71
MANI MALIK 68 (ROLL NO. 378881)
Sumit 68
Tanya Singh 68
Devansh 67
FARHA 66
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ANUMITA BHALLA 66
NEHAL 66
PRIYA 66
Chander mandal 66
Yogesh 66
Anshu 66
Sumit 66
Anurag 66
Devansh 65
JYOTSNA 65
Prachi 65
SHREYA 65
Sakshi 65
Vivek 65
Aashish 65
Anjali 65
Yasmin 65
Anurag 64
Bhavna 64
Anjali 64
VINAYAK 64
Akanksha 61 (509427)
AYUSH JAIN 63
Nishit 63 (21st Rank)
Pratibha 63
JITENDRA 63
SILKY 62
RUPIN 62
ANKIT 62
Sakshi 62
Atul 62
SWETA SHARMA 62
UDAY JANGRA 61 (ROLL NO. 378909)
RESHMI 61
KAVISH 61
Karishma 61
Nikita 61
Shefali sharma 61
Soni Jain 61
Aashish 61
PRADEEP 61
POONAM 60
VISHAL 60
Mukul 60 (509420)
Tanya 60 (509438)
FIRST ROW IS WAITING FOR YOUR NAME
WISHING YOU ALL THE BEST…. CA. PANAKJ SARAWAGI
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S.NO. CONTENTS PAGE

NO.
7-18
1. Definitions, objectives, scope and
significance of cost accounting and its
relationship with financial accounting
and management accounting
19-30
1A. Cost object, Cost unit and cost centres
31-52
1B. CLASSIFICATION OF COSTS
53-74
2. COST SHEET
75-101
3. MATERIAL cost (CAS-6)
102-113
3A. VALUATION OF MATERIAL
114-137
4. EMPLOYEE COST (CAS-7)
138-142
4A. LABOUR TURNOVER
143-192
5. OVERHEADS
193-199
5A. COMPREHENSIVE MACHINE HOUR
RATE
200-204
5B. CAS – 10 Direct expenses
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“Direction is more important than speed.

We are so busy looking at our speedometers
that we forgot the MILESTONE”

Definitions, objectives, scope and

significance of cost accounting and its
relationship with financial accounting
and management accounting
FREQUENCY OF MARKS
(5-8 Marks) (T)
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Study Note – 1 Part - 1

Definitions, objectives, scope and
significance of cost accounting and its
relationship with financial accounting and
management accounting
"Individually, we are one drop.
But, together, we are an ocean"
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Sometimes God closes all doors & shuts all

the windows. During those times trust him
because may be there is storm outside and he
wants you safe.
Cost object, Cost unit and
Cost centres
FREQUENCY OF MARKS
(1-6 Marks)
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Study Note – 1 Part - 2

Cost object, cost unit and cost
centres – Elements of Cost
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You will definitely succeed in your life if you

follow all the advices that you give to others.

(1-7 Marks)
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Study Note – 1 Part - 3

CLASSIFICATION OF COSTS
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A seed grows with no sound, but a tree falls

with huge noise. Destruction has noise, but
creation is silent. Grow Silently.

(0-9 Marks)
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CHAPTER - 2
COST SHEET/COST STATEMENTS
"Individually, we are one drop.
But, together, we are an ocean"
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FORMAT OF COST SHEET

PARTICULARS AMOUNT COST PER UNIT
RAW MATERIAL CONSUMED:
Opening stock of raw material XX
+ Purchases XX
+ Freight Inward Xx
- Closing stock of raw material XX XXX
+ Direct wages/Manufacturing wages/Productive
Wages XX
+ Direct Expenses:
Royalty paid for production XX
Amortized cost of moulds and patterns XX
Job charges paid to job workers XX XX
PRIME COST XX XX
+ factory/works/production/manufacturing overheads:

Depreciation on factory building Xx

Depreciation on plant and machinery Xx
Factory rent Xx
Factory insurance Xx
Indirect/unproductive wages Xx
Indirect material (sandpaper) Xx
Lubricants, oil, coolants etc. Xx
Power Xx
Plant leasing cost Xx
Property taxes on plant Xx Xx
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GROSS FACTORY COST Xx Xx

+ opening stock of work-in-progress Xx
- closing stock of work-in-progress Xx
FACTORY COST Xx Xx
+ Quality control cost
Expenses paid for quality control Xx
check activities
Salary paid to quality control staff Xx xx
+ Research and development cost Xx
+ Administrative overheads (relating to production Xx
activity)
Expenses paid for administration of Xx
factory work
Salary paid to production control Xx xx
manager
- Credit for scrap Xx
+ Packing cost (primary) xx
COST OF PRODUCTION Xx Xx
+ opening stock of finished goods Xx
COST OF GOODS AVAILABLE FOR SALE Xx
- closing stock of finished goods Xx
COST OF GOODS SOLD Xx Xx
+ Administration overheads (General):
Depreciation on office building Xx
Repairs and maintenance paid for Xx
vehicles used by directors
Salary paid to manager – finance Xx
and accounts
Salary paid to general manager Xx
Fee paid to auditors Xx
Interest and finance charges paid Xx Xx
(If not related with equity fund)
+ selling overheads:
Discount on sales Xx
Advertisement Xx
Marketing promotion Xx
Marketing salaries Xx
+ Distribution overheads:
Depreciation on delivery vans Xx
Traveler’s wages and commission Xx
Carriage outwards Xx
COST OF SALES/TOTAL COST Xx Xx
+ profit Xx Xx
SALES Xx Xx
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"Cost is a fact, price is policy"

SIMPLE COST SHEET
Q. 1. A firm has purchased a plant to manufacture a new product, the cost data for
which is given below:
Estimated annual sales 24,000 units
Estimated costs: ` (per unit)
Material 4
Direct labor 0.60
Factory overheads 24,000 per year
Administration expenses 28,800 per year
Selling expenses 15% of sales
Calculate the selling price if profit per unit is ` 1.02.
ANS: ` 9.2 PER UNIT
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DETAILED COST SHEET
[ADJUSTMENT OF OPENING AND CLOSING STOCK OF FINISHED GOODS]
Q. 2. From the following prepare a cost sheet:
Cost of material ` 13 per unit
Labour cost ` 7.50 per unit
Factory overheads ` 45000
Administrative overheads ` 50000
Selling overheads ` 2.50 per unit sold
Opening stock of finished goods- 500 units @ ` 19.75
Closing stock of finished goods- 250 units
Sales 10250 units at a profit of 20 % on sales
ANS: NUMBER OF UNITS PRODUCED: 10,000; SALES: 4, 10,000; CLOSING STOCK:
7,500; COST PER UNIT: ` 30 PER UNIT
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Q. 3. From the following prepare a cost sheet:
Cost of material ` 15 per unit
Labour cost ` 7 per unit
Factory overheads ` 40000
Administrative overheads ` 40000
Selling overheads ` 2.50 per unit sold
Opening stock of finished goods- 500 units @ ` 20
Closing stock of finished goods- 250 units
Sales 10250 units at a profit of 20 % on sales
ANS: NUMBER OF UNITS PRODUCED: 10,000; COST PER UNIT: ` 30 PER UNIT;
CLOSING STOCK: 7,500; SALES: 4, 10,156;
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Q. 4. Prepare a cost sheet from the following data to find out profit and cost per unit:
Amount (`)
Raw materials consumed 1, 60,000
Direct wages 80,000
Factory overheads 16,000
Office overheads 10% of factory cost
Selling overheads 12,000
Units produced (Qty.) 4,000
Units sold (Qty.) 3,600
Selling price per unit ` 100
ANS: PROFIT: 94560, COST P.U.:70.4, CL.STOCK:28160.
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[ADJUSTMENT OF OPENING AND CLOSING STOCK OF WIP]
Q. 5. The following information has been obtained from the records of AJIT
Corporation for the period from June 1 to June 30, 2009.
01-06-2009 30-06-2009
Cost of raw materials 60,000 50,000
Cost of WIP 12,000 15,000
Cost of stock of finished goods 90,000 1, 10,000
Purchase of raw materials during June 2009 4, 80,000
Wages paid 2, 40,000
Factory overheads 1, 00,000
Administration overheads 50,000
Selling and distribution overheads 25,000
Sales 10, 00,000
Prepare a statement giving the following information:
(1) Raw materials consumed.
(2) Prime cost.
(3) Factory costs.
(4) Cost of goods sold.
(5) Net profit.
ANS: RAW MATERIAL CONSUMED: 4,90,000; PRIME COST: 7,30,000; FACTORY
COSTS: 8,27,000; COST OF GOODS SOLD: 8,57,000; PROFIT: 1,18,000
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Q. 6. From the following particulars of a manufacturing firm, prepare a statement
showing:
1. cost of materials used,
2. Prime cost,
3. Works cost,
4. cost of production,
5. cost of sales,
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6. Profit earned.
Stocks of materials on 1st Jan. 2014 40,000
Purchases 11, 00,000
Stocks of finished goods on 1st Jan. 2014 50,000
Stocks of work-in-progress on 1 Jan. 2014
st
35,000
Productive wages 5, 00,000
Works overhead charges 1, 50,000
Office and administration overheads 90,000
Selling and distribution overheads 60,000
Stock of materials on 31 Jan. 2014
st
1, 40,000
Stock of finished goods on 31st Jan. 2014 60,000
Stock of work-in-progress on 31 Jan. 2014
st
25,000
Sales 22, 50,000
ANS: (1) 10,00,000; (2) 15,00,000; (3) 16,60,000; (4) 17,50,000 (5) 18,00,000; (6)
4,50,000;
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Q. 7. The following has been obtained from the records of ABC CO. ltd. For the month
of JUNE, 2014:
`
Cost of raw materials on 1 June, 2014
st
30,000
Purchase of raw materials during the month 4, 50,000
Wages paid 2, 30,000
Factory overheads 92,000
Cost of WIP on 1 June 2014
st
12,000
Cost of raw materials on 30 June 2014
th
25,000
Cost of WIP on 30 June 2014
th
15,000
Cost of stock of finished goods on 1 June 2014
st
60,000
Cost of stock of finished goods on 30 June 2014
th
55,000
Administrative overheads 30,000
Selling and distribution overheads 20,000
Sales 9, 00,000
Prepare:
1. Cost sheet showing the cost of production of goods manufactured.
2. Statement showing the cost of sales and the profit earned.
ANS: COST OF PRODUCTION: 8, 04,000; COST OF SALES: 8, 29,000; PROFIT:
71,000;
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Q. 8. Prepare a cost sheet from the following:
Sales 8,00,000
Material 1-1-2014 40,000
Material 31-12-2014 32,000
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Work-in-progress 1-1-2014 55,000

Work-in-progress 31-12-2014 72,000
Finished goods 1-1-2014 64,000
Finished goods 31-12-2014 1,51,300
Material purchased 1,52,000
Direct labour 1,45,000
Manufacturing overheads 1,08,000
Selling expenses 50,000
General office expenses 40,000
ANS: PROFIT: 4, 01,300;
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EXPENSES INCLUDED IN INDIVIDUAL OVERHEADS
Q. 9. From the following prepare the cost sheet:
Total production 5000 tons
Cost of raw materials 2000000
Carriage inwards 200000
Direct wages 2000000
Indirect wages 100000
Office expenses 1000000
Selling overheads 1000000
Payments of income tax 300000
Dividend paid 500000
A profit of 50 % on cost is desired.
ANS: SALES: 94, 50,000;
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Q. 10. Prepare the cost sheet to show the total cost of production and cost per unit
of goods manufactured by a company for the month of July 2009. Also find out the
cost of sales.
Amount (`)
Stock of raw materials (1-7-2009) 3,000
Raw materials purchased 28,000
Stock of raw materials (31-7-2009) 4,500
Manufacturing wages 7,000
Depreciation on plant 1,500
Loss on sale of a part of plant 300
Factory rent and rates 3,000
Office rent 500
General expenses 400
Discount on sales 300
Advertisement expenses 600
Income tax paid 2,000
The number of units produced during July, 2009 was 3,000.
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The stock of finished goods was 200 and 400 units on 1-7-2009 and 31-7-2009
respectively. The total cost of units on hand on 1-7-2009 was ` 2,800.
ANS: COST OF PRODUCTION: 38,900. COST P.U.:12.97. COST OF SALES: 37,413.
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Q. 11. The following details have been obtained from the cost records of comet
paints limited:
Amount (`)
Stock of raw materials on 01-09-2009 75,500
Stock of raw materials on 30-09-2009 91,500
Direct wages 52,500
Indirect wages 2,750
Sales 2, 11,000
WIP on 01-09-2009 28,000
WIP on 30-09-2009 35,000
Purchases of raw materials 66,000
Factory rent rates and power 15,000
Depreciation of plant and machinery 3,500
Expenses on purchases 1,500
Carriage outwards 2,500
Advertising 3,500
Office rent and taxes 2,500
Travelers wages and commission 6,500
Stock of finished goods on 01-09-2009 54,000
Stock of finished goods on 30-09-2009 31,000
Prepare a cost sheet giving the maximum possible break up of costs and profits.

ANS:
Cost sheet of comet paints
Particulars `
Raw material consumed:
Opening stock of raw material 75,500
(+) Purchases 66,000
(+) expenses on purchases 1,500
(-) closing stock of raw material 91,500 51,500
direct wages 52,500
Prime cost 1,04,000
(+) factory overheads:
Indirect wages 2,750
Rent 15,000
Depreciation 3,500 21,250
Gross factory cost 1,25,250
(+) opening stock of WIP 28,000
(-) closing stock of WIP 35,000
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Net factory cost 1,18,250

(+) office overheads
Rent 2,500
Cost of production 1,20,750
(+) opening stock of finished goods 54,000
(-) closing stock of finished goods 31,000
Cost of goods sold 1,43,750
(+) selling and distribution overheads:
Carriage outward 2,500
Advertising 3,500
Traveler’s wages and commission 6,500 12,500
Cost of sales 1,56,250
(+) profit (bal. fig.) 54,750
Sales 2,11,000
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Q.12. From the following prepare a cost sheet:
`
Raw materials 6,000
Direct wages 5,000
Factory overheads 2,400
Opening stock of finished goods 800 (200 kg)
Closing stock of finished goods (400 kg)
Sale of finished product 20,000 (3,000 kg)
Advertising and selling expenses 1,475
Profit desired is 30% on sales.
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Q. 13. the cost of sale of Product P is made up as follows:
Amount (`)
Materials used in manufacturing 54,000
Materials used in primary packing 10,000
Materials used in selling the product 1,500
Materials used in factory 750
Materials used in office 1,250
Labor required in producing 10,000
Labor required for supervision of factory 2,000
Direct expenses 5,000
Indirect expenses- factory 1,000
Administration Expenses 1,250
Depreciation on office building 750
Depreciation on Factory building 1,750
Selling expenses 3,500
Freight on material purchased 6,000
Advertising 1,250
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Assuming that all the products manufactured are sold, what should be the selling
price to obtain a profit of 20% on selling price?
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Q. 14. The sonal chemicals company supplies you the following details from the cost
accounts:
Particulars `
Stock of raw material on January 1, 2020 1,50,000
Stock of raw material on January 31, 2020 1,80,000
Direct wages 1,25,000
Indirect wages 6,000
Work in progress January 1, 2020 56,000
Work in progress January 31, 2020 30,000
Purchases of raw material 1,60,000
Factory rent, rates and power 50,000
Depreciation of plant and machinery 7,000
Carriage inward 3,000
Carriage outward 2,000
Advertising 5,000
Office rent 10,000
Traveler’s wages 12,000
Stock of finished goods January 1, 2020 (1,000 units) 54,000
Stock of finished goods January 31, 2020 (2,000 ?
units)
Bad debts 1,000
Interest on hire purchase installment 2,000
Prepare a cost sheet giving the cost and profits. The company wants to have a profit
of 25% on cost. The units manufactured during the month were 10,000 units.
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Q. 14A. Vipul ltd. submits the following information on 31st March, 2020:
Particulars `
Sales for the year 55,00,000
Purchases of material for the year 22,00,000
Direct labour 13,00,000
Inventories at the beginning of the year:
Finished goods 1,40,000
WIP 80,000
Material 60,000
Inventories at the end of the year:
Finished goods 1,60,000
WIP 1,20,000
Material 80,000
Factory overheads 60% of direct labour cost
Administration expenses 5% of sales
Selling and distribution expenses 10% of sales
You are required to prepare a cost sheet with all elements. (June 2019)
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Q. 14B. The following details are available from the books of SHUBHAN Ltd. for the
year ending March 31, 2020:
`
Direct wages 6,00,000
Purchase of materials 7,20,000
Other materials 36,000
Carriage (not related to purchase) 8,640
Wages of foreman and stock keeper 48,000
Other indirect wages 6,000
Cost of research and experiments 30,000
Office manager salary 72,000
Employees state insurance 6,000
Power, fuel and haulage 54,000
Drawing office expenses 36,000
Printing and stationary 12,000
Counting house salary 12,000
Sales 18,00,000
Stock as on 01-04-2019:
Raw materials 1,20,000
Work in progress 28,800
Finished product (6,000 units) 97,500
Stock as on 31-03-2020:
Raw materials 1,33,440
Work in progress 96,000
Finished product (12,000 units)
Income tax 22,000
Donation 5,000
Selling and distribution expenses are to be charged at ` 1 per unit. During the year
2019-20 units produced were 96,000. Based on the above information, you are required to
answer the below mentioned 4 questions.
(1) What is the amount of total prime cost shown in the cost sheet for the year 2019-20?
(A) ` 13,06,560
(B) ` 14,55,000
(C) ` 14,56,100
(D) ` 14,60,000

(2) The works cost per unit shown in the cost sheet is:
(A) ` 15
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(B) ` 15.16
(C) ` 15.80
(D) ` 16

(3) Total cost of production of 96,000 units shown in the cost sheet for the year 2019-20
will be:
(A) ` 14,55,360
(B) ` 15,30,120
(C) ` 15,60,000
(D) ` 15,68,000

(4) What is the amount of profit per unit earned by the company as per cost accounts for
the year 2019-20?
(A) ` 3.1
(B) ` 3.05
(C) ` 2.75
(D) ` 2.5 (December 2020)
Ans: (1) 13,06,560 (2) 15.16 (3) 15,60,000 (4) 2.75
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CLASSIFICATION COST ON THE BASIS OF BEHAVIOUR
Q. 15. X ltd. has received an enquiry for the supply of 1000 premium shirts. The
costs are estimated as under:
Raw materials 2,500 mtr @ ` 40 per mtr
Direct wages 10,000 hrs @ ` 4 per hr.
Variable overheads factory ` 2.40 per labour hr.
Selling and distribution ` 16,000
Fixed overheads factory ` 6,000
Selling and distribution ` 14,000
Prepare a cost sheet showing the price to be quoted per shirt which results in a profit
of 20% on selling price.
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Q. 16. The following data are available from the books and records of VEEMYES Ltd.
For the month of November 2017:
Direct labour cost ` 20,000 (125% of factory overheads)
Inventory accounts show the following figures:
November 1 (`) November 30 (`)
Raw materials 10,000 20,000
Work in progress 8,000 4,000
Finished goods 10,000 5,000
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Selling expenses 15,000

Office expenses 10,000
Sales 1,25,000
The company maintains a profit of 25% on cost.
You are required to prepare a cost sheet for the month of November 2017 with all
elements. (June 2018)
---------------------------------------------------------------------------------------------
Q. 17. Z ltd. Manufactures and sold 200 typewriters in the year 2017. Its summarized
trading and profit & loss account for the year 2017 is as follows:
Total output (in units) 200
Particulars ` Particulars `
To cost of material consumed 1,20,000 By sales 6,00,000
To direct wages 1,80,000
To manufacturing charges 75,000
To gross profit c/d 2,25,000
6,00,000 6,00,000
To management expenses 90,000 By gross profit b/d 2,25,000
To general expenses 30,000
To rent, rates and taxes 15,000
To selling expenses 45,000
To net profit 45,000
2,25,000 2,25,000
For the year 2018, it is estimated that:
(1) The output and sales will be 300 typewriters.
(2) Price of material will rise by 25% compared to previous year level.
(3) Wages per unit will rise by 10%.
(4) Manufacturing charges will increase in proportion to the combined cost of
material and wages.
(5) Selling expenses per unit will remain unchanged.
(6) Other expenses will remain unaffected by the rise in output.
Required:
Prepare a cost sheet showing the cost at which typewriters will be manufactured in
2018 and give price at which it should by marketed so as to show profit of 10% on
selling price. (December 2018)
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BRAIN+

"The sweetest couple in the world is SMILE &

TEARS.
They meet rarely but when they meet the moment
becomes unforgettable"
ITEMS INCLUDED IN INDIVIDUAL OVERHEADS
Q. 1. The following details have been obtained from the cost records of comet paints
limited:
`
Stock of raw materials on 01-09-2012 75,500
Stock of raw materials on 30-09-2012 91,500
Direct wages 52,500
Indirect wages 2,750
Sales 2, 11,000
WIP on 01-09-2012 28,000
WIP on 30-09-2012 35,000
Purchases of raw materials 66,000
Factory rent rates and power 15,000
Depreciation of plant and machinery 3,500
Expenses on purchases 1,500
Carriage outwards 2,500
Advertising 3,500
Office overheads (production activity) 2,500
Travelers wages and commission 6,500
Stock of finished goods on 01-09-2012 54,000
Stock of finished goods on 30-09-2012 31,000
Prepare a cost sheet giving the maximum possible break up of costs and profits.

Ans:
Cost sheet of comet paints
Particulars `
Raw material consumed:
Opening stock of raw material 75,500
(+) Purchases 66,000
(+) expenses on purchases 1,500
(-) closing stock of raw material 91,500 51,500
direct wages 52,500
Prime cost 1,04,000
(+) factory overheads:
Indirect wages 2,750
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Rent 15,000
Depreciation 3,500 21,250
Gross factory cost 1,25,250
(+) opening stock of WIP 28,000
(-) closing stock of WIP 35,000
Net factory cost 1,18,250
(+) office overheads (production activity) 2,500
Cost of production 1,20,750
(+) opening stock of finished goods 54,000
(-) closing stock of finished goods 31,000
Cost of goods sold 1,43,750
(+) selling overheads
Advertising 3,500
(+) Distribution overheads:
Carriage outward 2,500
Traveler’s wages and commission 6,500 9,000
Cost of sales 1,56,250
(+) profit (bal. fig.) 54,750
Sales 2,11,000
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"Life is a song - sing it.

Life is a game - play it.
Life is a challenge - meet it.
Life is a dream - realize it.
Life is a sacrifice - offer it.
Life is love - enjoy it"

(0-14 marks)
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CHAPTER-3
MATERIAL COST (CAS-6)
Quantity discount is discount allowed to the
bulk purchase.
PROCUREMENT PROCEDURES
Procurement is the purchase of goods and services at the best possible price to meet
a purchaser’s demand in terms of quantity, quality, dimensions and site. It means
that the goods/services are appropriate and that they are procured at the best
possible cost in terms of quality and quantity, time, and location. Every business
should define procurement processes intended to promote fair and open competition
while minimizing exposure to fraud and collusion.

Every business/firm has standard procurement procedures for getting goods or

services. These procedures cover all aspects of the procurement cycle, including the
selection of the supplier, contract negotiations, order placement and payment. All
firms have procurement procedures and they are used to control spending activity,
ensure appropriate approvals are in place and reduce the risk of overpayment. An
appropriate approval procedure is to limit access to the purchase order forms and
require signed authorization from a competent person.

Paymen
Plannin Quality
t
g

Order Material Procurement Specification

placin procedure

Selection of
Price
supplier
determinatio
n or

PROCUREMENT DOCUMENTATION
Documents which are involved in the procurement are called procurement
documents. Procurement documents serve an important aspect of the organizational
element in the project process. It is a kit which is used in process bidding and
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submitting project proposals. In a simple way, these are the contractual relationship
between the purchaser and the supplier of goods or services.

The procurement documents will differ according to type of contract which will be
executed. Basically procurement documents include of all documents that serve as
invitations to tender, solicit tender offers and establish the terms and conditions of a
contract. Generally these documents may be required for procuring any
good/services, which as are under:

Modificatio
Request for
n
proposal

Procurement Request for

Contrac
document information
t

Order Request for

quotation
Type of document Description
Request for proposal (RFP) It is an early stage in a procurement process.
Purchaser issues an invitation to supplier for
submitting a proposal on a particular goods or service
often through a bidding process.
Request for information (RFI) A request for information (RFI) is a standard business
process whose purpose is to collect written
information about the capabilities of various
suppliers. Normally it follows a format that can be
used for comparative purposes. It is a proposal
requested from a prospective seller or a service
provider to determine what products and services are
potentially available in the marketplace to meet a
buyer's needs and to know the capability of a seller
in terms of offerings and strengths of the seller.
Request for quotation (RFQ) A request for quotation (RFQ) is a standard business
process whose purpose is to invite suppliers into a
bidding process to bid on specific products or
services. RFQ, generally means the same thing as IFB
(Invitation For Bid). An RFQ typically involves more
than the price per item. Information like payment
terms, quality level per item or contract length are
possible to be requested during the bidding process.
These may serve as a binding contract.
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Offers This type of procurement documents are bids,

proposals, and quotes made by potential suppliers to
prospective clients.
Contracts Contracts refer to the final signed agreements
between clients and suppliers.
Amendments/Modifications This refers to any changes in solicitations, offers and
contracts. Amendments/ Modifications have to be in
the form of a written document.

STOCK VERIFICATION
Stock verification is the process of checking/verifying the stock physically held in
warehouse in terms of quantity and quality. It is required to provide an audit of
existing stock valuation. It is also the source of stock discrepancy information. Stock
verification may be performed as an intensive annual check or may be done
continuously by means of a cycle count. In short it refers to the process of physically
checking the quantities of different items of material available in stock in a warehouse
and tallying these physically available quantities with the quantities shown in stores
stock records.

Depending on timing of physical check of the quantity in stock, different types of

stock verification can be designed. The common types of stock verification systems
are as under:

Stock verification system

Periodic stock Perpetual stock

verification verification

It is done at predetermined periodical intervals, In this system the stock of

e.g. many businesses do their stock verification every item is verified every
just before the financial year end (i.e. March 31) time there is an issue or
so that the final accounts of the business will receipt transaction for the
reflect the accurate position of stocks. In this item. This means a much
system all items in the stock is divided in 12 stricter control over
groups and a particular month is fixed for stock physical stock.
verification of the items in the group.

ADVANTAGES OF PERPETUAL INVENTORY SYSTEM

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Availability of Easy detection

Better control
correct stock of errors
over stores
data
No interruption of
Advantages of production process
Easy to prepare
Perpetual Inventory
interim accounts Acts as internal
System
check

Accurate and upto date Early detection of Investment in

accounting records loss of stock material kept under
control

s.no. Heading Description

1. Easy detection of Errors and frauds can be easily detected at an early date.
errors It helps in preventing their occurrence.
2. Better control The system exercises better control over all receipts and
over stores issues in such a manner so as to give a complete picture
of both quantities and values of stock in hand at all times.
3. No interruption of Production process is not interrupted as the physical
production verification of stock is made on a planned and regular
process basis.
4. Acts as internal Under the system, records are made simultaneously in
check the bin cards and stores ledger accounts which acts as a
system of internal check for detection of errors as and
when they are committed.
5. Investment in The investment in materials is kept at a minimum level as
materials kept the actual stock is continuously compared with the
under control maximum level and minimum level.
6. Early detection of Loss of stock due to shrinkage, evaporation, accident,
loss of stock fire, theft, etc. can be easily detected.
7. Accurate and up- Due to continuous stocktaking, the store-keeper and
to-date stores accountant become more vigilant in their works
accounting and they maintain accurate and up-to-date records.
records
8. Easy to prepare It is possible to prepare periodical profit and loss account
interim accounts and balance sheet without physical stock-taking being
made.
9. Availability of Correct stock data is readily available for settlement of
correct stock insurance claims.
data

ECONOMIC ORDER QUANTITY (EOQ)

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It is also known as re- order quantity. Where the purchase price is constant
irrespective of the quantity purchased EOQ could be computed using Wilson formula.
In case of multiple purchase prices price break model has to be followed.

Economic order quantity (EOQ)

Wilson Formula
Price Break model

This is the purchasing quantity fixed in such a way as to minimize the total cost of
inventory. It basically denotes the order size. There are two components of
inventory costs–cost of acquisition and cost of possession.

The cost of acquisition is also referred to as Ordering cost which is expressed as

amount per purchase order. This cost includes clerical and administrative expenses
in relation to purchase requisition, quotations, comparative statements and
handling of purchase orders and supplier bills.

The cost of possession means the cost of maintaining or carrying inventory. This is
normally expressed as a percentage of the material cost. This normally covers
interest, handling and upkeep, stores rent.

It is important to understand the relationship between these two categories of

costs. The relationship between ordering costs and carrying costs is reverse.

So if the purchase quantity per order increases, the ordering costs will reduce but
the carrying costs will increase and vice versa. The tradeoff between these two costs
will represent the most economical ordering quantity. At EOQ level ordering and
carrying cost will be equal.
Where: Wilson Formula of EOQ C = Cost per
A= Annual consumption
unit x given
O= Cost per order;
%
C= Carrying or Holding cost per EOQ = √ (2*A*O)/C
unit per annum.

Total annual ordering cost ═ Total annual carrying cost

Note: (1) At EOQ the sum of total annual ordering cost and total annual carrying
cost will be minimum.
(2) Total annual ordering cost = (A/Order size) x O
(3) Total annual carrying cost = 1/2 x Order size x C

PRICE BREAK MODEL

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Price Break model

Calculate Total annual inventory cost at various order size

Total annual Total annual Total annual

purchase cost ordering cost carrying cost

Note: (1) Select the order size having the least total annual inventory cost.
(2) Price break model should only be used when there is price difference according
to lot size.
(3) Total annual purchase cost = A x cost per unit

Note: Other Formulas:

(1) Number of orders = A/Order size
(2) Optimum period of supply/gap between two orders= no. of periods in a year/no.
of orders.

COMPUTATION OF STOCK LEVELS

Re-order level

Danger level
Minimum stock level
Stock
levels

Average stock level Maximum stock level

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RE-ORDERLEVEL

Re-Order Level (ROL)

It indicates the level of stock at which new purchase order should be placed.
This level is fixed between minimum and maximum stock levels.

No safety stock Safety stock

ROL = Maximum consumption ROL = (Average consumption x

x Average lead time) + Safety
Maximum lead time stock

Note: (1) Safety stock is also known as buffer stock.

(2) Safety stock means an allowance that covers forecasting errors.
(3) Lead time is also known as Re-order period (ROP) or delivery period or
procurement time or replenishment time or supply period.
(4) Lead time indicates the time gap between placing of order and receiving of
material.
(5) Average consumption = (Minimum consumption + Maximum consumption)/2
Or
Annual consumption/Number of operating periods in a year
(6) Average Lead time = (Minimum Lead time + maximum Lead time)/2

MINIMUM LEVEL

Minimum Level

It indicates the lowest level of stock below which stocks are not permitted to
fall. This level is below the ROL.

Minimum level = ROL – (Average consumption x Average Lead time)

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MAXIMUM LEVEL

Maximum Level

It indicates the highest level of stock above which stocks are not permitted to
cross. This level is above the ROL.

Maximum level = ROL + EOQ – (Minimum consumption x Minimum Lead time)

AVERAGE STOCK LEVEL

Average stock Level

It indicates the quantity of material to be maintained on an average for the

whole year in store.

Average stock level = (Minimum level + Maximum level)/2

Or
½ (Re-order quantity) + Minimum Stock level

Note: The answers from these formulas may be different.

DANGER LEVEL

Danger level

This is fixed below the minimum level. This situation should be avoided as far as
possible, as emergency purchases will always cost more.

Danger level = Average consumption x lead time during emergency purchase

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TREATMENT OF SHORTAGES

Shortages

If physical quantity is less than recorded in stores ledger

Treated as issue in stores ledger

Normal O Abnormal

Cost is spread over Cost is transfer to

the good stock costing P/L A/c

Waste V
Scrap
s

Basic raw material lost Incidental residue from

in processing certain types of manufacture

Having some recoverable

No recoverable value
value

May be visible or Visible

invisible

Normal Abnormal

Charged from the good

units Transfer to costing P/L A/c
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INVENTORY TURNOVER RATIOS (ITR)

Inventory turnover ratio This ratio indicates how fast or slow the
(ITR) company consumes its material.

ITR = Raw material consumed Higher the ratio, better it is.

Average raw material

It is represented in number of High ratio

Low ratio
times.
Fast moving
Slow moving

Note: (1) Raw material consumed = Opening stock of raw material + Purchases –
Closing stock of raw material
(2) Average raw material = (Opening stock of raw material + Closing stock of raw
material)/2

ABC ANALYSIS

ABC It is an analytical method of inventory control which aims at

analysis concentrating efforts in those areas where attention is
required the most.

The cost of control should not be more than the cost of item
itself.

This method decides the degree of control required.

Materials are divided into three categories:

Category A Category B Category C

Value High (70%) Moderate (20%) Low

(10%)
Qty. Low Moderate (20%) High (70%)
(10%)
Note: (1) The % are not rigid and may be changed as per circumstances.
Q. Explain ABC analysis.
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VED analysis
VED stands for Vital, Essential and Desirable- analysis is used primarily for control of spare
parts. The spare parts can be classified in to three categories i.e., Vital, Essential and
Desirable- keeping in view the criticality to production.
Vital The spares, stock-out of which even for a short time will stop the
production for quite some time, and where in the stock-out cost is very
high are known as Vital spares.
For a car Assembly Company, Engine is a vital part, without the engine
the assembly activity will not be started.
Essential The spares or material absence of which cannot be tolerated for more
than few hours or a day and the cost of lost production is high and which
is essential for production to continue are known as Essential items.
For a car assembly company ‘Tyres’ is an essential item, without fixing
the tyres the assembly of car will not be completed.
Desirable The Desirable spares are those parts which are needed, but their absence
for even a week or more also will not lead to stoppage of production.
For example, CD player, for a car assembly company.

Q. Vital, essential and desirable (VED) analysis is used primarily for control of spare
parts.
(A) The statement is true;
(B) The statement is false;

JUST IN TIME
• Just in time (JIT) is a production strategy that improve a business return on
investment by reducing in-process inventory and associated carrying costs.

• In short, the Just-in-Time inventory system focuses on “the right material, at

the right time, at the right place, and in the exact amount”.

Advantages of JIT
1. Increased emphasis on supplier relationships.
2. • Supplies come in at regular intervals throughout the production day.
• Supply is synchronized with production demand.
• When parts move directly from the truck to the point of assembly, the
need for storage facilities is reduced.
3. • Reduces the working capital requirements, as very little inventory is
maintained.
4. • Minimizes storage space.
5. • Reduces the chance of inventory obsolescence or damage.

Q. Explain ‘Just in time’ (JIT) approach of inventory management. (December 2020)

Q. Match the following: (December 2019)

Column I Column II
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1. JIT A. Replacement method

B. Cost of utilities
C. Production strategy
D. Direct expenses

Q. Production strategy:
(A) Total sales less BEP sales
(B) CAS-18
(C) Just-in-time
(D) Kilowatt hour (December 2020)

Purchase Requisition Request by the production department to purchase

department for purchase of required materials.

It contains information of:

3 copies: • Specification;
Original = Purchasing department • Qty of material required;
Duplicate = Production Department • Timing of material
Triplicate = Authorized executive required;

Material Control
The function of ensuring that sufficient goods are retained in stock to meet all
requirements without carrying unnecessarily large stocks.

Objectives of a system of material control

(a) To make continuous availability of materials so that there may be uninterrupted
flow of materials for production. Production may not be held up for want of materials.
(b) To purchase requisite quantity of materials to avoid locking up of working capital
and to minimize risk of surplus and obsolete stores
(c) To make purchase competitively and wisely at the most economical prices so that
there may be reduction of material costs
(d) To purchase proper quality of materials to have minimum possible wastage of
materials
(e) To serve as an information centre on the materials knowledge for prices, sources
of supply, lead time, quality and specification.
Q. Describe the main objective of material control system. (December 2019)

Q. _____ is discount allowed to the bulk purchase.

(A) cash discount
(B) Quantity discount
(C) Rebate
(D) None of the mentioned options (December 2020)
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"Sometimes we have to keep quiet, swallow our pride and

accept that we are wrong. It is not giving up.
It is called growing up"
STOCK LEVELS
RE-ORDER LEVEL
Q. 1. Calculate re-order level from the following:
Usages rate 25 to 75 units per week
Re- order period 4 to 6 weeks
ANS: 450 UNITS;
---------------------------------------------------------------------------------------------
Q. 2. The maximum and minimum lead time is 4 weeks and 3 weeks respectively. If
the maximum and minimum weekly consumption is 25 units and 20 units
respectively, the re-ordering level will be —
(A) 100 Units
(B) 110 Units
(C) 120 Units
(D) 140 Units.
Ans: 100 units;
---------------------------------------------------------------------------------------------
MINIMUM STOCK LEVEL
Q. 3. Find out minimum stock level if:
Consumption 70-100 units per day
delivery period 2-6 days
---------------------------------------------------------------------------------------------
MAXIMUM STOCK LEVEL
Q. 4. Calculate:
(1) Re-order level,
(2) Maximum stock level,
(3) Minimum stock level
From the information of material A as given below:
Re-order quantity 3,600 units
Re-order period:
Minimum 3 weeks
Maximum 5 weeks
Maximum consumption 900 units per week
Minimum consumption 300 units per week
ANS: (1) 4,500; (2) 7,200; (3) 2,100;
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AVERAGE STOCK LEVEL
Q. 5. Calculate average stock level from the information of material A as given below:
Re-order quantity 3,600 units
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Re-order period:
Minimum 3 weeks
Maximum 5 weeks
Maximum consumption 900 units per week
Minimum consumption 300 units per week
---------------------------------------------------------------------------------------------
Q. 6. From the following information, calculate Re-order quantity:
Maximum re-order period 8 weeks
Average stock 400 units
Average usage 50 units per week
Maximum usage 80 units per week
Averages re-order period 6 weeks
ANS: 120 UNITS, USE AVERAGE STOCK LEVEL FORMULA TO FIND OUT RE-ORDER
QUANTITY
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Q. 7. The following information is available in respect of material number 30:
Re-order quantity 1,500 units
Re-order period 4 to 6 weeks
Maximum consumption 400 units per week
Normal consumption 300 units per week
Minimum consumption 250 units per week
Calculate:
(1) Re-order level;
(2) Minimum level;
(3) Maximum level;
(4) Average stock level
ANS: (1) 2,400 UNITS; (2) 900 UNITS; (3) 2,900 UNITS; (4) 1,900 UNITS;
---------------------------------------------------------------------------------------------
Q. 8.
Raw Usage per Re-order Price per Delivery Order Minimum
materials unit of quantity kg. Re. period level kg. level kg.
product kg. (weeks)
per 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
Weekly production varies from 175 to 225 units, averaging 200. What would you
expect the quantities of the following to be?
(1) Minimum stock of A.
(2) Maximum stock level of B.
(3) Re-order level of C.
(4) Average stock level of A? (December 2019)
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DANGER LEVEL
Q. 9. In a manufacturing company, a material is used as follows:
Maximum consumption 12000 units per week
Minimum consumption 4000 units per week
Normal consumption 8000 units per week
Reorder quantity 48,000 units
Time required for delivery:
Minimum 4 weeks
Maximum 6 weeks
Emergency 3 weeks
Calculate:
(1) Re-order level
(2) Minimum level
(3) Maximum level
(4) Danger level
(5) Average stock level.
ANS: (1) 72,000 UNITS (2) 32,000 UNITS (3) 1, 04,000 UNITS (4) 24,000 UNITS (5)
68,000 UNITS.
---------------------------------------------------------------------------------------------
ECONOMIC ORDER QUANTITY
Q. 10. A company usage 2,500 units of a material per month, cost of placing an order
is ` 150. The cost per unit is ` 20. The re-order period is 4 to 8 weeks. The minimum
consumption of raw material is 100 units whereas the average consumption is 275
units. The carrying cost of inventory is 20% p.a.
Calculate:
1. Re-order quantity
2. Re-order level
ANS: (1) 1,500; (2) MAXIMUM CONSUMPTION: 450 UNITS; RE-ORDER LEVEL: 3,600
UNITS;
------------------------------------------------------------------------------------------------
Q. 11. From the following information calculate EOQ.
Monthly demand 200 units
Unit price `5
Order cost per order ` 12
Storage cost 2 % p.a.
Interest rate 10 % p.a.
ANS: 310;
---------------------------------------------------------------------------------------------
Q. 12. The following details are available in respect of a firm:
(1) Annual requirement of inventory 40,000 units
(2) Purchase cost per unit Rs. 16
(3) Carrying cost 15% per year
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(4) Cost of placing order Rs. 480 per order

Determine the EOQ.
ANS: 4,000 UNITS.
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Q. 13. About 50 items are required every day for a machine. A fixed cost of Rs. 50
per order is incurred for placing an order. The inventory carrying cost per item
amounts to Rs. 0.02 per day. The lead period is 32 days. Compute:
(1) Economic order quantity
(2) Reorder level.
ANS: (1)500 UNITS (2)1600UNITS.
--------------------------------------------------------------------------------------
Q. 14. AMIT Ltd. manufactures a special product, which requires Z. the following
particulars were collected for the year 2018-2019:
(1) Monthly demand of Z 7,500 units
(2) Cost of placing an order Rs. 500
(3) Re-order period 5 to 8 weeks
(4) Cost per unit Rs. 60
(5) Carrying cost % per annum 10%
(6) Normal usage 500 units per week
(7) Minimum usage 250 units per week
(8) Maximum usage 750 units per week
Required:
(1) Re-order quantity
(2) Re-order level
(3) Minimum stock level
(4) Maximum stock level
(5) Average stock level.
(1) 3873UNITS (2) 6,000 (3) 2,750 (4) 8,623 (5) 5,687.
---------------------------------------------------------------------------------------------
Q. 15. You are required to calculate the following levels for part no. 123456 from the
information given there under:
(1) Re-ordering level
(2) Maximum level
(3) Minimum level
(4) Danger level
(5) Average stock level.
The following data may be used to calculate the re-ordering quantity.
Rs.
Total cost of purchasing relating to the order 20
Purchase price per unit including transportation 50
Annual cost of storage of 1 unit 5
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Number of units to be purchased during the year 5000

Lead times average 10 days

Maximum 15 days
Minimum 6 days
Max for emergency purchase 4 days
Rate of consumption average 15 units per day
Maximum 20 units per day
ANS: (1) 300 (2) 440 (3) 150 (4) 60 (5) 295 UNITS. EOQ=200 UNITS.
---------------------------------------------------------------------------------------------
Q. 16. Find out the economic order quantity (EOQ) from the following information:
Quarterly demand 1,200 units
Cost of placing an order ` 48
Cost per unit ` 24
Carrying cost as a % of average inventory 12%
---------------------------------------------------------------------------------------------
Q. 17. DEEPA Ltd manufactures a product A. The following particulars were collected
for the year 2012:
Cost of placing an order ` 400
Annual carrying cost per unit ` 32
Normal usage 300 units per month
Minimum usage 100 units per month
Maximum usage 600 units per month
Re-order period 4 to 8 months
Compute from the above:
(1) Re-order level;
(2) Minimum level.
---------------------------------------------------------------------------------------------
Q. 18. Sonal tubes ltd are the manufacturers of picture tubes for TV. The following
are the details of their operations during 2013-14. The consumption is 1,300 per
quarter.
Ordering cost ` 100 per order
Inventory carrying cost 20% per annum
Cost of tubes ` 500 per tube
Normal usage 100 tubes per week
Maximum usage 125 tubes per week
Minimum usage 75 tubes per week
Re-order period 6 to 8 weeks
You are required to calculate:
(1) Economic order quantity;
(2) Re-order level;
(3) Minimum level of stock;
(4) Maximum level of stock;
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Q. 19. A manufacturer requires 800 units of a certain component monthly. This is
currently purchased from a regular supplier at ` 50 per unit. The cost of placing an
order is ` 60 per order and annual carrying cost is ` 5 per piece. What is the economic
order quantity (EOQ) for placing order?
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Q. 20. A company manufactures 5,000 units of a product per month. The purchase
price of raw material is ` 20 per kg. the re-order period is 4 to 8 weeks. The
consumption of raw materials varies from 200 kg to 600 kg per week. The cost of
placing an order is ` 100. The carrying cost of inventory is 20% per annum. You are
required to calculate:
(1) Re-order quantity of material;
(2) Re-order level.
(Assume 50 weeks in a year).
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Q. 21. Medical Aids company manufactures a special product A. the following
particulars were collected for the year 2009:
Cost of placing an order ` 100
Annual carrying cost per unit ` 15
Normal usage 50 units per week
Minimum usage 25 units per week
Maximum usage 75 units per week
Re-order period 4 to 6 weeks
Compute from the above:
(1) Re-order quantity;
(2) Re-order level;
(3) Minimum level;
(4) Maximum level;
(5) Average stock level;
(weeks in a year 52)
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EOQ AND NUMBER OF ORDERS
Q. 22. From the following calculate economic order quantity and the number of orders
to be place per quarter.
Quarterly consumption 2,000 K.G
Cost of placing an order Rs. 50
Cost per unit Rs. 4
Storage cost 80% of average inventory
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Q. 23. From the following information, calculate economic order quantity and the
number of orders to be placed per quarter of the year for product X:
Quarterly consumption of material 2000 K.G
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Cost of placing an order Rs. 50

Cost per unit Rs. 40
Storage cost 80% on average inventory
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Q. 24. From the following information, calculate economic order quantity and the
number of orders to be placed per quarter of the year for product X:
Quarterly consumption of material 2000 K.G
Cost of placing an order Rs. 50
Cost per unit Rs. 4
Storage cost 80% on average inventory
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FREQUENCY OF ORDER
Q. 25.
Annual consumption of material 4,000 kg
Ordering cost per order `5
Material cost per unit ` 2 per kg
Carrying cost 8%
Calculate:
(1) EOQ;
(2) Number of orders per year;
(3) Frequency of orders in a year.
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ANNUAL TOTAL CARRYING COST
Q. 26. The annual carrying cost of material ‘X’ is ` 3.6 per unit and its total carrying
cost is `9,000 per annum. What would be the Economic order quantity for material
‘X’, if there is no safety stock of material X?
ANS: 5,000 UNITS.
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RELEVANT COST/VARIABLE COST/SYSTEM COST/SCIENTIFIC COST
Q.27. ANUJA ltd. is committed to supply 24,000 bearings per annum to Y ltd. on
steady basis. It is estimated that it costs 10 paisa as inventory holding cost per
bearing per month and that the ordering cost per order of bearing is `324.
(1) What would be the EOQ for bearing?
(2) Calculate relevant cost.
ANS: (1) 3,600 BEARINGS (2) COST=4,320.
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Q. 28. Using the following data, obtain the EOQ and the total variable cost/ relevant
cost associated with the policy of ordering quantities of that size:
Purchase cost of annual demand ` 20,000
Ordering cost ` 150 per order
Inventory carrying cost 24% of average inventory value `1
ANS: EOQ=5,000 UNITS, COST= ` 1,200.
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Q. 29. 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 ` 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 ` 40
per pack within a three days lead time. The ordering and related cost is ` 8 per order.
The storage cost is10% per cent per annum of average inventory investment.
Required:
(1) Calculate Economic Order Quantity.
(2) Calculate number of orders needed every year.
(3) Calculate the total cost of ordering and storage bowls for the year.
(4) Determine when the next order should to be placed. (Assuming that the company
does not maintain a safety stock and that the present inventory level is 333 packs
with a year of 360 working days)
ANS: (1) 400 PACKS. (2) 100 ORDERS PER YEAR. (3) 1,600. (4) IMMIDIATELY.
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Q. 30. Compute EOQ and the total variable cost for the following:
Annual demand 5,000 units
Unit price ` 20
Order cost ` 16
Storage rate 2% p.a.
Interest rate 12% p.a.
Obsolescence rate 6% p.a.

Ans: EOQ = 200 units; Total variable cost = 800;

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EXTRA COST INCURRED WHEN ORDER SIZE IS OTHER THAN EOQ
Q. 31. ANKUSH ltd. produces a product which has a monthly demand of 4,000 units.
The product requires a component X which is purchased at `20. For every finished
product, one unit of component is required. The ordering cost is ` 120 per order and
the holding cost is 10% p.a.
You are required to calculate:
(1) EOQ.
(2) If the minimum lot size to be supplied is 4,000 units, what is the extra cost,
the company has to incur?
(3) What is the minimum carrying cost, the company has to incur?
ANS: (1) 2,400 UNITS (2) 4,800. 5,440 EXTRA COST=640. (3) ` 2,400.
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Q. 32. A firm is using an EOQ system of inventory replenishment for one of its
purchased items, which has a known annual demand of 48,000 units with a near
uniform rate of consumption. The cost of placing an order is ` 250. The cost of the
item is `5 per unit. The firm uses an inventory carrying rate of 30% per annum.
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(1) Find the optimum order quantity, the number of order per year, and the system
cost.
(2) If the lead time (i.e. the time between the placement and delivery) is 10 days
no safety stock is kept and the year is taken as 300 days, find the re-order point.
(3) If for administrative reasons the firm wishes to place orders only once in three
months, how much extra cost will the firm incur on this policy.
ANS: (1) 4,000 UNITS. 12. 6,000. (2) 1,600 UNITS. (3) COST AT ORDER SIZE
12,000= 10,000, EXTRA COST= 4,000.
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Q. 33. ARCHANA plumbing supply company stocks thousands of plumbing items sold
to regional plumbers, contractors, and retailers. Mr. ARJUN, the firm’s general
manager, wonders how much money could be saved annually if EOQ were used
instead of the firm’s present rules of thumb. He instructs Mr. VISHAL the cost
accountant of the company to conduct an analysis of one material only to examine if
significant savings might result from using the EOQ. Mr. VISHAL develops the
following estimates from accounting information:
Annual demand 10,000 units
Present order quantity 400 values per order (present order
quantity)
Carrying cost `4 per unit per year
Ordering cost ` 55 per order
ANS: EOQ=524 UNITS. COST AT EOQ= 2099. COST AT ORDER SIZE 400= 2,175.
SAVING=76.
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CALCULATION OF TOTAL ANNUAL INVENTORY COST
Q. 34. Following information relating to a type of raw materials is available:
Annual demand 2400 units
Ordering cost per order `4
Unit price ` 2.40
Storage cost 2% per annum
Interest rate per annum 10%
Lead time half month
Calculate EOQ and total annual inventory cost.
ANS: EOQ=258 UNITS. TOTAL COST=5,834.
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Q. 35.The following information relating to a type of Raw material is available:
Annual demand 2000 units
Unit price ` 20.00
Ordering cost per order ` 20.00
Storage cost 2% p.a
Interest rate 8% p.a
Lead time half-month
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Calculate economic order quantity and total annual inventory cost of the raw
material.
ANS: EOQ=200 UNITS. TOTAL ANNUAL INVENTORY COST: 40,400.
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SELECTION BETWEEN EOQ AND SUPPLIER’S OFFER
Q. 36. A Company manufactures a special product which requires a component
‘ALPHA’. The following particulars are collected for the year 2010:
Annual demand of ALPHA 8,000 units
Cost of placing an order `200 per order
Cost per unit of ALPHA ` 400
Carrying cost % per annum 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:
(1) Compute the Economic order quantity.
(2) Advise whether the quantity discount offer can be accepted. (SM)
ANS: (1) 200 UNITS (2) COST AT EOQ=3216000, ORDER SIZE 4,000=32, 26,000.
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Q. 37. Your factory buys and uses a component for production at `10 per piece.
Annual requirement is 2,000 numbers. Carrying cost of inventory is 10% per annum.
Ordering cost is ` 40 per order. The purchase manager agrees that as the ordering
cost is very high, it is advantageous to place a single order for the entire annual
requirement. He also says that if we order for 2,000 numbers at a time, we get a 3%
discount from the supplier. Evaluate this proposal and make your recommendations.
ANS: EOQ=400 UNITS. COST AT EOQ= 20,400. AT ORDER SIZE 2,000=20.410.
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Q. 38. 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 is as follows:
Cost of material ‘X’ ` 20 per kg
Cost of placing an order ` 1000 per order
Carrying cost 15% per annum of average inventory
You are required:
(1) Calculate the economic order quantity for material ‘X’.
(2) Should the company accept an offer of 2% discount by the supplier, if he wants
to supply the annual requirement of material ‘X’ in 4 equal quarterly installments?

Ans: (1) 8,000 kgs; (2) Cost at EOQ = 19, 44,000; Cost at discount offer: 19, 20,880;
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Q. 39. PC Company purchases a specialized item and the quantity to be purchased is
2,500 pieces at a price of `200 per piece. Ordering cost per order is `200 and carrying
cost is 2% per year of the inventory cost. Normal lead time is 20 days and safety
stock is nil. Assume yearly working days as 250.
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(1) Calculate the Economic Ordering Quantity.

(2) Re-order Inventory Level.
(3) If a 2% discount on price is given for order quantity 1,250 pieces or more in a
lot, should the company accept the offer of discount?
(CMA INTER DECEMBER 2013)
Ans: EOQ = 500 units; reorder level = 200 units; total annual inventory cost at EOQ
= 5, 02,000; total annual inventory cost at order size 1,250 = 4, 92,850;
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Q. 40. ALCHEM manufacturer produces a product which requires a component costing
` 1,000 per unit. Other information related to the component are as under:
Usage of component 1,500 units per month
Ordering cost ` 75 per order
Storage cost rate 2% per annum
Obsolescence rate 1% per annum
Maximum usage 400 units per week
Lead time 6-8 weeks
The firm has been offered a quantity discount of 5% by the supplier on the purchase
of component, if the order size is 6,000 units at a time.
You are required to compute:
(1) Economic order quantity;
(2) Re-order level;
(3) Advise whether the discount offer be accepted by the firm or not.
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Q. 41. BSLIMITED is manufacturing a special product which requires a component
“SKY BLUE”. The following particulars are available for the year ended 31st March,
2018:
Annual demand of “SKY BLUE” 12,000 units
Cost of placing an order ` 1,800
Cost per unit of “SKY BLUE” ` 640
Carrying cost per annum 18.75%
The company has been offered a quantity discount of 5% on the purchase of “SKY
BLUE” provided the order size is 3,000 components at a time.
You are required to:
(1) Compute the Economic order quantity;
(2) Advise whether the quantity discount offer can be accepted;
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CALCULATION OF DISCOUNT %
Q. 42. A company manufactures a product from a raw material, which is purchased
at ` 80 per kg. Every order incurs a handling charge of `370 plus a freight charge of
` 380. The incremental cost is ` 0.25 per kg per month to store a unit in inventory.
In addition, the cost of working capital finance on investment in inventory of raw
material is ` 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.
(1) Calculate the economic order quantity of raw material.
(2) Advise, how frequently company should order for procurement be placed.
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(3) If the company proposes to rationalize placement of orders on quarterly basis,

what % of discount in the price of raw materials should be negotiated?
Assume 360 days in a year.
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PRICE BREAK MODEL
Q. 43. ANSHUL ltd. has received an offer of quantity discount on its order of materials
as under:
Price per ton (`) tones number
9600 less than 50
9360 50 and less than 100
9120 100 and less than 200
8,880 200 and less than 300
8640 300 and above
The annual requirement for the material is 500 tons. The ordering cost per order is
`12,500 and the stock holding cost is estimated at 25% of the material cost per
annum.
Required:
(1) Compute the most economical purchase level.
(2) Compute EOQ if there are no quantity discounts and the price per ton is `
10,500.
ANS: (1) 5004250, 4863500, 4736500, 4693250, 4664833. (2) 69 TONS.
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Q. 44. ANSHUL ltd. has received an offer of quantity discount on its order of materials
as under:
Price per ton (`) tones number
4,800 less than 50
4,680 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 tons. The ordering cost per order is
`6,250 and the stock holding cost is estimated at 25% of the material cost per annum.
Required:
(1) Compute the most economical purchase level.
(2) Compute EOQ if there are no quantity discounts and the price per ton is `
5,250.
ANS: 25, 68,250. 24, 31,750. 23, 68,250. 23, 46,625. 23, 32,417.
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Q. 45. A hardware store procures and sells hardware items. Information in an item
is given below:
Expected annual sales 8000 units
Ordering cost `180 per order
Holding cost 10% of the average inventory value
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The item can be purchased according to the following schedule:

Lot size unit price (`)
1-999 22
1000-1499 20
1,500-1999 19.50
2000 and above 18.50
You are required to determine best order size.
ANS: 179430, 162440, 158423, 150570.
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INVENTORY TURNOVER RATIO
Q. 46. The following details are provided by M/s SKU Enterprises for the year ended
31st March, 2018:
Particulars Material M (`) Material N (`)
Stock as on 01-04-2017 6,00,000 10,00,000
Stock as on 31-03-2018 4,50,000 7,25,000
Purchases during the year 9,50,000 18,40,000
You are required to:
(1) Calculate turnover ratio of both the materials;
(2) Advise which of the two materials is fast moving. (Assume 360 days in a year).

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Q. 47. Calculate the material turnover ratio for the year 2008 from the following
details:
Particulars Material X Material Y
Opening stock 25,000 87,500
Closing stock 15,000 62,500
Purchases 1, 90,000 1, 25,000
Determine the fast moving material.
Ans: X: 10TIMES, Y: 2TIMES. FAST MOVING: X.
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Q. 48. Calculate the material turnover ratio for the year 2008 from the following
details:
Particulars Material X Material Y
Opening stock 10,000 9,000
Closing stock 6000 11,000
Purchases 52,000 27,000
Determine the fast moving material.
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Q. 49. The opening stock, closing stock and purchases of materials were respectively
10,000, 16,000 and 84,000 during a production period. Compute the inventory
turnover ratio. (CMA INTER JUNE 2014 NEW)
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Q. 50. The opening stock, closing stock and materials consumed were respectively
10,000, 16,000 and 78,000 during a production period. Compute the inventory
turnover ratio.
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CALCULATION OF PURCHASE COST PER UNIT
Q. 51. A consignment consisted of two chemicals A and B. The invoice gave the
following data:
`
Chemical A 4 tones at ` 5.00 per kg 20,000
Chemical B 2 tones at ` 2.00 per kg 4,000
GST 1,200
Freight 900
Total 26,100
A shortage of 2 quintals in A and 1 quintal in B was noticed and it was considered
normal. What rate per kg would you adopt for pricing issues assuming provision of
20% towards further deterioration?
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Q. 52. 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:
Invoice `
200 units part no. A32 @ ` 5 1,000
Less: 20% discount 200
800
Add: GST @ 15% 120
920
Add: Packing charges (5 non-returnable boxes) 50
970
Note:
(1) A 2% discount will be given for payment in 30days.
(2) Documents substantiating payment of GST is enclosed for claiming input tax
credit.
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"By associating with wise people you will

become wise yourself."

VALUATION OF MATERIAL
 COST ACCOUNTING (CMA-INTER) 103
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CHAPTER – 3A
VALUATION OF MATERIAL
VALUATION OF MATERIAL ISSUES
The material received and stored in the warehouse is intended to be used for issue
to production. There will be several receipts and numerous issues of the items of
material and this is an ongoing activity. In an over simplified version, if all receipts
of a particular item of material have the same landed cost per unit, then there won’t
be any discussion on valuation. But in real world this is not so. Prices do fluctuate in
the market as the material may be bought from different vendors, indifferent
quantities, from different states which may result in different landed cost for the
same item.

The methods of valuation are:

FIRST-IN-FIRST-OUT (FIFO) METHOD
This method assumes that the material received first is consumed first. This is
only an assumption for the purpose of taking rates for valuing issues. The physical
flow may not necessarily coincide with this assumption. For issue valuation, the
rate of the earliest available lot is considered first and when the lot gets fully
consumed, the rate of next available is taken and so on.

BENEFITS: The method is simple and easy to operate. It results in valuation of

closing stock at latest prices. It can be conveniently applied if transactions are
not too many.

DISADVANTAGES: The calculations become complicated if the receipts are too many.
Companies having the JIT system will face this problem more.

APPLICATION: The method is applied in the industry where it is necessary to

ensure the physical flow as per the principle of FIFO. In pharmaceuticals or
chemical factories where the raw material has a shelf life, the principle of FIFO
must be followed.

LAST-IN-FIRST-OUT (LIFO) METHOD

This method assumes that the material received last is consumed first. This is
only an assumption for the purpose of taking rates for valuing issues. The
physical flow may not necessarily coincide with this assumption. For issue
valuation, the rate of the latest available lot is considered first and when the lot
gets fully consumed, the rate of the earlier available is taken and so on. This is
exactly re- verse of the FIFO method.

BENEFITS: The method is also simple and easy to operate. It results in valuation
of cost of production at latest prices. It can be conveniently applied if transactions
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are not too many.

DISADVANTAGES: The calculations become complicated if the receipts are too many.
Companies having the JIT system will face this problem more.

APPLICATION: The method is applied in the process type of industry where material
moves in lots from one process to the other and the individual identity of material
is not important .E.g. oil refineries, sugar mills, flourmills etc.

Q. what are the conditions that favor the adoption of LIFO method of
material pricing?
Ans: The conditions are:
➢ During a period of substantial price rise the use of LIFO method of pricing
would help to ensure that the cost of production determined is approximately the
current one.
➢ When there is a feeling that due to use of FIFO or average methods the profit
shown and tax paid are too high.

IMPLICATIONS OF THE FIFO AND LIFO METHOD

FIFO method LIFO method
Increasing prices:
Material Cost Lower Higher
Closing Stock value Higher Lower
Decreasing prices:
Material Cost Higher Lower
Closing Stock value Lower Higher

Q. Explain FIFO and LIFO method of store issue.

AVERAGE METHOD
Both the above methods consider the actual costs for valuation of issues and
stocks. However, both the methods are equally cumbersome if number of
transactions is very large and prices fluctuate too much; which will happen in a
longer term.

There may be wide variations in the value of cost of production and closing stock
by using FIFO or LIFO method.

To reduce the impact of such wide variation in the valuations and also to bring
about an equivalence in the cost charged to production & cost included in closing
stock, the system of using average rates may be applied. In average method, the
actual rates are not used, but the average rates are used.

There are two methods of averaging–simple average and weighted average. Let us
see how both these methods work and what their implications are:

SIMPLE AVERAGE METHOD

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It is also called as moving simple average method.

Under this method, the rates of various receipts are averaged out. The rates of
various receipts are added and this total is divided by total number of receipts.
The issue price is thus worked out by a simple formula:

Sum of units prices of materials in stock

Issue Price = ------------------------------------------------------
Number of purchases

A simple average of prices of lots available for issue is taken as ‘issue price’. After
the receipt of a new lot, a new average price is taken. It should be remembered
that for deciding the possible lots out of which the issues could have been made,
the method of FIFO is followed.

BENEFITS: The method is also simple and easy to operate. It results in valuation
of cost of production at average prices, thus reducing the fluctuations caused in
the methods based on actual costs. It can be conveniently applied if purchases
are made in identical lots.

DISADVANTAGES: The material and stock values do not reflect actual costs. Here
also if prices fluctuate widely, the cost of production may seem to vary, thus
vitiating results.

It is difficult to verify the closing stock figure lot-wise. The method considers only
rates and has no regard for the quantities held.

APPLICATION: The method is applied where prices do not vary much.

WEIGHTED AVERAGE METHOD

This method removes the limitation of simple average method in that it also takes
into account the quantities which are used as weights in order to find the issue
price. This method uses total cost of material available for issue divided by the
total quantity available for issue.

The formula applied is:

Total value of materials in stock

Issue Price = ------------------------------------------
Total no. of units in stock

The benefits of weighted average price are more or less similar to that of simple
average method, except for the fact that use of quantities as weights refines the
average mechanism to make it more equivalent.

Q. Define replacement price and standard price. Discuss the objectives

of these methods of pricing of materials and state the circumstances in
which they are used.
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Ans: Replacement price is defined as the price at which it is possible to purchase

an item, identical to that which is being replaced or revalued.
A standard price may be defined as a predetermined price fixed for a specified
period on the basis of all factors which may affect future price.
Under replacement price method, materials issued are valued at the replacement
costs of the items. This method pre-supposes the determination of the replacement
cost of the materials at the time of each issue, i.e. the cost at which identical
materials could be currently purchased. The product cost under this method is at
current market price which is the main objective of the replacement price method.
Replacement price method is used to value material issues in periods of rising prices
because the cost of material considered in cost of production would be able to
replace the materials at the increased price. This method is used to find the true
cost of production.
The fixation of standard price takes into account the quantity of materials to be
purchased, possibility of price fluctuations , etc. the standard price is used for
comparison with actual prices from period to period and to measure the efficiency
of the purchase of materials. This is used in conjunction with standard costing
system for control purposes and is a tool to the management if fluctuations in prices
are not violent.

BIN CARD

Bin card Quantity only

Record of receipts, issues and closing balances of items of stores

Separate bin card for each item

GRN = Goods received note

Maintained by storekeeper

The bin card is posted as and when transaction takes place.

Received material are recorder in bin card from

GRN
FORMAT OF BIN CARD
Code no. Level of stock
Description: Maximum:
Unit of quantity: Minimum:
Location code: Danger:
Re-order:
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Ordering qty.
Date Doc. No. Receipts Issues Balance On order Reserved

STORES LEDGER

Stores Ledger Quantity and value

Record of receipts, issues and closing balances of items of stores

Maintained by costing department

Transactions recorded on periodic intervals

FORMAT OF STORES LEDGER

Item code Normal stock level
Description Minimum stock level
Location Maximum stock level
Bin number Re-order level
Date Particulars Receipt Issues balance
Q R A Q R A Q R A
X X X X X X X X X
Q = Quantity
R = rate
A = amount

COMPARISON OF BIND CARD AND STORES LEDGER ACCOUNT

Bin card Stores ledger
Maintained by store keeper in store. Maintained by costing department.
Contains only quantity of material Contains both quantity and cost of
received, issued and returned. material.
Bin cards are updated instantly with Posting in stores ledger is done at
each receipt and issue. periodic intervals.
Each transaction is posted quickly. Transactions are summarized and
posted at intervals.

Q. D w ‘B ’ ‘S ’.

MATERIAL REQUISITION NOTE

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• Material Requisition is a document issued by a department in charge

requesting the Storekeeper to issue certain materials to a job.
• It is an important document as it authorizes issue of materials from stores and
thereby should be authenticated by appropriate authority.
• This document enables the Accounts Department to value the issue of the
materials to find out the cost of materials issued.
• The storekeeper uses this department to check total item wise issues made by
him during a certain period by adding up the details of issue from this document.

Q. In job costing, which of the following documents is used to record the issue
of direct materials to a job?
(A) Goods receipt note
(B) Purchase order
(C) Purchase requisition note
(D) Material requisition note (December 2019)

True/False
Q. Bin card is a record of both quantities and value. (December 2019)
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VALUATION OF MATERIAL ISSUES

FIFO METHOD
Q. 1. From the following information prepare store ledger account as per FIFO
method:
January 2019
1 opening balance 500 units @ ` 25 P.U.
3 Issue 70 units
4 Issue 100 units
8 Issue 80 units
13 Received 200 units @ ` 24 per unit
14 Returned to store, 15 units @ 24 P.U.
16 Issue 180 units
20 Received 240 units @ ` 24.75 per unit
24+ Issue 304 units
25 Received 320 units @ ` 24 per unit
26 Issue 112 units
27 Returned to store, 12 units @ ` 24.50 P.U.
28 Received 100 units @ ` 25 per unit
On 15 January there was a shortage of 5 units. Again it was found a shortage of 8
th

units on 27th January.

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LIFO
Q. 2. From the following information prepare store ledger account as per LIFO and
FIFO method:
Date Receipts (Qty.) Rates (Rs.) Issue (Qty)
1-1-2019 1000 1
10-1-2019 260 1.05
20-1-2019 700
21-1-2019 400 1.15
22-1-2019 300 1.25
23-1-2019 620
24-1-2019 240
25-1-2019 500 1.10
26-1-2019 380
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Q. 3. From the following information with regard to the month of January, 2019,
prepare stores ledger A/c under FIFO system. Also calculate the value of closing stock
under FIFO and LIFO method.
Jan. 1 Opening stock 200 pieces @ ` 2 each
Jan. 5 Purchases 100 pieces @ ` 2.2 each
Jan. 10 Purchases 150 pieces @ ` 2.4 each
Jan. 20 Purchases 120 pieces @ ` 2.5 each
Jan. 22 Issues 150 pieces
Jan. 25 Issues 100 pieces
Jan. 27 Issues 100 pieces
 COST ACCOUNTING (CMA-INTER) 110
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Jan. 28 Issues 200 pieces

---------------------------------------------------------------------------------------------
Q. 4. The following summarized information is available from the records of Oil Ltd.
for the month of March, 2020:
Sales for the month ` 19,25,000
Opening stock as on 01.03.2020 1,25,000 litres @ 6.50
Closing stock as on 31.03.2020 1,30,000 litres
Purchases (Including freight and insurance):
Date Quantity (litres) Rate (`)
05.03.2020 1,50,000 7.10
27.03.2020 1,00,000 7
Indirect expenses 45,000
From the above information you are required to calculate using FIFO and LIFO:
(1) Value of closing stock as on 31.03.2020;
(2) Cost of goods sold during March, 2020;
(3) Profit or loss for March, 2020;
(A detailed stores ledger account is not required. Only relevant figures need to be
calculated). (June 2017)
---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE METHOD
Q. 5. The following transactions took place in respect of a material item:
Receipt quantity Rate Issue quantity
March 2 200 units 2 -
March 10 300 units 2.40 -
March 15 - - 250 units
March 18 250 units 2.60 -
March 20 - - 200 units
Prepare a stores ledger sheet using:
(1) LIFO method,
(2) Weighted average method.
---------------------------------------------------------------------------------------------
Q. 6. Prepare a Stores Ledger Account from the following transactions assuming that
the issues have been priced on the principle of weighted average method.
Jan. 2 Received 4,000 units at ` 4 per unit
Jan. 20 Received 500 units at ` 5 per unit
Feb 5 Issued 2,000 units
Feb. 10 Received 6,000 units at ` 6 per unit
Feb. 12 Issued 4,000 units
Mar. 2 Issued 1,000 units
Mar 5 Issued 2,000 units
Mar 15 Received 4,500 units at ` 5.5 per unit
May 20 Issued 3,000 units
---------------------------------------------------------------------------------------------
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Q. 7. Show how the items given below relating to purchase and issues of raw material
will appear in the stores ledger using LIFO, FIFO and Weighted average methods of
pricing the materials issues.
2019 Particulars Units Price per unit (`)
Jan. 1 Opening balance 3,000 20
Jan. 5 Purchases 2,000 22
Jan. 11 Issue 1,500 ?
Jan. 22 Purchases 2,000 23
Jan. 24 Issue 1,500 ?
Jan. 28 Issue 2,000 ?
Jan. 31 Shortage 50 ?
----------------------------------------------------------------------------------------
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BRAIN+
FIFO AND LIFO METHOD
Q. 1. Prepare a store ledger account from the following transactions of DREAM
company ltd.:
April,2011 Opening balance 200 units @ `10 per
1 unit
5 receipt 250 units costing `2,000
8 receipt 150 units costing `1,275
10 Issue 100 units
15 receipt 50 units costing `500
20 Shortage 10 units
21 receipt 60 units costing `540
22 Issue 400 units
The issues up to 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced
at FIFO.
Shortage will be charged as overheads.

Ans: Stores ledger account of DREAM company ltd.:

Date Particulars Receipt Issues Balance
April, Q P A Q P A Q P A
2011
1 Opening - - - - - - 200 10 2,000
balance
5 Receipt 250 8 2,000 - - - 200 10 2,000
250 8 2,000
8 Receipt 150 8.5 1,275 - - - 200 10 2,000
250 8 2,000
150 8.5 1,275
10 Issue (LIFO) - - - 100 8.5 850 200 10 2,000
250 8 2,000
50 8.5 425
15 Receipt 50 10 500 - - - 200 10 2,000
250 8 2,000
50 8.5 425
50 10 500
20 Shortage - - - 10 10 100 190 10 1,900
(FIFO)
250 8 2,000
50 8.5 425
50 10 500
21 Receipt 60 9 540 - - - 190 10 1,900
250 8 2,000
50 8.5 425
 COST ACCOUNTING (CMA-INTER) 113
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50 10 500
60 9 540
22 Issue (FIFO) - - - 190 10 1,900 40 8 320
210 8 1,680 50 8.5 425
50 10 500
60 9 540
 COST ACCOUNTING (CMA-INTER) 114
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"Whenever you want to know how rich you are,

do not count your coins, drop a tear and
count how many hands reach out to wipe that.
That is true richness!"

(0-14 Marks)
 COST ACCOUNTING (CMA-INTER) 115
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CHAPTER – 4
EMPLOYEE COST (CAS – 7)

"People may not believe what you say! But, they will always
believe what you done! So prove your excellence in action better
than in words"
INTRODUCTION

Employee cost Important element of cost while calculating cost

of production and cost of services.

- Basic wages
Aim of management:
- Dearness
• Maximum labour productivity
allowance
• Minimum labour cost per unit
- leave salary
• Proper control over utilization of work force
- Employer’s
contribution to PF
- Employer’s The decision in the areas of employees may be:
contribution to ESI • Manpower planning;
- Expenditure on • Recruitment;
amenities to labour • Training and development;
- Overtime • Salaries, wages and benefits;
- Bonus • Low labour turnover

The following information is required for calculation of employee cost:

- Piece rate – Time rate – standard time
– Acrual time – Actual output – standard output
The above information is collected from job card of the employee.

Other information regarding deduction from salary collected from various

departments:
- Employee’s contribution to PF - Employee’s contribution to ESI
- Repayment of loan by the employee - Recovery of advances, penalties
- Recovery for goods - Income tax to be deducted
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ACCOUNTING OF LABOUR COST

Time
keeping

Allocation of Accountin Computation

payroll cost g of labour of payroll
cost

CONTROL OF LABOUR COST

In a large organization, the control of labour cost involves the coordinated efforts of
the following departments:–
Personnel deptt.

Control of Industrial engineering deptt.

Cost deptt.
labour
cost

Payroll deptt.
Time office deptt.

Personnel department This department is responsible for manpower planning,

recruitment, training, maintaining records of staff and
workmen and reporting to chief inspector of factories and
to top management on performance, overtime,
absenteeism, leave, etc.
Industrial engineering This department prepares plans and specifications of each
department job, supervises production activities, undertakes time and
motion studies, performs job-analysis, etc.
Time-office This department is primarily responsible for collection of
data relating to attendance, time spent on jobs or process
by the workmen, and providing information on attendance
and leave to Payroll department.
Payroll department This department is responsible for computing total and net
earnings of each worker, preparation of payroll and
maintenance of various records relating to payroll.
Cost department This department collects and classifies all cost data relating
to labour utilization by departments, and allocates them to
respective job or process as per available documents.

Q. Motion and time study is conducted by the:

(A) Time keeping department
(B) Personnel department
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(C) Payroll department

(D) Engineering department (December 2020)

TIME RECORDING

Time recording

Time keeping Time booking

Objectives: Objectives:
• pay-roll preparation; • To apportion overheads against jobs
• for calculation of overtime • To find out that the time utilized by
• finding out the labour cost the worker is proper
• for determining idle time • To evaluate labour performance
• for controlling labour cost
 Disc methods Bio metric attendance system

Token number is allotted to each In COST

this method attendance
ACCOUNTING is recorded
(CMA-INTER) 118
employee. When employee enter in the through employee fingerSARAWAGI
CA PANKAJ print or face
factory he will remove the token from the recognition or retina etc.
board and leave it in a box.

METHODS OF TIME BOOKING

Daily time sheet Weekly time sheet Job cards

Under this method, a daily In this method time is Job Card is a method of
time sheet is provided to recorded for all the recording details of time
each worker on which time jobs done during the with reference to the jobs
spent by him on various week. One sheet is or work orders
work orders is mentioned. allotted to each undertaken by the
This method can be worker. It involves workers. This method
conveniently used if the less paper work. facilitates the
worker works on various Method is useful for computation of labour
jobs of short duration like in construction work. cost with reference to
maintenance jobs. jobs or work orders.

OVERTIME COST

Overtime Working getting extended beyond normal working hours is

known as overtime. Such payments are made usually at a
higher rate (normally at double rate). Overtime payment
includes normal rate plus overtime premium.

Treatment of
Overtime

(1) If overtime is worked on specific jobs at the request of the customer, the cost is booked as
a direct labour cost on that job.
(2) If it is done regularly throughout the year due to labour shortage the wages rate should
be inflated as follows:
Wages rate = Total wages including overtime cost/Total hours including overtime
(3) If overtime is due to abnormal reasons, then overtime cost should be transfer to costing
profit and loss account.
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ATTENDANCE AND PAYROLL PROCEDURE

STATEMENT OF EMPLOYEE COST
Particulars `
Basic wages Xx
Dearness allowance Xx
Employer’s Contribution to provident fund Xx
Employer’s Contribution to employees state insurance Xx
Expenditure on amenities to labour Xx
Leave salary Xx
Overtime wages Xx
Bonus Xx
Total wages Xx

STATEMENT OF EMPLOYEE EARNINGS

Particulars `
Basic wages Xx
Dearness allowance Xx
Expenditure on amenities to labour Xx
Leave salary Xx
Overtime wages Xx
Bonus Xx
(-) Employees contribution to PF Xx
(-) Employees contribution to ESI Xx
Employee earnings xx
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IDLE TIME AND ITS TREATMENT

Idle Time Idle time refers to the time for which workers or staff members are
present on the work location, but no work is carried out. It indicates
the time lost. Idle time cost refers to the salaries or wages paid for the
lost time.

Treatment of
Overtime

Normal idle time: The idle time which cannot be avoided & is inevitable is termed as
Normal Idle time. If it is that of direct workers treat it as direct wages and in other
cases treat it as production overheads.

Example: lunch time, tea time, walk from factory gate to place of work etc.

Treatment: the cost of normal idle time should be charged from the product by
inflating the wages rate. For this purpose effective hourly rate should be
calculated as follows:
Effective hourly rate = Total wages/Number of effective hours
Number of effective hours = Total hours – Normal idle time hours

Normal idle time: The idle time which caused due to reasons that are within control
of management and could have been controlled through management action is
called as Abnormal Idle time.

Example: Breakdown of machines, non-availability of raw material, power failure

etc.

Treatment: Charge it to costing P&L account.

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REMUNERATION METHODS AND INCENTIVE SCHEMES

TIME BASED PAYMENTS

In this method time rate is already decided

Time rate system
and wages will be given to the worker on the
basis of actual time worked.
Wages = Actual hours x Rate per hour

In this plan wages as per time rate system is

Halsey
guaranteed and bonus will be given to the worker for
plan time saved.
Wages = (Actual hours x Rate per hour) + (50% of time
saved x Rate per hour)

Note: If different % of time saved is mentioned in question then the given %

should be considered in formula.

In this plan wages as per time rate system is

TIME BASED METHODS

Rowan guaranteed and bonus will be given to the worker for

plan time saved.
Wages = (Actual hours x Rate per hour) + [(Time
saved/Time Allowed) x time taken x Rate per hour)

Bedeaux Plan In this plan wages as per time rate system is

guaranteed and bonus will be given to the worker
for time saved.
Wages = (Actual hours x Rate per hour) + (75% of
time saved x Rate per hour)

Efficiency Rate per hour

Emerson’
s Upto 66.67% Normal rate
Efficiency Above 66.67% but Normal rate
Upto 100% + 20% bonus

Efficiency Above 100% Normal rate

+ 20% bonus +
On time basis = Standard time/Actual time Additional 1% bonus
On output basis = Standard output/Actual for each % exceeding
output
100% efficiency
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In this method piece rate is already decided

Piece rate system
and wages will be given to the worker on the
basis of actual pieces produced.
Wages = Actual pieces produced x Piece rate

Piece rate = Rate per hour/Standard Number of units per hour

PIECE RATE BASED METHODS

Taylor’s differential Efficiency Piece Rate

piece rate system Less than 100% 83% of piece rate or low
piece rate
100% or more 125% of piece rate or high
piece rate

Note: If different % of efficiency and piece rate is mentioned in question then

the given % should be considered.

Merrick’s Efficiency Piece Rate

differential piece Upto 83% Normal Piece Rate
rate system
Above 83% but 110% of normal Piece Rate
upto 100%

Above 100% 120% of normal Piece Rate

Combination of time and piece rate system

Gantt task and bonus system

Efficiency Wages Rate

Less than 100% Guaranteed time rate

At 100% 120% of time rate x standard time

Above 100% High piece rate

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GROUP BONUS SCHEMES

In organizations where team work is more important, the team as a whole has to be
motivated. Thus a plan is usually worked out whereby the bonus for increased output
is declared for the teams and then shared by individual members in agreed
proportion.

Q. how would you deal the fringe benefits in the cost accounts of a manufacturing concern?

Ans: In order to increase the employee’s morale, loyalty, and stability, the
employer grants him certain benefits such as housing, medical facilities, children’s
education either free or at concessional rates besides normal wages and other
allowances. If value of fringe benefit is substantial, they may be charged to
production as a direct charge by a supplementary wage rate, otherwise taken as
part of overheads.

FACTORS FOR INCREASING EMPLOYEE PRODUCTIVITY

1. Employing only those workers who possess the right type of skill.
2. Placing a right type of person to a right job.
3. Training young and old workers by providing them the right types of
opportunities.
4. Taking appropriate measures to avoid the situation of excess or shortage of
employees.
5. Carrying out work study for fixation of wages and for the simplification and
standardization of work.

Q. List important factors which must be taken into consideration for increasing labour
productivity.

Q. For reducing labour cost per unit, which of the following factors is the most important?
(A) Low wages rates
(B) Longer hours of work
(C) Higher Input-output ratio
(D) Strict control and supervision (December 2019)
 COST ACCOUNTING (CMA-INTER) 124
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"Mistakes are painful when they happen.

But years later its collection called
experiences
which lead to success"
COMPUTATION OF EMPLOYEE COST
Q.1. From the following particulars, calculate the employee cost per man day of 8
hours:
Basic salary ` 2 per day
Dearness allowance per month ` 150
Leave salary 10% of (Basic salary and dearness
allowance)
Employer’s contribution to P.F. 8% of (basic salary + dearness
allowance + leave salary)
Employer’s contribution to E.S.I 2.5% of (basic salary + dearness
allowance + leave salary)
Expenditure on amenities to labor ` 20 per head per month
Number of working days in a month 25 days of 8 hours each
Ans: Total labour cost: 263.1, Labour cost per day: 10.524.
---------------------------------------------------------------------------------------------
Q. 2. A worker is paid basic ` 1,000 p.m. and a dearness allowance of ` 200 p.m.
Worker contribution to provident fund is @ 10% of basic + DA and employer also
contributes the same amount as the employee. The employee state insurance
corporation premium is 6.5% of basic wages + DA of which 1.75% is paid by the
employees. It is the firm’s practice to pay 2 months wages (basic + DA) as bonus
each year.
The number of working days in a year is 300 of 8 hours each. Out of these the workers
is entitled to 15 days leave on full pay. Calculate the wage rate per hour for costing
purposes.
Ans: 8.30 per hour
---------------------------------------------------------------------------------------------
Q. 3. Calculate the labour hour rate of a worker X from the following data:
Basic pay ` 1,000 p.m.
D.A. ` 300 p.m.
Fringe benefits ` 100 p.m.
Number of working days in a year 300
Hours in a day 8
Holiday allowed in a year with full pay 20

Ans: 7.5 per hour

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CALCULATION OF EMPLOYEE EARNINGS

Q. 4. Calculate the earnings of A and B from the following particulars for a month:
A B
Basic wages ` 100 160
Dearness allowance 50% 50%
Employee’s Contribution to PF (on basic wages) 8% 8%
Employee’s Contribution to ESI (on basic 2% 2%
wages)
Overtime 10 hours
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 is at equal rates with employees’ contributions.
Ans: Earnings: A: 155; B: 224;
---------------------------------------------------------------------------------------------
ALLOCATION OF LABOUR COST TO JOBS
Q. 5. Calculate the earnings of A and B from the following particulars for a month and
allocate the labour cost to each job X, Y and Z:
A B
Basic wages 100 160
Dearness allowance on basic wages 50% 50%
Contribution to PF on basic wages + DA 10% 10%
Contribution to ESI on basic wages + DA 1.75% 1.75%
Overtime 10 hours -
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
is 4.75% and PF are at equal rates of 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.
Ans: earning: A = 165; B = 240; labour cost: A = 187; B: 275; Job X: 207; Y: 122;
Z: 134;
---------------------------------------------------------------------------------------------
OVERTIME
Q. 6. In a factory, the basic wages rate is ` 10 per hour and overtime rates are as
follows:
Before and after normal working hours 175% of basic wages rate
Sundays and holidays 225% of basic wages rate
During the previous year, the following hours were
worked:
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Normal time 1,00,000 hours

Overtime before and after working hours 20,000 hours
Overtime 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 hours 100 hours
Sundays and holidays 25 hours
Total 1,125 hours
You are required to calculate the labour cost chargeable to job ‘Z’ where overtime is
worked regularly throughout the year as a policy due to the labour shortage.
Ans: 13,162.5
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TREATMENT OF IDLE TIME
Q. 7. PRATIBHA an employee of ADITYA ltd. gets the following emoluments and
benefits:
Basic pay ` 1000 p.m.
D.A. ` 200 p.m.
Bonus 20% of salary and D.A.
Other allowances ` 250 p.m.
Employer’s contribution to P.F. 10% of salary and D.A.
‘PRATIBHA’ 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 ‘PRATIBHA’.
Ans: 10.86.
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REMUNERATION METHODS AND INCENTIVE SCHEMES
TIME RATE SYSTEM
Q. 8. A worked for 18 effective hours on job no. 24 where time rate per hour is ` 7.5
per hour. Calculate wages of A under time rate system.
Ans: 135;
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STRAIGHT PIECE WORK
Q. 9. Calculate total monthly remuneration of three workers, A, B and C from the
following data.
(1) Standard production per month per worker – 4000 units, actual production during
the month:
A 3,400 units
B 3,000 units
C 3,800 units
(2) Piecework rate Re. 0.25 per unit [actual production]
(3) Additional production bonus is `10 for each percentage for actual production
exceeding 80%.
(4) Dearness pay fixed `150 per month.
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Ans: A: 1,050, B: 900, C: 1,250

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CALCULATION OF BASIC PIECE RATE PER UNIT
Q. 10. Normal rate per hour for worker A in a factory is `5.40. Standard time per unit
for the worker is one minute. Calculate Normal piece rate per unit for the worker.
Ans: 0.09 per piece
---------------------------------------------------------------------------------------------
Q. 11. Wage negotiations are going on with the recognized labour union and the
management wants you as the cost accountant of the company to formulate an
incentive scheme with a view to increase productivity.
The case of three typical workers Achyuta, ananta and Govinda who produces
respectively 180, 120 and 100 units of the company’s product in a normal day of 8
hours is taken up for study.
Assume that day wages would be guaranteed at 75 paisa an hour and the piece rate
would be based on a standard hourly output of 10 units; calculate the earnings of
each worker under piece rate system.
Ans: piece rate: 0.075 per piece;
---------------------------------------------------------------------------------------------
HALSEY PLAN
Q. 12. Calculate the earnings of a worker under Halsey system. The relevant data is
as below:
Time rate (per hour) ` 0.6
Time allowed 8 hours
Time taken 6 hours
Time saved 2 hours
ANS: HALSEY: ` 4.2
---------------------------------------------------------------------------------------------
Q. 13. Calculate the earnings of a worker under Halsey system. The relevant data is
as below:
Time rate (per hour) `6
Time allowed 8 hours
Time taken 6 hours
Time saved 2 hours

Ans: 42;
---------------------------------------------------------------------------------------------
Q. 14. The time allowed for a job is 8 hours. The hourly rate is ` 8. Calculate bonus
earned under Halsey system with 50% bonus for time saved for each hour saved
progressively.
Ans: 1 hour saved = 4; 2 hours saved = 8; 3 hours saved = 12; 4 hours saved = 16; 5
hours saved = 20; 6 hours saved = 24; 7 hours saved = 28;
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Q. 15. Given that standard time for a job is 10 hours, actual time taken is 6 hours
and the rate of wages is ` 3 per hour. The total wages under Halsey scheme will be:
(A) ` 28;
(B) ` 20;
(C) ` 24;
(D) ` 10.
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ROWAN PLAN
Q. 16. You are given the following information of a worker:
Name of worker ‘X’
Ticket no. 002
Work started 1-4-19 at 8 a.m.
Work finished 5-4-19 at 12 noon
Work allotted production of 2,160 units
Work 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:
(1) Halsey plan and
(2) Rowan plan.
Ans: (1): ` 1,100, (2) ` 1,200
---------------------------------------------------------------------------------------------
Q. 17. A skilled worker in CHANPREET ltd. is paid a guaranteed wage rate of ` 30 per
hour. The standard time per unit for a particular product is 4 hrs. P, 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.
What could have been his total earnings and effective hourly rate, had he been put
on Halsey incentive scheme (50%).
ANS: 105, 35.
---------------------------------------------------------------------------------------------
Q. 18. 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.
ANS: 20.
---------------------------------------------------------------------------------------------
Q. 19. A skilled worker is paid a guaranteed wage rate of ` 120 per hour. The standard
time allowed for a job is 6 hours. He took 5 hours to complete the job. He is paid
wages under rowan incentive plan.
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(1) Calculate the effective hourly rate of earnings under rowan incentive plan.
(2) 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.
Ans: (1) 140; (2) 4.5 hours;
---------------------------------------------------------------------------------------------
Q. 20. A worker is allowed 2 hours to produce 5 units of a product. Wages are paid
to the worker @ ` 20 per hour. In a 48 hours week, the worker produced 150 units.
The earnings of the worker as per Rowan system will be:
1. ` 1,940
2. ` 1,450
3. ` 1,553
4. ` 1,152
Ans: 1,152
---------------------------------------------------------------------------------------------
Q. 21. The existing incentive system of Srishti ltd is as under:
Normal working week 5 days of 8 hours each plus 3 late shifts
of 3 hours each
Rate of payment Day work ` 160 per hour
Late shift ` 225 per hour
Average output per operator 49 hours 120 articles
week i.e. including 3 late shifts
In order to increase output and eliminate overtime, it was decided to switch on to
a system of payment by results. The following information is obtained:
Time rate (as usual) ` 160 per hour
Basic time allowed for 15 articles 5 hours
Piece work rate Add 20% to basic piece rate
Premium bonus Add 50% to time
Required:
Prepare a statement showing hours worked, weekly earnings, number of articles
produced and labour cost per article for one operator under the following systems:
(1) Existing time rate;
(2) Straight piece work;
(3) Rowan system;
(4) Halsey premium system;
Assume that 135 articles are produced in a 40-hour week under straight piece work,
Rowan Premium System, the Halsey Premium System above and worker earns half
the time saved under Halsey Premium System. (JUNE 2018)
---------------------------------------------------------------------------------------------
CONVERSION COST
Q. 22. APEX Ltd. has its factories at two locations. Rowan Plan is in use at location-A
and Halsey Plan at location-B. Standard time and basic rate of wages are same for a
job which is similar and is carried out on similar machinery. Time allowed is 60hours.
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Job at location-A is completed in 36 hours while at B it has taken 48 hours.

Conversion cost at respective places is `2,448 and `3,000. Overheads account for `
40 per hour.
Requirement:
(1) Find out the Normal Wage Rate: and
(2) Prepare the Comparative Conversion Costs in detail.
(CWA INTER DECEMBER 2008)
Ans1) `20 per hour
---------------------------------------------------------------------------------------------
Q. 23. APEX Ltd. has its factories at two locations. Rowan Plan is in use at location-A
and Halsey Plan at location-B. Standard time and basic rate of wages are same for a
job which is similar and is carried out on similar machinery. Time allowed is 60hours.
Job at location-A is completed in 36 hours while at B it has taken 48 hours.
Conversion cost at respective places is `1,224 and `1,500. Overheads account for `
20 per hour.
Requirement:
(1) Find out the Normal Wage Rate: and
(2) Prepare the Comparative Conversion Costs in detail.
(JUNE 2019)
---------------------------------------------------------------------------------------------
FACTORY COST
Q. 24. In a factory, Ram and Sham produce the same product using the same input
of the same material and at the same normal wage rate.
In addition, workman Ram is entitled to receive bonus according to Rowan plan while
sham is paid bonus as per Halsey plan (50%) sharing. The time allotted to the product
is fifty hours. Ram takes thirty hours and Sham takes forty hours to produce the
product. The factory cost of the product for Ram is ` 3,490 and for Sham is ` 3,600.
The factory overhead rate is ` 5 per man hour.
Calculate:
(1) Normal wage rate;
(2) Cost of material used for the product and
Ans: ` 20 per hour, cost of raw material: ` 2,500
---------------------------------------------------------------------------------------------
Q. 25. A workman takes 9 hours to complete a job on daily wages and 6 hours on a
scheme of payment by results. His hourly rate is 25 p. The Material cost of the product
is ` 4 and factory overheads are recovered at 150% of the total direct wages.
Calculate the factory cost of the product under following methods:
(1) Time rate system;
(2) Halsey Plan;
(3) Rowan Plan; (SM)
---------------------------------------------------------------------------------------------
COST OF LIVING BONUS
Q. 26. A worker under the Halsey method of remuneration has a rate of ` 12 per
week of 48 hours, plus a cost of living bonus of 10 p. per hour worked. He is given 8
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hours task to perform, which he performs in 6 hours, he is allowed 30% of the time
saved as premium bonus. What would be his earnings under Halsey Plan and Rowan
Plan.
---------------------------------------------------------------------------------------------
EMERSON PLAN
Q. 27. KARTIK executes a piece of work in 120 hours as against 150 hours allowed
to him. His hourly rate is `10 and he gets a dearness allowance @ `30 per day of 8
hours worked in addition to his wages. You are required to calculate total wages
received by KARTIK under the following incentive schemes:
(1) Rowan premium plan, and
(2) Emerson’s efficiency plan.
(CA-IPCC-NOVEMBER-2011, CMA INTER JUNE 2014 OLD)
Ans: (1) 1,890, (2) 2,190
---------------------------------------------------------------------------------------------
Q. 28. Mr. X had been allotted a work which had to be completed within 80 hours.
He took 74 hours to complete the work. The company pays incentive bonus of 10%
on the hourly rate if standard time is achieved and a further incentive bonus of 2%
on hourly rate for each 1% in excess of 100% efficiency is payable. The normal wage
rate is ` 30 per hour.
Calculate the effective wage rate per hour worked and total wages to be paid to Mr.
X. (Apply Emerson’s efficiency plan).
Ans: Efficiency: 108%; Effective rate per hour: 37.8; Total wages: 2,797;
---------------------------------------------------------------------------------------------
Q. 29. From the following information you are required to calculate the bonus and
earnings under Emerson efficiency system. The relevant information is as under:
Standard working hours 8 hours per day
Standard output per hour in units 5
Daily wage rate ` 50
Actual output in units 25 units

Ans: 50;
---------------------------------------------------------------------------------------------
Q. 30. In a factory, the standard output in 8 hours is 220 units. A worker actually
produces 242 units in the standard time. Wage rate is 8 per hour.
The total wages paid to the worker under Emerson's plan will be:
(A) 83.20
(B) 76.80
(C) 193.60
(D) 99.20
Ans: 83.2;
---------------------------------------------------------------------------------------------
TAYLOR’S DIFFERENTIAL PIECE RATE SYSTEM
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Q. 31. Using Taylor’s differential piece rate system; find the earning of A from the
following particulars:
Standard time per piece 12 minutes
Normal rate per hour ` 20
A produced (in 8 hours day) 37 Units
---------------------------------------------------------------------------------------------
Q. 32. Using Taylor’s differential piece rate system; find the earning of A from the
following particulars:
Standard time per piece 20 minutes
Normal rate per hour `9
A produced (in 8 hours day) 23 Units
---------------------------------------------------------------------------------------------
Q. 33. 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 40
Hourly wage rate `40 (guaranteed)
Standard/normal time taken per unit 15 minutes
Actual output for a week:
Worker A 176 pieces
Worker B 140 pieces
Differential piece rate:
80% of piece rate When output below normal
120% of piece rate When output above normal
Under Halsey system, worker gets a bonus equal to 50% of wages of time saved.
Calculate:
(1) Earning of workers under Halsey’s and Rowan’s premium scheme.
(2) Earning of workers under Taylor’s differential piece rate system and Emerson’s
efficiency plan.
---------------------------------------------------------------------------------------------
Q. 34. From the following particulars, calculate the earnings of workers X and Y.
Standard time allowed 20 units per hour
Normal time rate ` 30 per hour
Differential piece rate:
80% of piece rate When output below normal
120% of piece rate When output above normal
In a particular day of 8 hours:
Actual output: X 140 units
Y 165 units
(SM)
---------------------------------------------------------------------------------------------
Q. 35. Calculate the earnings of workers A and B under Straight piece rate system
and Taylor’s differential piece rate system from the following particulars:
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Normal rate per hour ` 1.8

Standard time per unit 20 seconds
Output per day of 8 hours is as follows:
Worker A 1,300 units
Worker B 1,500 units
Differentials to be applied are:
80% of the piece rate Below the standard
120% of piece rate At or above standard
(SM)
---------------------------------------------------------------------------------------------
MERRICKS’S DIFFERENTIAL PIECE RATE SYSTEM
Q. 36. X, Y and Z are three workers working in a manufacturing company and their
output during a particular 40 hours week was 96, 111 and 126 units respectively.
The guaranteed rate per hour is ` 10 per hour, normal piece rate is ` 4 per unit. High
task is 100 units per week. Compute the total earnings and labour cost per unit under
Taylor and Merrick Plan. (SM)
---------------------------------------------------------------------------------------------
GANTT TASK BONUS PLAN
Q. 37. In a factory the standard time allowed for completing a given task (50 units),
is 8 hours. The guaranteed time wages rate is ` 20 per hour. If a task is completed
in less than the standard time, the high rate of ` 4 per unit is payable. Calculate the
wages of a worker, under the Gantt task system, if he completes the task in 10 hours.

---------------------------------------------------------------------------------------------
BEDEAUX SYSTEM
Q. 38. Calculate the earnings of worker from the following information under bedeaux
system:
Standard time 30 seconds plus 50% relaxation allowance
Number of hours 8 hours per day
Actual output 500 units
Wages rate ` 10 per hour
---------------------------------------------------------------------------------------------
CALCULATION OF EARNINGS OF EACH WORKER UNDER GROUP TASK
Q. 39. A, B and C were engaged on a group task for which a payment of ` 725 was
to be made. A’s time basis wages are ` 8 per day, B’s ` 6 per day and C’s ` 5 per day.
A worked for 25 days; B worked for 30 days; and C for 40 days. Distribute the amount
of ` 725 among the three workers.
---------------------------------------------------------------------------------------------
Q. 40. Both direct and indirect labour of a department in a factory is entitled to
production bonus in accordance with a group incentive scheme, the outline of which
is as follows:
(1) For any production in excess of the standard rate fixed at 16,800 tons per month
(of 28 days) a general incentive of ` 15 per ton is paid in aggregate. The total amount
 COST ACCOUNTING (CMA-INTER) 134
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payable to each separate group is determined on the basis of an assumed % of such

excess production being contributed by it, namely @ 65% by direct labour, @ 15%
by inspection staff, @ 12% by maintenance staff an @ 8% by supervisory staff.
(2) Moreover, if the excess production is more than 20% above the standard, direct
labour also get a special bonus @ ` 5 per ton for all production in excess of 120% of
standard.
(3) Inspection staff is penalized @ ` 20 per ton for rejection by customer in excess
of 2% of production (Actual).
(4) Maintenance staff is also penalized @ ` 20 per hour for breakdown.
From the following particulars for a month, work out production bonus earned by
each group:
Actual working days 25 days
Production 21,000 tons (Actual)
Rejection by customer 500 tons
Machine breakdown 40 hours
Based on the above information, you are required to answer the below mentioned 4 questions:

(1) what is the amount of general incentive earned by both direct and indirect labour for
the month of September 2021:
(A) ` 90,000
(B) ` 95,000
(C) ` 98,200
(D) ` 98,500

(2) What is the amount of total production bonus (including special bonus) payable to the
direct labours/workers?
(A) ` 72,000
(B) ` 73,500
(C) ` 73,900
(D) ` 75,000

(3) What are the amount of penalty imposed on inspection staff and maintenance staff for
the month of September 2021:
(A) ` 1,200 and ` 1,000;
(B) ` 1,400 and ` 1,200;
(A) ` 1,600 and ` 800;
(A) ` 1,650 and ` 900;
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(4) The production bonus earned by inspection staff (Group) for the month of September
2021 is:
(A) ` 12,000
(B) ` 11,900
(C) ` 11,850
(D) ` 10,500 (December 2020)
Ans: (1) 90,000 (2) 73,500 (3) 1600 and 800 (4) 11,900;
---------------------------------------------------------------------------------------------
Q. 41. Ten men work as a group. When the weekly production of the group exceeds
standard (200 pieces per hour) each man in the group is paid a bonus for the excess
production in addition to his wages at hourly rates. The bonus is computed thus:
The percentage of production in excess of the standard amount is found and one-half
of this percentage is considered as the men’s share. Each man in the group is paid
as bonus this percentage of a wage rate of ` 3.20 per hour. There is no relationship
between the individual workman’s hourly rate and the bonus rate. The following is
the week’s records.
Hours worked Production
Monday 90 22,100
Tuesday 88 22,600
Wednesday 90 24,200
Thursday 84 20,100
Friday 88 20,400
Saturday 40 10,200
480 1,19,600
(1) Compute the rate and amount of bonus for the week;
(2) Compute the total pay of Jones who worked 41 ½ hours and was paid ` 2 per
hour basic and of Smith who worked 44 ½ hours and was paid ` 2.50 per hour basic.
(SM)
---------------------------------------------------------------------------------------------
Q. 42. Two fitters, a laborer and a boy undertake a job on piece rate basis for ` 1,290.
The time spent by each of them is 220 ordinary working hours. The rates of pay on
time rate basis, are ` 1.50 per hour for each of the two fitters, ` 1 per hour for the
laborer and ` 0.50 per hour for the boy.
Calculate the amount of piece-work premium and the share of each worker, when
the piece -work premium is divided proportionately to the wages paid.
Also compute the selling price of the above job on the basis of the following additional
data:
Cost of the direct material ` 2,010; works overhead at 20% of prime cost; selling
overhead at 10% of works cost and profit at 25% on cost of sales.
---------------------------------------------------------------------------------------------
MISCELLANEOUS QUESTIONS
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Q. 43. In a manufacturing concern the daily wage rate is ` 2.50. The standard output
in a 6-day week is 200 units representing 100% efficiency. The daily wage rate is
paid without bonus to those workers who show up to 66 2/3% of the efficiency
standard. Beyond this there is a bonus payable on a graded scale as below:
82% efficiency 5% bonus
90% Efficiency 9% bonus
100% efficiency 20% bonus
Further increase of 1% for every 1% further rise in efficiency.
In a 6-day week A produced 180 units; B 164 units; C 200 units; D 208 units and E
130 units. Calculate the earnings of these workers. (SM)
---------------------------------------------------------------------------------------------
Q. 44. Workmen of a particular grade working on 8-hour shift duty are guarantees a
wage of ` 32. An incentive scheme is in operation according to which production
bonus is earned directly proportional to performance but only after 100%
performance is reached. Four workmen A, B, C and D produce 48, 60, 75 and 90
units respectively in 6 hours working on a job which has standard time of 6 minutes
per unit as measured work content. Remaining 2 hours of the shift are spent in doing
unmeasured work for which no incentive bonus can be paid. Find for each workman:
(1) The production performance level achieved;
(2) Total earnings for the day. (SM)
----------------------------------------------------------------------------------------
Q. 45. The following particulars for the first week of September, 2019 relate to X and
Y two workers employed in a factory:
X Y
Job Completed — units 3,600 4,200
Out of above output rejected and unsalable 540 420
Time allowed 12 Mts/dozen 3 Hrs./200 units
Basic wage rate per hour `5 `6
Hours worked 45 50
The normal working hours per week are fixed at 42 hours. Bonus is paid @ 2/3 of the
basic wage rate for gross time worked and gross output produced without deduction
for rejected output. The rate of overtime for first 4 hours is paid at time plus 1/3 and
for next 4 hours is paid at time plus 1/2.
From the above data calculate for each employee:
(1) Number of bonus hours and amount of bonus earned;
(2) Total wages earned including basic wages overtime premium and bonus;
(3) Direct wages cost per 100 saleable units. (SM)
---------------------------------------------------------------------------------------------
Q. 46. A manufacturer introduces a new machinery into his factory with the result
that production per worker is increased. The workers are paid by results and it is
agreed for every 2% increases in average individual output, an increase of 1% on
the rate of wages will be paid.
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At the time the machinery is installed the selling price of the products falls by 8-
1/3%. Show the net saving in production costs which would be required to offset the
losses expected from the turnover and bonus paid to workers.
1st period 2nd period
Number of workers 175 125
Number of articles produced 16,800 14,000
Wages paid 33,600
Total sales 75,600
(SM)
---------------------------------------------------------------------------------------------
Q. 47. A work measurement study was carried out in a firm for 10 hours and the
following information was generated.
Units produced 350
Idle time 15%
Performance rating 120%
Allowance time 10% of standard time.
What is the standard time for task?
---------------------------------------------------------------------------------------------
 COST ACCOUNTING (CMA-INTER) 138
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"
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L R R V R -
 COST ACCOUNTING (CMA-INTER) 139
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CHAPTER – 4A
EMPLOYEE TURNOVER

Labour Turnover Labour turnover is defined as “the rate of change in the

average employee strength during a period”.

SEPARATION METHOD
Methods Separation includes workers left and discharged. This method
indicates the change in labour force due to separation of
employees.
Labour turnover = (Number of separations/Average number of
employees) x 100
Average employees = (Employees at beginning + Employees at
end)/2

REPLACEMENT METHOD
This method indicates the change in labour force due to
replacement of employees.
Labour turnover = (Number of replacement/Average number of
employees) x 100

FLUX METHOD
This method indicates the change in labour force due to
replacement, separation and business expansion.
Labour turnover = (Number of separations + Number of
Accessions/Average number of employees) x 100

Number of accessions = Number of replacement + Fresh recruited

employees due to business expansion

Cost of labour turnover/Profit lost/profit foregone

(1) Settlement cost of old employees
(2) Selection cost of new employees
(3) Training cost of new employees
(4) Contribution lost due to delay in filling vacancy
(5) Contribution lost due to less productivity of new employees
 COST ACCOUNTING (CMA-INTER) 140
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CAUSES OF LABOUR TURNOVER

Personal causes (1) Change of jobs for betterment

(2) Premature retirement due to ill health or
In such case, old age
employees leave the (3) Family problems
organization at his or (4) Discontentment over the jobs and working
her own will. environment

(1) Seasonal nature of the business

CAUSES OF EMPLOYEE TURNOVER

Unavoidable (2) Shortage of raw material, Power, Slack

causes market for the product etc.
(3) Change in the plant location
In such case it becomes (4) Disability, making a worker unfits for
obligatory on the part of work;
management to ask (5) Disciplinary measures
some or more their (6) Marriage [generally in the case of women]
employees to leave the
organization.

(1) Dissatisfaction with job, remuneration,

Avoidable hours of work, working conditions, etc.
causes (2) Bad relationship with management,
supervisor's or fellow workers;
Avoidable causes are (3) Lack of training facilities and promotional
those which require the avenues;
attention of (4) Lack of recreational and medical facilities;
management to keep
the labour turnover
ratio as low as possible.

Q. DISCUSS THE CAUSES OF LABOUR TURNOVER.

MATCH THE FOLLOWING (December 2019)

COLUMN I COLUMN II
1. Labour turnover A. Replacement method
B. Cost of utilities
C. Production strategy
D. Direct expenses
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LABOUR TURNOVER
Q. 1. During October 2019, the following information is obtained from the Personnel
Department of a manufacturing company. Labour force at the beginning of the month
1900 and at the end of the month 2100. During the month, 25 people left while 40
persons were discharged. 280 workers were engaged out of which only 30 were
appointed in the vacancy created by the number of workers separated and the rest
on account of expansion scheme. Calculate the Labour Turnover by different
methods.
---------------------------------------------------------------------------------------------
Q. 2. The extracts from the payroll of M/s. Maheshwari Bros. is as follows:
Number of employees at the beginning of 2019 150
Number of employees at the end of 2019 200
Number of employees resigned 20
Number of employees discharged 5
Replaced due to resignation and discharges 20
Calculate the Labour Turnover Rate for the factory by different methods.
---------------------------------------------------------------------------------------------
Q. 3. The rate of change of labour force in a company during the year ending 31st
March, 2020 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:
(1) Average numbers of workers on roll.
(2) Number of workers replaced during the year.
Ans: (1) 800; (2) 64;
---------------------------------------------------------------------------------------------
Q. 4. The information regarding number of employees on roll in D-MART for the month
of December, 2019 are given below:
Number of employees as on 01-12-2019 900
Number of employees as on 31-12-2019 1,100
During December, 2019, 40 employees resigned and 60 employees were discharged.
300 employees were recruited during the month. Out of these 300 employees, 225
employees were recruited for an expansion project of the D-MART and the rest were
recruited due to exit of the employees.
Assuming 365 days in a year, calculate employee turnover rate by applying the
following:
(1) Replacement method;
(2) Separation method;
(3) Flux method;
(4) Addition method;
---------------------------------------------------------------------------------------------
COST OF LABOUR TURNOVER/PROFIT LOST/PROFIT FOREGONE
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Q. 5. The management of XYZ Ltd. is worried about the 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 during the last
year. Last year’s sales amounted to ` 83, 03,300 and the profit/ volume ratio was
20%. 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 cost incurred consequent on Labour turnover revealed, on analysis the following.
Settlement cost due to leaving: ` 43, 820 & Recruitment costs: ` 26,740. Selection
costs: ` 12,750, & Training costs: ` 30,490.
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.
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“R D WHAT
X R Y”

OVERHEADS
 COST ACCOUNTING (CMA-INTER) 144
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CHAPTER-5
OVERHEADS

“ w ! ,
they will always believe what you have done!
So prove your excellence in action better than
w ”
MEANING OF OVERHEADS
Aggregation of indirect materials, indirect labour and other indirect expenses is
known as overheads.

Meaning of Overheads

Indirect Material Indirect Labour Indirect other expenses

FUNCTIONAL ANALYSIS
Overheads can be divided into the following categories on functional basis:

Overheads on the basis of function

Factory Administration Selling Distribution Research &

O/H O/H O/H O/H Development O/H

Note: (1) Factory O/H = Manufacturing o/h = Production o/h = Works o/h
(2) Administration O/H = Office o/h
(3) Administration O/H may be related to production or general. If it is related to
production it will be part of cost of production. If it is general it will not be part of
cost of production but will be part of total cost.
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Manufacturing or Manufacturing overheads includes all indirect costs (indirect

production or material, indirect labour and indirect expenses) incurred for
factory overheads operation of manufacturing or production division in a factory.
It is also known as, factory overheads, works overheads,
factory cost or works cost etc.
Indirect materials:
Lubricants, cotton waste, stationery, repair materials, etc.
Indirect labour, salaries and wages:
Supervisors, foremen, Inspectors, Storekeepers, Maintenance,
Indirect Expenses:
Rent, rates and insurance of factory, Power, lighting and heating
of factory
Administration It is the sum of those costs of general management,
overheads secretarial, accounting and administrative services, which
cannot be directly related to the production, marketing,
research or development functions of the enterprise.
Administration overheads include the cost of formulating the
policy, directing the organization and controlling the
operations of an undertaking which is not related directly to
production, selling, distribution, research or development
activity or function.
Indirect materials:
Office stationery and printing
Indirect labour, salaries and wages:
Office clerks , Secretaries , Accountants , Executives, Managers
and General Manager
Indirect Expenses:
lighting, heating and cleaning of office, Depreciation, repairs and
maintenance of office, furniture, equipment and buildings
Selling and Selling overheads is the cost of seeking to create and
distribution stimulate demand and of securing orders. It comprises the
overheads cost to products of distributors for soliciting and recurring
orders for the articles or commodities dealt in and of efforts
to find and retain customers. Distribution overhead is the
expenditure incurred in the process which begins with making
the packed product available for dispatch and ends with the
making the reconditioned returned empty package, if any,
available for re-use. It includes expenditure incurred in
transporting articles to central or local storage. It also
comprises expenditure incurred in moving articles to and from
prospective customer as in the case of goods on sale or return
basis. In case of gas, electricity and water industries
distribution means pipes, mains and services which may be
regarded as equivalent to packing and transportation.
Indirect materials:
Stationery and printing, Catalogues, Price list etc.
Indirect labour, salaries and wages:
Salesmen, Travelers, Agents, Demonstrators and technical
advisors to customers
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Indirect Expenses:
Advertising expenses, Expenses on consumers service, after
sales service etc.
Research and Research overhead is incurred for the new product, new
development process of manufacturing any product. The development
overheads overhead is incurred for putting research result on commercial
basis.
Indirect materials:
Stationery and printing, Cost of raw material used in research
Indirect labour, salaries and wages:
Staff engaged in research
Indirect Expenses:
Subscription to research associations, Depreciation, repairs and
maintenance of building and research equipment, plant etc.

MEANING OF COST ALLOCATION

It is defined as the process of allotment or identification or assignment of whole items
to cost centres or cost units. Thus the charging of direct costs to a cost center or cost
unit is the process of allocation of cost.

MEANING OF COST APPORTIONMENT

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

Q. DISTINGUISH BETWEEN ALLOCATION AND APPORTIONMENT OF COST.

PROCEDURE OF CHARGING OVERHEADS TO THE PRODUCTS

Procedure of charging overheads to product/Job/Order

O/H/Absorpti
Primary Secondary on/recovery Charging of O/H to
Distributio Distribution rate product/Job/order
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PRIMARY DISTRIBUTION OF OVERHEADS

Overheads are distributed among

Production departments An Service departments

departments

By using reasonable basis

Note: For presentation of Primary distribution of overheads, we have to prepare a

statement known as overhead analysis sheet.

Format of Overhead analysis sheet

Overhead Basis of Total amount Production Service
expense Apportionment (`) departments departments
A B X Y
Rent Area (ratio) Xx Xx Xx Xx Xx
Power KWhrs Xx Xx Xx Xx Xx
Overheads as per primary Xx Xx Xx xx
distribution (carried forward to
secondary distribution)
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Factory rent

Insurance of Floor area

building

Room
service
If light points
Lighting Light points
not given
exp.
BASIS OF APPORTIONMENT OF OVERHEAD EXPENSES

Insurance of
machinery
Value of machinery
Depreciation
of machinery

Note: Depreciation can also be

Maintenance
apportioned as follows:
of machinery
Value of machine x machine

Supervision

Meal charges
Number of employees
Canteen

Personnel
exp.

Kilowatt hours or horse power hours

Power

Stores exp. Value of material or no. of requisition

Fuel and Radiator sections

heat
Note: If insurance is

Direct material
should be assumed

Indirect material
given but not clear
machinery then it

whether it is of
of machinery

building or

Indirect wages Direct wages

General O/H

Actual usage
Variable exp.

Fixed exp. Normal capacity

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SECONDARY DISTRIBUTION OF OVERHAEDS

Cost of service departments are distributed among

By using An Reasonable
Production departments reasonable basis Method

Note: Cost of service departments = Direct material + Direct labour + Direct

expenses + Overheads as per primary distribution

Maintenance

Workshop Machine hours

BASIS OF APPORTIONMENT OF SERVICE DEPARTMENTS

Engineering
services

Canteen

Number of employees
Time
keeping

Personnel

Value of material or no. of requisition

Stores deptt.
slips or value of requisition

Purchase
Number of purchase orders
deptt

Power house Horse power hours

General Service Labour hours

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Direct The cost of service departments should be

redistribution distributed only over production
method departments.

Service department which provides

Methods of secondary distribution

Step
redistribution services to largest number of departments
method should be distributed first and so on.

Reciprocal Simultaneous
method equation method

Repeated Equation is formed between service

redistribution method departments and solved, then the calculated

amounts are to be distributed among the
production departments as per the given %.
Service department cost
distributed repeatedly till
figure of service dept. is
exhausted or become too
small.

Note: (1) Step distribution method is also known as step ladder method and
non-reciprocal method.
(2) Any service department should not be distributed in itself.
(3) After secondary distribution service departments should be nil.

ABSORPTION OF PRODUCTION OVERHEADS

Overhead absorption is also known as levy or recovery of overheads. Such rates are
known as predetermined rates. The predetermined rates are calculated using the
budgeted or standard overhead costs for the production departments as divided by
the budgeted or standard number of units of the base.

There are different ways of absorbing overheads using different types of

denominators. These are discussed below:
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Total factory o/h of the department

Production unit method
Number of units produced in deptt.

% of direct material Total factory o/h of the department

METHODS OF ABSORPTION

cost method Direct material cost of deptt.

% of direct wages cost Total factory o/h of the department

method Direct wages cost of deptt.

% of prime cost method Total factory o/h of the department

Prime cost of the deptt.

Labour hours method Total factory o/h of the department

Number of labour hours in deptt.

Labour hours method Total factory o/h of the department

Number of machine hours in deptt.

Note: (1) Methods which are based on cost basis should be calculated in % terms
and should be multiplied by 100.

(2) Prime cost = Direct material + Direct labour + Direct expenses.

(3) Absorption rate is calculated on the basis of budgeted factory overhead cost
of the department due to which it is also known as pre-determined rate.

(4) It is difficult to name a single method which is suitable for the absorption of
overhead costs under different circumstances. However, direct labor hour rate or
machine hour rate are considered as best methods specifically in those
manufacturing units in which labor or machine is a predominant factor.
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OVER OR UNDER ABSORPTION OF PRODUCTION OVERHEADS

Absorption of overheads

Under absorption Over absorption

If absorbed overheads are If absorbed overheads are

less than actual overheads. more than actual overheads.

Note: (1) Absorbed overheads = Actual base x Predetermined rate or absorption

rate or recovery rate.
(2) Actual base may be units or direct material cost or direct labour cost or
prime cost or labour hours or machine hours.
(3) If any actual expense includes expenses related to previous period or award
of labour court then it should be deducted from actual expenses before
calculation of under or over absorption of overheads.

TREATMENT OF OVER/UNDER ABSORPTION OF OVERHEADS

Treatment of under or over absorption of

overheads

Reason

Normal Abnormal or defective planning

Supplementary rate (SR) = Normal under or

Transfer to costing P/L A/C
over absorption/Number of units produced

Units sold x SR Finished stock WIP stock units x SR x

= Tr. To Cost of units x SR = Tr. To completion % = Tr. To WIP A/c

sales A/c finished stock A/c

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Q. Explain the treatment of over and under absorption of overheads in cost accounts.

CONCEPTS RELATED TO CAPACITY

Types of capacity

Rated Practic Normal Actual

al

TYPES OF MEANING
CAPACITY
Rated It refers to the capacity of a machine or a plant as indicated
capacity/Theoretical by its manufacturer. In fact, this capacity is the maximum
capacity possible productive capacity of a plant.
Practical capacity This capacity takes into account loss of time due to repairs,
maintenance, minor breakdown, idle time, set up time,
normal delays, Sundays and holidays, stock taking etc.
Normal capacity It is the capacity of a plant which is expected to be utilized
over a long period based on sales expectancy.
Actual capacity It is the capacity actually achieved during a given period.

Q. Maximum possible productive capacity of a plant when no operatine time is

lost is its:
(A) Normal capacity
(B) Practical capacity
(C) Theoretical capacity
(D) Capacity based on sales expectancy (December
2019)

Q. In absorption costing, __________ is added to inventory. (December

2019)

TREATMENT OF ADMINISTRATIVE OVERHEADS

As a class, administrative expenses bear only a remote relationship either to the
manufacturing or to the selling functions. The administrative divisions being
responsible only for laying down general policies of the company, its benefits, by and
large, are intangible and hence difficult to measure. Also, administrative expenses
are generally period costs are constant; they are not affected by any fluctuations in
the volume of production of sales activity. A careful watch over the variable
administrative expenses, e.g., postage, stationery, office maintenance and upkeep,
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office transport, repairs, etc., is nevertheless necessary since top executives may
sometimes overlook the need for exercising strict economy in expenses with which
they themselves are concerned.

There are three distinct methods of accounting for administrative overheads.

Apportioning between This method recognizes only two basic functions of a
production and sales manufacturing concern, i.e. manufacturing and selling
departments and distribution. Thus, administrative overheads are
apportioned over production and sales departments.
Therefore, each of the department should be charged
with the proportionate share of them. When this method
is adopted, administrative overheads lose their identity
and get merged with production and selling and
distribution overheads.
Transfer to profit and As per this method, administrative overheads are
loss account concerned with the formulation of policies and thus are
not directly concerned with either the production or the
selling and distribution functions. Further administrative
overheads are mainly of fixed costs. Lastly, there appears
to be no equitable base to charge administration
overheads to other functions or the products. In view of
these arguments, the administrative overheads are
charged to profit and loss account.
Treating administrative This method considers administration as a separate
overheads as a separate function like production and sales and, as such costs
addition to the cost of relating to formulating the policy, directing the
jobs or products organization and controlling the operations are taken as
a separate charge to cost of the jobs or a product, sold
along with the cost of other functions. The following
bases may be adopted for such absorption:
• Works cost
• Sales value/quantity
• Gross profit on sales
• Units manufactured
• Conversion cost.

TREATMENT OF SELLING AND DISTRIBUTION OVERHEADS

Selling costs or overhead expenses are those incurred for the purpose of promoting
the marketing and sales of different products. Distribution expenses, on the other
hand, are expenses relating to delivery and dispatch of goods sold. Examples of
selling and of distribution expenses have been considered earlier in this Study Lesson.
From the above, it is clear that the two types of expenses represent two distinct types
of functions. However, it is usual to group together these into one composite class,
namely, selling and distribution overhead, for the purpose of cost accounting. Such
a course has the merit of simplicity.
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ABSORPTION OF SELLING AND DISTRIBUTION EXPENSES

If selling and distribution expenses are small, they may be included in office
expenses. If these expenses are considerable, one of the following magnitudes may
be followed:

Percentage of In this method, on the basis of past years’ experience the

works cost percentage of selling expenses to works cost is ascertained and
used for finding out the selling and distribution expenses to be
charged to each job or product. This method can be followed
successfully if one product is produced or where selling expenses
are small though various articles are produced. The method will not
take into consideration different efforts involved in selling unless
the effort is in the same proportion as the cost of production.
A percentage From an analysis of past year’s accounts one can determine the
on the selling percentage which normal selling and distribution expenses bear to
price the normal turnover.
This method can be followed in those cases, where the products are
sold at fixed prices and the selling price of each article is known. If
prices fluctuate, the method will not give good results.
An estimated If there is only one product, the total estimated selling expenses
rate per unit can be divided by the total estimated number of unit to be sold to
give the selling on cost per unit. It would be better if constant and
variable expenses are separately treated, if there are more than
one product.
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"Past of ice is water,

Future of ice is water too,
We should live like ice,
No regrets for past &
No worries about future"
PRIMARY DISTRIBUTION OF OVERHEAD EXPENSES/OVERHEAD ANALYSIS
SHEET
Q. 1. A company’s production costs for the year ending 30-06-2020 are given below:
Production department Service departments
Item P1 P2 P3 S1 S2
` ` ` ` `
Direct wages 18,000 15,000 12,000 9,000 6,000
Stock value 45,000 27,000 18,000 - -
Area in (sq. meters) 400 300 270 150 80
Book value of machine 72,000 54,000 48,000 6,000 -
Total kw hrs. 600 400 300 150 50
No. of workers 54 48 36 24 18
The other expenses are as follows:
Rent ` 6,000
Repair ` 3,600
Depreciation ` 2,700
Power ` 5,400
Light ` 600
Supervision ` 9,000
Fire insurance for stock ` 3,000
ESI contribution ` 900
(i) What will be overheads as per primary distribution of production departments:
(A) P1 – 2,910; 67P2 – 1,610; P3 – 11,350
(B) P1 – 11,350; P2 – 8,505; P3 – 6,825
(C) P1 – 11,350; P2 – 1,610; P3 – 8,505
(D) P1 – 11,910; P2 – 8,610; P3 – 6,350

(ii) What will be amount of overheads as per primary distribution of service

departments:
(A) S1 – 2,910; S2 – 1,610
(B) S1 – 11,350; S2 – 8,505
(C) S1 – 11,350; S2 – 1,610
(D) S1 – 11,910; S2 – 8,610
Ans: (i) B; (ii) A.
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Q. 2. The ‘Prabhat Ltd.’ is divided into two production cost centers A and B, and two
service cost centers X and Y. The following is the summary of overhead costs for a
period. Works Manager’s Salary `4,000; Power `21,000; Contribution to PF `9,000;
Rent `6,000; Plant Maintenance `4,000. Canteen expenditure `12,000; Depreciation
of Plant and Machinery ` 20,000.
The following information is made available from the various departments.
Production department Service departments
Item A B X Y
` ` ` `
Direct wages 40,000 20,000 10,000 5,000
Area in (sq. meters) 2,000 3,000 500 500
Book value of machine 75,000 1,00,000 25,000 -
Total kw hrs. 3 3 1 -
No. of workers 16 8 4 4
(i) What will be amount of overheads as per primary distribution of production
departments:
(A) A – 2,910; B – 1,610
(B) A – 9,700; B – 3,100
(C) A – 11,350; B – 1,610
(D) A – 32,800; B – 30,400

(ii) What will be amount of overheads as per primary distribution of service

departments:
(A) A – 2,910; B – 1,610
(B) A 7– 9,700; B – 3,100
(C) A – 11,350; B – 1,610
(D) A – 32,800; B – 30,400
Ans: (i)6 D (ii) B
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ENTERTAINMENT
Teacher: How Old is your father.
Sunny: As old as I m.
Teacher: How is it possible?
Sunny: He becomes father only after I was born.
SECONDARY DISTRIBUTION (APPORTIONMENT OF SERVICE DEPARTMENTS
COST TO PRODUCTION DEPARTMENTS) (Reapportionment)
DIRECT DISTRIBUTION METHOD
Q. 3. The following figures are taken from the accounts of BALEN LTD a manufacturing
concern for the month of October 2020:
Indirect Materials:
Production Departments: X ` 19,000; Y ` 24,000; Z ` 4,000.
Service Departments: Maintenance ` 30,000; Stores ` 8,000.
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Indirect Wages:
Production Departments:
X ` 18,000; Y ` 22,000; Z ` 6,000.
Service Departments: Maintenance ` 20,000; Stores ` 13,000.
Other Expenses:
Power and Light: ` 1,20,000; Rent and Rates ` 56,000; Insurance of Assets ` 20,000;
Meal Charges ` 60,000; Depreciation @ 6% p.a. on capital value of assets.
Departmental data
Items Production departments Service departments
X Y Z Maintenance Stores
Area (Sq. ft.) 4,000 4,000 3,000 2,000 1,000
Capital value of 20,00,000 24,00,000 16,00,000 12,00,000 8,00,000
assets (`)
Kilowatt hours 2,000 2,200 800 750 250
Number of 180 240 60 80 40
employees
Service rendered by Maintenance Department to Production Departments:
X 50%; Y 30%; Z 20%.
Service rendered by Stores Department to Production Departments:
X 40%; Y 40%; Z 20%.
(i) What will be overheads as per primary distribution of production departments:
(A) X – 2,910; Y – 1,610; Z – 1,26,000
(B) X – 9,700; Y – 3,100: Z – 1,48,000
(C) X – 1,26,000; Y – 1,48,000; Z – 56,000
(D) X – 32,800; Y – 30,400; Z – 56,000

(ii) What will be overheads as per primary distribution of service departments:

(A) Maintenance – 12,910; Stores – 11,610
(B) Maintenance – 99,700; Stores – 33,100
(C) Maintenance – 90,000; Stores – 40,000
(D) Maintenance – 32,800; Stores – 30,400

(iii) What will be Total overheads of production departments after secondary

distribution:
(A) X – 12,910; Y – 21,610; Z – 1,26,000
(B) X – 1,87,000; Y – 1,91,000: Z – 82,000
(C) X – 1,26,000; Y – 1,48,000; Z – 56,000
(D) X – 32,800; Y – 30,400; Z – 56,000 (JUNE 2018)
Ans: (i) C; (ii) C; (iii) B.
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STEP DISTRIBUTION METHOD/NON-RECIPROCAL METHOD
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Q. 4. A manufacturing company has two production departments X and Y and three

service departments, time keeping, stores and maintenance. The departmental
summary showed the following expenses for the month of October:
Production departments `
X 16,000
Y 10,000
Service departments:
Time keeping 4,000
Stores 5,000
Maintenance 3,000

The other information is:

Particulars Production depts. Service depts.
X Y Time Stores Maintenance
keeping
No. of employees 40 30 20 16 10
No. of stores 24 20 - - 6
requisitions
Machine hours 2,400 1,600 - - -
(i) What will be Total overheads of production department X after secondary
distribution:
(A) X – 12,910
(B) X – 22,845
(C) X – 1,26,000
(D) X – 32,800

(ii) What will be Total overheads of production department Y after secondary

distribution:
(A) Y – 12,910
(B) Y – 22,845
(C) Y – 15,155
(D) Y – 32,800
Ans: (i) B; (ii) C.
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SIMULTANEOUS EQUATION METHOD
Q. 5. Production and Service department’s expenses:
`
Production department:
A 6,50,000
B 6,00,000
C 5,00,000
Service department:
P 1,20,000
Q 1,00,000
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The allocation is:

Production Departments Service departments
A B C P Q
P 30 40 15 - 15
Q 40 30 25 5 -
(i) What will be Total overheads of production department A after secondary
distribution:
(A) A – 7,12,910
(B) A – 7,22,845
(C) A – 7,35,340
(D) A – 7,32,800

(ii) What will be Total overheads of production department B after secondary

distribution:
(A) A – 6,12,910
(B) A – 6,22,845
(C) A – 6,35,340
(D) A – 6,86,045

(iii) What will be Total overheads of production department C after secondary

distribution:
(A) A – 5,12,910
(B) A – 5,48,615
(C) A – 5,35,340
(D) A – 5,32,800
Ans: (i) C; (ii) D; (iii) B.
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Q. 6. A company’s production costs for the year ending 30-06-2020 are given below:
Production department Service departments
Item P1 P2 P3 S1 S2
` ` ` ` `
Direct wages 18,000 15,000 12,000 9,000 6,000
Stock value 45,000 27,000 18,000 - -
Area in (sq. meters) 400 300 270 150 80
Book value of machine 72,000 54,000 48,000 6,000 -
Total kw hrs. 600 400 300 150 50
No. of workers 54 48 36 24 18
The other expenses are as follows:
Rent ` 7,200
Repair ` 3,600
Depreciation ` 2,700
Power ` 5,400
Light ` 600
Supervision ` 9,000
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Fire insurance for stock ` 3,000

Cost of idle time ` 900
(i) What will be overheads as per primary distribution of production departments:
(A) P1 – 22,910; P2 – 11,610; P3 – 1,26,000
(B) P1 – 11,750; P2 – 8,805: P3 – 7,095
(C) P1 – 1,26,000; P2 – 1,48,000; P3 – 56,000
(D) P1 – 32,800; P2 – 30,400; P3 – 56,000

(ii) What will be overheads as per primary distribution of service departments:

(A) S1 – 2,910; S2 – 1,610
(B) S1 – 9,700; S2 – 3,100
(C) S1 – 3,060; S2 – 1,690
(D) S1 – 2,800; S1 – 3,400

(iii) If S1 and S2 use 10% of each other's facilities, find the total cost of S1 by the
simultaneous equation method.:
(A) S1 – 2,910
(B) S1 – 7,000
(C) S1 – 6,000
(D) S1 – 3,262
Ans: (i) B (ii) C (iii) D
---------------------------------------------------------------------------------------------
Q. 7. A manufacturing company has three production departments and two service
departments. Given below are the production overheads incurred in respect of each
department:
Production department Service department
P ` 1,80,000 X ` 2,34,000
Q ` 1,70,000 Y ` 3,00,000
R ` 1,50,000
Service department overheads are proposed to be charged to production
departments on the following basis:
P Q R X Y
Service 20% 40% 30% - 10%
department
X
Service 40% 20% 20% 20% -
department
Y
(i) What will be total amount of overheads of X and Y after solving the simultaneous
equation.
(A) X – 3,00,000; Y – 3,30,000
(B) X – 3,30,000; Y – 3,00,000
(C) X – 3,00,000; Y – 4,00,000
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(D) X – 4,00,000; Y – 3,30,000

(ii) What will be total amount of overheads of production departments after secondary
distribution (Apply simultaneous equation).
(A) P – 3,72,000; Q – 3,56,000; R – 3,06,000
(B) P – 3,30,000; Q – 3,00,000; R – 3,72,000
(C) P – 3,00,000; Q – 4,00,000; R – 3,56,000
(D) P – 4,00,000; Q – 3,30,000; R – 3,06,000

Ans:
Simultaneous equation
X = 2, 34,000 + .20Y
Y = 3, 00,000 + .10X
X = 2, 34,000 + .20(3, 00,000+.10X)
X = 2, 34,000 + 60,000 + .02X
.98X = 2, 94,000
X = 3, 00,000.
Y = 3, 30,000.

Statement of secondary distribution

Particulars Basis P Q R
Overheads As per primary 1,80,000 1,70,000 1,50,000
distribution
Apportionment of X 20%, 40%, 30% 60,000 1,20,000 90,000
Apportionment of Y 40%, 20%, 20% 1,32,000 66,000 66,000
Production department overheads 3,72,000 3,56,000 3,06,000
---------------------------------------------------------------------------------------------
Q. 8. A factory is having three production departments A, B and C, and two service
departments S and T.
The expenses incurred by the production departments during a period are:
A ` 25,000; B ` 31,000; and C ` 28,000. The expenses for S are ` 8,000 and the T
are ` 13,900.
The expenses of the S and T are apportioned to the production departments on the
following basis:
A B C S T
Expenses of S 30% 20% 40% - 10%
Expenses of T 40% 15% 25% 20% -
(i) What will be total amount of overheads of production department A after
secondary distribution as per simultaneous equation method.
(A) 34,300
(B) 35,450
(C) 36,150
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(D) None of the above

(ii) What will be total amount of overheads of production department B after

secondary distribution as per simultaneous equation method.
(A) 34,300
(B) 35,450
(C) 36,150
(D) None of the above

(iii) What will be total amount of overheads of production department C after

secondary distribution as per simultaneous equation method.
(A) 34,300
(B) 35,450
(C) 36,150
(D) None of the above (December 2018)
Ans: (i) A (ii) B (iii) C
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Q. 9. A manufacturing company has three production departments and two service
departments. Given below are the production overheads as per primary distribution
summary in respect of each department:
Production department Service department
A ` 7,810 P ` 4,000
B ` 12,543 Q ` 2,600
C ` 4,547
Service department overheads are proposed to be charged to production
departments on the following basis:
A B C P Q
Service department P 30% 40% 20% - 10%
Service department Q 10% 20% 50% 20% -
(i) What will be total amount of overheads of production department A after
secondary distribution as per simultaneous equation method.
(A) 4,300
(B) 5,450
(C) 9,500
(D) None of the above

(ii) What will be total amount of overheads of production department B after

secondary distribution as per simultaneous equation method.
(A) 34,300
(B) 35,450
(C) 15,000
(D) None of the above
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(iii) What will be total amount of overheads of production department C after

secondary distribution as per simultaneous equation method.
(A) 4,300
(B) 5,450
(C) 7,000
(D) None of the above

Ans:
Simultaneous equation
P = 4,000 + .20Q
Q = 2,600 + .10P
P = 4,000 + .20(2,600+.10P)
P = 4,000 + 520 + .02P
.98P = 4,520
P = 4,612.
Q = 3,061.

Statement of secondary distribution

Particulars Basis A B C
Overheads As per primary ` 7,810 ` 12,543 ` 4,547
distribution
Apportionment of P 30%, 40%, 20% 1,384 1,845 922
Apportionment of Q 10%, 20%, 50% 306 612 1,531
Production department overheads 9,500 15,000 7,000
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Q. 9A. ZEESLIN ltd. a manufacturing company has three production departments and two
service departments.
The departmental overhead distribution summary of January 2021 gives the following
details:
Production departments `
M ` 16,000
S ` 13,000
T ` 14,000 43,000
Service departments
X ` 4,680
Z ` 6,000 10,680
53,680
The service department expenses are charged on % basis:
Service departments Production departments Service departments
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M S T X Z
X 20% 25% 35% - 20%
Z 25% 25% 40% 10% -
The company uses the simultaneous equation method for apportionment and distribution of
service departments overhead expenses to production departments.
Present figure to nearest rupee.
Based on the above information, answer the below mentioned 4 questions:
(1) What is the total overhead expenses of service department Z (its own + share of X)?
(A) ` 7,078;
(B) ` 7,150;
(C) ` 7,210;
(D) ` 7,250;

(2) What is the total overhead expenses of department M after secondary distribution?
(A) ` 16,116;
(B) ` 16,680;
(C) ` 18,247;
(D) ` 18,847;

(3) What is the total overhead expenses of department S after secondary distribution?
(A) ` 7,078;
(B) ` 1,050;
(C) ` 16,116;
(D) ` 18,717;

(4) What is the total overhead expenses of department T after secondary distribution?
(A) ` 18,717;
(B) ` 16,116;
(C) ` 10,320;
(D) ` 7,078; (December 2020)
Ans: (1) 7,078 (2) 18,847 (3) 16,116 (4) 18,717;
------------------------------------------------------------------------------------------------------
REPEATED RE-DISTRIBUTION METHOD/CONTINUED DISTRIBUTION METHOD
Q. 10. A company has three production department and two service departments.
The department distribution summery for a period has the following totals. You are
required to distribute the cost-of-service departments to the production department
based on repeated re-distribution method:
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Production department:
P1 ` 2.400
P2 ` 2,100
P3 ` 1,500
Service department:
S1 ` 700
S2 ` 900
The total expenses of service department are charged out on a percentage basis as
follows:
P1 P2 P3 S1 S2
S1 20% 40% 30% - 10%
S2 40% 20% 20% 20% -
(i) What will be total amount of overheads of production department P1 after
secondary distribution as per repeated distribution method.
(A) 4,300
(B) 5,450
(C) 9,500
(D) 2,975

(ii) What will be total amount of overheads of production department P2 after

secondary distribution as per repeated distribution method.
(A) 4,300
(B) 5,450
(C) 5,000
(D) 2,657

(iii) What will be total amount of overheads of production department P3 after

secondary distribution as per repeated distribution method.
(A) 4,300
(B) 5,450
(C) 7,000
(D) 1,967
Ans: (i) D (ii) D (iii) D
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Q. 11. Production and Service department’s expenses:
`
Production department:
A 6,50,000
B 6,00,000
C 5,00,000
Service department:
P 1,20,000
Q 1,00,000
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The allocation is:

Production Departments Service departments
A B C P Q
P 30 40 15 - 15
Q 40 30 25 5 -
(i) What will be total amount of overheads of production department P1 after
secondary distribution as per repeated distribution method.
(A) 4,30,000
(B) 5,45,000
(C) 9,50,000
(D) 7,35,340

(ii) What will be total amount of overheads of production department P2 after

secondary distribution as per repeated distribution method.
(A) 4,30,000
(B) 5,45,000
(C) 5,00,000
(D) 6,86,045

(iii) What will be total amount of overheads of production department P3 after

secondary distribution as per repeated distribution method.
(A) 4,30,000
(B) 5,45,000
(C) 7,00,000
(D) 5,48,615
Ans: (i) D (ii) D (iii) D
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OVERHEAD RATE/ABSORPTION RATE/RECOVERY RATE/PRE-DETERMINED
RATE
PRODUCTION UNIT METHOD
Q. 12. A manufacturer found that his production costs for an accounting period had
been as follows:
Direct wages 80,000
Direct material cost 20,000
Production overhead 1, 60,000
Units produced 20,000
The direct cost of an order was:
Direct wages ` 800
Direct material cost ` 3,000
Units produced in order 3,000
(i) Overhead rate per unit will be:
(A) 4
(B) 8
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(C) 12
(D) 16

(ii) Calculate the works overheads chargeable to order, using overhead rate per unit:
(A) 12,000
(B) 16,000
(C) 24,000
(D) 32,000
ANS: (i) B (ii) C
---------------------------------------------------------------------------------------------
DIRECT MATERIAL COST % METHOD
Q. 13. A manufacturer found that his production costs for an accounting period had
been as follows:
Direct wages 60,000
Direct material cost 80,000
Production overhead 40,000
The direct cost of job 155 was:
Direct material cost ` 16,000
(i) Overhead rate as per % of direct material method will be:
(A) 40%
(B) 50%
(C) 12%
(D) 16%

(ii) Calculate the production overheads chargeable to job 155, using overhead rate
as per % of direct material method:
(A) 2,000
(B) 8,000
(C) 4,000
(D) 3,000
Ans: (i) B (ii) B
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DIRECT WAGES COST % METHOD
Q. 14. In an Engineering Factory, the following have been extracted for the quarter
ended 31st December 2020.
Production departments Service departments
A B C X Y
Direct wages (`) 30,000 45,000 60,000 15,000 30,000
Direct material (`) 15,000 30,000 30,000 22,500 22,500
Number of workers 1,500 2,250 2,250 750 750
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Electricity KWH 6,000 4,500 3,000 1,500 1,500

Assets value 60,000 40,000 30,000 10,000 10,000
Number of light points 10 16 4 6 4
Area sq. yards 150 250 50 50 50
The expenses for the period were:
Amount (`)
Power 1,100
Lighting 200
Stores overheads 800
Welfare of staff 3,000
Depreciation 30,000
Repairs 6,000
General overheads 12,000
Rent and taxes 550
(i) If Y is apportioned among production departments in the ratio of direct wages and
X in the ratio of 5:3:2 as per direct distribution method, what will be total overheads
of production departments after secondary distribution:
(A) A – 51,247; B – 45,962; C – 46,441
(B) A – 17,700; B – 14,330: C – 12,570
(C) A – 26,000; B – 48,000; C – 56,000
(D) A – 32,800; B – 30,400; C – 56,000

(ii) Compute the departmental overhead rate for each of the production departments,
assuming that overheads are recovered as a percentage of direct wages:
(A) A – 170.82%; B – 102.14%; C – 77.40%
(B) A – 177.00%; B – 143.30%: C – 25.70%
(C) A – 260.00%; B – 480.00%; C – 56.00%
(D) A – 328.00%; B – 304.00%; C – 56.00%
Ans: (i) A (ii) A
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Q. 15. The following information relates to the production department of a factory:
Material used ` 30,000
Direct labour ` 20,000
Overheads ` 5,000
On an order carried out in the department, direct wages amounted to ` 3,000. Find
out the overheads chargeable to this order on the basis of direct wages:
(A) ` 700
(B) ` 650
(C) ` 800
(D) ` 750
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Q. 16. XYZ manufactures household pumps which pass through three departments
viz. Foundry, Machine Shop and Assembling. The manufacturing expenses are as
follows:
Foundry Machine Assembling Total
` ` ` `
Direct wages 10,000 50,000 10,000 70,000
Works overhead 5,000 90,000 10,000 1,05,000
The factory cost of manufacturing a type of ‘C’ pump was prepared by the company
as follows:
`
Material 16
Wages: Foundry 2
Machine shop 4
Assembling 2
8
Works overhead: 150% of direct wages 12
36
(i) Is there any fallacy?
(A) Yes
(B) No

(ii) If there is any fallacy, what will be correct factory cost?

(A) There is no fallacy;
(B) 34.2
(C) 43.2
(D) 23.4
Ans: (i) A (ii) B
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Q. 17. Consider the following data pertaining to the production of a company for a
particular month: Opening stock of raw material ` 11,570 Closing stock of raw
material ` 10,380 Purchase of raw material during the month ` 1,28,450 Total
manufacturing cost charged to product ` 3,39,165 Factory overheads are applied at
the rate of 45% of direct labour cost.
(i) What will be raw material used:
(A) 1,29,640
(B) 2,19,640
(C) 3,29,640
(D) 2,29,640

(ii) What will be amount of direct labour:

(A) 2,09,525
(B) 1,29,640
(C) 2,19,640
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(D) 1,44,500

(iii) What is the amount of factory overheads applied to production:

(A) 65,025
(B) 56,025
(C) 44,500
(D) 55,500
Ans: (i) A (ii) D (iii) A
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PRIME COST % METHOD
Q. 18. In a certain factory three products are made from different materials by similar
process. For a typical period, production costs are as under:
A B C
Material used 1,600 2,000 800
Direct labour cost 1,200 1,000 400
Overheads (Actual) 800 650 350
Overhead is charged to cost of each product at the rate of 25% on prime cost.
(i) Is application of prime cost method in the above case is reasonable?
(A) Yes
(B) No

(ii) Which method is preferable in above case?

(A) % of prime cost
(B) % of Direct wages
(C) % of material cost
(D) Labour hour rate

(iii) What will be amount of absorbed overheads as per % of prime cost method?
(A) A – 800; B – 650; C - 350
(B) A – 700; B – 750; C – 300
(C) A – 800; B – 650; C – 300
(D) A – 700; B – 750; C – 350

(iii) What will be absorption rate as per preferable method?

(A) A – 43.75%; B – 37.5%; C – 37.5%
(B) A – 43.75%; B – 37.5%; C – 73.5%
(C) A – 43; B – 37; C – 37
(D) A – 43%; B – 37%; C – 37%
Ans: (i) B (ii) C (iii) B (iv) A
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Q. 19. A concern producing a single product estimates the following expenses for a
production period:
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`
Direct material 50,000
Direct labour 50,000
Direct expenses 5,000
Overhead expenses 2,10,000
What will be the overhead recovery rate on the basis of prime cost?
(A) 100%
(B) 200%
(C) 300%
(D) 400%
(CMA INTER DECEMBER 2013 NEW)
Ans: B
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LABOUR HOUR RATE METHOD
Q. 20. The following information is given:
The total number of operators working in a 300
deptt.
The number of working days per year 300
Number of hours per day 8
Total departmental overhead ` 3,42,000
Normal idle time 5% of the total number of days
(i) What will be number of working hours?
(A) 2,84,000 hours
(B) 4,84,000 hours
(C) 6,84,000 hours
(D) 8,84,000 hours

(ii) Find the overheads rate per direct labour hour.

(A) 0.5 per hour
(B) 1.5 per hour
(C) 2.5 per hour
(D) 3.5 per hour (CMA INTER JUNE 2014 NEW)
Ans: (i) C (ii) A
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Q. 21. Self-help ltd. has gensets and produces its own power. Data for power cost
are as follows:
Horse power hours Production departments Service
departments
A B X Y
Needed capacity production 10,000 20,000 12,000 8,000
Used during the month of 8,000 13,000 7,000 6,000
may
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During the month of May, costs for generating power amounted to ` 9,300; of this `
2,500 was considered to be fixed cost. Service department X renders service to A, B
and Y in the ratio of 13:6:1, while Y renders service to A and B in the ratio of 31:3.
Given that the direct labour hours in departments A and B are 1,650 hours and 2,175
respectively, find the power cost per labour hour in each of these two depts.
(i) What will be overheads as per primary distribution of production departments:
(A) A – 2,910; B – 1,610
(B) A – 2,100; B – 3,600
(C) A – 1,260; B – 8,000
(D) A – 2,800; B – 3,400

(ii) What will be overheads as per primary distribution of service departments:

(A) X – 2,000; Y – 1,600
(B) X – 9,700; Y – 3,100
(C) X – 3,060; Y – 1,690
(D) X – 2,800; Y – 3,400

(iii) What will be total amount of overheads of production departments after

secondary distribution as per reasonable method:
(A) A – 4,950; B – 4,350
(B) A – 4,350; B – 4,950
(C) A – 4,000; B – 4,000
(D) None of the above

(iv) Compute the departmental overhead rate for each of the production
departments, assuming that overheads are recovered as a labour hour rate:
(A) A – 1; B – 1
(B) A – 7; B – 1
(C) A – 2; B – 4
(D) A – 3; B – 2
ANS: (i) B (ii) A (iii) A (iv) D
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LABOUR HOUR RATE METHOD WITH COST SHEET
Q. 22. The New Enterprises Ltd. has three producing departments A, B and C two
service Departments D and E. The following figures are extracted from the records of
the Co.
Amount (`)
Rent and rates 5,000
General lighting 600
Indirect wages 1,500
Power 1,500
Depreciation on machinery 10,000
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Sundries 10,000
The following further details are available:
A B C D E
Floor space (Sq. mts.) 2,000 2,500 3,000 2,000 500
Light points 10 15 20 10 5
Direct wages 3,000 2,000 3,000 1,500 500
H.P. of machines 60 30 50 10 -
Working hours 6,226 4,028 4,066 - -
Value of material 60,000 80,000 1,00,000 - -
Value of assets 1,20,000 1,60,000 2,00,000 10,000 10,000
The expenses of D and E are allocated as follows:
A B C D E
D 20% 30% 40% - 10%
E 40% 20% 30% 10% -
(i) What will be total overheads of production departments after secondary
distribution as per repeated redistribution method:
(A) A – 1,247; B – 5,962; C – 16,441
(B) A – 7,700; B – 4,330: C – 12,570
(C) A – 9,339; B – 9,061; C – 12,200
(D) A – 2,800; B – 3,400; C – 56,000

(ii) Compute the departmental overhead rate for each of the production departments,
assuming that overheads are recovered as a labour hour rate:
(A) A – 1.5; B – 1.25; C – 7
(B) A – 1.5; B – 1.25: C – 2
(C) A – 2.5; B – 4.25; C – 5
(D) A – 1.5; B – 2.25; C – 3

(iii) What is the factory cost of an article if its raw material cost is `50, labour cost
`30 and it passes through Departments A, B and C. For 4, 5 & 3 hours respectively.
(A) 106.25
(B) 206.25
(C) 56.25
(D) 156.25
ANS: (i) C (ii) D (iii) A
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MACHINE HOUR RATE METHOD
Q. 23. The following information relates to the activities of a production department
of factory for a certain period.
Amount (`)
Material used 36,000
Direct wages 30,000
Labour hours 12,000
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Hours of machinery operation 20,000

Overheads chargeable to the 25,000
department
On one order carried out in the department during the period the relevant data were:
-
Direct materials consumed ` 6,000
Direct labour ` 4,950
Direct labour hours 1,650
Machine hours 1,200
(i) Calculate overhead rate and overhead charges (Order) as per % of direct material
method:
(A) 69.44%; 4,166.4
(B) 68.44%; 4,166.4
(C) 70.44%; 4,166.4
(D) 67.44%; 2,166.4

(ii) Calculate overhead rate and overhead charges (Order) as per % of direct wages
method:
(A) 69.33%; 4,125
(B) 83.33%; 4,125
(C) 70.33%; 4,166
(D) 67.33%; 4,166

(iii) Calculate overhead rate and overhead charges (Order) as per labour hour
method:
(A) 2.083; 3,437
(B) 1.083; 3,437
(C) 3.083; 4,166
(D) 4.083; 4,166

(iv) Calculate overhead rate and overhead charges (Order) as per machine hour
method:
(A) 1.25; 1,500
(B) 2.25; 1,500
(C) 3.25; 3,437
(D) 4.25; 3,437
ANS: (i) A (ii) B (iii) A (iv) A
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Q. 24. The production department of a factory furnishes the following information for
the month of March 2020:
Materials used Rs.54,000
Direct wages Rs.45,000
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Overheads Rs.36,000
Labour hours worked 36,000
Hours of machine operation 30,000
For an order executed by the department during a particular period, the relevant
information was as under:
Materials used Rs.6,000
Direct wages Rs.5,000
Labour hours worked 4,000
Machine hours worked 2,400
On the basis of above information, answer the following:
(i) Overhead rate as per direct material cost % method will be:
(A) 66.67%
(B) 16.67%
(C) 33.33%
(D) None of the above
(ii) Overhead charges chargeable to the job as per direct material cost % method will
be:
(A) 4,000
(B) 4,200
(C) 2,880
(D) None of the above

(iii) Overhead rate as per Labour hours method will be:

(A) 1 per hour
(B) 1.2 per hour
(C) 2.1 per hour
(D) None of the above

(iv) Overhead charges chargeable to the job as per Labour hours method will be:
(A) 4,000
(B) 4,200
(C) 2,880
(D) None of the above

(v) Overhead rate as per Machine hours method will be:

(A) 1 per hour
(B) 1.2 per hour
(C) 2.1 per hour
(D) None of the above

(iv) Overhead charges chargeable to the job as per Machine hours method will be:
(A) 4,000
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(B) 4,200
(C) 2,880
(D) None of the above (CMA INTER JUNE 2013)
Ans: (i) A (ii) A (iii) A (iv) A (v) B (vi) C
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Q. 25. The following information relates to the activities of production Dept. M of MTH
Ltd. for Nov 2020:
Materials Consumed: ` 3, 83,000; Direct labour: ` 5, 74,000; Factory overhead
chargeable to Dept. M: ` 2, 75,760; Labour hours worked: 18,384 hours; Machine
hours: 3064 hours;
One job order carried out in Dept. M has the following details:
Material Consumed: ` 11,000; Direct Labour Cost = ` 19,000; Direct labour hours:
540 hours; Machine hours worked: 85 hours.

On the basis of above information, answer the following:

(i) Overhead rate as per direct material cost % method will be:
(A) 66%
(B) 16%
(C) 72%
(D) None of the above

(ii) Overhead charges chargeable to the job as per direct material cost % method will
be:
(A) 4,000
(B) 4,200
(C) 7,920
(D) None of the above

(iii) Overhead rate as per direct labour cost % method will be:
(A) 66%
(B) 48%
(C) 72%
(D) None of the above

(iv) Overhead charges chargeable to the job as per direct labour cost % method will
be:
(A) 4,000
(B) 9,120
(C) 7,920
(D) None of the above
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(v) Overhead rate as per prime cost % method will be:

(A) 66%
(B) 48%
(C) 29%
(D) None of the above

(vi) Overhead charges chargeable to the job as per prime cost % method will be:
(A) 8,700
(B) 9,120
(C) 7,920
(D) None of the above

(vii) Overhead rate as per Labour hours method will be:

(A) 15 per hour
(B) 12 per hour
(C) 21 per hour
(D) None of the above

(viii) Overhead charges chargeable to the job as per Labour hours method will be:
(A) 4,000
(B) 4,200
(C) 8,100
(D) None of the above

(ix) Overhead rate as per Machine hours method will be:

(A) 90 per hour
(B) 12 per hour
(C) 21 per hour
(D) None of the above

(x) Overhead charges chargeable to the job as per Machine hours method will be:
(A) 7,650
(B) 4,200
(C) 2,880
(D) None of the above (CMA INTER DECEMBER 2014)
Ans: (i) C (ii) C (iii) B (iv) B (v) C (vi) A (vii) A (viii) C (ix) A (x) A
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Q. 26. If in a certain period, factory overheads are ` 22,500 and normal working
hours of machine are 5,000, the machine hour rate will be:
(A) ` 400
(B) ` 4.5
(C) ` 17,500
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(D) ` 27,500
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Q. 27. The following data is available for Akhil ltd for the year ended 31st March 2015:
Administrative overheads ` 2,50,000
Production overheads ` 2,74,200
Factory cost ` 3,42,800
WIP ` 74,000
Machine hours 4,000 hours
The absorption rate for production overheads is:
(A) ` 68.55
(B) ` 216.75
(C) ` 235.25
(D) ` 198.25
Ans: 68.55;
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Q. 28. Ganges Printing Co. has three operating departments:
1. Printing and Binding
2. Lithographing and
3. Engraving.
The company has a job order cost system using a single predetermined expense rate.
The management has been made aware of the deficiencies of using such a rate and
is now interested in departmentalizing factory overhead. A study reveals that:
Department 1 has 3 similar machines representing a large investment and calling for
high repairs and depreciation charges.
Department 2 has the workers perform similar tasks and are therefore paid the same
hourly wage.
Department 3 however has several classes of workers; each group being paid the
same hourly wage. The estimated factory overhead and production data costs are as
follows:
Printing and binding Lithographing Engraving
Factory overheads 40,000 68,750 1,20,000
Direct labour hours 10,000 20,000 40,000
Direct labour cost 25,000 55,000 80,000
Machine hours 20,000 - -
(i) Which method of absorption should be used in department 1:
(A) Machine hour rate
(B) Labour hour rate
(C) % of direct wages
(D) % of direct material

(ii) Which method of absorption should be used in department 2:

(A) Machine hour rate
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(B) Labour hour rate

(C) % of direct wages
(D) % of direct material

(iii) Which method of absorption should be used in department 3:

(A) Machine hour rate
(B) Labour hour rate
(C) % of direct wages
(D) % of direct material

(iv) Calculate overhead rate of each department as per method recommended:

(A) Department 1 – 2; Department 2 – 3.4375; Department 3 – 150%
(B) Department 1 – 3; Department 2 – 2.4375; Department 3 – 100%
(C) Department 1 – 4; Department 2 – 1.4375; Department 3 – 110%
(D) Department 1 – 5; Department 2 – 4.4375; Department 3 – 120%
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Q. 29. Alpha ltd. has 3 production departments and 2 service departments. The
overhead distribution sheet of the company showed the following totals:
Production departments `
P 75,500
Q 72,000
R 96,500
Service departments:
X 46,250
Y 15,750
Other information is as follows:
(1) Working hours of production departments are:
P 6,226 hours
Q 4,028 hours
R 4,066 hours
(2) Services rendered by service departments are as under:
P Q R X Y
X 20% 30% 40% 10%
Y 40% 20% 30% 10%
(i) Calculate the total overheads of the production departments after distributing the
service departments by simultaneous equation method:
(A) P – 93,395; Q – 90,608; R – 1,21,997
(B) P – 93,395; Q – 90,608; R – 2,21,997
(C) P – 93,395; Q – 1,90,608; R – 1,21,997
(D) None of the above

(ii) Calculate the overhead rate per hour of production departments:

(A) P – 15; Q – 22.49; R - 30
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(B) P – 25; Q – 22.49; R – 30

(C) P – 15; Q – 23.49; R – 30
(D) P – 15; Q – 22.49; R - 35 (June 2019)
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Q. 30. The monthly budget of a department is as under:
Amount (`)
Direct material 45,000
Direct wages 60,000
Overheads 90,000
Direct labour hours 15,000
Machine hours 30,000
(i) Find out the overhead recovery rate based on direct material cost method.
(A) 100%
(B) 200%
(C) 300%
(D) 400%

(ii) Find out the overhead recovery rate based on direct labour cost method.
(A) 100%
(B) 150%
(C) 300%
(D) 400%

(iii) Find out the overhead recovery rate based on prime cost method.
(A) 85.71%
(B) 200.7%
(C) 300.7%
(D) 400.7%

(iv) Find out the overhead recovery rate based on direct labour hour rate method.
(A) 1
(B) 2
(C) 3
(D) 6

(v) Find out the overhead recovery rate based on machine hour rate method.
(A) 1
(B) 2
(C) 3
(D) 6
Ans: (i) B (ii) B (iii) A (iv) D (v) C
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CALCULATION OF UNDER OR OVER ABSORPTION OF OVERHEADS

Q. 31. The following particulars were extracted from the records of Epsilon Ltd. on
31st December:
Department A Department B Department C
` ` `
Overhead incurred 2,000 1,500 2,500
Overhead 2,200 1,400 2,250
absorbed
(i) What will be under/over absorption of overheads in Department A:
(A) Under absorption of 200
(B) Over absorption of 200
(C) Under absorption of 100
(D) Under absorption of 250

(ii) What will be under/over absorption of overheads in Department B:

(A) Under absorption of 200
(B) Over absorption of 200
(C) Under absorption of 100
(D) Under absorption of 250

(iii) What will be under/over absorption of overheads in Department C:

(A) Under absorption of 200
(B) Over absorption of 200
(C) Under absorption of 100
(D) Under absorption of 250
ANS: (i) B (ii) C (iii) D
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Q. 32. T ltd uses pre-determined overhead rate of ` 15 per labour hour. The actual
labour hours are 5,750 and the actual overhead cost is ` 85,000.
Amount of under or over absorption of overheads will be:
(A) Over absorption 1,250
(B) Under absorption 1,250
(C) Over absorption 2,500
(D) Under absorption 2,500 (CMA INTER JUNE 2013)
Ans: A
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Q. 33. The budgeted fixed overheads amounted to ` 84,000. The budgeted and actual
production amounted to 20,000 units and 24,000 units respectively. This means that
there will be an:
1. Under-absorption of ` 16,800
2. Under-absorption of ` 14,000
3. Over-absorption of ` 16,800
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4. Over-absorption of ` 14,000
Ans: over absorption: 16,800;
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Q. 34. The budgeted fixed overheads amounted to ` 75,000. The budgeted and actual
production amounted to 15,000 units and 20,000 units respectively. This means that
there will be an:
(A) Under absorption of ` 25,000
(B) Under absorption of ` 18,750
(C) Over absorption of ` 25,000
(D) Over absorption of ` 18,750
Ans: over absorption: 25,000;
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TREATMENT OF UNDER OR OVER ABSORPTION
Q. 35.
Overhead incurred `1,50,000
Overhead recovered ` 1,00,000
Cost of sales ` 10,00,000
Finished goods ` 8,00,000
Work in progress ` 7,00,000
(i) Overheads under absorbed will be:
(A) ` 50,000
(B) ` 1,00,000
(C) ` 1,50,000
(D) ` 1,25,000

(ii) Supplementary rate will be:

(A) ` 0.020
(B) ` 0.025
(C) ` 0.030
(D) ` 0.035

(iii) Amount transfer to cost of sales A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 1,50,000
(D) ` 1,25,000

(iv) Amount transfer to finished goods stock A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 16,000
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(D) ` 1,25,000

(v) Amount transfer to WIP A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 14,000
(D) ` 1,25,000
Ans: (i) A (ii) A (iii) B (iv) C (v) C
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Q. 36. Your company uses a historical cost system and applies overheads on the basis
of “Predetermined” rates. The following are the figures from the Trial Balance as at
30-9-2020:
Dr. (`) Cr. (`)
Manufacturing overheads 4,26,544 -
Manufacturing overheads – Applied - 3,65,904
Work in progress 1,41,480 -
Finished goods stock 2,30,732 -
Cost of goods sold 8,40,588
(i) Under absorption of overheads will be:
(A) ` 50,000
(B) ` 60,640
(C) ` 1,50,000
(D) ` 1,25,000

(ii) If entire amount of under absorption is transfer to profits and loss account, the
profit be:
(A) Increase by ` 60,640
(B) Decrease by ` 60640
(C) No change
(D) None of the above

(iii) Supplementary rate will be:

(A) ` 0.02
(B) ` 0.05
(C) ` 0.03
(D) ` 0.50

(iv) Amount transfer to cost of sales A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 7,074
(D) ` 1,25,000
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(v) Amount transfer to finished goods stock A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 16,000
(D) ` 11,537

(vi) Amount transfer to WIP A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 14,000
(D) ` 42,029

(vii) What will be amount of WIP after adjustment of under absorption:

(A) ` 1,48,554
(B) ` 2,00,000
(C) ` 1,40,000
(D) ` 4,20,294

(viii) What will be amount of Finished goods after adjustment of under absorption:
(A) ` 1,48,554
(B) ` 2,42,269
(C) ` 1,40,000
(D) ` 4,20,294

(ix) What will be amount of cost of goods sold after adjustment of under absorption:
(A) ` 1,48,554
(B) ` 2,00,000
(C) ` 8,82,617
(D) ` 4,20,294
Ans: (i) B (ii) B (iii) B (iv) C (v) D (vi) D (vii) A (viii) B (ix) C
---------------------------------------------------------------------------------------------
WHEN THERE IS INCOMPLETE UNITS
Q. 37. PINKY ltd. recovers overheads at a pre-determined rate of `50 per man-day.
The total factory overheads incurred and the man-days actually worked were `79
lakhs and 1.5 lakhs days respectively. During the period 30,000 units were sold. At
the end of the period 5,000 completed units were held in stock but there was no
opening stock of finished goods. Similarly, there was no stock of uncompleted units
at the beginning of the period but at the end of the period there were 10,000
uncompleted units which may be treated as 50% complete.
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On analyzing the reasons, it was found that 60% of the unabsorbed overheads were
due to defective planning and the balances were attributable to increase in overhead
cost.
On the basis of above information, answer the following:
(i) Under or over absorption will be:
(A) 1,00,000
(B) 2,00,000
(C) 3,00,000
(D) 4,00,000

(ii) Supplementary rate will be:

(A) 1
(B) 2
(C) 3
(D) 4

(iii) Amount transfer to cost of sales A/C will be:

(A) 1,00,000
(B) 1,20,000
(C) 1,40,000
(D) 1,60,000

(iv) Amount transfer to Finished goods A/C will be:

(A) 10,000
(B) 20,000
(C) 30,000
(D) 40,000

(v) Amount transfer to WIP A/C will be:

(A) 10,000
(B) 20,000
(C) 30,000
(D) 40,000
Ans: (i) D (ii) D (iii) B (iv) B (v) B
---------------------------------------------------------------------------------------------
Q. 38. PINKY ltd. recovers overheads at a pre-determined rate of `25 per man-day.
The total factory overheads incurred and the man-days actually worked were
`41,50,000 and 1.5 lakhs days respectively. During the period 30,000 units were
sold. At the end of the period 10,000 completed units were held in stock but there
was no opening stock of finished goods. Similarly, there was no stock of uncompleted
units at the beginning of the period but at the end of the period there were 30,000
uncompleted units which may be treated as 66.67% complete.
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On analyzing the reasons, it was found that 40% of the unabsorbed overheads were
due to defective planning and the balances were attributable to increase in overhead
cost.
(i) Overheads under absorbed will be:
(A) ` 4,00,000
(B) ` 1,00,000
(C) ` 1,50,000
(D) ` 1,25,000

(ii) Amount transfer to profit and loss account due to defective planning will be:
(A) ` 1,60,000
(B) ` 2,00,000
(C) ` 2,40,000
(D) ` 2,80,000

(iii) Supplementary rate will be:

(A) ` 4
(B) ` 3
(C) ` 2
(D) ` 1

(iv) Amount transfer to cost of goods sold A/C will be:

(A) ` 5,00,000
(B) ` 1,20,000
(C) ` 1,50,000
(D) ` 1,25,000

(v) Amount transfer to finished goods stock A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 16,000
(D) ` 40,000

(vi) Amount transfer to WIP A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 14,000
(D) ` 80,000
Ans: (i) A (ii) A (iii) A (iv) B (v) D (vi) D
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Q. 39. PINKY ltd. recovers overheads at a pre-determined rate of `30 per man-day.
The total factory overheads incurred and the man-days actually worked were `
5,20,000 and 12,500 days respectively. During the period 30,000 units were sold. At
the end of the period 10,000 completed units were held in stock but there was no
opening stock of finished goods. Similarly, there was no stock of uncompleted units
at the beginning of the period but at the end of the period there were 30,000
uncompleted units which may be treated as 60% complete.
On analyzing the reasons, it was found that 50% of the unabsorbed overheads were
due to defective planning and the balances were attributable to increase in overhead
cost. (December 2019)
On the basis of above information, answer the following:
(i) Overheads under absorbed will be:
(A) ` 1,45,000
(B) ` 1,00,000
(C) ` 1,50,000
(D) ` 1,25,000

(ii) Amount transfer to profit and loss account due to defective planning will be:
(A) ` 60,000
(B) ` 72,500
(C) ` 40,000
(D) ` 80,000

(iii) Supplementary rate will be:

(A) ` 4.25
(B) ` 3.25
(C) ` 2.25
(D) ` 1.25

(iv) Amount transfer to cost of goods sold A/C will be:

(A) ` 37,500
(B) ` 20,000
(C) ` 50,000
(D) ` 25,000

(v) Amount transfer to finished goods stock A/C will be:

(A) ` 12,500
(B) ` 20,000
(C) ` 16,000
(D) ` 40,000
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(vi) Amount transfer to WIP A/C will be:

(A) ` 50,000
(B) ` 20,000
(C) ` 14,000
(D) ` 22,500
Ans: (i) A (ii) B (iii) D (iv) A (v) A (vi) D
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ADMINISTRATION OVERHEAD RATE
Q. 40. In a factory the expenses of factory are charged on a fixed percentage basis
on wages and office overhead expenses are calculated on the basis of percentage of
works cost.
Order 1 Order 2
Material 12,500 18,000
Wages 10,000 14,000
Selling price 44,850 61,880
% of profit on cost 15% 12%
On the basis of above information, answer the following:
(i) Factory overhead rate will be:
(A) 75%
(B) 30%
(C) 60%
(D) 35%

(ii) Office overhead rate will be:

(A) 75%
(B) 30%
(C) 60%
(D) 35%
---------------------------------------------------------------------------------------------
ABSORPTION OF SELLING AND DISTRIBUTION OVERHEADS
Q. 41. A company produced a simple product in three sizes A, B and C.
Expenses Amount Basis of apportionment
Sales salaries 10,000 Direct charge
Sales commission 6,000 Sales turnover
Sales office expenses 2,096 Number of orders
Advertisement general 5,000 Sales turnover
Advertisement specific 22,000 Direct charge
Packing 3,000 Total volume cu.ft. units sold
Delivery expenditure 4,000 ---- do -----
Warehouse expenses 1,000 ---- do -----
Expenses credit collection 1,296 Number of orders
Data available relating to the three sizes are as follows:
Total Size A Size B Size C
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No. of salesman, all paid same salary 10 4 5 1

Units sold 10,400 3,400 4,000 3,000
No. of orders 1,600 700 800 100
% of specific advertisement 100% 30% 40% 30%
Sales turnover 2,00,000 58,000 80,000 62,000
Volume of cu. Ft. per unit of finished - 5 8 17
product
On the basis of above information, answer the following questions:
(i) What will be the total expenses of A, B and C:
(A) A – 16,634; B – 22,456; C – 15,302
(B) A – 16,634; B – 22,456; C – 16,302
(C) A – 16,634; B – 23,456; C – 15,302
(D) A – 15,634; B – 22,456; C – 15,302

(ii) Cost per unit sold will be:

(A) A – 4.89; B – 5.614; C – 5.10
(B) A – 1.34; B – 2.456; C – 1.02
(C) A – 1.34; B – 2.456; C – 1.52
(D) A – 1.34; B – 2.456; C – 1.12

(iii) Selling cost as a % of sales will be:

(A) A – 28.67%; B – 28.07%; C – 24.68%
(B) A – 16.63%; B – 22.45%; C – 16.30%
(C) A – 16.63%; B – 23.45%; C – 15.30%
(D) A – 15.63%; B – 22.45%; C – 15.30%
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SEGREGATION OF SEMI-VARIABLE OVERHEADS
Q. 42. For a department the standard overhead rate is ` 2.50 per hour and the
overhead allowances are as follows:
Activity level (Hours) Budget overhead allowances
3,000 10,000
7,000 18,000
11,000 26,000
(i) Variable overhead per hour will be:
(A) ` 1 per hour
(B) ` 2 per hour
(C) ` 3 per hour
(D) ` 4 per hour

(ii) Total fixed cost will be:

(A) ` 1,000
(B) ` 2,000
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CA PANKAJ SARAWAGI

(C) ` 3,000
(D) ` 4,000

(iii) The standard activity level on the basis of which the standard overhead rate has
been worked out:
(A) 3,000 hours
(B) 7,000 hours
(C) 8,000 hours
(D) 11,000 hours
Ans: (i) B; (ii) D (iii) D
----------------------------------------------------------------------------------------------------------
Q. 43.
Level of activity
Capacity (%) 80 100
Labour hours 400 500
Maintenance expenses of a plant (`) 2,600 2,750
On the basis of above information, calculate:
(i) Variable cost per hour:
(A) 0.5
(B) 1
(C) 1.5
(D) 2

(ii) Fixed cost:

(A) 1,000
(B) 2,000
(C) 3,000
(D) 4,000
Ans: (i) C (ii) B
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SEGREGATION OF SEMI-VARIABLE OVERHEADS
Q. 44. The budgeted level of activity of the department is 5,000 hours per period and
the study of the various items of expenditure reveals the following:
Amount (`) ` per hour
Indirect wages 0.4
Repairs:
Upto 2,000 hours 100
For each additional 500 hours upto a total of 4,000 35
hours
Additional from 4,001 to 5,000 hours 60
Additional above 5,000 hours 70
Rent and rates 350
Power:
 COST ACCOUNTING (CMA-INTER) 192
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Upto 3,600 hours 0.25

For hours above 3,600 0.20
Consumable supplies 0.24
Supervision:
Upto 2,500 hours 400
Additional for each extra 600 hours above 2500 and 100
upto 4,900 hours
Additional above 4,900 hours 150
Depreciation upto 5,000 hours 650
Above 5,000 hours and upto 6,500 hours 820
Cleaning upto 4,000 hours 60
Above 4,000 hours 80
Heat and lighting:
From 2,100 hours to 3,500 hours 120
From 3,500 hours to 5,000 hours 150
Above 5,000 hours 175
(i) Overhead rate per hour will be as per fixed budget:
(A) 1.457
(B) 1.372
(C) 1.732
(D) None of the above

(ii) Overhead rate per hour will be at 70% and 110% as per flexible budget:
(A) 70% = 1.457; 110% = 1.372
(B) 70% = 1.372; 110% = 1.457
(C) 70% = 1.457; 110% = 1.732
(D) None of the above
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 COST ACCOUNTING (CMA-INTER) 193
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" ’ will forget what you

said,
people will forget what you did,
w w
. "
 COST ACCOUNTING (CMA-INTER) 194
CA PANKAJ SARAWAGI

Study note – 2
Cost ascertainment – Elements of
cost
CHAPTER – 5A.
COMPREHENSIVE MACHINE HOUR
RATE
"Life shrinks or expands in ’ ."
MACHINE HOUR RATE
This is the rate calculated by dividing the actual or budgeted overhead cost
related to a machine or a group of machines by the appropriate number of
machine hours. These hours could be actual hours or budgeted hours. When
budgeted hours are used, they are taken at average capacity at which a factory
normally operates.

A machine hour rate may be calculated using only those overheads which are
directly related to the machine e.g. power, fuel, repairs, maintenance,
depreciation etc. These expenses are totaled and then divided by the hours to
compute the rate. This is called as ordinary machine hour rate. Whereas, if costs
not related to machine are also included (e.g. supervision, rent, lighting, heating
etc.) for the rate calculation, such rate is called as Composite machine hour rate.

Total factory overheads of the department

Overhead rate = ------------------------------------------------
No. of machine hrs. in the department

STATEMENT OF MACHINE HOUR RATE

Particulars `
STANDING CHARGES:
Supervision Xx
Rent Xx
Lighting Xx
Heating Xx
Insurance Xx
Administrative expenses allocated to the Xx
machine
Foreman’s salary Xx
MACHINE EXPENSES:
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Power Xx
Fuel Xx
Repairs Xx
Maintenance Xx
Depreciation Xx
Consumables supplies Xx
Spare parts Xx
TOTAL EXPENSES Xx

SET-UP TIME
The time required to prepare a work station from a standard condition to
readiness to commence a specified operation.

Note: if there is any setting up time and it is non – productive, it should be deducted
from the total machine hours.

If there is any setting up time and it is productive it should not be deducted from
the total machine hours.

CALCULATION OF MACHINE HOURS

Total hours Xxx
(-) setting up time (unproductive) Xxx
(-) break down Xxx
(-) maintenance Xxx
Xxx

GLOSSARY
Machine A rate calculated by dividing the budget or estimated overhead
Hour Rate or labour and overhead cost attributable to a machine group of
similar machines by the appropriate number of machine hours.

The hours may be the number of hours for which the machine
or group is expected to be operated, the number of hours which
would relate to normal working for the factory, or full capacity.
 COST ACCOUNTING (CMA-INTER) 196
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Ek admi apne bete ko cycle par baitha kar

rulaye ja raha tha.
Kisi ne pucha tumhara beta kyo ro raha h.
Admi bola: CYCLE me ghanti nahi hai.
COMPREHENSIVE MACHINE HOUR RATE
Q. 1. In a machine department of a factory there are 5 identical machines. From the
particulars given below; prepare the machine hour rate for one of the machines.
Space of the department 10,000 sq. mts.
Space occupied by the machine 2,000 sq. mts.
Cost of the machine 20,000
Scrap value of the machine 300
Estimated life of the machine 13 years
Depreciation 7.5% p.a.
Normal running of the machine 2,000 hours p.a.
Power consumed by the machine 3,000 p.a.
Repairs and maintenance throughout the working life of the 5,200
machine
Sundry supplies including oil etc. 600 p.a.
Other expenses of the department:
Rent 9,000
Lighting (To be apportioned according to workers employed) 400
Supervision 1,250
Other charges 5,000
It is ascertained that the degree of supervision required by the machine is 2/5th and
3/5th being devoted to other machines.
There are 16 workers in the department of whom 4 attended to the machine and the
remaining to the other machines.
Assumption: Other charges considered standing.
---------------------------------------------------------------------------------------------
Q. 2. From the following particulars given below compute Machine hour rate for a
machine.
Cost of the machine 24,000
Scrap value 4,000
Estimated working life 40,000 hours
Estimated repairs and maintenance during the whole 2,000
life
Standing charges of the shop for 4 weekly period 3,000
Working hours in 4 weekly period 100 hours
Number of machines in the shop 30
Power used per hour 4 units @ 10 paise per unit
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Q. 3. In a machine department of a factory there are 5 identical machines. From the

particulars given below; prepare the machine hour rate for one of the machines.
Space of the department 8,000 sq. ft.
Space occupied by the machine 1,600 sq. ft.
Cost of the machine 20,000
Estimated life of the machine 10 years (2,000 hours p.a.)
Depreciation 7.5% p.a.
Power consumed by the machine 3,000 p.a.
Repairs and maintenance 520 p.a.
Other expenses of the department:
Rent 9,000
Lighting 750
Supervision 1,500
Other charges 4,000
It is ascertained that the degree of supervision required by the machine is 2/5th and
3/5th being devoted to other machines.
There are 3 mechanics drawing ` 50, ` 60, ` 70 p.m. respectively.
---------------------------------------------------------------------------------------------
Q. 4. From the following particulars, calculate machine hour rate:
Cost of machine ` 10,000
Estimated life 10 years
Scrap value ` 1,000
Estimated working time 50 weeks of 40 hours each (2,000
hours p.a.)
Power used during production is 16 units per hour @ 10 paisa per unit.
The machine requires a chemical solution ` 20 each time
which is replaced at the end of each week
at a cost of
Cost of maintenance ` 1,200 per annum
Two attendants control the operation of ` 120
this machine together with five other
identical machines. Their combined weekly
wages
General work overheads allocated to this ` 2,000
machine for the year
---------------------------------------------------------------------------------------------
Q. 5. Work out the machine hour rate for the following machine:
Details Amount (`)
Cost of machine 58,000
Estimated scrap value 3,000
Working life 20,000 hours
Repairs and maintenance during working life of machine 12,000
Power ` 1 per hour
Rent per month (10% to be charged for this machine) 1,500
Normal running hours of machine per month 180
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Other Standing charges p.m. 200

---------------------------------------------------------------------------------------------
UNPRODUCTIVE AND SETTING UP TIME
Q. 6. The following particulars relate to a processing machine treating a typical
material. You are required to calculate the machine hour rate.
The cost of the machine 10,000
Estimated life 10 years
Scrap value 1,000
Working time (50 weeks of 44 hrs. each) 2,200 hrs.
Machine maintenance per annum 200 hrs.
Setting up time 5% of Total productive time
Electricity 16 units per hr. @ 10 paise per
unit
Chemicals required weekly ` 20
Maintenance cost per year 1,200
Two attendants control the operation of this ` 140
machine together with 6 other identical
machines. Their combined weekly wages
General work overheads allocated to this ` 2,000
machine for the year
---------------------------------------------------------------------------------------------
Q. 7. AT ltd. engineering co. having 25 different types of automatic machines,
furnishes you the following data for 2019-20 in respect of machine B:
Cost of the machine 50,000
Life 10 years
Scrap value Nil
Overheads expenses:
Factory rent 50,000 p.a.
Heating and lighting 40,000 p.a.
Supervision 1,50,000 p.a.
Reserve equipment for machine B 5,000 p.a.
Area of the factory 80,000 sq. ft.
Area occupied by machine B 3,000 sq. ft.
Wages of operator ` 24 for 8 hours (he attends one machine
when it is under setup and 2 machines
while under operation)
Production hours 3,600 p.a.
Setting up time 400 hours
Power 0.5 per hour
Prepare a schedule of comprehensive machine hour rate and find out the cost of the
following jobs:
Job 1102 Job 1308
Set up time (hrs.) 80 40
Operation time (hrs.) 130 160
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Q. 8. 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 total productive time
Additional information:
(1) Power 25 units @ ` 5 per unit per hour .
(2) Cost of repairs and maintenance ` 26,000 per annum.
(3) Chemicals required for operating the machine ` 2,600 per month.
(4) Other Overheads chargeable to the machine ` 18,000 per month.
(5) Insurance premium per annum 2% of the cost of the machine.
(6) No. of operators – 02 (looking after three other machines also).
(7) Salary per operator per month ` 18,500.
-------------------------------------------------------------------------------------
Q. 9. From the following information, calculate the machine hour rate for recovery of
overheads for a drilling machine installed in a machine shop.
(1) The machine operates for 8 hours a day and 300 days a year.
(2) 400 hours of machine time in a year is used for repairs and maintenance.
(3) Setting up time of the machine is 200 hours per annum.
(4) Annual cost of repairs and maintenance of the machine is `40,000.
(5) Power used is 10 units per hour at a cost of `8 per unit.
(6) An operator, whose monthly wages is ` 8,000, devotes 75% of his time exclusively
to operate the machine.
(7) Depreciation is ` 2, 40,000 per annum and insurance is `25,000 per annum.
(8) Other indirect expenses chargeable to the machine are ` 12,000 per month.
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 COST ACCOUNTING (CMA-INTER) 200
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"what is the meaning of life?

Life itself has no meaning,

but Life is an opportunity to create a
meaning"

COST ACCOUNTING STANDARD - 10

DIRECT EXPENSES
 COST ACCOUNTING (CMA-INTER) 201
CA PANKAJ SARAWAGI

CHAPTER – 5B
COST ACCOUNTING STANDARD - 10
DIRECT EXPENSES
MEANING OF DIRECT EXPENSES
Expenses relating to manufacture of a product or rendering a service, which can be
identified or linked with the cost object other than direct material cost and direct
employee cost.

The following expenses may be treated as direct expenses (inclusions):

 Cost of patents;
 Royalty payment;
 Hire charges in respect of special machinery or plant;
 Cost of special patterns, designs or tools;
 Experimental costs and expenditure in connection with models;
 Architect, surveyor and other consultant fee;
 Travelling expenses to site;
 Inward charges and freight charges on material;

The following are not the part of direct expenses (exclusions):

 Finance cost;
 Imputed cost;
 Recoveries, credits, subsidy, grant received;
 Penalty, damages paid to statutory authorities;

GENAERAL PRINCIPLES OF MEASUREMENT OF DIRECT EXPENSES

 Identification of direct expenses shall be based on traceability in an
economically feasible manner;
 Direct expenses incurred for bought out resources shall be determined at
invoice price including all taxes and duties and any other expenditure directly
attributed thereto net of trade discounts, taxes and duties refundable or to be
credited;
 Direct expenses paid in lump sum or which are in the nature of one-time
payment shall be amortized on the basis of estimated output or benefit to be derived
from such expenses;
 Finance cost shall not be part of direct expenses;
 Any subsidy or grant received with respect to any direct expenses shall be
reduced for ascertainment of the cost of the cost object;
 Penalties or damages paid shall not be part of direct expenses;
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 Any change in the cost accounting principles applied for measurement of the
direct expenses should be made only if it is required by law or for compliance with
the requirement of a CAS or a change would result in a more appropriate preparation
and presentation of cost statement of the organization;
 Credit or recoveries relating to direct expenses shall be deducted to arrive at
the net direct expenses;

MATCH THE FOLLOWING

COLUMN I COLUMN II
1. CAS-10 A. Replacement method
B. Cost of utilities
C. Production strategy
D. Direct expenses
(December 2019)
 COST ACCOUNTING (CMA-INTER) 203
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Q. 1. Calculate the direct expenses as per CAS-10 from the following information:
Royalty paid on sales ` 1,25,000
Royalty paid on production ` 1,00,000
Design charges ` 26,000
Hire charges of equipment used for production ` 45,000
Software development charges related to production ` 55,000
(CMA INTER JUNE 2014 NEW)
---------------------------------------------------------------------------------------------
Q. 2. Calculate the direct expenses as per CAS-10 from the following information:
Royalty paid on sales ` 30,000
Royalty paid on production ` 20,000
Design charges ` 15,000
Hire charges of equipment used for production ` 2,000
Software development charges related to production ` 22,000
(SM)
---------------------------------------------------------------------------------------------
Q. 3. Compute the value of direct expenses based on the following data:
Royalty paid on units produced ` 50,000
Software development charges relating to ` 36,000
production
Design charges ` 17,500
Hire charges of equipment used for production ` 5,500
---------------------------------------------------------------------------------------------
Q. 4. Royalty paid on sales ` 89,000; Software development charges related to
product is ` 22,000. Calculate direct expenses:
A. 1, 11,100; B. 1,11,000; C. 1,11,110; D. 1,10,000
---------------------------------------------------------------------------------------------
Q. 5. Compute total direct expenses of product X from the following information,
giving appropriate explanatory notes:
Particulars Figures
Production (units) 20,000
Sales (units) 16,000
Labour hours 10,000
Labour rate per hour ` 8
Royalty per unit of sale ` 2
Royalty per unit of production ` 1
Design charges ` 12,000
Interest on loan for purchase of machine ` 5,000
Hire charges of equipment used for 6,000
manufacturing product Y `
Penalty for violating patent ` 4,000
(CMA INTER JUNE 2015)
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Q. 6. A manufacturing industry produces product P, Royalty paid on sales is ` 23,500

and design charges paid for the product is ` 1,500. Compute the direct expenses:
A. 25,000; B. 22,000; C. 26,500; D. None of these.
---------------------------------------------------------------------------------------------
Q. 7. A manufacturing unit produces two products X and Y. the following information
is furnished:
Particulars Product X Product Y
Units produced 20,000 15,000
Units sold 15,000 12,000
Machine hours utilized 10,000 5,000
Design charges 15,000 18,000
Software development charges 24,000 36,000
Royalty paid on sales ` 54,000 [@ ` 2 per unit sold, for both the products]; Royalty
paid on units produced ` 35,000 [@ ` 1 per unit purchased, for both the products],
Hire charges of equipment used in manufacturing process of Product X only ` 5,000,
Compute the Direct Expenses. (SM)
---------------------------------------------------------------------------------------------
Q. 8. SB ltd. producing product CEMO provides the following information:
`
Royalty paid on sales 90,000
Software development charges relate to the product 20,000
Direct expenses will be:
(A) ` 89,000
(B) ` 1,10,000
(C) ` 1,11,000
(D) ` 1,12,000 (December 2020)
------------------------------------------------------------------------------------------------------