to be covered

1. Cost Sheet
2. Material Cost
3. Employee Cost & Direct Expenses
4. Overheads
5. Activity Based Costing
6. Job Costing
7. Batch costing
8. Cost Accounting System
9. Introduction to Cost & Management Accounting
 COST SHEET - CONCEPTS
1. Cost Sheet
It is a statement which shows the break-up and build-up of costs for a particular period.

2. Statement of Cost/Cost Sheet

Particulars Total Cost per
Cost (`) unit (`)
Opening stock of Raw Material
Add: Purchases
Less: Closing stock of Raw Material
Add: Carriage/Freight inward
Less: Raw material purchase return
Less: Sale value of scrap of raw material
Direct Material Consumed
Add: Direct labour cost
Add: Direct expenses or chargeable expenses
Prime Cost
Add: Factory/Work Overheads
Gross Factory/Work Cost
Add: Opening stock of WIP
Less: Closing stock of WIP
Net Factory/Work cost
Add: Quality control cost
Add: Research and Development cost
Add: Administrative overheads (related to production)
Add: Packing cost (primary)
Less: Credit for recoveries/Scap/Defectives/By-Product
Cost of Production
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of Goods Sold
Add: Administrative overheads (general)
Add: Selling and distribution overheads
Cost of Sales
3. Points to Remember (PTR)
(A) Loss or Gain

(B) Certain expenses not appear in cost sheet:

Ø Goodwill or preliminary expenses written off
Ø Income tax
Ø Loss on sale of assets or investment
Ø Cost pertaining to or arising out of a pandemic e.g. COVID-19
Ø Penalty, fines, damages etc.

(C) Work = Factory

Work Overheads = Factory Overheads
Work Cost = Net Factory Cost

(D) Cost of goods available for sale =

(E) Cost of goods processed during the period =

(G) Employee/Labour cost: It includes-

Ø Wages
Ø Bonus
Ø Allowances
Ø Overtime
Ø Employer contribution to PF/ESI/SSS
Ø Any other benefit

(H) Direct Expenses

Ø Royalty for production
Ø Cost of utilities such as power & fuel, steam etc.
Ø Fee for technical know-how
 Ø Cost of product/service specific design or drawing
Ø Cost of product/service specific software
Ø Amortized cost of moulds, patterns, patents etc.
Ø Job charges paid to job workers
Ø Hire charges paid for hiring specific equipment
Ø Other expenses which are directly related with production

4. Treatment of Expenses
Expenses Treatment
Drawing office expenses
Haulage
Stores Related Expenses
Stores Consumed = Opening + Purchases – Closing
Warehouse or Godown Expenses
Loose tools written off
Bank charges
Salesmen commission
Cost of Samples
Audit Fee
General Expenses
Counting House Salaries
Production planning expenses in office
Director’s fees
Fee for exhibition participation
Pollution control expenses
Carriage on raw material return
Bad Debts
Packaging
(A) Primary Packaging
(B) Secondary Packaging
GST
(A) GST Output
(B) GST Input
(C) ITC Available
(D) ITC Not Available

Custom Duty

Discount
(A) Trade Discount
(B) Cash Discount
(C) Other discount or discount on sales

Waste/Scrap
(A) Scrap for which amount is received on sale
(1) Related to raw material
(2) Arises during production
(B) Scrap for which disposal cost is to be incurred

Defectives
(B) Sold as it is at discount
(1) When low discount
(2) When high discount
(C) Goods are rectified by incurring rectification
cost
5. Administration Overheads
If administration overheads is ___% of NFC or If administration overheads is ` ___ per unit
produce then in both situation consider them as related to production.

6. Conversion Cost
It is the cost to convert raw material into finished goods. It is sum total of direct labour, direct
expenses and factory overheads.

7. Valuation of Stock
Stock can be valued either on FIFO basis or LIFO basis or Weighted average method. Unless
otherwise provided FIFO method will be used for valuation of stock.
According to FIFO Method,
Value of cl. stock of raw material = !"#$%& #( )*+ "*&,)-*. /$)01*2,3
4*+ "*&,)-*. /$)01*2, 5$*%&-&6
× "#. %&'() +,- .,&/+0,# 120&%

Value of closing stock of finished goods = 7#2& #( 8)#3$0&-#%

9%-&2 /)#3$0,3
× "#'%023 %&'() 4020%ℎ/6 3''6% 120&%

According to Weighted Average Method,

4: /$)01*2,;</. >&#0? #( 4:
Value of cl. stock of raw material = 4: /$)01*2, $%-&2;</. 2&#0? 4: $%-&2
× "#. %&'() +,- .,&. 120&%
7#2& #( 8)#3$0&-#% ; </. 2&#0? @A
Value of closing stock of finished goods = 9%-&2 /)#3$0,3;</. 2&#0? @A $%-&2
× "#'%023 %&'() 78 120&%

For raw material,

Raw material consumed units = Op. stock RM units + RM Purchase units – Cl. stock RM
For finished goods,
Finished goods units sold = Op. stock FG units + FG units produced – Cl. stock FG units
If there is NIL Opening stock
!"#$ "& '(")*+$,"- !"#$ "& 1"")# 2"3)
Cost per unit of finished goods = =
.-,$# /(")*+0) .-,$# 2"3)

8. Calculation of per unit data and vice versa

(A) For calculating per unit data
Ø Divide all values by Units Produced upto cost of production
Ø Divide all values by Units Sold from COGS and onwards
(B) If factory overheads or administration overheads (production related) per unit is given
then multiply it with number of units produced to get total value.
(C) If administration overheads (general) and selling and distribution overheads per unit is
given then multiply it with number of units sold to get total value.
9. Recovery Rate
It is the rate which is used to recover/absorb/charge overheads from the products being
manufactured or services being provided.
Unless otherwise provided, following basis will be used for recovery of overheads:
Factory overheads
Administration overheads
Selling and distribution overheads

10. Change in Cost Effects

Total Cost = No. Of units ´ Cost per unit

Total VC Total FC
Quantity Effect
Price Effect

Relation between:
(A) Quantity and Variable cost
(B) Price and Variable cost
(C) Price and Fixed cost
(D) Wages and Efficiency

Unless otherwise provided, following points are to be assumed:

(a) VC per unit will remain same
(b) Total FC will remain same
(c) All direct cost are considered to be variable in nature
(d) All overheads are considered to be fixed in nature
 COST SHEET QUESTIONS
Question – 1
SK ltd. has the following expenditures for the year ended 31st March:
Particulars Amount (`) Amount (`)
Raw materials purchased 10,00,00,000
GST paid on the above purchases @18% (eligible for 1,80,00,000
input tax credit)
Freight inwards 11,20,600
Wages paid to factory workers 29,20,000
Contribution made towards employees’ PF and ESI 3,60,000
Production bonus paid to factory workers 2,90,000
Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,000
Amount paid for purchase of moulds and patterns (life 8,96,000
is equivalent to two years production)
Job charges paid to job workers 8,12,000
Stores and spares consumed 1,12,000
Depreciation on:
Factory building 84,000
Office building 56,000
Plant & Machinery 1,26,000
Delivery vehicles 86,000 3,52,000
Salary paid to supervisors 1,26,000
Repairs & maintenance paid for:
Plant & Machinery 48,000
Sales office building 18,000
Vehicles used by directors 19,600 85,600
Insurance premium paid for:
Plant & Machinery 31,200
Factory building 18,100
Stock of raw materials & WIP 36,000 85,300
Expenses paid for quality control check activities 19,600
Salary paid to quality control staffs 96,200
Research & development cost paid for improvement in 18.200
production process
Expenses paid for pollution control and engineering & 26,600
maintenance
Expenses paid for administration of factory work 1,18,600
Salary paid to functional managers:
Production control 9,60,000
 Finance & accounts 9,18,000
Sales & Marketing 10,12,000 28,90,000
Salary paid to General Manager 12,56,000
Packaging cost paid for:
Primary packing necessary to maintain quality 96,000
For re-distribution of finished goods 1,12,000 2,08,000
Wages of employees engaged in distribution of goods 7,20,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,20,000
Performance bonus paid to sales staff 1,80,000
Value of stock as on 1st April of last year
Raw materials 18,00,000
Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000
st
Value of stock as on 31 March of current year
Raw materials 9,60,000
Work-in-process 8,70,000
Finished goods 18,00,000 36,30,000
Amount realized by selling of scrap and waste generated during manufacturing process is `86,000. From the
above data you are required to prepare statement of cost for the year ended 31st March, showing (i) prime cost,
(ii) factory cost, (iii) cost of production, (iv) cost of goods sold and (v) cost of sales.
Solution
Particulars Amount (`)
Opening stock of raw material 18,00,000
Add: Raw material purchases 10,00,00,000
Less: Closing stock of raw material (9,60,000)
Add: Freight inwards 11,20,600
Raw material consumed 10,19,60,600
Direct Labour:
Wages paid to factory workers 29,20,000
Contribution to PF & ESI 3,60,000
Production bonus paid to factory workers 2,90,000 35,70,000
Direct Expenses:
Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,500
Amortised cost of moulds and patterns 4,48,000
Job charges paid to job workers 8,12,000 35,70,000
Prime Cost 10,74,25,200
Factory overheads:
Stores and spares consumed 1,12,000
Depreciation on factory building 84,000
 Depreciation on plant & machinery 1,26,000
Repairs & maintenance for plant & machinery 48,000
Insurance premium paid for plant & machinery 31,200
Insurance premium paid for factory building 18,100
Insurance premium paid for stock of raw material 36,000
Salary paid to supervisors 1,26,000
Expenses paid for pollution control 26,600 6,07,900
Gross Factory cost 10,83,33,100
Add: Opening WIP 9,20,000
Less: Closing WIP (8,70,000)
Net Factory cost 10,80,83,100
Quality control cost:
Expenses paid for quality control check 19,600
Salary paid to quality control staff 96,200 1,15,800
Research and development cost paid 18,200
Administrative overheads related to production
Expenses paid for administration 1,18,600
Salary paid to production control manager 9,60,000 10,78,600
Less: Realisable value on sale of scrap (86,000)
Add: Primary packaging cost 96,000
Cost of production 10,93,05,700
Add: Opening stock of finished goods 11,00,000
Less: Closing stock of finished goods (18,000,000)
Cost of goods sold 10,86,05,700
Administrative overheads:
Depreciation on office building 56,000
Repairs & maintenance paid for vehicles for directors 19,600
Salary paid to manager-finance and accounts 9,18,000
Salary paid to general manager 12,56,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,20,000 27,69,600
Selling and distribution overheads
Repairs & maintenance paid to sales office building 18,000
Salary paid to manager – sales & marketing 10,12,,000
Performance bonus paid to sales staffs 1,80,000
Depreciation on delivery vehicles 86,000
Packaging cost paid for re-distribution 1,12,000
Wages of employees engaged in distribution of goods 7,20,000 21,28,000
Cost of Sales 11,35,03,300
Question – 2
The following data relates to manufacturing of a standard product during the month of the March:
Particulars Amount (in `)
Stock of Raw material as on 01-03 80,000
Work in progress as on 01-03 50,000
Purchase of raw material 2,00,000
Carriage inwards 20,000
Direct wages 1,20,000
Cost of special drawing 30,000
Hire charges paid for Plant 24,000
Return of Raw Material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000
Depreciation on Delivery Van 6,000
Warehousing charges 1,500
Stock of Raw material as on 31-03 30,000
Stock of Work in Progress as on 31-03 24,000
• Store overheads on material are 10% of material consumed.
• Factory overheads are 20% of the prime cost
• 10% of the output was rejected and a sum of `5,000 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were rectified at an
additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8,000 units during the month.
You are required to prepare a cost sheet for the above period showing the:
(i) Cost of raw material consumed
(ii) Prime cost
(iii) Work cost
(iv) Cost of production
(v) Cost of sales
Solution Cost Sheet
Particulars Amount (`)
Opening stock of raw material 80,000
Add: Raw material purchases 2,00,000
Add: Carriage inward 20,000
Less: Return of raw material (40,000)
Add: Carriage on return 6,000
Less: Closing stock of raw material (30,000)
Raw Material consumed 2,36,000
Direct wages 1,20,000
 Direct Expenses: Cost of special drawing 30,000
Hire charges paid for plant 24,000 54,000
Prime Cost 4,10,000
Stores Overheads (10% × 2,36,000) 23,600
Factory overheads (20% × 4,10,000) 82,000
Rectification cost of defectives (1,20,000 × 90% × 10% × 20%) 2,160
Gross Factory Cost 5,17,760
Add: Opening WIP 50,000
Less: Closing WIP (24,000)
Net Factory Cost 5,43,760
Less: Scrap sale (5,000)
Cost of Production/COGS 5,38,760
Administration Overheads:
Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000 29,500
Selling & Distribution Overheads:
Expenses for participation in industrial exhibition 8,000
Warehousing charges 1,500
Depreciation on Delivery Van 6,000 15,500
Cost of Sales 5,83,760

Question – 3
A Ltd. produces a single product X. During the month of July 2023, the company has produced 14,560
tonnes of X. The details for the month of July 2023 are as follows:
(a) Materials consumed `15,00,000
(b) Power consumed in operating production machinery 13,000 Kwh @ `7 per Kwh
(c) Diesels consumed in operating production machinery 1,000 litres @ `93 per litre
(d) Wages & salary paid – `64,00,000
(e) Gratuity & leave encashment paid – `44,20,000
(f) Hiring charges paid for Heavy Earth Moving machines (HEMM) engaged in production -
`13,00,000. Hiring charges is paid on the basis of production.
(g) Hiring charges paid for cars used for official purpose – `80,000
(h) Reimbursement of diesel cost for the cars – `20,000
(i) The hiring of cars attracts GST under RCM @5% without credit.
(j) Maintenance cost paid for weighing bridge (used for weighing of final goods at the time of despatch)
–
`7,000
(k) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the time of
despatch) and factory premises is `6,000 and `18,000 per month respectively.
(l) TA/ DA and hotel bill paid for sales manager- `16,000
(m) The company has 180 employees works for 26 days in a month.
Required to prepare a Cost sheet for the month of July 2023.
Solution
Particulars Amount (`)
Material consumed 15,00,000
Direct Wages:
Wages and salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Direct Expenses:
Power cost (13,000 kwh ´ `7) 91,000
Diesel cost (1,000 litre ´ `93) 93,000 1,84,000
Prime Cost 1,38,04,000
AMC cost of CCTV installed at factory premises 18,000
GFC/NFC/COP/COGS 1,38,22,000
Administration Overheads:
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
GST @5% on RCM Basis (1,00,000 ´ 5%) _5,000 1,05,000
Selling and distribution overheads:
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000
TA/DA & hotel bill of sales manager 16,000 29,000
Cost of Sales 1,39,56,000

Question – 4
The following particulars relating to the year have been taken from the books of a company:
Stock on 1st January: Kg `
Raw materials 2,000 2,000
Finished mixture 500 1,750
Factory stores 7,250
Purchases:
Raw materials 1,60,000 1,80,000
Factory stores 24,250
Sales:
Finished mixture 1,53,050 9,18,000
Factory Scrap 8,170
Factory wages 1,78,650
Power 30,400
Depreciation on machinery 18,000
Salaries:
Factory 72,220
Office 37,220
Selling 41,500
Expenses:
Direct 18,500
 Office 18,200
Selling 18,000
st
Stock on 31 December:
Raw materials 1,200 ?
Finished mixture 450 ?
Factory stores 5,550
The stock of finished mixture at the end of the year is to be valued at the factory cost of the mixture for that
year. The purchase price of raw materials remained unchanged throughout the year. Prepare a statement giving
the maximum possible information about cost and its break-up for the year.
Solution Cost Sheet
Particulars Amount (`)
Opening stock of material 2,000
Add: Material purchases 1,80,000
Less: Closing stock of material (1,350)
Raw material consumed 1,80,650
Add: Wages 1,78,650
Add: Direct expenses
Direct expenses 18,500
Power 30,400 48,900
Prime Cost 4,08,200
Add: Factory overheads
Depreciation 18,000
Factory salary 72,220 72,220
Factory stores consumed (7,250+24,250-5,550)25,950 1,16,170
Factory cost 5,24,370
Less: Sales of factory scrap (8,170)
Cost of production 5,16,200
Add: Opening stock of finished mixture 1,750
Less: Closing stock of finished mixture [(5,24,370 ´ 450) ÷ 1,53,000] (1,542)
Cost of goods sold 5,16,408
Add: Administration overheads
Office salaries 37,220
Office expenses 18,200 55,420
Add: Selling & distribution overheads
Selling salary 41,500
Selling expenses 18,000 59,500
Cost of sales 6,31,328
Add: Profit (Balancing figure) 2,86,672
Sales 9,18,000
Units Produced = 1,53,050 + 450 – 500 = 1,53,000
Question – 5
The following data are available from the books and records of A Ltd. for the month of April 2022:
Particulars Amount (`)
st
Stock of raw materials on 1 April 2022 10,000
Raw material purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease rent of production assets 10,000
Administrative overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
Stock of raw materials on 30th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
st
Stock of finished goods as on 1 April 2022 was 200 units having a total cost of `28,000. The entire opening
stock of finished goods has been sold during the month. Production during the month of April, 2022 was 3,000
units. Closing stock of finished goods as on 30th April, 2022 was 400 units.
You are required to:
(I) Prepare a cost sheet for the above period showing the:
(i) Cost of raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of production
(v) Cost of goods sold
(vi) Cost of sales
(II) Calculate selling price per unit, if sale is made at profit of 20% on sales.
Solution
(I) Cost Sheet
Particulars Amount (`)
Opening stock of raw material 10,000
Add: Raw material purchased 2,80,000
Less: Closing stock of raw material (40,000)
Raw material consumed 2,50,000
Add: Manufacturing wages 70,000
Prime cost 3,20,000
Add: Factory overheads
Depreciation on plant 15,000
Lease rent of production assets 10,000
Expenses for pollution control 1,000 26,000
Gross Factory Cost/ Net Factory cost 3,46,000
Add: Expenses paid for quality control check activities 4,000
Add: Administrative overheads (Production) 15,000
Add: Primary packing cost 8,000
Add: Research & development cost (Process related) 5,000
 Cost of production 3,78,000
Add: Opening stock of finished goods 28,000
!,#$,%%% (50,400)
Less: Closing stock of finished goods ! !,%%%
´ 400%
Cost of goods sold 3,55,600
Add: Packing cost for redistribution of finished goods 1,500
Add: Advertisement expenses 1,300
Cost of sales 3,58,400

(II) Statement of calculation of selling price

Particulars Amount (`)
Cost of sales 3,58,400
Units sold (200 + 3,000 – 400) 2,800
Cost per unit 128
Add: Profit per unit [128 ´ (20/80)] 32
Selling price per unit 160

Question – 6
The following figures are available from the books of SK Co. for the year 31st March:
` `
Materials: Profit for the year 12,180
st
Stock on 1 April 2,000 Selling overhead 10,500
Stock on 31st March 4,000 Factory overhead 9,000
Purchases 20,000 Administration overhead 8,400
Wages 15,000
(a) Prepare a cost sheet showing prime cost, work cost, cost of production, cost of sales and sales.
(b) In April, the factory receives an order for a job which will require materials `2,400 and wages `1,500.
Ascertain the sale price of the job if the factory intends to earn a profit 10% higher than the percentage of
profit earned in year ending on 31st March. Assume that the factory overhead has gone up by 16(2/3)% and
selling overhead has gone down by 20% after 31st March. Further assume that factory overhead is recovered
as a percentage of the wages and administration and selling overhead as a percentage of works cost.
Solution
Statement of Cost and Profit
Particulars Amount (`)
Opening stock of material 2,000
Add: Purchases 20,000
Less: Closing stock of material (4,000)
Direct material consumed 18,000
Add: Direct wages 15,000
Prime cost 33,000
Add: Factory overhead 9,000
GFC/NFC/COP/COGS 42,000
Add: Administration overhead 8,400
Add: Selling overhead 10,500
Cost of Sales 60,900
Add: Profit 12,180
Sales 73,080
Calculation of Recovery Rates
(',%%%()*.*******%)
Factory overheads as % of direct wages = × 100 = 70% of direct wags
).,%%%
$,/%%
Administration overheads as % of NFC = /0,%%% × 100 = 20% of NFC
()%,.%%10%%)
Selling overheads as % of NFC = × 100 = 20% of NFC
/0,%%%
()0,)$%()%%)
Profit as % of Cost of sales = × 100 = 22% of Cost of sales
*%,'%%
Statement of calculation of selling price of Job
Particulars Amount (`)
Direct Material 2,400
Direct wages 1,500
Prime Cost 3,900
Add: Factory overheads (70% × 1,500) 1,050
GFC/NFC/COP/COGS 4,950
Add: Administration overheads (20% × 4,950) 990
Add: Selling overheads (20% × 4,950) 990
Cost of sales 6,930
Add: Profit (22% × 4,950) 1,525
Sales 8,455

Question – 7
A factory incurred the following expenditure during the year:
`
Direct material consumed 12,00,000
Manufacturing wages 7,00,000
Manufacturing overheads:
Fixed 3,60,000
Variable 2,50,000 6,10,000
25,10,000
In the next year, following changes are expected in production and cost of production.
(a) Production will increase due to recruitment of 60% more workers in the factory.
(b) Overall efficiency will decline by 10% on account of recruitment of new workers.
(c) There will be an increase of 20% in fixed overhead and 60% in variable overhead.
(d) The cost of direct material will be decreased by 6%.
(e) The company desire to earn a profit of 10% on selling price.
Ascertain the cost of production and selling price.
Solution
Let existing production units 100
Add: Increase due to recruitment of worker(100 × 60%) 60
160
Less: Decline due to efficiency (160 × 10%) 16
New Production units 144
Statement of cost and sale
Particulars Working Amount (`)
Direct material 144 94 16,24,320
(12,00,000 × × ,
100 100
Direct wages 144 100 11,20,000
(7,00,000 × × ,
100 90
Prime Cost 27,44,320
(+) Fixed manufacturing overheads 120 4,32,000
(3,60,000 × ,
100
(+) Variable manufacturing overheads 144 160 5,76,000
(2,50,000 × × ,
100 100
Cost of Sales 37,52320
(+) Profit (Bal. fig.) 4,16,924
Sales (37,52,320 ÷ 90%) 41,69,244

Question – 8
A factory’s normal capacity is 1,20,000 units per annum. The estimated costs of production are as under:
(a) Direct material `3 per unit; direct labour `2 per unit (Subject to a minimum of `12,000 p.m.)
(b) Indirect expenses—Fixed `1,60,000 per annum: Variable `2 per unit; Semi-variable`60,000 upto 50%
capacity and additional `20,000 for every 20% increase in capacity.
(c) Each unit of raw material yields scrap which is sold at the rate of 20 paise per unit.
The factory worked at 50% capacity for the first three months but it was expected that it would work @
80% capacity for the remaining 9 months. During the first three months, the selling price per unit was `12.
What should be the price in the remaining nine months to produce a total profit of `2,18,000?
Solution
Statement of Cost
Particulars First 3 months Bal. 9 months
Level of operation 50% 80%
Units .% ! $% '
1,20,000 × )%% × )0 = 15,000 1,20,000 × )%% × )0 = 72,000
Direct material @ `3 p.u. 45,000 2,16,000
Direct wages 15,000 × 2 72,000 × 2
1 23 4 36,000 1 23 4 1,44,000
12,000 × 3 12,000 × 9
Fixed expenses ! '
1,60,000 × )0 = 40,000 1,60,000 × )0 = 1,20,000
Variable expenses @ `2 p.u. 30,000 1,44,000
 Semi-variable expenses ! !
60,000 × )0 = 15,000 (60,000 + 20,000 + 20,000) × )0 =
75,000
(-) Scrap @ `0.20 p.u. (3,000) (14,400)
Total Cost 1,63,000 6,84,600
Statement of Calculation of Selling Price for Remaining 9 Months
Sales for first 3 months (15,000 ´ 12) 1,80,000
Less: Cost for first 3 months 1,63,000
Profit for first 3 months 17,000
Annual Target profit 2,18,000
Profit require from remaining 9 months 2,01,000
Add: Cost for remaining 9 months 6,84,600
Sales for remaining 9 months 8,85,600
Units for remaining 9 months 72,000
Selling price for remaining 9 months 12.30

Question – 9
SK Engineering Company Limited manufactures two types of auto bearing – type ‘S’ and type ‘K’. The
company’s records show the following particulars for the bearings for the month of May:
`
Direct Materials 38,10,000
Direct Labour 20,10,000
Production Overheads 6,03,000
Office Overheads 6,42,300
There was no work-in-progress at the beginning or at the end of the month. It was ascertained that:
(a) Direct material cost per bearing for type ‘S’ was 160 percent of those for type ‘K’.
(b) Direct labour cost per bearing for type ‘K’ was 40 percent of those for type ‘S’.
(c) Production overheads were absorbed on the basis of direct labour cost.
(d) Office overheads were absorbed on the basis of factory cost.
(e) Selling and distribution overheads were `2 per bearing sold for each type.
(f) Stock of finished bearing on 1st May was 15,000 bearings @ `15 of type ‘S’ and 20,000 bearings @
`8 of type ‘K’.
(g) Production during the month of May was 2,70,000 bearings of type ‘S’ and 3,30,000 bearings of type
‘K’ and out of May’s output 25,000 bearings of type ‘S’ and 40,000 bearings of type ‘K’ would remain
in stock on 31st May which were valued at cost of production.
You are required to:
(i) Prepare a statement showing cost of production for each type of bearings.
(ii) Prepare a statement showing the selling price at which the bearings would be marketed, if the company
desires @ 20 percent profit on selling price.
Solution
Statement of cost and calculation of selling price
Particulars S K Total
Direct Material (2,70,000*1.6 :3,30,000*1) 21,60,000 16,50,000 38,10,000
Direct Wages (2,70,000*1 :3,30,000*0.40) 13,50,000 6,60,000 20,10,000
Prime Cost 35,10,000 23,10,000 58,20,000
Production Overheads (30% of wages) 4,05,000 1,98,000 6,03,000
Factory Cost/COP 39,15,000 25,08,000 64,23,000
Add: Opening Stock 2,25,000 1,60,000 3,85,000
!',).,%%% 0.,%$,%%%
Less: Closing Stock 8 0,#%,%%% × 25,0009 8 !,!%,%%% × 40,0009 (3,62,500) (3,04,000) (6,66,500)
Cost of goods sold 37,77,500 23,64,000 61,41,500
Administration Overheads (10% of Factory cost) 3,91,500 2,50,800 6,42,300
Add: Selling & Distribution OHs (2,60,000 × 2) (3,10,000 × 2) 5,20,000 6,20,000 11,40,000
Cost of Sales 46,89,000 32,34,800 79,23,800
Add: Profit 11,72,250 8,08,700 19,80,950
Sales 58,61,250 40,43,500 99,04,750
Units 2,60,000 3,10,000 -
SP per unit 22.54 13.04 -
Working Note – 1
Particulars Product S Product K
Opening stock units 15,000 20,000
Add: Production units 2,70,000 3,30,000
Less: Closing Stock units 25,000 40,000
Sale units 2,60,000 3,10,000
 Cost Sheet

MCQs
Q(1). Generally, for the purpose of cost sheet preparation, costs are classified on the basis of:
A. Functions B. Variability
C. Relevance D. Nature

Q(2). Which of the following does not form part of prime cost:
A. Cost of packing
B. Cost of transportation paid to bring materials to factory
C. GST paid on raw materials (input credit cannot be claimed)
D. Overtime premium paid to workers

Q(3). SK Ltd. received an order, for which it purchased a special frame for manufacturing, it is a part of:
A. Direct Materials B. Direct Expenses
C. Factory Overheads D. Administration Overheads

Q(4). Salary paid to plant supervisor is a part of:

A. Direct expenses B. Factory overheads
C. Quality control cost D. Administration cost

Q(5). Depreciation of director’s laptop is treated as a part of:

A. Administration overheads B. Factory overheads
C. Direct expenses D. Research & Development cost

Q(6). A manufacture has set-up a lab for testing of products for compliance with standards, salary of this lab staffs are part
of:
A. Work overheads B. Quality control cost
C. Direct expenses D. Research & development costs

Q(7). Audit fees paid to auditors is part of:

A. Administration cost B. Production cost
C. Selling and distribution cost D. Not shown in cost sheet

Q(8). Salary paid to factory store staff is part of:

A. Factory overheads B. Production cost
C. Direct employee cost D. Direct material cost

Q(9). Canteen expenses for factory workers are part of:

A. Factory overheads B. Administration cost
C. Marketing cost D. None of the above

Q(10). A company pays royalty to State Government on the basis of production, it is treated as:
A. Direct Material Cost B. Factory Overheads
C. Direct Expenses D. Administration cost
 MATERIAL COST - CONCEPTS
1. Material Cost
It is one of the major element of cost in a manufacturing organisation. Thus, proper care is to
be taken for this cost.

2. Components of Material Cost

(A) Purchase Cost = No. of units purchased ´ Cost per unit
(B) Ordering Cost = No. of orders ´ Cost per order
!""#$% '()#*'(+(",
No. of orders =
-'.(' /*0(
123 /35 /65
Frequency of order =
78. 8: 8'.(';

(C) Carrying cost = Average quantity of goods ´ Carrying cost per unit per annum
-'.(' ;*0(
Average quantity =
5
-'.(' ;*0(
Average quantity with safety stock = safety stock +
5

3. Determination of Order Size

It should be at the level where material cost is minimum.

4. Economic Order Quantity (EOQ)

It is that order size at which sum total of ordering cost and carrying cost is minimum.
5×!×-
EOQ = !
=

Where, A = Annual requirement of raw material

O = Cost per order
C = Carrying cost per unit per annum

5. Levels of Inventory
(A) Re-order level (ROL) = Maximum consumption ´ Maximum lead time
= Safety stock + (Average consumption ´ Average lead time)
= Minimum stock + (Average cons. ´ Average lead time)

(B) Maximum level = ROL + ROQ – (Minimum cons. ´ Minimum lead time)

(C) Minimum level = ROL – (Average consumption ´ Average lead time)

 >*"*+#+ %(?(%@>$A*+#+ %(?(%
(D) Average level =
5
B(C-'.(' )#$",*,D
= Minimum level + 5

(E) Danger level = Average consumption ´ Emergency lead time

= Minimum consumption ´ Emergency lead time

6. ABC Analysis
It stands for always better control analysis.

Category % Quantity % Value Control

A 10% 70% High
B 20% 20% Moderate
C 70% 10% Low

7. Inventory Turnover Ratio (ITR)

B$E +$,('*$% F8";#+(.
ITR for raw material = !?('$G( '$E +$,('*$% )#$",*,D = ___ times
=8;, 8: G88.; ;8%.
ITR for finished goods = !?('$G( :*"*;H(. G88.; )#$",*,D = ___ times
123 /35 /65
Frequency or Inventory holding period (days) =
IJB

8. Choice of Substitute Material

Select the material which has lowest cost per unit of finished goods
Material A Material B
Cost per kg `20 `25
Input-output ratio 200% 120%
Cost per unit of output

9. Landing Cost of Material or Valuation of Material

Items Treatment
Trade Discount
Cash Discount
Subsidy/Grant/Incentive
Road tax/ Toll tax/
 IGST/CGST/SGST
(A) If ITC available
(B) If ITC not available
Custom Duty
Penalty / Fine / Demurrage
Insurance
Commission
Container Cost
Return value of container
Shortage
(A) Normal
(B) Abnormal

Distribution of Freight or similar items

Distribution of GST, Custom duty or similar items

10. Safety Stock Determination

It is determined at the level where sum total of stock out cost and carrying cost of safety
stock is minimum.

Carrying cost of safety stock = Safety stock unit ´ Carrying cost per unit per annum
Annual Stock out cost = Annual stock out units ´ Stock out cost per unit

11. Material Records

It can be done in two ways i.e. Perpetual system and Periodic system.

12. Preparation of Stores Ledger

(A) Material return from factory or production to stores
- Show as receipt at the price at which originally issued
- To be issued first in FIFO or LIFO method

(B) Material return by stores to supplier or vendor

- Show as issued in stores ledger at the price at which originally purchased
- If original price not known than at recent issue rate.
(C) Transfer from one job to another
- No entry in stores ledger

(D) In case of normal loss, show as issue in quantity column only and thus price of balance
quantity increases.

(E) In case of abnormal loss, show as issue as per the method prevailing and transfer the
same to costing P&L account.
 MATERIAL COST QUESTIONS
Question – 1
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is `240
and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50.

At present, the order size is 3,000 spare parts.

(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?
Solution
(i) Annual requirement (A) = 27,000
Cost per order (O) = `240
Carrying cost per unit p.a. (C) = 50 × 12.5% = `6.25
!×#×$ !×!&,(((×!)(
EOQ = ! =! = 1,440 units
% *.!,

Statement of Cost
Particulars Order size = 3,000 Order size = 1,440
Purchase cost 27,000 × 50 = 13,50,000 27,000 × 50 = 13,50,000
Ordering cost !&,((( !&,(((
-,(((
× 240 = 2,160 .,))(
&'18.75 &' 19 × 240 = 4,560
Carrying cost -,((( .,))(
!
× 6.25 = 9,375 !
× 6.25 = 4,500
Total cost 13,61,535 13,59,060
Saving due to EOQ = `13,61,535 - `13,59,060 = `2,475
!&,(((
(ii) Re-order point = Maximum consumption × Maximum time = -*(
× 12 = 900 units
!&,(((
(iii) Number of orders under EOQ Model = .,))(
= 18.75 or 19
-*(
Frequency of order = ./
= 18.94 days

Question – 2
A company manufactures a product from a raw material which is purchased at `60 per kg. The company incurs
a handling cost of `360 plus freight of `390 per order. The incremental carrying cost of inventory of raw
material is `0.50 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is `9 per kg per annum. The annual production of the product is 1,00,000 units and
2.5 units are obtained from one kg of raw material.
Required:
(a) Calculate the economic order quantity of raw material
(b) Advise, how frequently should orders for procurement be placed. (Assuming 360days in the year)
(c) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
Solution
(a) A = 1,00,000 ÷ 2.5 = 40,000 kg
O = 360 + 390 = `750
C = 9 + (0.5 × 12) = `15
2´ A´O !×)(,(((×&,(
EOQ = =! = 2,000 kg
C .,

Annual requriement of material )(,(((

(b) Number of orders to be placed = = !,((( = 20 orders
Order size (EOQ)
-*( -*(
Frequency of order = 01. = = 18 days
13 145647 !(

(c) Desired number of orders = 4

)(,(((
\ desired order size = )
= 10,000 kg
Let new price = y
Statement of Cost
Costs Order Size = 2,000 Order Size = 10,000
Purchase Cost 40,000 × 60 = 24,00,000 40,000 × y = 40,000y
Ordering Cost )(,((( )(,(((
!,(((
× 750 = 15,000 .(,(((
× 750 = 3,000
Carrying Cost !,((( .(,(((
!
× 15 = 15,000 !
× 15 = 75,00
Total Cost 24,30,000 40,000y + 78,000
Now to rationalize cost of both options, total cost should be same under both options.
\ 24,30,000 = 40,000y + 78,000
y = `58.80
\ Discount per unit = `60 – `58.80 = `1.20
..!(
Discount % = *(
× 100= 2%

Question – 3
The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be `90 per
unit. The incremental cost of processing an order is `135 and the annual cost of storage is estimated to be `12
per unit. Compute the optimal order quantity and total relevant cost of this order quantity?
Suppose that `135 as estimated to be the incremental cost of processing an order is incorrect and should have
been `80. All other estimates are correct. Estimate the difference in cost on account of this error?

Assume at the commencement of the period that a supplier offers 4,000 units at a price of `86. The materials
will be delivered immediately and placed in the stores. Assume that the incremental cost of placing the order is
zero and original estimate of `135 for placing an order for the economic batch is correct. Analyze, should the
order be accepted?
Solution
!×#×$ !×),(((×.-,
EOQ = ! %
=! .!
= 300 units
Relevant cost of this order quantity:
Ordering cost [(4,000 ÷ 300) × 135] 1,800
Carrying cost [(300 ÷ 2) × 12] 1,800
Relevant cost 3,600

!×#×$ !×),(((×8(
Revised EOQ = ! =! = 231 units
% .!
Relevant cost of this order quantity:
Ordering cost [(4,000 ÷ 231) × 80] 1,385
Carrying cost [(231 ÷ 2) × 12] 1,386
Relevant cost 2,826
Difference in cost on account of this error = 3,690 – 2,826 = `864
Statement of Evaluation of Offer
Costs Order Size = 300 Order Size = 4,000
Purchase Cost 4,000 × 90 = 3,60,000 4,000 × 86 = 3,44,000
Ordering Cost ),((( ),(((
-((
× 135 = 1,800 ×0=0
),(((
Carrying Cost -(( ),(((
× 12 = 1,800 × 12 = 24,000
! !
Total Cost 3,63,600 3,68,000
This special offer at `86 per unit should not be accepted as its total cost is higher as compared to original
offer.

Question – 4
SK Ltd. manufactures a product S which requires two raw materials P and M in a ratio of 1:4. The sales
department has estimated a demand of 5,00,000 units for the product for the year. To produce one unit of finished
product, 4 units of material P is required.

Stock position at the beginning of the year is as below:

Product SK 12,000 units
Material P 24,000 units
Material M 52,000 units

To place an order the company has to spend `15,000. The company is financing its working capital using a
bank cash credit @ 13% p.a.

Product SK is sold at `1,040 per unit. Material P and M are purchased at `150 and `200 respectively.

Required: Compute economic order quantity (EOQ):

(a) If purchase order for both materials is placed separately
(b) If purchase order for both materials is not placed separately

Solution
Annual production of Product SK = Annual demand – Opening stock = 5,00,000 – 12,000 = 4,88,000 units
Annual requirement of raw material = (Annual Production × Material per unit) – Opening stock
Material P = (4,88,000 × 4) – 24,000 = 19,28,000 units
Material M = (4,88,000 × 16) – 52,000 = 77,56,000 units
 !×#×$ !×./,!8,(((×.,,(((
(a) EOQ of Material P = ! =! = 54,462 units
% .-%×.,(

!×#×$ !×&&,,*,(((×.,,(((
EOQ of Material M = ! %
=! .-%×!((
= 94,600 units

!×#×$ !×(./,!8,(((;&&,,*,((()×.,,(((
(b) EOQ of Material P & M Combined = ! =! = 1,08,452 units
% .-%×./(∗
.,(8,),!×./,!8,(((
Material P quantity = = 21,592 units
/*,8),(((
.,(8,),!×&&,,*,(((
Material M quantity = = 86,860 units
/*,8),(((
(.,(×./,!8,((();(!((×&&,,*,((()
*Price = (./,!8,(((;&&,,*,((()
= `190

Question – 5
SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Tons (No.) Price per tons (`)
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2,000 5.80
2,000 and less than 4,000 5.70
4,000 and above 5.60
The annual requirement for the materials is 4,000 tons. The ordering cost per order is `6 and the carrying cost
is estimated at 20% per annum. You are required to compute the most Economic Order Quantity presenting the
relevant information in a tabular form.
Solution
Tons Price Order Purchase Ordering Carrying Cost Total
Size Cost Cost Cost
Less than 250 6 200 4,000×6 )((( !(( 24,240
!((
× 6 = 120 !
× 20% × 6 = 120
= 24,000
250 to 800 5.90 250 4,000×5.90 )((( !,( 23,844
!,(
× 6 = 96 × 20% × 5.9 = 148
!
= 23,600
800 to 2,000 5.80 800 4,000×5.80 )((( 8(( 23,694
× 6 = 30 × 20% × 5.8 = 464
8(( !
= 23,200
2,000 to 4,000 5.70 2,000 4,000×5.70 )((( !((( 23,952
× 6 = 12 × 20% × 5.7 = 1,140
!((( !
= 22,800
4,000 & above 5.60 4,000 4,000×5.60 )((( )((( 24,646
)(((
×6=6 !
× 20% × 5.6 = 2,240
= 22,400
Total cost is lowest at order size of 800. So, economic order quantity is 800 units.
Question – 6
A company uses three raw materials A, B and C for a particular product for which the following data apply:
Raw Usage per Reorder Price per Delivery period Reorder Minimum
material unit Quantity Kg Min Average Max level level
(Kg) (Kg) (`) (Kg) (Kg)
A 10 10,000 0.10 1 2 3 8,000
B 4 5,000 0.30 3 4 5 4,750
C 6 10,000 0.15 2 3 4 2,000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would be the
following quantities:
(a) Minimum stock of A?
(b) Maximum stock of B?
(c) Re-order level C?
(d) Average stock level of A?
Solution
(a) Minimum stock of A = ROL – (Average lead time × Average consumption)
= 8,000 – (2× 200 × 10) = 4,000 kg
(b) Maximum stock of B = ROL + ROQ – (Min. lead time × Min. consumption)
= 4,750 + 5,000 – (3× 175 × 4) = 7,650 kg
(c) Re-order level of C = Max. lead time × Max. consumption
= 4 × 225 × 6 = 5,400 kg
=$> .(,(((
(d) Average level of A = Minimum level + !
= 4,000 + !
= 9,000 kg

Question – 7
M/s SK Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during the year:
Average monthly market demand 2,000 tubes
Ordering cost `100 per order
Inventory carrying cost 20% per annum
Cost of tubes `500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks
Compute the following from the above information:
(a) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%,
is it worth accepting?
(b) Maximum level of stock
(c) Minimum level of stock
(d) Reorder level
Solution
(a) A = 100 × 52 = 5,200 (We have to consider only consumption and not monthly demand)
O = `100
C = 20% × 500 = `100
2´ A´O !×,,!((×.((
EOQ = =! = 102 tubes
C .((

Statement of Evaluation of Offer

Costs Order Size = 102 Order Size = 1,500
Purchase Cost 5,200 × 500 = 26,00,000 5,200 × (500-5%) = 24,70,000
Ordering Cost ,,!(( ,,!((
= 50.98 &' 51 × 100 = 5,100 = 3.47 &' 4 × 100 = 400
.(! .,,((

Carrying Cost .(! .,,((

× 20% × 500 = 5,100 × 20% × 475 = 71,250
! !
Total Cost 26,10,200 25,41,650
Since the total cost is lower at order size of 1,500, thus it is recommended to accept the offer.
(b) Re-order level = Max. consumption × Max. lead time
= 200 × 8 = 1,600 tubes
(c) Minimum level = ROL – (Avg. lead time × Avg. Consumption)
= 1,600 – (100 × 7) = 900 tubes
(d) Maximum level = ROL + ROQ – (Minimum consumption × Minimum lead time)
= 1,600 + 102 – (50 × 6) = 1,402 tubes

Question – 8
A company buys in lots of 6,250 units which is a 3 month’s supply. The cost per unit is `2.40. Each order costs
`45 and inventory carrying cost is 15% of average inventory value.
Required:
(a) What is the total annual cost of existing inventory policy?
(b) How much money could be saved by employing the economic order quantity?
(c) If the company operates 250 days a year, the procurement time is 10 days and safety stock is 500 units.
Find the reorder level, maximum level, minimum level and average inventory level.
Solution
A = 6,250 × 4 = 25,000
O = `45
C = 15% × 2.40 = `0.36
(a) At present, order size of company is equal to 6,250.
Total annual cost = Purchase cost + Ordering cost + Carrying cost
!,,((( *,!,(
= (25,000 × 2.40) + 3 *,!,( × 454 + 3 !
× 0.364 = `61,305

2´ A´O !×!,,(((×),
(b) EOQ = =! (.-*
= 2,500 units
C
Total annual cost = Purchase cost + Ordering cost + Carrying cost
!,,((( !,,((
= (25,000 × 2.40) + 3 !,,(( × 454 + 3 !
× 0.364 = `60,900
 Saving due to EOQ = `61,305 – `60,900 = `405

(c) Re-order level = (Avg. consumption × Avg. lead time) + Safety stock
!,,(((
=3 !,(
× 104 + 500 = 1,500 units
Maximum level = ROL + ROQ – (Min. consumption × Min. lead time)
!,,(((
= 1,500 + 2,500 - 3 × 104 = 3,000 units
!,(
Minimum level = ROL – (Avg. consumption × Avg. lead time)
!,,(((
= 1,500 - 3 × 104 = 500 units
!,(
?@A. B6C6B ; ?DE. B6C6B ,(( ; -,(((
Average level = = = 1,750 units
! !

Question – 9
A company produces a product ‘AB’ by using two raw materials – ‘Material Ae’ and ‘Material Be’ in the ratio
of 5:3.

A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the trend
will continue for the entire year. The ratio of input and output is 8:5.

Other information about raw material Ae is as follows:

Purchase price `150 per kg
Re-order period 2 to 3 days
Carrying cost 12%

Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase if becomes obsolete.

To place an order for material ‘Ae’ the company has to incur an administrative cost of `375 per order. At
present, material ‘Ae’ is purchased in a lot of 7,500 kgs to avail the discount on purchase. Company works for
25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic order quantity (EOQ) for material Ae
(b) Maximum stock level for Material Ae

Solution
(a) Annual raw material requirement = 50,000 12 (8 5) = 9,60,000 kg
Material requirement of Ae = 9,60,000 (5 8) = 6,00,000 kg
!×#×$ !×*,((,(((×-&,
EOQ = ! %
=! .!%×.,(
= 5,000 kg
(b) Maximum level for material Ae = ROL + ROQ – (Min. consumption × Min. lead time)
= (Max. consumption × Max. time) + ROQ – (Avg. consumption × Avg. time)
*,((,((( *,((,(((
=3 !,×.!
× 34 + 7,500 - 3 !,×.!
× 24 = 9,500 kg
Also, since material Ae is perishable in nature and will become obsolete after 3.5 days,
*,((,(((
\ Maximum level = 3 !,×.!
× 3.54 = 7,000 kg
 So maximum level will be minimum of the two values i.e. 7,000 kg and 9,500 kg.
\ Maximum level for material Ae = 7,000 kg

Question – 10
SK Ltd. produces a product ‘SK’ using a raw material P. To produce one unit of SK, 2 kg of P is required. As
per the sales forecast conducted by the company, it will able to sale 10,000 units of SK in the coming year. The
following is the information regarding the raw material P:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product SK.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur `720 on paper and documentation work.
From the above information find out the followings in relation to raw material P:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Solution
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘P’:
Sales forecast of the product ‘SK’ 10,000 units
Less: Opening stock of ‘SK’ 900 units
Fresh units of ‘SK’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘SK (9,100 units × 2 kg) 18,200 kg.
Less: Opening Stock of ‘P’ 1,000 kg.
Annual demand for raw material ‘P’ 17,200 kg
F×GH,FII×GHFI
(ii) EOQ = ! GJ.HK% LM GFN
= 1,200 kg

(iii) Re- Order level = (Maximum consumption per day × Maximum lead time)
OPPQRS TLPUQVWXYLP LM Z G\,FII
=3 JK[
+ 67894 × 8 days = 3 JK[
+ 67894 × :;<=>= 560 kg
(iv) Minimum consumption per day of raw material ‘P’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So, minimum consumption per day will be
]YP.TLPUQVWXYLP ; ]R^.TLPUQVWXYLP
Average Consumption = F
]YP.TLPUQVWXYLP ; HI _`
50 kg = F
Min. consumption = 100 kg – 70 kg = 30 kg.
(a) Re-order Quantity = EOQ – 200 kg = 1,200 kg – 200 kg = 1,000 kg
(b) Maximum Stock level = ROL + Re-order Quantity – (Min. consumption × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,440 kg.
(c) Minimum Stock level = ROL – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000kg 1,200kg
II No. of orders a year GH,FII GH,FII
= 17.2 or 18 orders = 14.33 or 15 orders
G,III G,FII

III Ordering cost 18 orders x `720 = `12,960 15 orders x `720 = `10,800

IV Average inventory G,III G,FII
F
= 500kg F
= 600 kg
V Carrying cost 500kg x `17.2 = `8,600 600kg x `17.2 = 10,320
VI Total cost `21,560 `21,120
Extra Cost incurred due to not ordering EOQ = `21,560 - `21,120 = `440

Question – 11
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and has
provided the following data for the year ended on 31st March, 2021:
Particulars Material A (`) Material B (`)
Opening stock as on 1.04.2020 30,000 32,000
Purchases during the year 90,000 51,000
Closing stock as on 31.02.2021 20,000 14,000
(i) You are required to calculate:
a) The inventory turnover ratio of ‘Material A’ and ‘ Material B’
b) The number of days for which the average inventory is held for both materials ‘A’ and ‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year)
Solution
(i) Calculation of Inventory Turnover Ratio
Particulars Material A Material B
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
Less: Closing Stock 20,000 14,000
Raw Material Consumed (A) 1,00,000 69,000
$a6A@Ab;%B17@Ab -(,(((;!(,((( -!,(((;.),(((
Average Stock 3 4 (B) !
= 25,000 !
= 23,000
!
Inventory Turnover Ratio (ITR) .,((,((( */,(((
!,,(((
= 4 times !-,(((
= 3 times
-*( -*(
Number of days (360 ÷ ITR) = 90 days = 120 days
) -

Question – 12
MM Ltd. has provided the following information about the items in its inventory.
 Item Code Number Units Unit Cost (`)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM ltd. has adopted the policy of classifying the items constituting 15% or above to Total Inventory Cost as
“A” category, items constituting 6% or less of Total Inventory Cost as “C” category and the remaining items as
“B” category.
You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC analysis of Inventory Control adopted by MM
Ltd.
Solution
Statement of Cost
Item Code Units Unit Total Cost % of Total Rank Category
Number Cost Cost
(`)
101 25 50 1,250 16.67% II A
102 300 01 300 4% VI C
103 50 80 4,000 53.33% I A
104 75 08 600 8% IV B
105 225 02 450 6% V C
106 75 12 900 12% III B
Total 7,500 100%

Question – 13
SK & Co., an unregistered supplier under GST, purchased material from PK Ltd. which is registered under GST.
The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot `2,50,000
Trade discount @ 10% on listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @ 10%
(Will be given only if payment is made within 30 days.)
Toll Tax paid `5,000
Freight and Insurance `17,000
Demurrage paid to transporter `5,000
Commission and brokerage on purchases `10,000
Amount deposited for returnable containers `30,000
Amount of refund on returning the container `20,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons. The payment to the supplier was made within 21 days of the
purchases. You are required to calculate cost per unit of material purchased by SK & Co.
Solution
Statement of calculation of cost per unit
Particulars Amount (`)
Listed price of materials (on lot) 2,50,000
Less: Trade discount @ 10% on listed price (25,000)
2,25,000
Add: CGST @ 6% of 2,25,000 13,500
Add: SGST @ 6% of 2,25,000 13,500
2,52,000
Add: toll tax 5,000
Add: Freight and insurance 17,000
Add: Commission and brokerage paid 10,000
Add: Cost of refundable containers (30,000 – 20,000) 10,000
2,94,000
Add: Other expenses (2,94,000 ÷ 98%) 6,000
Total cost of material (A) 3,00,000
Total quantity of material in one lot 5,000 units
Less: Normal loss @20% of 5,000 1,000 units
Net quantity of material (B) 4,000 units
Material cost per unit (A ÷ B) 75
Note:
(a) GST is payable on net price i.e. listed price less trade discount
(b) Cash discounts is treated as interest and finance cost, hence it is ignored.
(c) Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of materials. It is an
abnormal cost and thus, not included.

Question – 14
M/s SK Ltd trades in chairs. It stocks sufficient quantity of chairs of almost every variety. In year end, the report
of sales manager revealed that M/s SK experienced stock-out of chairs. The stock-out data is as follows:
Stock-out of chairs No. of times
100 2
80 5
50 10
20 20
10 30
0 33
M/s SK loses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory. Determine
optimum safest stock level.
Solution
Computation of probability of stock out
Stock-out (units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00

Statement showing determination of Optimal Stock

Safety Stock-out Expected annual Expected annual Annual Total annual
Stock Units units Prob. stock out units stock out costs holding cost expected cost
100 0 0 0 0 5,000 5,000
80 20 0.02 0.4 60 4,000 4,060
1.0 150
50 0.02
50 1.5 225 2,500 2,875
30 0.05
2.5 375
1.6 240
80 0.02
3 450
20 60 0.05 1,000 2,140
3 450
30 0.10
7.6 1,140
1.8 270
90 0.02
3.5 525
70 0.05
10 4.0 600 500 2,195
40 0.10
2.0 300
10 0.20
11.3 1,695
100 0.02 2 300
80 0.05 4 600
50 0.10 5 750
0 0 2,700
20 0.20 4 600
10 0.30 3 450
18 2,700
It is recommended to maintain safety stock level of 20 units at which total cost is least i.e. `2,140.

Question – 15
SK Ltd. uses a small casting in one of its finished products. The castings are purchased from a foundry. SK
limited purchases 54,000 castings per year at a cost of `800 per casting. The castings are used evenly throughout
the year in the production process on a 360 day per year basis. The company estimates that it costs `9,000 to
place a single purchase order and about `300 to carry one casting in inventory for a year. The high carrying
costs results from the need to keep the castings in carefully controlled temperature and humidity conditions, and
from the high cost of insurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time
and percentage of their occurrence are shown in the following tabulation.
Delivery time (days): 6 7 8 9 10
Percentage of occurrence: 75 10 5 5 5
Required:
(a) Compute the economic order quantity (EOQ)
(b) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety
stock? The re-order point?
(c) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety
stock? The re-order point?
(d) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one
year?
(e) Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only `600. In addition, company estimates that when the waste and
inefficiency caused by inventories are considered, the true costs of carrying a unit in stock is `720 per
year.
(i) Compute the new EOQ
(ii) How frequently would the company be placing an order, as compared to the old purchasing policy?
Solution
A = 54,000
O = `9,000
C = `300
2´ A´O !×,),(((×/,(((
(a) EOQ = =! = 1,800 units
C -((

(b) For 15% risk of being out of stock, the company needs to maintain stock for 7 days.
Average days = 6 days
\ Safety stock = 7 – 6 = 1 day
,),(((
Safety stock = -*((
× 1 = 150 units
,),(((
Re-order level = Safety stock + (Avg. consumption × Avg. time) = 150 + 3 × 64 = 1,050 units
-*((

(c) For 5% risk of being out of stock, the company needs to maintain stock for 9 days.
Average days = 6 days
\ Safety stock = 9 – 6 = 3 day
,),(((
Safety stock = -*((
× 3 = 450 units
,),(((
Re-order level = Safety stock + (Avg. consumption × Avg. time) = 450 + 3 -*(( × 64 = 1,350 units

,),(((
(d) Ordering cost = × 9,000 = `2,70,000
.,8((
.,8((
Carrying cost = 3 !
+ 4504 × 300 = `4,05,000
Total Cost = `6,75,000
(e) A = 54,000
O = `600
C = `720
 2´ A´O !×,),(((×*((
(i) EOQ = =! &!(
= 300 units
C
-*( -*(
(ii) Old policy frequency days = 01. 13 145647
= -(
= 12 days
-*( -*(
New policy frequency days = 01. 13 145647
= .8( = 2 days
 Material Cost

MCQs
Q(1). Direct material can be classified as:
A. Fixed cost B. Variable cost
C. Semi-variable cost D. Prime cost

Q(2). In most of the industries, the most important element of cost is

A. Material B. Labour
C. Overheads D. Administration cost

Q(3). Which of the following is considered to be the normal loss of materials?

A. loss due to accidents B. Pilferage
C. Loss due to breaking the bulk D. Loss due to careless handling of materials

Q(4). In which of the following methods of pricing, costs lag behind the current economic values?
A. Last-in-first out price B. First-in-first out price
C. Replacement price D. Weighted average price

Q(5). Continuous stock taking is a part of

A. Annual stock taking B. Perpetual inventory
C. ABC Analysis D. Bin cards

Q(6). In which of the following methods, issues of materials are priced at pre-determined rate?
A. Inflated price method B. Standard price method
C. Replacement price method D. Market price method

Q(7). When prices fluctuate widely, the method that will smooth out the effect of fluctuations is:
A. Simple average price B. Weighted average price
C. Moving average price D. Inflated price

Q(8). When prices fluctuate widely, the method that will smooth out the effect of fluctuations is
A. simple average B. weighted average
C. FIFO D. LIFO

Q(9). Under the FSN system of inventory control, inventory is classified on the basis of:
A. volume of material consumption B. frequency of usage of items of inventory
C. criticality of the item of inventory for production D. value of items of inventory

Q(10). Form used for making a formal request to the purchasing department to purchase materials is a:-
A. Material transfer note B. Purchase requisition note
C. Bill of materials D. Material requisition note
 CA INTERMEDIATE – NOV 23 ATTEMPT
COST AND MANAGEMENT ACCOUNTING
SUPER REVISION (MARATHON) :- PART I
S. CHAPTERS
NO.
1 COST SHEET
2 MATERIAL COST
3 EMPLOYEE COST AND DIRECT EXPENSES
4 OVERHEADS
5 ACTIVITY BASED COSTING
6 JOB COSTING
7 BATCH COSTING
8 COST ACCOUNTING SYSTEM
 EMPLOYEE COST - CONCEPTS
1. Labour Turnover
It is the rate of change in labour force of an organisation. It can be calculated by following
ways:
!"#$%& () *%+,&,-.(/
(A) Separation Method = 01%&,2% !(. () 4(&5%&6
× 100
!"#$%& () 7%+8,9%#%/-
(B) Replacement Method = × 100
01%&,2% !(. () 4(&5%&6
!"#$%& () :;+,/6.(/
(C) New Recruitment Method = 01%&,2% !(. () 4(&5%&6
× 100
(!(. () *%+,&,-.(/=!(. () ,9%66.(/6)
(D) Flux Method = × 100
01%&,2% !(. () 4(&5%&6
(!(. () *%+,&,-.(/=!(. () &%+8,9%#%/-)
(E) Flux Method = 01%&,2% !(. () 4(&5%&6
× 100
?+%/./2=@8(6./2
(F) Average worker =
A
B,$("& C"&/(1%& 7,-%
(G) Equivalent Annual LTR = !(. () D,E6 ./ -F% +%&.(D
× 365

2. Idle Time
3. Statement of Wage Rate Calculation
Particulars Amount (`)
Basic Wages --
Dearness Allowance --
Bonus --
Commission --
Perquisite --
Overtime --
Any other allowances --
Employer contribution to PF/ESI etc. --
Gross Wages --
Effective Working Hours (Total hours – Normal Idle Hours) --
Wage rate per hour --

4. Net Wages or In-hand wages calculation

Particulars Amount (`)
Gross Wages --
(-) Employee contribution to PF/ESI etc. --
(-) Employer contribution to PF/ESI etc. --
(-) Tax deducted at source (TDS) --
(-) Professional Tax --
(-) Any other deduction --
Net Wages Payable --

5. Overtime
It is hours worked over and above the normal working hours.

6. Overtime Premium
Ø It is the extra amount of wages paid over the normal rate.
Ø According to Factories Act of 1948, a worker is en@tled for over@me at double the rate
of his wages if he works more than 9 hours in a day or more than 48 hours in a week.

7. Treatment of Overtime Premium

Ø If it is restored at the desire of the customer, then the en@re amount of over@me
should be charged to the job directly.
 Ø If it is due to a general pressure of work to increase the output, the premium as well
as over@me wages may be charged general overheads.
Ø If it is due to the negligence or delay of workers of a par@cular department, it may be
charged to the concerned department.
Ø If it is due to abnormal reasons, it may be charged to cos@ng profit and loss account.

8. Wage Payment System

(A) Time Rate System
Wages = No. of hours worked ´ Rate per hour
(B) Piece Rate system
Wages = No. of units produced ´ Rate per unit (or Piece rate)

9. Incentive Plans
(A) Halsey Plan
Total Earnings = (H × R) + [50% × (S – H) × R]
(B) Halsey-wier Plan
Total Earnings = (H × R) + [33.33% × (S – H) × R]
(C) Rowan Plan
*GH
Total Earnings = (H × R) + '( ) × * × +,
*
Where, H = Actual hours worked
R = Rate per hour
S = Standard hours or time allowed
(S – H) = Time saved

10. Effective Hourly Rate of Earning

C(-,8 4,2%6
Effective hourly rate of earning = 09-",8 F("&6 I(&5%D
 EMPLOYEE COST QUESTIONS
Question – 1
SK Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel department has calculated
labour turnover rate 24.92% for the last year using Flux method.

Following is the data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Data processor 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 — ?
Voice Agents ? 20 20 ?
Assistant Managers ? 20 — 30
Senior Voice Agents 4 — — 12
Senior Data 8 — — 34
Processors Team Leaders ? — — ?
Employees transferred from the Subsidiary Company
Senior Voice Agents — 8 — —
Senior Data Processors — 26 — —
Employees transferred to the Subsidiary Company
Team Leaders — — 60 —
Assistant Managers — — 10 —

At the beginning of the year there were total 772 employees on the payroll of the company. The opening strength
of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 : 2.

The company has decided to abandon the post of Team Leaders and consequently all the Team Leaders were
transferred to the subsidiary company. The company and its subsidiary are maintaining separate set of books of
account and separate Personnel Department.

You are required to calculate:

(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the SK Ltd.
Solution
Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year
At the beginning of the year At the end of the year
Data Processors 540 1,560
Payroll Processors 80 40
[Left- 60 + Closing- 40 – Joined- 20]
Supervisors* 30 90
Voice Agents* 30 30
Assistant Managers* 20 30
Senior Voice Agents 4 12
Senior Data Processors 8 34
Team Leaders 60 0
Total 772 1,796
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst. Managers =
[772 – {540 + 80 + 4 + 8 + 60} employees] or [772 – 692 = 80 employees]
! ! #
[{Supervisors- !" × "= 30, Voice Agents- !" × "= 30 & Asst. Managers- !" × "= 20} employees]
At the end of the year:
[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined – 20 Left) = 30]

(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Recruitment Replacement Total Joining
Data Processor 60 1,020 60 1,080
Payroll Processors 60 -- 20 20
Supervisors -- 60 -- 60
Voice Agents 20 -- 20 20
Assistant Managers 10 10 10 20
Sr. Voice Agents -- 8 -- 8
Sr. Data Processors -- 26 -- 26
Team Leaders 60 -- -- --
Total 210 1,124 110 1,234
(Since, SK Ltd. and its subsidiary are maintaining separate Personnel Department, so transfer-in and transfer-
out are treated as recruitment and separation respectively.)

(a) Calculation of Labour Turnover:

$%. %( )*+,%-)). /)+,01)2 23/456 78) -)0/
Replacement Method = × $""
9:)/06) 5%.%( )*+,%-)). %5 /%,,
;;<
= (>>#?;,>AB)/# × $"" = 8.57%

$%.%( )*+,%-)). .)+0/07)2 23/456 78) -)0/

Separation Method = × $""
9:)/06) 5%.%( )*+,%-)). %5 /%,,
#;<
= (>>#?;,>AB)/# × $"" = 16.36%

(b) Labour Turnover under Flux Method

$%.%( )*+,%-)). (E%45)2 ? .)+0/07)2) 23/456 78) -)0/
Flux Method = × $""
9:)/06) 5%.%( )*+,%-)). %5 /%,,
;,#!F?#;<
= (>>#?;,>AB)/# × $"" = 112.46%
Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it has not taken
the No. of new recruitment while calculating the labour turnover under Flux method.

Question – 2
PQR Limited has replaced 72 workers during the quarter ended 31st March, 2022. The labour rates for the quarter
are as follows:
Flux Method 16%
Replacement Method 8%
Separation Method 5%
You are required to ascertain:
(i) Average number of workers on roll (for the quarter),
(ii) Number of workers left and discharged during the quarter,
(iii) Number of workers recruited and joined during the quarter,
(iv) Equivalent employee turnover rates for the year.
Solution
GH.HI JKLMNOKPKQRS
(i) Replacement Method - Labour turnover rate = TUKJNVK QWPXKJ HI YHJZKJS ´ 100
[\
8 = TUKJNVK QWPXKJ HI YHJZKJS ´ 100
Average number of workers = 900
GH.HI SKLKNJNR]HQS
(ii) Separation Method - Labour turnover rate = TUKJNVK QWPXKJ HI YHJZKJS ´ 100
GH.HI SKLKNJNR]HQS
5 =
^__
´ 100
Number of separations (left and discharged) = 45
GH.HI SKLNJNR]HQS ? GH.HI JKOJW]RPKQRS & aH]QKK
(iii) Flux Method - Labour turnover rate = TUKJNVK QWPXKJ HI YHJZKJS
´ 100
bc ? GH.HI JKOJW]RPKQRS & aH]QKK
16 =
^__
´ 100
Number of workers recruited & joined = 99

(iv) Equivalent Employee turnover rate

de
Flux Method – Labour turnover rate = f
´ 12 = 64%
g
Replacement Method – Labour turnover rate = ´ 12 = 32%
f
c
Separation Method – Labour turnover rate = f ´ 12 = 20%

Question – 3
SK Ltd. wants to ascertain the profit lost during the year 2020-21 due to increased labour turnover. For this
purpose, they have given you the following information:
(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60% of the
experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit was `25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is `180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was `1,83,480.
(6) Recruitment cost was `1,56,340
(7) Training cost was `1,13,180
You are required to calculate the profit lost by the company due to increased labour turnover during the year
2020-21.
Solution
c_,___
Output by experienced workers in 50,000 hours = = 5,000 units
d_
∴ Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 – 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of `180 = `36
Total contribution lost = `36 × 12,000 units = `4,32,000
Cost of repairing defective units = 3,000 units × 0.2 × `25 = `15,000
Profit forgone due to labour turnover
Particulars Amount (`)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2020-21 9,00,000

Question – 4
Following data have been extracted from the books of M/s ABC Private Limited:
Salary (each employee, per month) `30,000
Bonus 25% of salary
Employer’s contribution to PF, ESI etc. 15% of salary
Total cost at employees’ welfare activities `6,61,500 per annum
Total leave permitted during the year 30 days
Number of employees 175
Normal idle time 70 hours per annum
Abnormal idle time (due to failure of power supply) 50 hours
Working days per annum 310 days of 8 hours
You are required to calculate:
1) Annual cost of each employee
2) Employee cost per hour
3) Cost of abnormal idle time, per employee
Solution
Calculation of effective hours
Total working hours (310 × 8) 2,480
Less: Leave days (30 × 8) __240
Available working hours 2,240
 Less: Normal loss ___70
Effective working hours 2,170
Statement of employee cost per hour
Particulars Amount (`)
Salary (30,000 × 12) 3,60,000
Bonus (25% × 3,60,000) 90,000
Employees contribution to PF (15% × 3,60,000) 54,000
Employee welfare (6,61,500 ÷ 175) 3,780
Total Annual Cost (A) 5,07,780
Effective working hours (B) 2,170
Employee cost per hour (A ÷ B) 234
Cost of abnormal idle time per employee = `234 × 50 hours = `11,700

Question – 5
A total of 108 labour hours have been put in a particular job card for repair work engaging a semi-skilled and
skilled labour (Mr. Deep and Mr. Sam respectively).

The hours devoted by both the workers individually on daily basis for this particular job are given below:
Monday Tuesday Wednesday Thursday Friday
10.5 8.0 10.5 9.5 10.5
The skilled labour also worked on Saturday for 10 hours.

Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 5 hours on Saturdays;
the workers are however paid full wages for Saturday (8 hours for 5 hours worked).

Semi-skilled and skilled worker is paid ordinary wage @`400 and `600 respectively per day of 8 hours labour.
Further, the workers are also paid dearness allowance @20%. Extra hours worked over and above 8 hours are
also paid at ordinary wage rate however, overtime premium of 100% of ordinary wage rate is paid if a worker
works for more than 9 hours in a day and 48 hours in a week.

You are required to compute the wages payable to Mr. Deep (semi-skilled) and Mr. Sam (skilled).
Solution
Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled)
Day Actual Normal Extra Overtime Equivalent normal Total normal
hours hours Hours hours hours for overtime hours
worked payable
A B C D=A–B E=D 2 F=B+C+
E
Monday 10.5 8 1 1.5 3 12
Tuesday 8 8 - - - 8
Wednesday 10.5 8 1 1.5 3 12
Thursday 9.5 8 1 0.5 1 10
 Friday 10.5 8 1 1.5 3 12
Saturday - - - - - -
Total 49 40 4 5 10 54

Calculation of total normal hours to be paid for Mr. Sam (Skilled)

Day Actual Normal Extra Overtime Equivalent normal Total normal
hours hours Hours hours hours for overtime hours
worked payable
A B C D=A–B E=D 2 F=B+C+
E
Monday 10.5 8 1 1.5 3 12
Tuesday 8 8 - - - 8
Wednesday 10.5 8 1 1.5 3 12
Thursday 9.5 8 1 0.5 1 10
Friday 10.5 8 1 1.5 3 12
Saturday 10 5 3+1=4 1 2 11
Total 59 45 8 6 12 65
Note: Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though 5 hours of
working is required on Saturday because in question it is mentioned that both condition of 9 hour per day and
48 hour a week has to be satisfied. Thus, only 1 hour of overtime over 9 hours will be paid at overtime rate.

Wages Payable
Particulars Mr. Deep Mr. Sam
Basic wage per hour 400 8 = 50 600 8 = 75
Dearness allowance per hour @ 20% 10 15
Hourly wage rate 60 90
Total normal hours payable 54 65
Total wages payable 3,240 5,850

Question – 6
Calculate the earnings of S and K from the following particulars for a month and calculate the labour cost to
each job A, B and C.
S K
Basic Wages `100 `160
Dearness allowance 50% 50%
Contribution of provident fund (on basis wages) 8% 8%
Contribution of employee’s state insurance (on basic wages) 2% 2%
Overtime 10 hours ---
The normal working hours for the month are 200. Overtime is paid as double the total of normal wages and
dearness allowance. Employer’s contribution to state insurance and provident fund are at equal rates of
employee’s contribution. The two workers were employed on jobs X, Y and Z in the following properties:
A B C
Worker S 40% 30% 30%
Worker K 50% 20% 30%
Overtime was done on Job B.
Solution
Statement of wages
Particulars Worker S Worker K
Basic Wages 100 160
Dearness Allowance 50 80
Employer contribution to PF 8 12.80
Employer contribution to state insurance 2 3.20
(d__?c_)×\×d_ 15 -
Overtime * \__
+
Total 175 256
Statement of cost of Jobs
Particulars A B C
Overtime - 15 -
Bal. of Worker S’s wages 64 48 48
(160 in 40:30:30)
Worker K’s Wages 128 51.20 76.80
(256 in 50:20:30)
Total 192 114.20 124.80

Question – 7
A skilled worker in SK Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a
particular product is 4 hours. S, 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%)?
Solution
Let actual time taken by the worker S = H

Total wages in Rowan plan = (H × 30) + æç H ö÷ × (4 – H) × 30

è4ø
2
(H × 37.50) = 30H + 30H – 7.5H
22.5H = 7.5H2
H = 3 hours

Total wages of workman in Halsey scheme = (3 × 30) +

50 × (4 – 3) × 30 = `105
100
Effective hourly rate of earnings under Halsey Plan = 105 = `35
3 hours

Question – 8
Two workers ‘S’ and ‘K’ produce the same product using the same material. Their normal wage rate is also the
same. ‘S’ is paid bonus according to Rowan scheme while ‘K’ is paid bonus according to Halsey scheme. The
time allowed to make the product is 50 hours. ‘S’ takes 30 hours while ‘K’ takes 40 hours to complete the
product. The factory overhead rate is `5 per person-hour actually worked. The factory cost of product
manufactured by ‘S’ is `3,490 and for product manufactured by ‘K’ is `3,600.
Required:
(a) Compute the normal rate of wages
(b) Compute the material cost
(c) Prepare a statement comparing the factory cost of the product as made by two workers.
Solution
Let x be the cost of material and y be the normal rate of wages per hour
Statement of Factory Cost
Particulars Worker S Worker K
` `
Material x x
Wages 30y 40y
Bonus (A = 30y ´ 20/50) (B = 10y ´ 50%) 12y 5y
Overheads @ `5 per person hour worked 150 200
x + 42y + 150 x + 45y + 200
The following two equations can be made
x + 42y + 150 = `3,490 ….(i)
x + 45y + 200 = `3,600 ….(ii)
On subtracting equation (i) from equation (ii)
3y + 50 = 110
or 3y = 110 – 50
y = 60/3 = 20
On substituting the value of y in equation (i)
x + 840 + 150 = 3,490
or x = 3,490 – 990
or x = 2,500
Thus:
(a) Normal Wage Rate is `20 per hour
(b) Cost of material used for the product is `2,500

(c) Statement of Cost

Particulars Worker S Worker K
Material 2,500 2,500
Wages 600 800
Bonus 240 100
Overheads @ `5 per person hour worked 150 200
3,490 3,600
Question – 9
Mr. S is working by employing 10 skilled workers. He is considering the introduction of some incentive scheme
- either Halsey Scheme (with 50% bonus) or Rowan Scheme - of wage payment for increasing the labour
productivity to cope with the increased demand for the product by 25%. He feels that if the proposed incentive
scheme could bring about an average 20% increase over the present earnings of the workers, it could act as
sufficient incentive for them to produce more and he has accordingly given this assurance to the workers.

As a result of this assurance, the increase in productivity has been observed as revealed by the following figures
for the current month:
Hourly rate of wages (guaranteed) `2.00
Average time for producing 1 piece by one worker at the previous performance 2 hours
(This may be taken as time allowed)
No. of working day in the month 25
No. of working hours per day for each worker 8
Actual production during the month 1,250 units
Required:
(a) Calculate effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
(b) Calculate the savings to Mr. S in terms of direct labour cost per piece under the above schemes.
(c) Advice Mr. S about the selection of the scheme to fulfill his assurance.
Solution
Actual hours = 25 × 8 × 10 = 2000; Standard hours = 1,250 × 2 = 2,500; Wage rate = 2

(a) Earning under Halsey scheme = (2,000 × 2) + 50 × (2,500 – 2,000) × 2 = `4,500

100
Effective hourly rate of earnings under Halsey Plan = 4,500 = `2.25
2,000 hours

Earnings under Rowan plan = (2,000 × 2) + æçç 2,000 ö÷÷ × (2,500 – 2,000) × 2 = `4,800
è 2,500 ø

Effective hourly rate of earnings under Rowan Plan = 4,800 = `2.40

2,000 hours
(b) Labour cost per piece under time wage system = 2 × 2 = `4

Labour cost per piece under Halsey = 4,500 = `3.60

1,250
Savings per piece under Halsey Scheme = 4 – 3.60 = `0.40

Labour cost per piece under Rowan = 4,800 = `3.84

1,250
Savings per piece under Rowan Scheme = 4 – 3.84 = `0.16
(c) As per above, it is better for Mr. S to adopt Halsey Scheme but since he has assured workers of an average
20% increase over the present earnings, he will have to select Rowan Scheme as is evident from the
following:

Increase in earning under Halsey Scheme = 4,500 - 4,000 ´ 100 = 12.5%

4,000
 Increase in earning under Rowan Scheme = 4,800 - 4,000 ´ 100 = 20%
4,000

Question – 10
A Company is undecided as to what kind of wage scheme should be introduced. The following particulars have
been compiled in respect of three workers. Which are under consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Production in units:
- Product S 210 - 600
- Product K 360 - 1350
- Product M 460 250 -
Standard time allowed per unit of each product is:
S K M
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at `1/-
You are required to calculate the wages of each worker under:
(a) Guaranteed hourly rate basis
(b) Piece rate earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings are less
than 50% of basic pay).
(c) Premium bonus basis where the worker received bonus based on Rowan scheme.
Solution
(a) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours worked Hourly wage rate Wages (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400

(b) Computation of wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit Units Wages Units Wages Units Wages
S 15 210 3,150 - - 600 9,000
K 20 360 7,200 - - 1,350 27,000
M 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-I, II and III will be paid the
wages as computed i.e. `24,150, `7,500 and `36,000 respectively.
(c) Computation of wages of each worker under Rowan scheme
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken Saved rate per Earning
hour
I 402.5 380 22.5 40 15,00 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Working Notes:
(1) Piece rate per unit
Product Standard time per Piece rate per Piece rate per unit
unit in minute minute
S 15 1 15
K 20 1 20
M 30 1 30

(2) Time allowed to each worker

Worker Product S Product K Product M Total hours
I 210 × 15 = 3,150 360 × 20 = 7,200 460 × 30 = 13,800 24,150÷60 = 402.5
II - - 250 × 30 = 7,500 7,500÷60 = 125
III 600 × 15 = 9,000 1,350 × 20 = 27,000 - 36,000÷60 = 600

fg_
(3) Bonus of worker -I under Rowan = × 22.5 × 40 = 850
b_\.c_
d__
Bonus of worker -II under Rowan = d\c × 25 × 50 = 1,000
cb_
Bonus of worker -III under Rowan = × 60 × 60 = 3,240
e__
 Employee Cost & Direct Expenses
MCQs
Q(1). Idle time is the time under which-
A. Full wages are paid to workers B. No productivity is given by the workers
C. Both (a) & (b) D. None of the above

Q(2). Cost of idle time due to non-availability of raw material is-

A. charged to overhead costs B. charged to respective jobs
C. charged to costing profit & loss account D. None of the above

Q(3). Time and motion study is conducted by-

A. Time keeping department B. Personnel department
C. Payroll department D. Engineering department

Q(4). Identify, which one of the following, does not account for increasing labour productivity:
A. Job satisfaction B. Motivating workers
C. High labour turnover D. Proper supervision and control

Q(5). Labour turnover is measured by-

A. Number of persons replaced ÷ average number of workers
B. Number of persons separated ÷ number of workers at the beginning of the year
C. (Number of persons replaced + number of persons separated) ÷ number of persons at the beginning + number of persons
at the end of the year)
D. None of the above

Q(6). Time booking refers to a method wherein _______ of an employee is recorded

A. Attendance B. Food expenses
C. Health status D. Time spent on a particular job

Q(7). Employee cost includes:

A. Wages and salaries B. Allowance and incentives
C. Payment for overtime D. All of the above

Q(8). If the time saved is less than 50% of the standard time, then the wages under Rowan and Halsey premium plan on
comparison gives-
A. More wages to workers under Rowan plan than Halsey plan
B. More wages to workers under Halsey plan than Rowan plan
C. Equal wages under two options
D. None of the above

Q(9). Important factors for control of employee cost can be-

A. Time and motion study B. Control over idle time and overtime
C. Control over employee turnover D. All of the above

Q(10). Out of the following methods attendance is marked by recognizing an employee based on physical and behavioral
traits-
A. Punch-card attendance method B. Bio-metric attendance system
C. Attendance register method D. Token method

Q(11). If overtime is required for meeting urgent orders, the overtime premium should be charged as:
A. Respective job B. Overhead cost
C. Costing P&L A/c D. None of the above

Q(12). Standard time of a job is 60 hours, and guaranteed time rate is `0.30 per hour. What is the amount of wages under
Rowan plan if jobs is completed in 48 hours?
A. `16.20 B. `17.28
C. `18.00 D. `14.40
 OVERHEADS - CONCEPTS
1. Overheads
It is the total of indirect material, indirect labour and indirect expenses.

2. Steps for Overheads

(A) Estimation and Distribution
(B) Recovery Rate
(C) Under or Over Recovery

3. Types of Department
(A) Production Department – Involved in manufacturing of goods or services
(B) Service Department – Help production department in performing their services

4. Distribution
(A) Allocation
(B) Apportionment

5. Overheads Distribution
6. Overheads Distribution Statement

7. Recovery Rate
Rate at which overheads are recovered/absorbed/charged
!"#$%&%# ()%*+%,#-
Recovery Rate = Pre-determined absorption rate = !"#$%&%# *%.()%*/ 0,-%

8. Type of Recovery Rate

!"#$%&%# 1)%*+%,#-
(A) Direct Material Cost % Method = !"#$%&%# 2,&%*3,4 5(-& × 100
!"#$%&%# 1)%*+%,#-
(B) Direct Labour Cost % Method = !"#$%&%# 6,0("* 5(-& × 100
!"#$%&%# 1)%*+%,#-
(C) Direct Prime Cost % Method = !"#$%&%# 7*38% 5(-& × 100
!"#$%&%# 1)%*+%,#-
(D) Unit Cost Method = !"#$%&%# 7*(#".&3(9 :93&-
!"#$%&%# 1)%*+%,#-
(E) Labour Hour Rate Method = !"#$%&%# 6,0("* ;("*-
!"#$%&%# 1)%*+%,#-
(F) Machine Hour Rate Method = !"#$%&%# 2,.+39% ;("*-

9. Machine Hour Rate

It is applied in case of capital intensive units.
 All overheads are divided into Fixed/Standing Charges and Variable/Running Charges

10. Points to Remember (PTR)

(A) Depreciation

(B) Effective Machine Hours =

(C) Normal Idle Time – Hours during which work is not done e.g. maintenance, setup,
lunch etc.
(D) Unless otherwise provided, following points are to be assumed for setup hours:
11. Dual Recovery Rate/ Two-tier Machine Hour Rate
It is to be used in following situation:
(A) When question mention to use
(B) Job charge is for separation and operation separately

In this case set-up hours are considered to be productive

For FC per machine hour – Use total hours (Production + Set-up)

FC per machine hour will remain same for both i.e. operation and set-up
VC will be computed separately for both production and set-up.

12. Type of Recovery Rate

1)%*+%,#- (< #%=,*&8%9&
(A) Departmental recovery rate = !,-% ),4"% (< #%=,*&8%9&
1)%*+%,#- (< >,.&(*/
(B) Blanket or plant-wise recovery rate = !,-% ),4"% (< >,.&(*/
13. Under or Over Recovery of Overheads
 OVERHEADS QUESTIONS
Question – 1
From the following information work out the production hour rate of recovery of overheads in Departments A,
B and C by using (1) Simultaneous equation method; (2) Repeated distribution method; (3) Trial & Error
Method
Production Department Service Department
Item Total
A B C D E
Rent 1,000 200 400 150 150 100
Electricity 200 50 80 30 20 20
Fire Insurance 400 80 160 60 60 40
Plant Depreciation 4,000 1,000 1,500 1,000 300 200
Transport 400 50 50 50 100 150
Estimated Working Hours 1,000 2,500 1,800
Expenses of the Service departments D and E are apportioned as under:
A B C D E
D 30% 40% 20% - 10%
E 10% 20% 50% 20% -
Solution
1. Simultaneous Equation Method
Statement of Overhead Distribution
Production Departments Service Departments
Particulars Basis
A B C D E
Rent Allocation 200 400 150 150 100
Electricity Allocation 50 80 30 20 20
Fire Insurance Allocation 80 160 60 60 40
Plant Depreciation Allocation 1,000 1,500 1,000 300 200
Transport Allocation 50 50 50 100 150
Total 1,380 2,190 1,290 630 510
Cost of department D (w.n.-1) Apportionment 224 299 149 (747) 75
Cost of department E (w.n.-1) Apportionment 59 117 292 117 (585)
Total (A) 1,663 2,606 1,731 - -
Estimated working hours (B) 1,000 2,500 1,800 - -
Overheads rate per hour
(A ÷ B) 1.663 1.0424 0.9617 - -
Working note – 1
Let D = Total expenses of service department ‘D’ to be apportioned
Let E = Total expenses of service department ‘E’ to be apportioned
Thus, D = 630 + (0.2)E
E = 510 + (0.1)D
Solving above equations, we get, D = 747 (approx.) and E = 585 (approx.)
2. Repeated Distribution Method
Statement of Overhead Distribution
Production Departments Service Departments
Particulars Basis
A B C D E
Rent Allocation 200 400 150 150 100
Electricity Allocation 50 80 30 20 20
Fire Insurance Allocation 80 160 60 60 40
Plant Depreciation Allocation 1,000 1,500 1,000 300 200
Transport Allocation 50 50 50 100 150
Total 1,380 2,190 1,290 630 510
Cost of department D 30:40:20:10 189 252 126 (630) 63
1569 2442 1416 - 573
Cost of department E 10:20:50:20 57 114 287 115 (573)
1626 2556 1703 115 -
Cost of department D 30:40:20:10 35 45 23 (115) 12
1661 2601 1726 - 12
Cost of department E 10:20:50:20 1 3 6 2 (12)
1662 2604 1732 2 -
Cost of department D 30:40:20:10 1 1 - (2) -
Total (A) 1,663 2,605 1,732 - -
Estimated working hours (B) 1,000 2,500 1,800 - -
Overheads rate per hour
(A ÷ B) 1.633 1.0424 0.9617 - -
3. Trial & Error Method
Statement of Overhead Distribution
Production Departments Service Departments
Particulars Basis
A B C D E
Rent Allocation 200 400 150 150 100
Electricity Allocation 50 80 30 20 20
Fire Insurance Allocation 80 160 60 60 40
Plant Depreciation Allocation 1,000 1,500 1,000 300 200
Transport Allocation 50 50 50 100 150
Total 1,380 2,190 1,290 630 510
Re-distribution of Service department expenses
Particulars Department D Department E
Overhead as per primary distribution 630 510
Apportionment of Dept-D expenses to Dept-E (10% of 630) - 63
Apportionment of Dept-E expenses to Dept-D [20% of (510+63 )] 115 -
Apportionment of Dept-D expenses to Dept-E (10% of 115) - 12
Apportionment of Dept-E expenses to Dept-D (20% of 12) 2 -
Total 747 585
 Distribution of Service department’s overheads to production department
Particulars Production Departments
A B C
Overheads as per primary distribution 1,380 2,190 1,290
Dept-D (90% of 747) 224 299 149
Dept-E (80% of 585) 59 117 292
Total (A) 1,663 2,606 1,731
Estimated working hours (B) 1,000 2,500 1,800
Overheads rate per hour (A ÷ B) 1.663 1.042 0.962

Question – 2
M/s NOP Limited has its own power plant and generates its own power. Information regarding power
requirements and power used are as follows:
Production Dept. Service Dept.
A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the month of May 16,000 20,000 12,000 8,000
During the quarter ended September 2018, costs for generating power amounted to `12.60 lakhs out of which
`4.20 lakhs was considered as fixed cost.

Service Dept. X renders service to A, B and Y in the ratio of 6:4:2 whereas department Y renders service to A
and B in the ratio 4:1. The direct labour hours of Department A and B are 67,500 hours and 48,750 hours
respectively. Required:
1) Prepare overheads distribution sheet
2) Calculate factory overhead per labour hour for the department A and B
Solution Overheads Distribution Sheet
Production
Total Service Department
Particulars Basis Department
Amount
A B X Y
Fixed Overheads Needed cap. 4,20,000 1,20,000 1,50,000 90,000 60,000
(20:25:15:10)
Variable Used capacity 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
Overheads (16:20:12:8)
Total 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
Cost of Dept. X 6:4:2 1,35,000 90,000 -(2,70,000) 45,000
Cost of Dept. Y 4: 1 1,80,000 45,000 - (2,25,000)
Total 6,75,000 5,85,000 - -
Labour hours 67,500 48,750
Fact. OH per hr. `10 `12
Question – 3
SK Ltd. manufactures luggage trolleys for airports. The factory, in which the company undertakes all of its
production, has two production departments- ‘Fabrication’ and ‘Assembly’, and two service departments-
‘Stores’ and ‘Maintenance’. The following information have been extracted from the company’s budget for the
financial year ended 31st March:
Allocated Overhead Costs `
Fabrication Department 15,52,000
Assembly Department 7,44,000
Stores Department 2,36,000
Maintenance Department 1,96,000
Other Overheads `
Factory rent 15,28,000
Factory building insurance 1,72,000
Plant & machinery insurance 1,96,000
Plant & Machinery Depreciation 2,65,000
Subsidy for staffs’ canteen 4,48,000

Direct Costs ` `
Fabrication Department:
Material 63,26,000
Labour 8,62,000 71,88,000
Assembly Department:
Material 1,42,000
Labour 13,06,000 14,48,000
The following additional information is also provided:
Fabrication Assembly Stores Maintenance
Department Department Department Department
Floor area (square meters) 24,000 10,000 2,500 3,500
Value of plant & machinery (`) 16,50,000 7,50,000 75,000 1,75,000
No. of stores requisitions 3,600 1,400 --- ---
Maintenance hours required 2,800 2,300 400 ---
No. of employees 120 80 38 12
Machine hours 30,00,000 60,000
Labour hours 70,000 26,00,000
Required:
(a) Prepare a table showing the distribution of overhead costs of the two service departments to the two
production departments using step method; and
(b) Calculate the most appropriate overhead recovery rate for each department.
(c) Using the rates calculated in part (b) above, calculate the full production costs of the following job
order:
Job number IGI2019
 Direct Materials `2,30,400
Direct Labour:
Fabrication Department 240 hours @ `50 per hour
Assembly Department 180 hours @ `50 per hour
Machine hours required:
Fabrication Department 210 hours
Assembly Department 180 hours
Solution
(a) Table of Primary Distribution of Overheads
Basis of Total Production Dept. Service Depart.
Particulars
Apportionment Amount Fabrication Assembly Stores Maintenance
OHs Allocated Allocation 27,28,000 15,52,000 7,44,000 2,36,000 1,96,000
Direct Costs Actual - - - --- ---
Other OHs:
Floor Area
Factory rent 15,28,000 9,16,800 3,82,000 95,500 1,33,700
(48:20:5:7)
Factory bldg.. Floor Area
1,72,000 1,03,200 43,000 10,750 15,050
insurance (48:20:5:7)
Value of P&M
P&M insurance 1,96,000 1,22,038 55,472 5,547 12,943
(66:30:3:7)
Value of P&M
P&M Dep. 2,65,000 1,65,000 75,000 7,500 17,500
(66:30:3:7)
Canteen No. of employees
4,48,000 2,15,040 1,43,360 68,096 21,504
Subsidy (60:40:19:6)
53,37,000 30,74,078 14,42,832 4,23,393 3,96,697

Re-distribution of Service Departments’ Expenses:

Particulars Basis of Production Department Service Departments
Apportionment Fabrication Assembly Stores Maintenance
OH as per Primary
Primary distribution 30,74,078 14,42,832 4,23,393 3,96,697
distribution
Maintenance Hours
Maint. Depart. Cost 2,01,955 1,65,891 28,851 (3,96,697)
(28:23:4:-)
32,76,033 16,08,723 4,52,244 ---
No. of Stores
Stores Department 3,25,616 1,26,628 (4,52,244)
Requisition (18:7)
36,01,649 17,35,351 --- ---

(b) Overhead Recovery Rate

Department Apportioned Basis of Overhead Overhead Recovery Rate
Overhead (`) Recovery Rate (`)
(I) (II) [(I)÷(III)]
Fabrication 36,01,649 30,00,000 Machine Hours 1.20 per Machine Hour
Assembly 17,35,351 26,00,000 Labour Hours 0.67 per Labour Hour
(c) Calculation of full production costs of Job no. IGI2014.
Particulars Amount (`)
Direct Materials 2,30,400
Direct Labour:
- Fabrication Deptt. (240 hours × `50) 12,000
- Assembly Deptt. (180 hours × `50) 9,000
Production Overheads:
- Fabrication Deptt. (210 hours × `1.20) 252
- Assembly Deptt. (180 hours × `0.67) 121
Total Production Cost 2,51,773

Question – 4
SNS Trading Company has three Main Departments and two Service Departments. The data for each department
is given below:
Departments Expenses Area (in Sq. Mtr.) Number of
(`) employees
Main Department:
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Department:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in Square
Meters’ and ‘Number of Employees’ respectively:
You are required to:
(i) Prepare a statement showing the distribution of expenses of service departments to the main departments
using the “Step Ladder Method” of overhead distribution.
(ii) Compute the rate per hour of each Main Department, given that, the Purchase Department, Packing
Department and Distribution Department works for 12 hours a day, 24 hours a day and 8 hours a day
respectively. Assume that there are 365 days in a year and there are no holidays.
Solution
(i) & (ii) Overheads Distribution Sheet
Particulars Basis Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
Expenses Allocation 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Maintenance Area 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Department (12:15:7:6)
Expenses
Personnel No. of Ees 1,04,000 2,21,000 91,000 - (4,16,000)
Department (8:17:7)
Expenses
Total 7,96,000 12,61,000 5,53,000 - -
 Total Hours 12 × 365 = 24 × 365 = 8 × 365 = - -
4,380 8,760 2,920
Rate per
hour 181.74 143.95 189.38 - -
Working Note - 1
Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
Area (in sq. mtr.) 12 15 7 - 6
% of service rendered by
Maintenance Department 30% 37.50% 17.50% - 15%
Number of Employees 800 1700 700 200 -
% of service rendered by
Personnel department 23.53% 50% 20.59% 5.88%
The usual method used for ranking the support departments for Step Down Allocation Method is % of Service
rendered by one Service Department to another. Based on this, Maintenance Department provides 15% (highest
%) of service to Personnel Department. Thus, first maintenance department expenses should be distributed first.

Question – 5
From the following data, work out the predetermined machine hour rates for Departments A and B of a factory:
Preliminary estimates of expenses
Total (`) Dept. A (`) Dept. B (`)
Power 15,000 -- --
Spare Parts 8,000 3,000 5,000
Consumable stores 5,000 2,000 3,000
Depreciation on machinery 30,000 10,000 20,000
Insurance on machinery 3,000 -- --
Indirect labour 40,000 -- --
Building maintenance 7,000 -- --
The final estimates are to be prepared on the basis of above figures after making into consideration the
following factors:
(a) An increase of 10 per cent in price of spare parts.
(b) An increase of 20 per cent in the consumption of spare parts for department B only.
(c) Increase in the straight line method of depreciation from 10 percent on the original value machinery to
12 per cent.
(d) 15 per cent general increase in wage rates.
The following information is available:
Dept. A Dept. B
Estimated direct labour hours 80,000 1,20,000
Ratio of K.W. rating 3 2
Estimated machine hours 25,000 30,000
Floor Space (Sq. ft) 15,000 20,000
Solution
Statement of Cost
Particulars Basis Dept. A Dept. B
Power KW Rating - 3:2 9,000 6,000
Spare Parts w.n. 1 3,300 6,600
Consumable Stores Allocation 2,000 3,000
Dep. On machine w.n. 2 12,000 24,000
Insurance on Machine Value of machine - 1:2 1,000 2,000
Indirect Labour
DL Hours - 8:12 18,400 27,600
(40,000 + 15% = 46,000)
Building Maintenance Floor space - 15:20 3,000 4,000
Total (A) 48,700 73,200
Machine Hours (B) 25,000 30,000
Machine Hr. Rate (A÷B) 1.95 2.44
Working note - 1
Particulars Dept. A Dept. B
Spare parts 3,000 5,000
(+) Increase in price @10% 300 500
3,300 5,500
(+) Increase in consumption@20% - 1,100
Total 3,300 6,600
Working note - 2
Particulars Dept. A Dept. B
Existing Depreciation (A) 10,000 20,000
Value of Machine (A ÷ 10%) 1,00,000 2,00,000
New Depreciation @ 12% 12,000 24,000

Question – 6
A manufacturing unit has purchased and installed a new machine at a cost of `24,90,000 to its fleet of 5 existing
machines. The new machine has an estimated life of 12 years and is expected to realize `90,000 as scrap value
at the end of its working life.

Other relevant data are as follows:

(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant maintenance work is
carried out on weekends when production is totally halted. The estimated maintenance hours are 416.
During the production hours machine set-up and change over works are carried out. During the set-up
hours no production is done. A total 312 hours are required for machine set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is `2,40,000 pa.a
(iii) The machine requires a component to be replaced every week at a cost of `2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each operator is paid `30,000
per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine consumes 60 units per hour.
During the maintenance the machine consumes only 10 units per hour. Rate of electricity per unit of
consumption is `6.
(vi) Departmental and general works overhead allocated to the operation during last year was `5,00,000.
During the current year it is estimated to increase by 10%.
Required to compute the machine hour rate.
Solution
Effective machine hours = 2,496 – 312 = 2,184 hours
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
!",$%,%%%&$%,%%% 2,00,000
Depreciation ! '!
"
Operator’s salary [30,000 × 3 × 12 × (1/6)] 1,80,000
Fringe Benefits (1,80,000 × 20%) 36,000
Department & General Overheads [5,00,00 × 110% × (1/6)] 91,667
Fixed expenses 5,07,667
Effective machine hours 2,184
Fixed expenses per machine hour 232.45
Variable Expenses per machine hour
Maintenance (2,40,000 ÷ 2,184) 109.89
('! ' 57.14
Replacement cost #2,400 × × )
) !,'*"
Electricity during production [(2,496 ×60 × 6) ÷ 2,184] 411.43
Electricity during maintenance [(416 × 10 × 6) ÷ 2,184] 11.43
Machine hour rate 822.34

Question – 7
Calculate Machine Hour Rate from the following particulars:
Cost of Machine - `25,00,000
Salvage Value - `1,25,000
Estimated life of the machine - 25,000 Hours
Working Hours (per annum) - 3,000 Hours
Hours required for maintenance - 400 Hours
Setting-up time required - 8% of actual working hours
Additional Information:
(a) Power 25 units @ `5 per unit per hour.
(b) Cost of repairs and maintenance `26,000 per annum.
(c) Chemicals required for operating the machine `2,600 per month.
(d) Overheads chargeable to the machine `18,000 per month.
(e) Insurance Premium (per annum) 2% of the cost of machine
(f) No. of operators - 02 (looking after three other machines also)
 (g) Salary per operator per month `18,500
Solution
Let effective machine hours = y
\ set-up time = (0.08)y
Thus, y = 3,000 – 400 – (0.08)y
y = 2,407
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
Chemicals (2,600 × 12) 31,200
Overheads (18,000 × 12) 2,16,000
Insurance (25,00,000 × 2%) 50,000
'*,+%% ×'!×! 1,11,000
Salary # )
"
Fixed expenses 4,08,200
Effective machine hours 2,407
Fixed expenses per machine hour 169.59
Variable Expenses per machine hour
!+,%%,%%%&',!+,%%% 95
Depreciation # )
!+,%%%
Repair & Maintenance (26,000 ÷ 2,407) 10.80
Power (25 × 5) 125
Machine hour rate 400.39

Question – 8
A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without an operator
wholly engaged on it. The original cost of all the 8 machines works out to `32,00,000. The following particulars
are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time – hours per operator 10
Average rate of wages per day of 8 hours per operator `100
Production bonus estimated 10% on wages
Power consumed `40,250
Supervision and Indirect Labour `16,500
Lighting and Electricity `6,000
The following particulars are given for a year:
Insurance `3,60,000
Sundry work Expenses `50,000
Management Expenses allocated `5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables) 5% of the value of all the machines
Prepare a statement showing the comprehensive machine hour rate for the machine shop.
Solution
Effective machine hour = (208 × 6 × 6) – [(18 – 20 – 10) × 6] = 7,200
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
Wages [{(208 × 6 × 6) – (18 × 6)} × (100/8)] 92,250
Bonus (92,250 × 10%) 9,225
Supervision 16,500
Lighting and electricity 6,000
Insurance [3,60,000 × (6/12)] 1,80,000
Depreciation [32,00,000 × 10% × (6/12)] 1,60,000
Sundry work expenses [50,000 × (6/12)] 25,000
Management expenses allocated [5,00,000 × (6/12)] 2,50,000
Fixed expenses 7,38,975
Effective machine hours 7,200
Fixed expenses per machine hour 102.64
Variable Expenses per machine hour
) ' 11.11
Repair & Maintenance #32,00,000 × 5% × '! × .!%%)
"%,!+% 5.59
Power # .,!%% )
Machine hour rate 119.34

Question – 9
ABS Enterprises produces a product and adopts the policy to recover factory overheads applying blanket rate
based on machine hours. The cost records of the concern reveal following information:
Budgeted production overheads `10,35,000
Budgeted machine hours 90,000
Actual machine hours worked 45,000
Actual production overheads `8,80,000
Production overheads (actual) include –
Paid to worker as per court’s award `50,000
Wages paid for strike period `38,000
Stores written off `22,000
Expenses of previous year booked in current year `18,500
Production –
Finished goods 30,000 units
Sale of finished goods 27,000 units
The analysis of cost information reveals that 1/3 of the under absorption of overheads was due to defective
production planning and the balance was attributable to increase in costs.
You are required:
(i) To find out the amount of under absorbed production overheads.
(ii) To give the ways of treating it in Cost Accounts
(iii) To apportion the under absorbed overheads over the items.
Solution
(i) Amount (`)
Total production overheads actually incurred during the period 8,80,000
Less: Amount paid to worker as per court order 50,000
Less: Expenses of previous year booked in current year 18,500
Less: Wages paid for the strike period under reward 38,000
Less: Obsolete material written off 22,000 (1,28,500)
7,51,500
Less: Production overheads absorbed (45,000 x `11.5) 5,17,500
Under recovered overheads 2,34,000
'%,(+,%%%
Budgeted machine hour rate = $%,%%% /0123= `11.50 per hour

(ii) As one third of the under absorbed overheads i.e. `78,000 (`2,34,000 × 1/3) were due to defective
production policies, this being abnormal, hence should be debited to profit and loss account.

(iii) Amount of balance under absorbed overheads = `2,34,000 – 78,000 = `1,56,000

',+),%%%
Supplementary rate = = `5.20 per equivalent unit
(%,%%% 14563
Amount (`)
Finished stock (27,000 units × 5.20) 1,40,400
Cost of sales (3,000 units × 5.20) _15,600
Total 1,56,000
 Overheads

MCQs
Q(1). “Fixed overhead costs are not affected in monetary terms during a given period by a change in output”. But this
statement holds good provided:
A. Increase in output is not substantial B. Increase in output is substantial
C. Both (a) & (b) D. None of the above

Q(2). ____ capacity is defined as actually utilized capacity of plant.

A. Theoretical B. Installed
C. Practical D. Normal

Q(3). The allotment of whole items of cost centres or cost units is called:
A. Overhead absorption B. Cost apportionment
C. Cost allocation D. None of the above

Q(4). Primary packaging cost is a part of:

A. Direct material cost B. Production cost
C. Selling overheads D. Distribution overheads

Q(5). Director’s remuneration and expenses form part of:

A. Production overheads B. Administration overheads
C. Selling overheads D. Distribution overheads

Q(6). Which of the following is not the classification of overhead based on its functionality?
A. Factory overhead B. Administrative overhead
C. Fixed overhead D. Selling overhead

Q(7). Bad Debts is an example of:

A. Distribution overhead B. Production overhead
C. Selling overhead D. Administration overhead

Q(8). Normal capacity of a plant refers to the difference between:

A. Maximum capacity and practical capacity
B. Practical capacity and normal capacity
C. Practical capacity and estimated idle capacity as revealed by long term sales trend
D. Maximum capacity and actual capacity

Q(9). The difference between actual factory overhead and absorbed factory overhead will be usually at the minimum level,
provided pre-determined overhead rate is based on:
A. Maximum capacity B. Direct labour hours
C. Machine hours D. Normal capacity

Q(10). Which of the following overhead cost may not be apportioned on the basis of direct wages?
A. Worker’s holiday pay B. Perquisite to worker
C. ESI contribution D. Managerial salaries
 ACTIVITY BASED COSTING - CONCEPTS
1. Background of ABC

2. Traditional System Vs ABC

3. Cost Pool
It is the total cost of an activity.

4. Cost Driver
It is the base due to which cost changes

5. Steps in ABC
(A) Identify different activities
(B) Identify overheads related to activities
(C) Identify cost drivers
(D) Calculate activity cost driver rate (ACDR)
!"#$%&%# ()%*+%,#- ./ ,0&1)1&2
ACDR =
!"#$%&%# 3.-& 4*1)%*

(E) Recover overheads based on ACDR

 ACTIVITY BASED COSTING QUESTIONS
Question – 1
PQR Pens Ltd. manufactures two products – ‘Gel Pen’ and ‘Ball Pen’. If furnishes the following data for the
year 2017:
Product Annual Output Total Machine Total number of Total number of
(Units) Hours Purchase orders set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56
The annual overheads are as under:
Particulars `
Volume related activity costs 4,75,020
Set up related costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each Product – Gel Pen and Ball Pen on the basis of:
(i) Traditional method of charging overheads
(ii) Activity based costing method and
(iii) Find out the difference in cost per unit between both the methods.
Solution
(i) Calculation of cost under Traditional Approach:
!"#$% "'()*($+, 23,56,666
Overheads rate per Machine hour = !"#$% -$.*/0( *"1),= 78,666938,666 = `20 per machine hour

Statement of Cost
Particulars Gel Pen Ball Pen
Overheads absorbed (A) 20 × 24,000 = 4,80,000 20 × 54,000 = 10,80,000
Units (B) 5,500 24,000
Overheads per unit (A ÷ B) 87.27 45
(ii) Statement showing Activity Based Cost
Activity Cost Pool Cost Driver Ratio Total Gel Pen Ball Pen
Amount (`) (`) (`)
Volume Related Machine Hour 24:54 4,75,020 1,46,160 3,28,860
Activity Costs
Set-up Related Costs No. of Set-ups 30:56 5,79,988 2,02,321 3,77,667
Purchase Related No. of Purchase 240:448 5,04,992 1,76,160 3,28,832
Costs Orders
Total Costs 5,24,641 10,35,359
Output (Units) 5,500 24,000
Cost per unit 95.39 43.13

(iii) Statement of Difference in Cost

Particulars Gel Pen Ball Pen
 Overheads cost per unit (`) – Traditional Approach 87.27 45
Overheads Cost per unit (`) – ABC 95.39 43.13
Difference per unit -8.12 +1.87

Question – 2
SK Ltd. has collected the following data for its two activities. It calculates activity cost rates based on cost driver
capacity:
Activity Cost Driver Capacity Cost
Power Kilowatt hours 50,000 kilowatt hours `40,00,000
Quality inspections No. of inspections 10,000 inspections `60,00,000
The company makes three products S, K and M. For the year ended March 31, 2021, the following consumption
of cost driver was reported:
Product Kilowatt Hours Quality Inspections
S 10,000 3,500
K 20,000 2,500
M 15,000 3,000
Required:
(i) Compute the costs allocated to each product from each activity
(ii) Calculate the cost of unused capacity for each activity
(iii) Discuss the factors the management considers in choosing a capacity level to compute the budgeted fixed
overhead cost rate.

Solution
:";() .",# 86,66,666
(a) Power per Kilowatt Hours = = = `80 per Kwh
</%";$## ="1), 36,666
>1$%/#? @0,A(.#/"0 B",# 56,66,666
Quality Inspection per inspection = C". "E /0,A(.#/"0,
= 26,666
= `600 per inspection
Statement of Cost
Particulars Product S Product K Product M Total
Power cost 10,000×80= 20,000×80= 15,000×80= 36,00,000
8,00,000 16,00,000 12,00,000
Quality inspection cost 3,500×600= 2,500×600= 3,000×600= 54,00,000
21,00,000 15,00,000 18,00,000

(b) Statement showing calculation of unused capacity

Particulars Capacity (A) Utilized (B) Unutilized (A – B)
Power cost 40,00,000 36,00,000 4,00,000
Quality inspection cost 60,00,000 54,00,000 6,00,000

(c) The factors considered by management in choosing a capacity level are as follows:
Ø Effect on product costing and cost management
Ø Effect on pricing decision
Ø Effect on performance evaluation
 Ø Effect on financial statement
Ø Effect on difficulty in forecasting

Question – 3
SK is a global brand created by SK Ltd. The company manufactures three range of beauty soaps i.e. SK-Gold,
SK-Pearl, and SK-Diamond. The budgeted costs and production for the month of March, 2021 are as follows:
SK-Gold SK-Pearl SK-Diamond
Production of 4,000 3,000 2,000
soaps (Units)
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential Oils 60 ml `200 / 100 ml 55 ml `300 / 100 ml 65 ml `300 / 100 ml
- Cocoa Butter 20 g `200 / 100 g 20 g `200 / 100 g 20 g `200 / 100 g
- Filtered Water 30 ml `15 / 100 ml 30 ml `15 / 100 ml 30 ml `15 / 100 ml
- Chemicals 10 g `30 / 100 g 12 g `50 / 100 g 15 g `60 / 100 g
- Direct Labour 30 Min. `10 / hour 40 Min. `10 / hour 60 Min. `10 / hour
SK Ltd. followed an Absorption Costing System and absorbed its production overheads, to its products using
direct labour hour rate, which were budgeted at `1,98,000.

Now, SK Ltd. is considering adopting an Activity Based Costing system. For this, additional information
regarding budgeted overheads and their cost drivers is provided below:
Particulars (`) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operators per unit of production are 5, 5, and 6 for SK-Gold, SK-Pearl, and SK-
Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii)
Mass of output produced is equivalent to the mass of input materials taken together.)

You are requested to:

(i) Prepare a statement showing the unit costs and total costs of each product using the absorption costing
method.
(ii) Prepare a statement showing the product costs of each product using the ABC approach.
(iii) State what are the reasons for the different product costs under the two approaches?

Solution
(i) Statement of calculation of labour hours
SK– Gold SK– Pearl SK– Diamond Total
Prod. of soaps (units) (A) 4,000 3,000 2,000 9,000
Direct labour (min.) (B) 30 40 60 -
 Direct labour hours 2,000 2,000 2,000 6,000
[(A×B)÷60]
F1+G(#(+ "'()*($+, 2,IJ,666
Overhead rate per direct labour hour = = = `33 per direct labour hour
F1+G(#(+ %$H"1) *"1), 5,666
Statement of cost
SK – Gold SK – Pearl SK – Diamond
Essential oils 766×56 L66×33 L66×53
= 120 = 165 = 195
266 266 266
Cocoa Butter 766×76 766×76 766×76
266
= 40 266
= 40 266
= 40
Filtered water 23×L6 23×L6 23×L6
= 4.50 = 4.50 = 4.50
266 266 266
Chemicals L6×26 36×27 56×23
=3 =6 =9
266 266 266
Material cost per unit 167.50 215.50 248.50
Direct labour per unit 26×L6 26×86 26×56
=5 = 6.67 = 10
56 56 56
Overheads per unit LL×L6 LL×86 LL×56
56
= 16.50 56
= 22 56
= 33
Total cost per unit 189.00 244.17 291.50
Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000

(ii) Calculation of Cost Driver

Activity Amount(`) Cost driver quantity (B) Cost Driver
(A) Rate (A ÷ B)
Forklifting 58,000 Gold – [{(60×0.8)+20+30+10}×4,000]=4,32,000 0.06 per
Pearl – [{(55×0.8)+20+30+12}×3,000]=3,18,000 gram
Diamond – [{(65×0.8)+20+30+15}×2,000]=2,34,000
Total weight = 9,84,000
Supervising 60,000 8,666×L6 10 per
Gold - 56
= 2,000
L,666×86
machine hour
Pearl - 56
= 2,000
7,666×56
Diamond - 56
= 2,000
Total machine hours= 6,000
Utilities 80,000 Gold – 5×4,000 = 20,000 1.70 per
Pearl – 5×3,000 = 15,000 machine
Diamond – 6×2,000 = 12,000 operation
Total operations = 47,000

Statement of cost
SK – Gold SK – Pearl SK – Diamond
Material cost per unit 167.50 215.50 248.50
Direct labour per unit 26×L6 26×86 26×56
56
=5 56
= 6.67 56
= 10
Foklifting cost per unit 0.06×108 = 6.48 0.06×106 = 6.36 0.06×117 = 7.02
 Supervising cost per unit 26×L6 26×86 26×56
56
=5 56
= 6.67 56
= 10
Utilities cost per unit 1.705 = 8.50 1.70×5 = 8.50 1.70×6 = 10.20
Total cost per unit 192.48 243.70 285.72
Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440

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

Question – 4
PQR Ltd. has decided to analyze the profitability of its five new customers. It buys soft drink bottles in cases at
`45 per case and sells them to retail customers at a list price of `54 per case. The data pertaining to five
customers are given below:
Particulars Customers
A B C D E
Number of cases sold 9360 14200 62000 38000 9800
List selling price ` 54 54 54 54 54
Actual selling price 54 53.40 49 50.20 48.60
Number of purchase orders 30 50 60 50 60
Number of customers visits 4 6 12 4 6
Number of deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expediate deliveries 0 0 0 0 2
It’s five activities and their cost drivers are:
Activity Cost Driver
Order taking `200 per purchase order
Customer visits `300 per each visit
Deliveries `4.00 per delivery km travelled
Product Handling `2.0 per case sold
Expedited deliveries `100 per each such delivery

You are required to:

(i) Compute the customer level operating income of each of five retail customers by sing the cost driver
rates.
(ii) Examine the results to give your comments on Customer ‘D’ in comparison with Customer ‘C’ and on
Customer ‘E’ in comparison with Customer ‘A’.

Solution
(i) Statement of operating income
Particulars Customer Customer Customer Customer Customer
A B C D E
 Units 9,360 14,200 62,000 38,000 9,800
Revenue 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
[54 × No. of units]
(-) Discount - 8,520 3,10,000 1,44,400 52,920
[(List price – Actual price) ×
No. of units]
Net revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(-) Order taking 6,000 10,000 12,000 10,000 12,000
[200×No. of purch. order]
(-) Customer visit 1,200 1,800 3,600 1,200 1,800
[300×No. of visit]
(-) Deliveries 3,200 2,880 4,800 6,400 9,600
[4 × km travel × No. of
deliveries]
(-) Production handling 18,720 28,400 1,24,000 76,000 19,600
[2 × No. of units]
(-) Expedited deliveries - - - - 200
[100×No. of delivery]
(-) COGS 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
[45 × No. of units]
Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)
(ii) Separate disclosure of revenue helps us to identify the relationship between discount and sales quantity.
Customer Quantity Discount Discount %
A 9,360 - 0%
C 62,000 5 5÷54 = 9.25%
D 38,000 3.80 3.80÷54 = 7.03%
E 8,775 5.40 5.40÷54 = 10%
Customer D gets lower discount as compared to Customer C. It may be due to lower quantity purchased
by customer D as compared to Customer C.
Customer E gets higher discount as compared to Customer A. Customer E discount is higher in-spite of
ordering comparative lower quantity and its reason should be further explored.

Question – 5
A drug store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. due to some
constraints, it has decided to go for only one product line of drugs. It has provided the following data for the
year 2020-21 for each product line:
Drug Types
A B C
Revenue (in `) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in `) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in 560 810 630
nos)
Number of deliveries received 950 1,000 850
 Hours of shelf-stocking time 900 1,250 2,350
Units sold (in nos) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
Activity Description of Activity Total Cost (`) Cost-allocation base
Drug License fee Drug License fee 5,00,000 To be distributed in ratio
2:3:5 between A, B and C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of goods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time
Customer Support Assistance provided to 28,20,000 4,70,000 units sold
customers
You are required to:
(i) Calculate the operating income and operating income as a percentage (%) of revenue of each product line
if:
a) All the support costs (other than cost of goods sold) are allocated in the ratio of cost of goods sold
b) All the support costs (Other than cost of goods sold) are allocated using activity-based costing system.
(ii) Give your opinion about choosing the product line on the basis of operating income as a percentage (%)
of revenue of each product line under both the situation as above.

Solution
(i) (a) Statement of operating income
Particulars Drug A Drug B Drug C Total
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
COGS 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Gross Margin 33,05,500 43,58,250 65,61,250 1,42,25,000
(-) Operating cost (in 16,57,800 27,26,700 48,25,500 92,10,000
COGS Ratio)
Operating Income (B) 16,47,700 16,31,550 17,35,750 50,15,000
Operating income % (B ÷ 22.12% 14.60% 9.32% 13.46%
A)

(i) (b) Statement of Cost

Particulars Cost (`) (A) Cost Driver (B) Cost per cost driver
(A÷B)
Ordering 8,30,000 2,000 purchase order `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery
Shelf stocking 32,40,000 4,500 hours of shelf `720 per hour of shelf
stocking time stocking time
Customer support 28,20,000 4,70,000 units sold `6 per unit sold

Statement of operating income

 Particulars Drug A Drug B Drug C
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000
COGS 41,44,500 68,16,750 1,20,63,750
Gross Margin (B) 33,05,500 43,58,250 65,61,250
Drug License Fee (in 1,00,000 1,50,000 2,50,000
2:3:5)
Ordering cost 415 ´ 560 = 2,32,400 415 ´ 810 = 3,36,150 415 ´ 630 =2,61,450
Delivery cost 650 ´ 950 = 6,17,500 650 ´1000 = 6,50,000 650 ´ 850 = 5,52,500
Shelf Stocking cost 720 ´ 900 = 6,48,000 720 ´1250 = 9,00,000 720 ´2350 =
16,92,000
Customer support 6 ´ 175200 = 6 ´ 150300 = 9,01,800 6 ´ 144500 = 8,67,000
10,51,200
Operating cost (C) 26,49,100 29,37,950 36,22,950
Operating income (B– 6,56,400 14,20,300 29,38,300
C=D)
Operating income % 8.81% 12.71% 15.78%
(D÷A)

(ii) When the operating costs are distributed on the basis of cost of goods sold, Drug A has the highest level of
operating income percentage because lesser operating cost share is distributed to it.

Activity based costing shows that Drug C uses the large amount of operating cost resources than the other
two drugs and simultaneously generates the highest level of revenue and thus operating income percentage
is maximum in case of Drug C.
 Activity Based Costing

MCQs
Q(1). A cost driver is:
A. An item of production overheads B. A common cost which is shared over cost centres
C. Any cost relating to transport D. An activity which generates costs

Q(2). In activity based costing, costs are accumulated by activity using:

A. Cost drivers B. Cost objects
C. Cost pools D. Cost benefit analysis

Q(3). A cost driver:

A. Is a force behind the overhead cost B. Is an allocation base
C. Is a transaction that is a significant determinant of cost D. All of the above

Q(4). Which of the following is not a correct match:

Activity Cost Driver
(a) Production scheduling Number of production runs
(b) Dispatching Number of dispatch orders
(c) Goods receiving Goods received orders
(d) Inspection Machine hours

Q(5). Transactions undertaken by support department personnel are the appropriate cost drivers. Find the out which is not
appropriate:
A. The number of purchase, supplies and customers’ orders drives the cost associated with new material inventory, work-in-
progress and finished goods inventory.
B. The number of production runs undertaken drivers production scheduling, inspection and material handling
C. The quality of raw material issued drives the cost of receiving department costs
D. The number of packing orders drives the packing costs.

Q(6). Steps in ABC include:

A. Identification of activities and their respective costs
B. Identification of cost driver of each activity and computation of an allocation rate per activity
C. Allocation of overhead cost to products/services based on the activities involved
D. All of the above

Q(7). Which of the following is not a benefit of ABC?

A. Accurate cost allocation B. Improved decision making
C. Better control on activity and costs D. Reduction of prime cost

Q(8). The steps involved for installation of ABC in a manufacturing company include the following except:
A. Borrowing fund
B. Feasibility study
C. Building up necessary IT infrastructure and training of line employees
D. Strategy and value chain analysis

Q(9). Which of the following statements are true: (1) Activity based management involves activity analysis and
performance measurement; (2) Activity based costing serves as a major source of information in ABM.
A. (1) True; (2) False B. (1) True; (2) True
C. (1) False; (2) True D. (1) False; (2) False

Q(10). The key elements of activity based budgeting are:

A. Type of activity to be performed B. Quantity of activity to be performed
C. Cost of activity to be performed D. All of the above
 COST ACCOUNTING SYSTEM - CONCEPTS
1. Cost Accounting System

2. Reasons for Reconciliation

(A) Items shown only in financial accounts
(B) Items shown only in cost accounts
(C) Under or over recovery of overheads in cost accounts
(D) Different basis for valuation of stock
(E) Basis of Depreciation

Format of reconciliation statement

(When starting point is taken as profit as per P&L accounts)
Particulars (+) Amount (-) Amount
Profit as per P&L Accounts ü -
(+) Expenses in P&L only ü -
(-) Income in P&L only - ü
(+) Appropriations in P&L only ü -
(+) Under recovered OHs in cost accounts ü -
(-) Over recovered OHs in cost accounts - ü
(+) Under valued opening stock in cost accounts ü -
(-) Over valued opening stock in cost accounts - ü
(+) Over valued closing stock in cost accounts ü -
 (-) Under valued closing stock in cost accounts - ü
(-) Expenses in cost accounts only - ü
Total ü ü
Profit as per P&L Account ü -
*In case of loss, the amount will appear in minus column

3. Points to Remember (PTR)

(A) In case of no information then use non-integrated method
(B) Treatment of Overheads
Transfer to P&L A/c
Show as Balance c/d
 COST ACCOUNTING SYSTEM QUESTIONS
Question – 1
Journalise the following transactions assuming cost and financial accounts are integrated:
`
Raw materials purchases 20,000
Direct Materials issued to production 15,000
Wages paid (30% indirect) 12,000
Direct wages charged to production 8,400
Manufacturing expenses incurred 9,500
Manufacturing overheads charged to production 9,200
Selling and Distribution costs 2,000
Finished Products (at cost) 20,000
Sales 29,000
Closing stock Nil
Receipts from Debtors 6,900
Payment to Creditors 11,000
Solution
Journal Entries
Particular Dr. Cr.
(`) (`)
Stores Ledger Control A/c Dr. 20,000
To Creditors A/c 20,000
Work-in-progress Ledger Control A/c Dr. 15,000
To Stores Ledger Control A/c 15,000
Wages Control A/c Dr. 12,000
To Bank A/c 12,000
Work-in-progress Ledger Control A/c Dr. 8,400
To Wages Control A/c 8,400
Factory Overhead Control A/c Dr. 3,600
To Wages Control A/c 3,600
Factory Overhead Control A/c Dr. 9,500
To Bank A/c 9,500
Work-in-progress Ledger Control A/c Dr. 9,200
To Factory Overhead Control A/c 9,200
Selling & Distribution Overhead Control A/c Dr. 2,000
To Bank A/c 2,000
Finished Goods Ledger Control A/c Dr. 20,000
To Work-in-progress Ledger Control A/c 20,000
 Particular Dr. Cr.
(`) (`)
Debtors A/c Dr. 29,000
To P&L A/c 29,000
Bank A/c Dr. 6,900
To Debtors A/c 6,900
Creditors A/c Dr. 11,000
To Bank A/c 11,000

Question – 2
The following balances were extracted from a Company’s ledger as on 30th June, 2018
Debit (`) Credit (`)
Raw material control A/c 2,82,450
Work-in-progress control A/c 2,38,300
Finished stock control A/c 3,92,500
General ledger adjustment A/c 9,13,250
9,13,250 9,13,250

The following transactions took place during the quarter ended 30th September, 2018:
`
Factory overheads – allocated to work-in-progress 1,36,350
Goods finished – at cost 13,76,200
Raw material purchased 12,43,810
Direct wages – allocated to work-in-progress 2,56,800
Cost of goods sold 14,56,500
Raw materials – issued to production 13,60,430
Raw materials – credited by suppliers 27,200
Raw materials losses – inventory audit 6,000
Work-in-progress rejected (with no scrap value) 12,300
Customer’s returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c
Solution
Raw Material Control A/c
To Balance B/d 2,82,450 By General Ledger Adj. A/c 27,200
To General Ledger Adj. A/c 12,43,810 By Work in Progress Control A/c 13,60,430
By Costing P&L A/c (Loss) 6,000
By Balance c/d (Balance figure) 1,32,630
15,26,260 15,26,260
 Work in Progress Control A/c
To Balance b/d 2,38,300 By Finished goods Control A/c 13,76,200
To Raw material control A/c 13,60,430 By Costing P&L A/c 12,300
To Wages control A/c 2,56,800 By Balance c/d (Balancing Figure) 6,03,380
To Factory OH control A/c 1,36,350
19,91,880 19,91,880
Finished Stock Ledger Control A/c
To Balance b/d 3,92,500 By Cost of Sales A/c 14,56,500
To Work in Progress Control A/c 13,76,200 By Balance c/d (Bal. Fig.) 3,58,100
To General Ledger Adjustment A/c 45,900
18,14,600 18,14,600
General Ledger Adjustment A/c
To Costing P&L (Sales) (Bal. fig.) 25,68,910 By Balance B/d 9,13,250
To Raw material control A/c 27,200 By Raw material control a/c 12,43,810
By Wages control A/c 2,56,800
By Factory OH control A/c 1,36,350
By Finished Goods Control A/c 45,900
9,55,000 25,96,110

Question – 3
A company operates on historic job cost accounting system, which is not integrated with the financial
accounts. At the beginning of a month, the opening balances in cost ledger were:
` (in lakhs)
Stores Ledger Control Account 80
Work-in-progress Control Account 20
Finished goods Control Account 430
Building Construction Account 10
Cost Ledger Control Account 540
During the month, the following transactions took place:
Materials - Purchased 40
Issued to production 50
Issued to maintenance 6
Issued to building construction 4
Wages - Gross wages paid 150
Indirect wages 40
For building construction 10
Works Overheads - Actual amount incurred (excluding items shown above) 160
Absorbed in building construction 20
Under absorbed 8
Royalty paid 5
Selling, distribution and administration overheads 25
 Sales 450
At the end of the month, the stock of raw material and work-in-progress was `55 lakhs and `25 lakhs
respectively. The loss arising in the raw material account is treated as factory overheads. The building under
construction was completed during the month. Company’s gross profit margin is 20% on sales. Prepare the
relevant control accounts to record the above transactions in the cost ledger of the company.
Solution
Stores Ledger Control A/c (SLC)
To Balance b/d 80 By Work-in-progress 50
To Cost Ledger Control (Purchased) 40 By Works Overhead 6
By Building Construction 4
By Factory Overhead (B/F) 5
By Balance c/d 55
120 120
Work in Progress Control A/c (WIP)
To Balance b/d 20 By Finished Goods Ledger Control 333
To Stores Ledger Control 50 (B/F)
To Wages Control 100 By Balance c/d 25
To Factory Overhead 183
To Cost Ledger Control 5
(Royalty) (Note 2)
358 358
Finished Goods Control A/c (FGC)
To Balance b/d 430 By Cost of Sales (Note 3) 360
To WIP (Finished Goods Produced in By Balance c/d 403
the Month) 333
763 763
Building Construction A/c
To Balance b/d 10 By Cost Ledger Control 44
To Stores Ledger Control 4 (Capitalized as Building)
To Wages Control 10
To Works Overheads 20
44 44
Cost Ledger Control A/c (CLC)
To Building Construction 44 By Balance b/d 540
To Costing P & L A/c 450 By Stores Ledger Control 40
To Balance c/d 483 By Wages Control A/c 150
By Work Overhead 160
By WIP (Royalty) 5
By SDA Overheads 25
By Costing P & L A/c 57
977 977
 Factory/Works Overhead A/c
To Stores Ledger Control 5 By Building Construction 20
To Wages Control 40 By WIP (B/F) 183
To Cost Ledger Control 160 By Costing P & L A/c – Under 8
To Stores Ledger Control 6 Absorption (Note – 1)
211 211
Wages Control A/c
To Cost Leger Control (Gross Wages) 150 By WIP (Direct Wages) (B/F) 100
By Factory Overheads (Indirect Wages)
By Building Construction A/c 40
10
150 150
S & D Admin. Overheads Control A/c
To Cost Ledger Control 25 By Cost of Sales 25
25 25
Cost of Sales A/c
To Finished Goods Ledger Control 360 By Costing P & L A/c 385
To SDA Overheads 25
385 385
Costing P & L A/c
To Cost of Sales 385 By Cost Ledger Control Sales 450
To Factory Overhead 8
To Cost Ledger Control Net Profit 57
450 450
Trial Balance at the End of the Month
Stores Ledger Control 55
Work in Progress 25
Finished Goods Ledger Control 403
Cost Ledger Control 483
Total 483 483
Note:
1. Work Overhead Under-Absorbed: There are 3 methods of treatment of under-absorption of works
overheads. There was no opening balance in works overheads Ac Under-absorption of `8 lakhs is 4% of
`205 lakhs total. It is a negligible amount. Adoption of supplementary rate is not required. Hence, it has
been transferred to the debit of costing P & L A/c.
2. Royalty Paid `5 Lakhs: Assumed that it has been paid on the basis of production. Then it is a direct expense
which is port of prime cost. Hence, it has been debited to WIP control A/c.
3. Sales 450
Less: G. P. 20% on sales 90
Cost of sales 360
Question – 4
A fire destroyed some accounting records of a company. You have been able to collect the following from the
spoilt papers/records and as a result of consultation with accounting staff in respect of January:
(i) Incomplete Ledger Entries
Raw Material A/c
` `
Beginning Inventory 32,000

Work in Progress A/c

` `
Beginning Inventory 9,200 Finished Stock 151000

Creditors A/c
` `
Closing Balance 19,200 Opening Balance 16400

Manufacturing Overheads A/c

` `
Amount Spent 29,600

Finished Goods A/c

` `
Opening Inventory 24,000 Closing Inventory 30000
(ii) Additional Information:
(a) The cash book showed that `89,200 have been paid to creditors for raw material
(b) Ending inventory of work in progress included material `5,000 on which 300 direct labour hours have
been booked against wages and overheads
(c) The job card showed that workers have worked for 7,000 hours. The wage rate is `10 per labour hour.
(d) Overhead recovery rate was `4 per direct labour hour.
You are required to complete the above accounts in the cost ledger of the company.
Solution
Raw Material Control A/c
To Balance b/d 32,000 By Work-in-progress 53,000
To Creditors 92,000 By Balance c/d (B/F) 71,000
1,24,000 1,24,000
Work in Progress Control A/c (WIP)
To Balance b/d 9,200 By Finished Goods Ledger Control 1,51,000
To Raw Material Control (B/F) 53,000 By Balance c/d
To Wages Control (7,000 × 10) 70,000 Material 5,000
To Manufacturing Overhead 28,000 Wages (300×10) 3,000
 Overheads (300×4) 1,200 9,200
1,60,200 1,60,200
Creditors A/c
To Bank 89,200 By Balance b/d 16,400
To Balance c/d 19,200 By Material (Purchase) (B/F) 92,000
1,08,400 1,08,400
Manufacturing Overheads A/c
To Amount Spent 29,600 By Work-in-progress (7,000×4) 28,000
By P&L (B/F) 1,600
29,600 29,600
Finished Goods A/c
To Opening inventory 24,000 By Cost of Sales (B/F) 1,45,000
To Work-in-progress 1,51,000 By Closing Inventory 30,000
1,75,000 1,75,000

Question – 5
R Ltd. showed a Net profit of `3,60,740 as per their cost accounts for the year ended 31st March, 2021. The
following information was revealed as a result of scrutiny of the figures from the both sets of accounts.
Sr. No. Particulars (`)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600
Required to prepare a reconciliation statement showing the profit as per financial records.
Solution
Reconciliation Statement
Particulars + (`) - (`)
Profit as per cost accounts 3,60,740 -
Add: Over recovered selling OHs 10,250 -
Less: Over valued closing stock in cost accounts - 7,300
Add: Rent received credited in financial accounts 5,450 -
Less: Bad Debts provided in financial accounts - 3,250
Less: Income tax provided in financial accounts - 15,900
Less: Loss on sale of capital assets in financial accounts - 5,800
Less: Under recovered administration overheads in cost - 3,600
3,76,440 35,850
Loss as per financial account - 3,40,590
Question – 6
The profit and loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:
Profit and Loss Account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
To Direct Wages 3,50,000 (15,000 units)
To Factory overheads 2,60,000 By Dividend received 9,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000
• Factory overheads are 50% fixed and 50% variable
• Administrative overheads are 100% fixed
• Selling overheads are completely variable
• Normal production capacity of ABC Ltd. is 20,000 units
• Indirect expenses are absorbed in the cost accounts on the basis of normal production capacity.
• Notional rent of own premises charged in cost accounts is amounting to `12,000.
You are required to:
(i) Prepare a cost sheet and ascertain the Profit as per cost Records for the year ended 31st March, 2021.
(ii) Reconcile the profit as per Financial records with Profit as per Cost Records.

Solution
(i) Cost Sheet
Particulars Amount
Raw material consumed 6,50,000
Direct wages 3,50,000
Prime Cost 10,00,000
!,#$,$$$×&$%
Add: Fixed factory overheads ! !$,$$$
× 15,000' 97,500
Add: Variable factory overheads (2,60,000 × 50%) 1,30,000 2,27,500
Add: Notional rent of own premises 12,000
GFC/NFC/COP/COGS 12,39,500
(,$&,$$$ 78,750
Add: Administrative overheads ! !$,$$$ × 15,000'
Add: selling & Distribution overheads 85,000
Cost of Sales 14,03,250
Add: Profit (Balancing figure) 96,750
Sales 15,00,000

(ii) Reconciliation Statement

Particulars + (`) - (`)
Profit as per P&L Account 57,000 -
 Add: Under recovered factory overheads (2,60,000 – 2,27,500) 32,500 -
Less: Notional rent of own premises - 12,000
Add: Under recovered administrative overheads (1,05,000 – 26,250 -
78,750)
Add: Loss on sale of investment 2,000 -
Less: Dividend received - 9,000
Total 1,17,750 21,000
Profit as per Cost Account 96,750 -

Question – 7
The following is the summarized Trading and Profit and Loss Account of SK Ltd. for the year ended 31st March,
2021:
Particulars Amount (`) Particulars Amount (`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct Wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works Overheads 4,26,000 Work-in-progress:
Administration Overheads 1,50,000 - Materials 34,000
Selling & distribution overheads 1,65,000 - Wages 16,000
Net Profit for the year 3,22,500 - Work overheads 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works overheads have been
charged @ 20% on prime cost, (ii) administration overheads are related with production activities and are
recovered at `5 per finished unit, and (iii) selling and distribution overheads are recovered at `6 per unit sold.

You are required to prepare:

(i) Costing Profit and Loss Account indicating the net profits
(ii) A statement showing reconciliation between profit as disclosed by the Cost Accounts and Financial
Accounts

Solution
Units produced = Units sold + Cl. Stock FG – Op. Stock FG = 30,000 + 2,000 – 0 = 32,000
Costing Profit & Loss Account
Particulars Amount (`) Particulars Amount (`)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime cost 21,58,000
Work overheads (20% of prime cost) 4,31,600
Gross factory cost 25,89,600
Less: Work-in-progress (60,000)
Net Factory cost 25,29,600
Administration overheads (5×32,000) 1,60,000
Cost of production 26,89,600
 !#,)*,#$$ (1,68,100)
Less: Finished stock! +!,$$$
× 2,000'
Cost of goods sold 25,21,500
Selling & distribution overheads 1,80,000
(6×30,000)
Cost of sales 27,01,500
Profit (Bal. fig.) 2,98,500
30,00,000 30,00,000

Reconciliation statement
Particulars + (`) - (`)
Profit as per cost accounts 2,98,500 -
Add: Over recovered work OHs 5,600 -
Less: Over valued closing WIP in cost accounts - 6,000
Add: Under recovered Administration OHs 10,000 -
Less: Over valued Cl. stock in cost accounts - 600
Add: Over recovered selling & distribution OHs 15,000 -
3,29,100 6,600
Profit as per profit & loss account 3,22,500 -

Question – 8
The financial books of a company reveal the following data for the year ended 31st March, 2021:
Particulars `
Opening Stock:
Finished goods 625 units 53,125
Work-in-process 46,000
01.04.2020 to 31.03.2021
Raw materials consumed 8,40,000
Direct labour 6,10,000
Factory overheads 4,22,000
Administration overheads (production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales 12,615 units 22,80,000
Closing stock: Finished goods 415 units 45,650
Work-in-process 41,200
The cost records provide as under:
Ø Factory overheads are absorbed at 70% of direct wages
Ø Administration overheads are recovered at 15% of factory cost
Ø Selling and distribution overheads are charged at `3 per unit
Ø Opening stock of finished goods is valued at `120 per unit
Ø The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.

Required:
(a) Prepare a statement for the year ended 31st March, 2021. Show
Ø The profit as per financial records
Ø The profit as per costing records
(b) Prepare a statement reconciling the profit as per costing records with the profit as per Financial Records.

Solution
(a) Statement of Profit as per Financial Records
Particulars ` Particulars `
To Opening stock of Finished goods 53,125 By Sales 22,80,000
To work-in-process 46,000 By Closing stock of Finished 45,650
Goods
To Raw materials consumed 8,40,000 By Work-in-process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000
To Selling & Distribution overheads 72,000
To Dividends paid 1,22,000
To Bad Debts 18,000
To Profit 69,725
24,50,850 24,50,850
Units produced = Units sold + Closing stock – opening stock = 12,615 + 415 – 625 = 12,405

Statement of Profit as per Costing Records

Particulars `
Raw material consumed 8,40,000
Direct labour 6,10,000
Prime cost 14,50,000
Factory overheads (6,10,000×70%) 4,27,000
Factory cost 18,77,000
Add: Opening WIP 46,000
Less: Closing WIP (41,200)
Factory cost of goods purchased 18,81,800
Add: Administration overheads (15% × 18,81,800) 2,82,270
Cost of Production 21,64,070
Add: Opening stock (625 × 120) 75,000
!(,#,,$-$ (72,397)
Less: Closing stock ! (!,,$&
× 415'
 Cost of goods sold 21,66,673
Selling and distribution overheads (12,615 × 3) 37,845
Cost of sales 22,04,518
Profit (Bal. fig.) 75,482
Sales 22,80,000

(b) Reconciliation Statement

Particulars + (`) - (`)
Profit as per cost accounts 75,482 -
Add: Over absorbed administration overheads 84,270 -
Add: Over valued opening stock of finished goods 21,875 -
Add: Interest received 38,000 -
Add: Rent received 46,000 -
Add: Factory overheads over absorbed 5,000 -
Less: Selling & distribution overheads under - 34,155
recovered
Less: closing stock overvalued - 26,747
Less: Dividend - 1,22,000
Less: Bad debts - 18,000
2,70,627 2,00,902
Profit as per financial accounts 69,725 -
Note – It is assumed that administration overheads are related to production.
 Cost Accounting System

MCQs
Q(1). Under the Non-integrated accounting system
A. Some ledger is maintained for cost and financial accounts by accountants
B. Separate ledgers are maintained for cost and financial accounts
C. (a) & (b) both
D. None of the above

Q(2). Notional costs

A. May be included in integrated accounts B. May be included in Non-integrated accounts
C. Cannot be included in Non-integrated accounts D. None of the above

Q(3). Under Non-integrated accounting system, the account made to complete double entry is:
A. Stores ledger control account B. work-in-progress control account
C. finished goods control account D. General ledger adjustment account

Q(4). Integrated systems of accounts are maintained

A. In separate books of accounts for costing and financial accounting purposes
B. In same books of accounts
C. Both (a) & (b)
D. None of the above

Q(5). Under Non-integrated system of accounting, purchase of raw material is debited to which account
A. Material control account/ Stores ledger control account B. General ledger adjustment account
C. Purchase account D. None of the above

Q(6). Under Non-integrated accounts, if materials worth, `1,500 are purchased for a special job, then which account will be
debited:
A. Special job account / Work-in-Process account B. Material control account
C. Cost Control Account D. None of the above

Q(7). Which account is to be debited if materials worth `500 are returned to vendor under Non-integrated accounts:
A. Cost ledger control account B. Finished goods control account
C. WIP control account D. None of the above

Q(8). Which of the following items is included in cost accounts?

A. Notional rent B. Donations
C. Transfer to general reserve D. Rent receivable

Q(9). When costing loss `5,600, administrative overhead under-absorbed being `600, the loss as per financial accounts
should be
A. `5,600 B. `6,200
C. `5,000 D. None of the above

Q(10). Which of the following items should be added to costing profit to arrive at financial profit?
A. Over-absorption of works overhead B. Interest paid on debentures
C. Income tax paid D. All of the above
 JOB & BATCH COSTING - CONCEPTS
1. Job Costing
Ø It is that form of specific order costing under which each job is treated as a cost unit and
costs are accumulated and ascertained separately for each job.
Ø In other words, it is that form of specific order costing which applies where work is
undertaken according to customer’s requirement.
Ø It is generally used in industries where production is not on continuous basis, rather it
is only when order from customers are received according to their specifications e.g.
printing press, repair shop, etc.
Ø In this method cost of each job is computed by preparing the Job Cost Sheet.

2. Batch Costing
Ø It is that form of specific order costing which applies where similar articles are
manufactured in batches either for sale or use within the undertaking.
Ø Each batch of output is a cost unit and is costed separately.
Ø The total batch cost divided by number of units produced in a batch gives cost per unit.
Ø It is generally undertaken in case of pharmaceutical production, shoes, garments, etc.

3. Economic Batch Quantity (EOQ)

It is that batch size at which sum total of ordering cost and carrying cost is minimum.
!×#×$
EOQ = !
%

Where, A = Annual requirement of raw material

S = Set-up cost per batch
C = Carrying cost per unit per annum
 JOB & BATCH COSTING QUESTIONS
Question – 1
The following data presented by the supervisor of a factory for a Job.
`per unit
Direct material 120
Direct wages @ `4 per hour 60
(Department A-4 hrs., B-7hrs, C-2hrs & D-2hrs)
Chargeable Expenses 20
Total 200

Analysis of the Profit and Loss Account for the year ended 31st March 2019
` `
Material used 2,00,000 Sales 4,30,000
Direct Wages:
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special Stores Items 6,000
Overheads:
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross Profit c/d 1,30,000 ________
4,30,000 4,30,000
Selling Expenses 90,000 Gross Profit b/d 1,30,000
Net Profit _40,000 _______
1,30,000 1,30,000
It is also to be noted that average hourly rates for all the four departments are similar. Required:
(i) Prepare a Job Cost Sheet
(ii) Calculate the entire revised cost using the above figures as the base.
(iii) Add 20% profit on selling price to determine the selling price.

Solution
Working Notes:
Overhead recovery rate on overall basis:
!!,###
Overhead recovery rate = !",""" = `3.52
$ %
$
 Statement of calculation of recovery rates
Particulars Working Recovery Rate
Dept. A 12,000 `4 per direct labour hour
12,000
% 4 '
Dept. B 6,000 `3 per direct labour hour
8,000
% 4 '
Dept. C 9,000 `3.60 per direct labour hour
10,000
% 4 '
Dept. D 17,000 `3.40 per direct labour hour
20,000
% 4 '
Selling exp. As % of 90,000 30% of NFC
× 100
NFC 2,00,000 + 50,000 + 6,000 + 44,000

(i) Statement of calculation of cost of Job

Particulars Working Amount (`)
Material 120
Wages 60
Chargeable expenses 20
Prime Cost 200
(+) Overheads (4+7+2+2)×3.52 52.80
GFC\NFC 252.80
(+) Selling expenses 30% × 252.80 75.84
Total Cost 328.64

(ii) Statement of calculation of cost of Job

Particulars Working Amount (`)
Material 120
Wages 60
Chargeable expenses 20
Prime Cost 200
(+) Overheads Dept. A = 4 × 4.00 = 16
Dept. B = 7 × 3.00 = 21
Dept. C = 2 × 3.60 = 7.20
Dept. D = 2 × 3.40 = 6.80 51
GFC\NFC 251
(+) Selling expenses 30% × 251 75.30
Total Cost 326.30

(iii) Statement of calculation of selling price of job

Total cost of job `326.30
Add: Profit (326.30 × ¼) `81.58_
Sales `407.88

Question – 2
In a manufacturing company, factory overheads are charged as fixed percentage basis on direct labour and office
overheads are charged on the basis of percentage of factory cost. The following information are available related
to the year ending 31st March:
Product A Product B
Direct materials `19,000 `15,000
Direct Labour `15,000 `25,000
Sales `60,000 `80,000
Profit 25% on cost 25% on sales price
You are required to find out:
(a) The percentage of factory overheads on direct labour
(b) The percentage of office overheads on factory cost
Solution
Let factory OH % on Direct labour = x
Let administration OH % on net factory cost = y
Statement of Cost
Product A Product B
Sales 60,000 80,000
Profit 12,000 [(60,000 × (25/125)] 20,000 (80,000 × 25%)
Total Cost 48,000 60,000

Statement of Cost
Product A Product B
Direct Material 19,000 15,000
Direct labour 15,000 25,000
Prime cost 34,000 40,000
Factory OHs 150x 250x
NFC/COP/COGS 34,000 + 150x 40,000 + 250x
(+) Admin. OH 340y + 1.5xy 400y + 2.5xy
COS 34,000 + 150x +340y + 1.5xy 40,000 + 250x + 400y + 2.5xy

\34,000 + 150x + 340y + 1.5xy = 48,000 _______(1)

& 40,000 + 250x + 400y + 2.5xy = 60,000 _______(2)
Multiply equation (1) by 2.5 and equation (2) by 1.5 and subtract them, we get
85,000 + 375x + 850y + 3.75xy = 1,20,000
±60,000 ± 375x ± 600y ± 3.75xy = ±90,000
We get,
 25,000 + 250y = 30,000
y = 20
Put value of y = 20 in equation (1),
34,000 + 150x + 340(20) + 1.5x(20) = 48,000
x = 40
Thus, Factory OH % on direct labour = 40% and administration OH % on factory cost = 20%

Question – 3
AUX ltd. has an annual demand from a single customer for 60,000 Covid-19 Vaccines. The customer prefers to
order in the lot of 15,000 vaccines per order. The production cost of vaccine is `5,000 per vaccine. The set-up
cost per production run of Covid-19 vaccines is `4,800. The carrying cost is `12 per vaccine per month.
You are required to:
(i) Find the most Economical Production Run
(ii) Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.

Solution
(i) Annual demand = A = 60,000 vaccines
Set-up cost per run = S = `4,800
Carrying cost per unit per annum = C = `12 × 12 = `144
&×(×) &×+#,###×!,,##
Economic Batch Quantity = / *
=/ -!!
= 2,000 vaccines

(ii) Statement of Cost

Particulars Batch size = 2,000 vaccines Batch size = 15,000 vaccines
Set-up cost +#,### +#,###
&,###
× 4,800 = 1,44,000 -.,###
× 4,800 = 19,200
Carrying cost &,### -.,###
× 144 = 1,44,000 × 144 = 10,80,000
& &
Total Cost 2,88,000 10,99,200
Extra cost = `10,99,200 – `2,88,000 = `8,11,200

Question – 4
A jobbing factory has undertaken to supply 300 pieces of a component per month for the ensuing six months.
Every month a batch order is opened against which materials and labour hours are booked at actual. Overheads
are levied at a rate per labour hour. The selling price contracted for is `8 per piece. From the following data
calculate the cost and profit per piece of each batch order and overall position of the order for 1,800 pieces.
Month Batch output Material cost Direct wages (`) Direct labour hours
(`)
January 310 1150 120 240
February 300 1140 140 280
March 320 1180 150 280
April 280 1130 140 270
May 300 1200 150 300
June 320 1220 160 320
The other details are:
Month Chargeable Direct labour
expenses (`) hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

Solution
Statement of Cost and Profit per batch
Particulars Jan. Feb. March April May June Total
Batch output (in units) 310 300 320 280 300 320 1,830
Sale value (`) 2,480 2,400 2,560 2,240 2,400 2,560 14,640
Material cost (`) 1,150 1,140 1,180 1,130 1,200 1,220 7,020
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses* (`) 589 687 687 662 736 785 4,146
Total cost (`) 1,859 1,967 2,017 1,932 2,086 2,165 12,026
Profit per batch (`) 621 433 543 308 314 395 2,614
Total cost per unit (`) 6.00 6.56 6.30 6.90 6.95 6.77 6.57
Profit per unit (`) 2.00 1.44 1.697 1.10 1.05 1.23 1.43
Overall position of the order for 1,200 units
Sales value of 1,800 units @ `8 per unit `14,400
Total cost of 1,800 units @ `6.57 per unit `11,826
Profit `2,574
/0123 *526782938 :;<8=>8> C#,-!#
*Chargeable Expenses Rate = /0123 ?@68A1 3290B6 50B6>
= &,,+## = `2.452448 per labour hour
It is assumed that recovery rate is based on overall 6 months period. Other way is to compute recovery rate
for each month and then compute the cost.

Question – 5
SK Confectioners (SKC) owns a bakery which is used to make bakery items like pastries, cakes and muffins.
SKC use to bake at least 50 units of any item at a time. A customer has given an order for 600 cakes. To process
a batch, the following cost would be incurred:
Direct materials - `5,000
Direct wages - `500 (irrespective of units)
Oven set-up cost - `750 (irrespective of units)
SKC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total production
cost of each batch to allows for selling, distribution and administration overheads. SKC requires a profit margin
of 25% of sales value.
Required:
(a) Determine the price to be charged for 600 cakes
(b) Calculate cost and selling price per cake
(c) Determine what would be selling price per unit if the order is for 605 cakes.

Solution
(a) Statement of determination of selling price
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Amount (`)
Direct material cost (5,000 × 12) 60,000
Direct wages (500 × 12) 6,000
Oven set-up cost (750 × 12) 9,000
Production overheads (20% × 6,000) 1,200
Total Production cost 76,200
S&D and Administration overheads (10% × 76,200) 7,620
Total cost 83,820
Profit (1/3 × 83,820) 27,940
Sales value 1,11,760

(b) Cost per cake = 83,820 ÷ 600 = `139.70

Selling price per cake = 1,11,760 ÷ 600 = `186.27

(c) Statement of determination of selling price

Particulars Amount (`)
.,### 60,500
Direct material cost % .#
× 605'
Direct wages (500 × 13) 6,500
Oven set-up cost (750 × 13) 9,750
Production overheads (20% × 6,500) 1,300
Total Production cost 78,050
S&D and Administration overheads (10% × 78,050) 7,805
Total cost 85,855
Profit (1/3 × 85,855) 28,618
Sales value 1,14,473
Selling price per unit (1,14,473 ÷ 605) 189.21
 Batch Costing
MCQs
Q(1). Different businesses in order to determine cost of their product or service offering follow:
A. Different methods of costing B. Uniform costing
C. Different techniques of costing D. None of the above

Q(2). In order to determine cost of the product or service, following are used:
A. Techniques of costing like marginal, standard etc. B. Methods of costing
C. Comparatives D. All of the above

Q(3). Unit costing is applicable where:

A. Product produced are unique and no 2 products are same
B. Dissimilar articles are produced as per customer specification
C. Homogeneous articles are produced on large scale
D. Products made require different raw materials

Q(4). In case product produced or jobs undertaken are of diverse nature, the system of costing to be used should be:
A. Process costing B. Operating costing
C. Job costing D. None of the above

Q(5). Job costing is:

A. Applicable to all industries regardless of the products or services provided
B. Techniques of costing
C. Suitable where similar products are produced on mass scale
D. Method of costing used for non-standard and non-repetitive products

Q(6). The production planning department prepares a list of materials and stores required for the completion of a specific
job order, this list is known as:
A. Bin card B. Bill of material
C. material requisition slip D. None of the above

Q(7). Batch costing is a type of:

A. Process costing B. Job costing
C. differential costing D. Direct costing

Q(8). Batch costing is similar to that under job costing except with the difference that a:
A. Job becomes a cost unit B. Batch becomes the cost unit instead of a job
C. Process becomes a cost unit D. None of the above

Q(9). The main points of distinction between job and contract costing includes:
A. Length of time to complete B. Big jobs
C. Activities to be done outside the factory area D. All of the above

Q(10). Economic batch quantity is that size of the batch of production where:
A. Average cost is minimum B. Set-up cost of machine is minimum
C. Carrying cost is minimum D. Both (b) and (c)
 Job Costing
MCQs
Q(1). In case product produced or jobs undertaken are of diverse nature, the system of costing to be used should be:
A. Process costing B. Operation costing
C. Job costing D. None of the above

Q(2). The production planning department prepares a list of materials and stores required for the completion of a specific
job order, this list is known as:
A. Bin card B. Bill of material
C. Material requisition slip D. None of the above

Q(3). Job costing is similar to that under Batch costing except with the difference that a:
A. Job becomes a cost unit B. Batch becomes the cost unit instead of a job
C. Process becomes a cost unit D. None of the above

Q(4). In job costing which of the following documents are used to record the issue of direct material to a job:
A. goods received note B. Material requisition note
C. Purchase order D. Purchase requisition

Q(5). The most suitable cost system where the products differ in type of materials and work performed is:
A. Job costing B. Process costing
C. Operating costing D. None of the above

Q(6). Which of the following statements is true:

A. Job cost sheet may be used for estimating profit of jobs
B. Job costing cannot be used in conjunction with marginal costing
C. A production order is an order received from a customer for particular jobs
D. None of the above

Q(7). Which of the following statement is true:

A. Job cost sheet may be prepare for facilitating routing and scheduling of the job
B. Job costing can be suitably used for concerns producing uniformly any specific product
C. Job costing cannot be used in companies using standard costing
D. None of the above
 Introduction to Cost & Management Accounting

MCQs
Q (1). ________is anything for which a separate measurement is required.
A. cost unit B. cost object
C. cost driver D. cost centre

Q (2). Which of the following is true about cost control?

A. It is a corrective function B. It challenges the set standards
C. It ends when targets achieved D. It is concerned with future

Q (3). Cost unit in power sector is:

A. Kilometer (KM) B. Kilowatt-hour (kWh)
C. Number of electric points D. Number of hours

Q (4). Process costing method is suitable for

A. Transport sector B. Chemical industries
C. Dam construction D. Furniture making

Q (5). Distinction between direct cost and indirect cost is an example of ______ classification.
A. By Element B. By Function
C. By Controllability D. By Variability

Q (6). The advantages of using IT in Cost Accounting does not include:

A. Integration of various functions
B. Stock needs to be reconciled with goods received note
C. Reduction in multicity of documents
D. Customized reports can be prepared

Q(7). A taxi provider charges minimum `80 thereafter `12 per kilometer of distance travelled, the behavior of conveyance
cost is:
A. Fixed cost B. Semi-variable cost
C. Variable cost D. Administrative cost

Q(8). SK Ltd. has three production department, each department has two machines, which of the following cannot be
treated as a cost centre for cost allocation:
A. Machines under the production department B. Production departments
C. Both production department and machines D. SK Ltd.

Q(9). Which of the following is an example of functional classification of cost:

A. Direct material cost B. Fixed cost
C. Administrative overheads D. Indirect overheads

Q(10). Ticket counter at railway station will be covered under __________ centre.
A. Cost B. Revenue
C. Profit D. Investment