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CA Intermediate (New Syllabus)


Cost & Management Accounting (Paper 3)
July 2021 - Suggested Answers
Question No. 1 is compulsory.
Answer any four questions out of the remaining five questions.
Working notes should form part of the answer.

Question 1(a) : [ 5 Marks ]


Reference : Chapter 2 - Material Cost - ABC Analysis
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 of 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.

Answer 1(a) :
(i) Statement of Total Inventory Cost and Ranking of items :

Item Units Unit Total % of Total Ranking


code No. cost Inventory cost Inventory
(`) (`) Cost

101 25 50 1,250 16.67 2


102 300 1 300 4.00 6
103 50 80 4,000 53.33 1
104 75 8 600 8.00 4
105 225 2 450 6.00 5
106 75 12 900 12.00 3
750 7,500 100.00

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(ii) Classifying items as per ABC Analysis of Inventory Control


Basis for ABC Classification as % of Total Inventory Cost
15% & above -- „A‟ items
7% to 14% -- „B‟ items
6% & Less -- „C‟ items

Ranking Item Total Inventory % of Total Category


code cost (`) Inventory
No. Cost

1 103 4,000 53.33 A


2 101 1,250 16.67
Total A 5,250 70.00
3 106 900 12.00 B
4 104 600 8.00
Total B 1,500 20.00
5 105 450 6.00 C
6 102 300 4.00
Total C 750 10.00
Grand Total 7,500 100.00

Question 1(b) : [ 5 Marks ]


Reference : Chapter 4 - Overhead Cost

SNS Trading Company has Three Main Departments and two Service Departments. The data
for each department is given below :

Departments Expenses Area in Number of


(in `) (Sq.Mtr.) 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 Departments :
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 Metres‟ 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.

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Answer 1(b) :
Student Note :
It is assumed that the expenses given in the question are for 1 year and hence, we need to
calculate hours for 365 days i.e. for a year.
For step ladder method, it is assumed that Maintenance Dept. expenses will be distributed first
and then Personnel Dept.

Schedule Showing the Distribution of Expenses of Service Departments using Step


ladder method and Calculation of Rate per Hour :

Particulars Basis for Purchase Packing Distribu- Mainte- Personnel


apportion (`) (`) tion (`) nance (`) (`)
ment
Expenses Given 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Maintenance 12:15:7:6 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Department
Personnel 8 : 17 : 7 1,04,000 2,21,000 91,000 --- (4,16,000)
Department
Total (a) 7,96,000 12,61,000 5,53,000 NIL NIL
Total Hours (b) 4,380 8,760 2,920
[12 x 365] [24 x 365] [8 x 365]
Rate per hour (a) / (b) 181.74 143.95 189.38

Question 1(c) : [ 5 Marks ]


Reference : Chapter 7 - Batch Costing - EBQ

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.

Answer 1(c) :
(i) Calculation of most Economical Production Run

2 x 60,000 x ` 4,800 = 2,000 Vaccines


12 x 12

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(ii) Calculation of Extra Cost due to processing of 15,000 vaccines in a batch :

Particulars When run size is When run size is


2,000 vaccines 15,000 vaccines
(a) Total set up cost [ 60,000 / 2,000 x 4,800 ] [ 60,000 / 15,000 x 4,800 ]
= ` 1,44,000 = ` 19,200
(b) Total Carrying cost ½ x 2,000 x ` 144 ½ x 15,000 x ` 144
= ` 1,44,000 = ` 10,80,000
(c) Total Cost [ a + b ] ` 2,88,000 ` 10,99,200

Thus, extra cost = ` 10,99,220 - ` 2,88,000 = ` 8,11,200

Question 1(d) : [ 5 Marks ]


Reference : Chapter 13 - Marginal Costing - Cost BEP
LR Ltd. is considering two alternative methods to manufacture a new product it intends to
market. The two methods have a maximum output of 50,000 units each and produce identical
items with a selling price of ` 25 each. The costs are :

Particulars Method - 1 Method - 2


Semi-Automatic (`) Fully-Automatic (`)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000

You are required to calculate :


(1) Cost Indifference Point in units. Interpret your results.
(2) The Break-even Point of each method in terms of units.

Answer 1(d) :
(i) Cost Indifference Point :
= Difference in Fixed cost
Difference in Variable cost per unit
= ( 3,00,000 - 1,00,000 ) = 40,000 units
( 15 - 10 )

Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs should
be used. At activity level above the indifference point, alternative with lower variable
costs should be used.

Range of no. of units Alternative to be chosen


No. of units ≤ 40,000 Method - 1, Semi - Automatic
No. of units ≥ 40,000 Method - 2, Fully - Automatic

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(ii) Break Even point (in units) :

Particulars Method - 1 Method - 2


(a) Selling price per unit 25 25
(b) Variable cost per unit 15 10
(c) Contribution per unit [ a - b ] 10 15
(d) Fixed costs 1,00,000 3,00,000
(e) BEP in units [ d / c ] 10,000 20,000

Question 2(a) : [ 10 Marks ]


Reference : Chapter 6 - Cost Sheet
The following data relates to manufacturing of a standard product during the month of March,
2021 :

Particulars Amount (`)


Stock of Raw material as on 01-03-2021 80,000
Work in Progress as on 01-03-2021 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 31-03-2021 30,000
Stock of Work in Progress as on 31-03-2021 24,000

 Store overheads on materials 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 :
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Works Cost
(iv) Cost of Production
(v) Cost of Sales

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Answer 2(a) :
Student Note : ICAI has given 2 answers for this question. In one answer, ICAI treated 'Hire
charges paid for Plant' as Direct Expenses and in another answer, it was treated as 'Indirect
Expenses'. It means, ICAI itself is not sure about it. However, ICAI gave marks to both the sets
of answers. In my personal opinion, it is an indirect expense, unless it is given for a specific
product. The answer given below has treated hire charges for plant as indirect cost.

Statement of Cost for the month of March, 2021

Particulars (`) (`)


Cost of Raw Material Consumed :
Raw materials purchased after returns (` 2,00,000 - ` 40,000) 1,60,000
Add :Carriage inwards 20,000
Add : Opening stock of raw materials 80,000
Less : Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000
Direct expenses :
Cost of special drawing 30,000 30,000
Prime Cost 3,80,000
Hire charges paid for Plant 24,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 76,000
Additional expenditure for rectification of defective products
(refer working note) 2,160 1,31,160
Gross factory cost 5,11,160
Add : Opening value of W-I-P 50,000
Less : Closing value of W-I-P (24,000)
Works / Factory Cost 5,37,160
Less : Realisable value on sale of scrap (5,000)
Cost of Production 5,32,160
Add : Opening stock of finished goods -
Less : Closing stock of finished goods -
Cost of Goods Sold 5,32,160
Administrative overheads (General) :
Maintenance of office building 2,000
Salary paid to Office staff 25,000
Legal Charges 2,500 29,500
Selling overheads :
Expenses for participation in Industrial exhibition 8,000 8,000
Distribution overheads :
Depreciation on delivery van 6,000
Warehousing charges (assumed on finished goods) 1,500 7,500
Cost of Sales 5,77,160

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Working Notes :
1. Number of Rectified units
Total Output 8,000 units
Less : Rejected 10% 800 units
Finished product 7,200 units

Defective units rectified (10% of finished product) 720 units

2. Proportionate additional expenditure on 720 units rectified


= 20% of proportionate direct wages
= 0.20 x (` 1,20,000 / 8,000 units x 720 units )
= ` 2,160

Question 2(b) : [ 5 Marks ]


Reference : Chapter 11 - Joint Product - Further processing decision
OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process
results in four products at the split-off point i.e. S, P, N and A. Product „A‟ is fully processed at
the split-off point. Product S, P and N can be individually further refining into SK, PM, and NL
respectively. The joint cost of purchasing the crude vegetable oil and processing it were `
40,000. Other details are as follows :

Product Further processing Sales at split-off Sales after further


Cost (`) Point (`) processing (`)

S 80,000 20,000 1,20,000


P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -

You are required to identify the products which can be further processed for maximizing profits
and make suitable suggestions.

Answer 2(b) :
Decision for further processing of Product S, P and N (using incremental approach) :

Particulars S (`) P (`) N (`)


Sales revenue after further processing 1,20,000 40,000 48,000
Less : Sales value at split-off point 20,000 12,000 28,000
 Incremental Sales Revenue 1,00,000 28,000 20,000
Less : Further processing cost 80,000 32,000 36,000
 Incremental Profit / (Loss) 20,000 (4,000) (16,000)

Suggestion : On observing the figures of Incremental Profit / (Loss) one can say that OPR Ltd.
is earning additional profit after further processing of Product S only i.e. ` 20,000. Hence, for
maximizing profits, only Product S should be further processed and Product P, N and A should
be sold at split-off point.

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Question 2(c) : [ 5 Marks ]


Reference : Chapter 3 - Labour Cost - Labour Turnover Ratio
Following information is given of a newly setup organization for the year ended on 31st March,
2021.

Number of workers replaced during the period 50


Number of workers left and discharged during the period 25
Average number of workers on the roll during the period 500

You are required to :


(i) Compute the Employee Turnover Rates using Separation Method and Flux Method.
(ii) Equivalent Employee Turnover Rates for (i) above, given that the organization was setup
on 31st January, 2021.

Answer 2(c) :
(i) Employee Turnover rate

Using Separation method :


Number of employees Separated during the period
= --------------------------------------------------------------------------- x 100
Average number of employees during the period on roll

25
= ------- x 100 = 5% (for 2 months)
500

Using Flux method :


(Number of employees Separated +
Number of employees Replaced during the period)
= ---------------------------------------------------------------------------- x 100
Average number of employees during the period on roll

(50 + 25)
= ------------- x 100 = 15% (for 2 months)
500

(ii) Equivalent Employee Turnover rate per annum :

5%
Using Separate method = -------------- x 12 months = 30%
2 months

15%
Using Flux method = -------------- x 12 months = 90%
2 months

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Student Note : There is a logical error in the above question i.e. No. of workers replaced are
more than the number of workers left & discharged. It is assumed that no. of workers replaced
and joined are same.

Question 3(a) : [ 10 Marks ]


Reference : Chapter 12 - Cost Ledger - Reconciliation of Profit

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)

Particulars ` Particulars `
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.

Answer 3(a) :
Student Note :
ICAI should have clearly mentioned in the question that Fixed OH are charged on the basis of
normal production capacity. Because, in the actual solution, only fixed overheads are charged
on the basis of normal capacity and variable overheads are charged at actuals. We have a
similar question in our classroom notes also.

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Working Note :
Calculation of Fixed OH Recovery Rates :
(a) For Factory Overheads = Fixed Factory OH / Normal Production Capacity
= ( 50% x 2,60,000 ) / 20,000 units
= ` 1,30,000 / 20,000 units = ` 6.50 per unit

(b) For Administration Overheads


= ` 1,05,000 / 20,000 units = ` 5.25 per unit

(i) Cost Sheet for the year ended 31st March, 2021 : ( for 15,000 units)

Particulars (`) (`)


Direct material 6,50,000
Direct wages 3,50,000
Prime cost 10,00,000
Factory Overheads :
Variable (50% of ` 2,60,000) actual 1,30,000
Fixed ( ` 6.50 per unit x 15,000 units ) 97,500 2,27,500
Works cost 12,27,500
Administrative OH ( ` 5.25 per unit x 15,000 units ) 78,750
Notional Rent charged in cost accounts 12,000
Cost of production 13,18,250
Selling Overheads - fully variable 85,000
Cost of Sales 14,03,250
Profit (Balancing figure) 96,750
Sales revenue 15,00,000

(ii) Statement of Reconciliation :

Particulars Add Less Total


Profit as per Financial Accounts 57,000
Under absorption of Factory OH in cost accounts 32,500
[ 2,60,000 - 2,27,500 ]
Under absorption of Admin. OH in cost accounts 26,250
[ 1,05,000 - 78,750 ]
Notional rent considered only in cost accounts 12,000
Items considered only in Financial Accounts :
Loss on sale of investments 2,000
Dividend received 9,000
Sub-total 60,750 21,000 39,750
Profit as per Cost Accounts 96,750

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Question 3(b) : [ 10 Marks ]


Reference : Chapter 5 - Activity Based Costing

PQR Ltd. is engaged in the production of three products, P, Q and R. The company calculates
Activity Cost Rates on the basis of Cost Driver capacity which is provided as below :

Activity Cost Driver Cost Driver Capacity Cost (`)


Direct Labour hours Labour hours 30,000 Labour hours 3,00,000
Production runs No. of Production runs 600 Production runs 1,80,000
Quality Inspections No. of Inspections 8,000 Inspections 2,40,000

The consumption of activities during the period is as under :

Activity / Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500

You are required to :


(i) Compute the costs allocated to each Product from each Activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iii) A potential customer has approached the company for supply of 12,000 units of a new
product „S‟ to be delivered in lots of 1,500 units per quarter. This will involve an initial
design cost of ` 30,000 and per quarter production will involve the following :

Direct Material ` 18,000


Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspections 250

Prepare cost sheet segregating Direct and Indirect costs and compute the Sale value per
quarter of product „S‟ using ABC system considering a mark up of 20% on cost.

Answer 3(b) :

Working notes :

Rate per unit of cost driver :

Direct Labour hours (` 3,00,000/30,000 Labour hours) ` 10 per Labour hour


Production runs (` 1,80,000/600 Production runs) ` 300 per Production run
Quality Inspection (` 2,40,000/8,000 Inspections) ` 30 per Inspection

Unused Capacity
= Total Cost Driver capacity given - Capacity used i.e. consumption of activities

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(i) Statement of cost allocation to each product from each activity :

Particulars P (`) Q (`) R (`) Total (`)


Direct Labour 1,00,000 80,000 60,000 2,40,000
hours (10,000 Labour (8,000 Labour (6,000 Labour
hours x `10) hours x `10) hours x `10)
Production runs 60,000 54,000 48,000 1,62,000
(200 Production (180 Production (160 Production
runs x ` 300) runs x ` 300) runs x ` 300)
Quality 90,000 75,000 45,000 2,10,000
Inspections (3,000 Insp. x (2,500 Insp. x (1,500 Insp. x
` 30) ` 30) ` 30)

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

Particulars `
Direct Labour hours ( ` 3,00,000 - ` 2,40,000 ) 60,000
Production runs ( ` 1,80,000 - ` 1,62,000 ) 18,000
Quality Inspection ( ` 2,40,000 - ` 2,10,000 ) 30,000
Total cost of unused capacity 1,08,000

(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ :

Particulars `
For 1,500 units of product „S‟ to be delivered per quarter :
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ` 10) 15,000
Initial design cost per quarter [ ` 30,000 / 12,000 x 1,500 units ] 3,750
Direct Costs (A) 36,750
Set up Cost (15 Production runs x ` 300) 4,500
Inspection Cost (250 Inspections x ` 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add : Mark-up (20% on cost) 9,750
Sale Value for 1,500 units per quarter 58,500
Selling Price per unit „S‟ ( ` 58,500 / 1500 units ) 39.00

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Question 4(a) : [ 10 Marks ]


Reference : Chapter 10 - Process Costing
A Manufacturing unit manufactures a product „XYZ‟ which passes through three distinct
Processes – X, Y and Z. The following data is given :

Particulars Process X Process Y Process Z


Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000

 The total Production Overheads of ` 15,750 was recovered @ 150% of Direct Wages.
 15,000 units at ` 2 each were introduced to Process „X‟ .
 The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process „Z‟.
 No stock of materials or work in progress was left at the end.
The following additional information is given :

Process % of wastage to normal input Value of Scrap per unit (`)


X 6% 1.10
Y ? 2.00
Z 5% 1.00

You are required to :


(i) Find out the percentage of wastage in process 'Y', given that the output of Process „Y‟ is
transferred to Process 'Z' at ` 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z.

Answer 4(a) :
Comments : It was a tricky question with some errors in framing the question itself. Actual
output of each process is not given in the question. Hence, we have to assume normal loss as
actual loss. However, to tally the final output of 12,000 units at the end of Process 'Z', we have
to assume a figure of Abnormal Gain units as a balancing figure.
Advise : Stay away from such questions in the exam. It is a speed breaker question.

Process X Account

Particulars Units Rate (`) Particulars Units Rate (`)


To Material 15,000 2.00 30,000 By Normal Loss A/c 900 1.10 990
Introduced [ 6% x 15,000 units ]
To Additional --- 2,600
material By Process-Y A/c 14,100 41,610
To Direct wages 4,000 [ Bal. Figure ]
To Production 6,000
OH @ 150% DL
15,000 42,600 15,000 42,600

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Process Y Account

Particulars Units Rate (`) Particulars Units Rate (`)


To Process X 14,100 41,610 By Normal Loss A/c 1,895 2.00 3,790
[ see working below ]
To Additional 2,250
material By Process Z A/c 12,205 4.00 48,820
To Direct wages 3,500
To Production 5,250
OH @ 150% DL
14,100 52,610 14,100 52,610

# Calculation for % of wastage in process 'Y' :


Let‟s consider number of units lost under process „Y‟ = A
Total cost – Realisable value from normal loss
Now, --------------------------------------------------------------- = ` 4 (given)
Inputs units – Normal loss units

` 52,610 - ` 2A
------------------------ = ` 4 on solving this equation, we will get -
14,100 units - A

4 x ( 14,100 units - A ) = 52,610 - 2A


56,400 - 4A = 52,610 - 2A
56,400 - 52,610 = 4A - 2A
 2A = 3,790 Hence A = 1,895 units ( i.e. normal loss units )
1,895 units
% of wastage = ------------------ x 100 = 13.44% of input
14,100 units

Process Z Account

Particulars Units Rate (`) Particulars Units Rate (`)


To Process-Y 12,205 4.00 48,820 By Normal Loss A/c 610 1.00 610
[5% x 12,205 units]
To Additional 2,000
material By Process Z A/c 12,000 4.9771 59,726
To Direct 3,000 [see working below]
wages
To Production 4,500
OH @ 150%
To Abnormal 405 4.9771 2,016
gain (wn below)
12,610 60,336 12,610 60,336

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Cost per unit of completed units from Process Z :


Total Cost – Realisable value from normal loss ` 58,320 - ` 610
= --------------------------------------------------------------- = --------------------------- = ` 4.9771 (approx)
Inputs units – Normal loss units 12,205 – 610 units

Abnormal Gain (Bal. Fig.) = ( 610 + 12,000 units ) - 12,205 units = 405 units

Question 4(b) : [ 5 Marks ]


Reference : Chapter 9 - Service Costing
MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its newly
launched „COVID-19‟ Insurance policy :

Office administration cost 48,00,000


Claim management cost 3,80,000
Employee cost 16,20,000
Postage and logistics 32,40,000
Policy issuance cost 29,50,000
Facilities cost 46,75,000
Cost of marketing of the policy 1,38,90,000
Policy development cost 35,00,000
Policy servicing cost 96,45,000
Sales support expenses 32,00,000
I.T. Cost ?

Number of Policy sold : 2,800


Total insured value of policies = ` 3,500 Crores
Cost per rupee of insured value = ` 0.002
You are required to :
(i) Calculate Total Cost for “COVID-19” Insurance policy segregating the costs into four main
activities namely : (a) Marketing and Sales support (b) Operations (c) I.T. Cost and (d)
Support functions.
(ii) Calculate Cost Per Policy.

Student Note :
You have to first calculate total cost as = (total insured value x cost per rupee of insured value)
i.e. 7 crores. Then you will get IT Cost as balancing figure.

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Answer 4(b) :
(i) Calculation of total cost for ‘COVID-19’ Insurance policy :

Particulars Amount (`) Amount (`)


a. Marketing and Sales support :
- Policy development cost 35,00,000
- Cost of marketing of the policy 1,38,90,000
- Sales support expenses 32,00,000 2,05,90,000
b. Operations :
- Policy issuance cost 29,50,000
- Policy servicing cost 96,45,000
- Claim management cost 3,80,000 1,29,75,000
c. IT Cost *( Bal. Fig.) 2,21,00,000
d. Support functions :
- Postage and logistics 32,40,000
- Facilities cost 46,75,000
- Employees cost 16,20,000
- Office administration cost 48,00,000 1,43,35,000
Total Cost (` 3,500 crores x 0.002) 7,00,00,000

Total cost ` 7,00,00,000


(ii) Calculation of cost per policy = -------------------- = -------------------- = ` 25,000
No. of policies 2,800

Question 4(c) : [ 5 Marks ]


Reference : Chapter 8 - Contract Costing

Brick Constructions Ltd. commenced a contract on April 1, 2020. The contract was for `
10,00,000. The following information relates to the Contract as on 31st March, 2021 :
 The value of work completed up to Feb. 28, 2021 was certified by the architect and as a
matter of policy, the Contractee has retained ` 1,30,000 as retention money which is 20%
of the certified work and paid the balance amount.
 The cost of work completed subsequent to the architect‟s certificate was of ` 30,000.
 The expenditure incurred related to material purchase, wages and other chargeable
expenses were ` 5,10,000.
 Materials of the value of ` 20,000 were lying on the site.
 A special plant was purchased specifically for this contract at ` 40,000 and after use on
this contract till 31st March, 2021, it was valued at ` 25,000.
You are required to compute the value of Work Certified, Cash received for certified work and
Notional profit of the contract for the year ended on 31st March, 2021.

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Answer 4(c) :
1. Value of Work Certified
` 1,30,000
= ---------------------- = ` 6,50,000
20%

2. Cash Received
= Value of Work certified – Retention Money
= 6,50,000 – 1,30,000 = ` 5,20,000

3. Notional Profit
= (Value of Work certified + Cost of work uncertified) – Total cost incurred
= (6,50,000 + 30,000) – [ 5,10,000 + (40,000 – 25,000) – 20,000 ]
= 6,80,000 – 5,05,000
= ` 1,75,000

Question 5(a) : [ 10 Marks ]


Reference : Chapter 14 - Standard Costing

The standard output of a Product „DJ‟ is 25 units per hour in manufacturing department of a
Company employing 100 workers. In a 40 hours week, the department produced 960 units of
product „DJ‟ despite 5% of the time paid was lost due to an abnormal reason. The hourly wage
rates actually paid were ` 6.20, ` 6.00 and ` 5.70 respectively to Group „A‟ consisting 10
workers, Group „B‟ consisting 30 workers and Group „C‟ consisting 60 workers. The standard
wage rate per labour is same for all the workers. Labour Efficiency Variance is given ` 240 (F).
You are required to compute :
(i) Total Labour Cost Variance
(ii) Total Labour Rate Variance
(iii) Total Labour Gang Variance
(iv) Total Labour Yield Variance and
(v) Total Labour Idle Time Variance

Answer 5(a) :
Student Note :
 Three variance method is used. Efficiency variance is calculated using Actual Hours
Worked and not Paid.
 Labour Yield Variance = Sub-efficiency variance like sub-usage variance.
 Labour Cost Variance = Rate + Efficiency + Idle Time variance and
 Efficiency Variance = Gang + Yield variance (based on actual hours worked).
 All 100 workers together working in a team will produce 25 units in 1 gang hour.
 Convert gang hours in to labour hours before calculation of variances.
 Standard wage rate is missing and has to be calculated using Efficiency Variance. You
will get Std. wage rate as ` 6 per hour. Calculate this answer first and then you will get
the remaining answers.

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Working Notes :
1. Calculation of Standard Man hours for actual output
100 workers are expected to produce 25 units in 1 hour i.e. std. output per gang hour.
Hence, for actual output of 960 units, we need -
960 units / 25 units per hour = 38.4 std. gang hours
Hence, standard man hours shall be = 38.4 x 100 workers = 3,840 hours

2. Calculation of actual labour hours and actual cost :


The workers have worked for one week of 40 hours. Hence, each worker in the gang will
be paid for 40 hours. The calculation of actual cost is shown in the table below :

Type of No. of Actual Rate/hr. Amount Abnormal Actual


Workers Workers Hours (`) Paid idle time Hours
Paid hours Worked
(`)
a b = a x 40 c d=bxc e=bx f=b-e
5%
Group „A‟ 10 400 6.2 2,480 20 380
Group „B‟ 30 1,200 6.0 7,200 60 1,140
Group „C‟ 60 2,400 5.7 13,680 120 2,280
Totals 100 4,000 23,360 200 3,800

3. Calculation of Standard wage Rate :


Labour Efficiency Variance = 240 (F)
SR x ( Standard hours – Actual Hours Worked ) = 240 (F)
SR x ( 3,840 – 3,800 ) = 240
Standard Rate (SR) = 240 / 40 = ` 6 per hour

(i) Total Labour Cost Variance


= (Standard hours x Standard Rate) – (Actual Hours Paid x Actual rate)
= ( 3,840 x 6 ) – 23,360 (WN 2) = ` 320 (A)

(ii) Total Labour Rate Variance


= (Standard Rate – Actual Rate) x Actual Hours paid
Group „A” = ( 6 – 6.2 ) x 400 = 80 (A)
Group „B‟ = ( 6 – 6 ) x 1,200 = NIL
Group „C‟ = ( 6 – 5.7 ) x 2,400 = 720 (F)
640 (F)

(iii) Total Labour Gang Variance (i.e. Mix Variance)


= Std. Rate x ( Std. Mix – Actual Mix )
Note : In the given question, the standard wage rate for all the types of workers is same,
hence there is no question of any variance.
Hence, Gang Variance = NIL
ICAI has given the same answer in a complicated manner.

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(iv) Total Labour Yield Variance (i.e. sub-efficiency variance)


As Gang Variance is NIL, Labour Yield Variance = Labour Efficiency Variance
= Standard Rate x [ Standard Hours – Actual Hours Worked ]
= 6 x ( 3,840 – 3,800 ) = ` 240 (F)

(v) Total Labour idle time variance


= Total Idle hours x Standard rate per hour
= 200 hours x 6 = ` 1,200 (A)

Question 5(b) : [ 10 Marks ]


Reference : Chapter 15 - Budgetary Control
PSV Ltd. manufactures and sells a single product and estimated the following related
information for the period November, 2020 to March, 2021.

Particulars Nov. 20 Dec. 20 Jan. 21 Feb. 21 March 21


Opening Stock of Finished 7,500 3,000 9,000 8,000 6,000
Goods (in Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000
Selling Price per unit (in `) 10 12 15 15 20

Additional Information :
 Closing stock of finished goods at the end of March, 2021 is 10,000 units.
 Each unit of finished output requires 2 kg of Raw Material „A‟ and 3 kg of Raw Material „B‟.

You are required to prepare the following budgets for the period November, 2020 to March,
2021 on monthly basis :
(i) Sales Budget (in `)
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material „A‟ and „B‟ separately (in units)

Answer 5(b) :
Student Notes :
 Opening stock of FG of next month = Closing stock of FG of the previous month
 Part (iii) of the question says 'Raw Material Budget'. It is not mentioned whether it is a
'Consumption Budget' or 'Purchase Budget'. Considering the information available in the
question, it is possible to prepare only Raw Material consumption Budget.

(i) Sales Budget :

Particulars Nov. 20 Dec. 20 Jan. 21 Feb. 21 Mar. 21


Sales (in units) 30,000 35,000 38,000 25,000 40,000
Selling Price (` p.u.) 10 12 15 15 20
Total Sales (`) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000

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(ii) Production Budget (in units) :


Particulars Nov. 20 Dec. 20 Jan. 21 Feb. 21 Mar. 21
Sales (units) 30,000 35,000 38,000 25,000 40,000
Add : Closing stock of FG 3,000 9,000 8,000 6,000 10,000
Less : Opening stock of FG (7,500) (3,000) (9,000) (8,000) (6,000)
 Production (units) 25,500 41,000 37,000 23,000 44,000

(iii) Raw Material Consumption Budget (in units) :

Particulars Nov. 20 Dec. 20 Jan. 21 Feb. 21 Mar. 21


(a) Production of FG (units) 25,500 41,000 37,000 23,000 44,000
(b) Consumption of RM 'A' (kg.) 51,000 82,000 74,000 46,000 88,000
[ (a) x 2 kg. ]
(c) Consumption of RM 'B' (kg.) 76,500 1,23,000 1,11,000 69,000 1,32,000
[ (a) x 3 kg. ]

Question 6 : Theory Questions


Answer any four of the following : [ 4 Que. x 5 Marks each = 20 Marks ]

(a) Specify the types of Responsibility centres under the following situations :
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organisation.
(iv) Maharatna, Navratna and Miniratna public sector undertaking (PSU) of Central
Government.
(v) Sales Department of an organization.

(b) What is Margin of Safety? What does a large Margin of Safety indicates? How can you
calculate Margin of Safety?

(c) Rowan Premium Bonus system does not motivate a highly efficient worker as a less
efficient worker and a highly efficient worker can obtain same bonus under this system.
Discuss with an example?

(d) What do you understand by Build-Operate-Transfer (BOT) approach in Service


Costing? How is the toll rate computed?

(e) Write a short note on VED analysis of Inventory Control.

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Answer 6 :

(a) Types of Responsibility Centre :

Particulars Types of Centre


(i) Purchase of bonds, stocks, or real estate property Investment Centre
(ii) Ticket counter in a Railway station Revenue Centre
(iii) Decentralized branches of an organization Profit Centre
(iv) Maharatna, Navratna and Miniratna public sector Investment Centre
undertaking (PSU) of Central Government
(v) Sales Department of an organization Revenue Centre

(b) Margin of Safety : The margin of safety can be defined as the difference between the
expected level of sales and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety Sales can be calculated as :
Margin of Safety Sales = Projected or Actual sales – Breakeven sales
It also can also be calculated as :
Profit
Margin of Safety = --------------
P/V Ratio

(c) Rowan Premium Plan : According to this system a standard time allowance is fixed for
the performance of a job and bonus is paid if time is saved. Under Rowan System, the
bonus is the proportion of the time wages as time allowed of basic wages.

Time Saved
Bonus = ----------------------- x ( Time taken x Rate per hour )
Time Allowed

Example to explain efficiency of worker and amount of bonus :


Time rate (per hour) ` 60
Time allowed 8 hours
Time taken by „X‟ 6 hours
Time taken by „Y‟ 2 hours
Time Saved
Bonus = ----------------------- x ( Time taken x Rate per hour )
Time Allowed

2 hours
For ‘X’ = -------------- x ( 6 hours x ` 60 ) = ` 90
8 hours

6 hours
For ‘Y’ = -------------- x ( 2 hours x ` 60 ) = ` 90
8 hours

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From the above example, it can be concluded that a highly efficient worker 'Y' will get the
same amount of bonus as less efficient worker 'X' under Rowan system.

(d) Build-Operate-Transfer (BOT) Approach : In recent years a growing trend emerged


among Governments in many countries to solicit investments for public projects from the
private sector under BOT scheme. BOT is an option for the Government to outsource
public projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the facility and
eventually, after specified concession period, the ownership is transferred to the
Government. Therefore, BOT can be seen as a developing technique for infrastructure
projects by making them amenable to private sector participation.

Toll Rate : In general, the toll rates should have a direct relation with the benefits that the
road users would gain from its improvements. The benefits to road users are likely to be
in terms of fuel savings, reduction in travel time and good riding quality.

To compute the toll rate, following formula may be used


Total Cost + Profit
= ----------------------------
Number of Vehicles

(e) Vital, Essential and Desirable (VED) : Under this system of inventory analysis,
inventories are classified on the basis of its critically for the production function and final
product. Generally, this classification is done for spare parts which are used for
production.
(i) Vital - Items are classified as vital when its unavailability can interrupt the production
process and cause a production loss. Items under this category are strictly controlled
by setting re-order level.
(ii) Essential - Items under this category are essential but not vital. The unavailability
may cause sub-standard performance and loss of efficiency in production process.
Items under this category are reviewed periodically and get the second priority.
(iii) Desirable - Items under this category are optional in nature; unavailability does not
cause any production or efficiency loss.

*****

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