July, 2021 Exam
July, 2021 Exam
July, 2021 Exam
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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 :
SNS Trading Company has Three Main Departments and two Service Departments. The data
for each department is given below :
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.
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.
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
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.
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.
Working Notes :
1. Number of Rectified units
Total Output 8,000 units
Less : Rejected 10% 800 units
Finished product 7,200 units
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) :
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.
Answer 2(c) :
(i) Employee Turnover rate
25
= ------- x 100 = 5% (for 2 months)
500
(50 + 25)
= ------------- x 100 = 15% (for 2 months)
500
5%
Using Separate method = -------------- x 12 months = 30%
2 months
15%
Using Flux method = -------------- x 12 months = 90%
2 months
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.
The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given below :
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
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.
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
(i) Cost Sheet for the year ended 31st March, 2021 : ( for 15,000 units)
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 / 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
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 :
Unused Capacity
= Total Cost Driver capacity given - Capacity used i.e. consumption of activities
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
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 :
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
Process Y Account
` 52,610 - ` 2A
------------------------ = ` 4 on solving this equation, we will get -
14,100 units - A
Process Z Account
Abnormal Gain (Bal. Fig.) = ( 610 + 12,000 units ) - 12,205 units = 405 units
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.
Answer 4(b) :
(i) Calculation of total cost for ‘COVID-19’ Insurance policy :
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.
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
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.
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
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.
(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?
Answer 6 :
(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
2 hours
For ‘X’ = -------------- x ( 6 hours x ` 60 ) = ` 90
8 hours
6 hours
For ‘Y’ = -------------- x ( 2 hours x ` 60 ) = ` 90
8 hours
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.
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.
(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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