Cost & Management Accounting

Ans 1.
Introduction: -
Definitions:
 Prime Cost: Prime Cost consists of all direct costs associated with the manufacturing
of a product. It includes the cost of raw materials, direct labor, and direct expenses (if
any).
Prime Cost=Direct Materials + Direct Wages
 Factory Overhead: Factory Overhead comprises indirect costs incurred in the
manufacturing process that cannot be directly traced to a specific product. It includes
indirect materials, indirect labor, and other indirect expenses.
Factory Overhead=Indirect Wages+Rent, Rates and Taxes of Factory+Electricity
Charges: Factory+Fuel Charges: Boiler+Depreciation W/Off: Plant and
Machinery+Repairs to Plant and Machinery
 Factory Cost: Factory Cost is the total cost incurred by the company to manufacture
a product. It includes Prime Cost and Factory Overhead.
Factory Cost=Prime Cost+Factory Overhead
 Overhead: Overhead is the total indirect costs incurred by a company. It includes
both factory and office overhead.
Overhead=Factory Overhead+Office Overhead
 Cost of Sale (or Cost of Goods Sold): Cost of Sale represents the total cost incurred
to produce and sell a product. It includes all costs from the factory to the point of sale.
It includes Factory Cost, Freights (both inward and outward), and any additional
direct or indirect costs related to the production and sale of goods.
Cost of Sale=Factory Cost+Freights: Inwards+Freights: Outwards+General Charges
Concept and Application: -
Solution: Cost sheet of Sam Ltd.’s for the year ending March 31, 2023.
(Rs.)
Opening stock of materials 2,82,000
Add: Purchases 12,48,000
15,30,000
Add: Freight Inward 48,000
15,78,000
Less: Closing Stock 3,00,000
Raw Material Consumed 12,78,000
Direct Wages 3,57,600
(i) Prime Cost 16,35,600
(ii) Add: Factory Overheads
Indirect Wages 24,000
Repairs to plant and machinery 63,600
Rent, Rate and Taxes – Factory 18,000
Depreciation – Plant and machinery 42,600
 Electricity charges 72,000
Fuel 96,000
Manager’s Salary (20%) 14,400 3,30,600
(iii) Factory Cost 19,66,200
(iv) Add: Overheads
Salaries to administration staff 60,000
Freight Outward 30,000
Rent, Rate and Taxes – Office 9,600
Travelling 18,600
Salesmen's salaries and commission 50,400
Depreciation – Furniture 3,600
Director's fees 36,000
General Charges 37,200
Manager’s Salary (80%) 57,600 3,03,000
(v) Cost of sale 22,69,200

The amount of cash discounts and bad debts will be subtracted from sales revenue.
Conclusion: The computed values are as follows:
(i) Prime Cost: 16,35,600
(ii) Factory Overhead: 3,30,600
(iii) Factory Cost: 19,66,200
(iv) Overhead: 3,03,000
(v) Cost of Sale: 22,69,200
Ans 2.
Introduction: -
Labor turnover is a critical metric for organizations, reflecting the rate at which employees
leave and are replaced within a specified period. It is a key indicator of the stability and
efficiency of a workforce. Manas Ltd., like any other company, is keen on assessing its labor
turnover to gain insights into its workforce dynamics. In this analysis, we will compute the
labor turnover using various methods and delve into the concepts, applications, and
conclusions drawn from these measurements.
Concept and Application: -
These methods help in understanding the dynamics of the workforce. A high labor turnover
might indicate issues such as dissatisfaction, poor working conditions, or inadequate
employee engagement. Conversely, a low turnover may imply a stable and content
workforce. By employing different methods, organizations can gain a nuanced perspective on
the reasons behind turnover.
For Manas Ltd., the high Separation Rate may indicate challenges with employee retention or
satisfaction. The Replacement Rate suggests that although replacements are made, they may
not be sufficient to offset the departures. The Flux Rate gives a comprehensive picture by
considering both departures and replacements.
We can compute the labor turnover under four different methods as follows:
I. Addition Rate:
Labor Turnover = Number of additions during the period / Average number of
workers during the period *100
Labor Turnover = 560 / 4000 *100
Labor Turnover = 14%
II. Separation Rate:
Labor Rate = Number of separations during the period / Average number of
workers during the period *100
Labor Rate = 130 / 4000 *100
Labor Rate = 3.25%
III. Replacement Rate:
Labor turnover on account of replacement = Number of replacements during the
period / Average number of workers during the period *100
Labor turnover on account of replacement = 60 / 4000 * 100
Labor turnover on account of replacement = 1.5%
IV. Flux Rate:
Flux Rate = (Number of new joining + Number separations during the period) / 2)
/ Average number of workers during the period *100
Flux Rate = (560 + 130 / 2) / 2000 *100
Flux Rate = 345 / 2000 * 100
Flux Rate = 8.65%
Conclusion: - Analyzing labor turnover is crucial for organizations to identify areas for
improvement. Manas Ltd. can use the computed turnover rates to delve deeper into the
reasons behind departures and make informed decisions to enhance employee satisfaction and
retention.
In conclusion, the introduction and application of various labor turnover measurement
methods provide a holistic understanding of workforce dynamics. This analysis enables
organizations like Manas Ltd. to make data-driven decisions, fostering a healthier work
environment and improving overall organizational performance.
Ans 3 (a) & (b).
Introduction: - Cost accounting methods play a crucial role in determining the financial
performance of a company. Two common costing methods are absorption costing and
variable costing. These methods allocate costs to products differently, impacting the reported
income. In this context, we will analyze the income statements for the first two years using
both absorption and variable costing.
Concept & Application:
(Amount in Rs.)
Years
Particulars Year 1 Year 2
A. Sales at Rs. 3 per unit 4500 5400

B. Cost of goods sold

Cost of production:

Variable manufacturing cost 1050 750

Fixed manufacturing cost 1050 1050
Cost of Production 2100 1800

Add: Opening Stock - 300

Less: Closing stock 300 150

Cost of goods sold 850 900

C. Gross marginal contribution (A-B) 3650 4500

Fixed manufacturing costs 1050 1050
Variable marketing & administration costs 1500 1800
Fixed marketing & administration costs 600 600
Total D 3150 3450

Profit (C-D) 500 1050

Cost of manufacturing per unit = Total manufacturing cost / Total Production

Year 1 = 1050 / 2100 = Rs. 0.5
Year 2 = 750 / 1500 = Rs. 0.5
Valuation of closing stock:
Year 1 = 2100 – 1500 = 600 units x Rs. 0.5 = 300
Year 2 = 1800 – 1500 = 200 units x Rs. 0.5 = 150
Conclusion: The choice between absorption and variable costing affects the reported income
and, consequently, the financial performance evaluation of a company. Absorption costing
considers fixed manufacturing overhead as a product cost, distributing it among units
produced, while variable costing treats fixed manufacturing overhead as a period cost. The
income statements under these methods provide insights into how different cost allocations
impact profitability. Companies need to carefully choose the costing method based on their
business model, industry standards, and reporting requirements to present a true and fair view
of their financial performance. Both absorption and variable costing have their merits, and the
decision should align with the company's strategic goals and financial reporting objectives.