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18 Nov ABC 2 Dec Service Costing
19 Nov Working Capital 3 Dec Ratio Analysis
20 Nov Cost Sheet 4 Dec CAS, Joint & By
21 Nov Trade receivable 5 Dec Job & Batch
22 Nov Standard Costing 6 Dec FM & Costing Theory
23 Nov Cash Management 7 Dec SM Revision
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1. Reliable India Pvt Ltd is a startup company engaged in manufacturing of Agro Tech product from a raw
material, which is purchased at Rs.190 per kg. The company incurs a handling cost of Rs. 1,470
plus, freight of Rs.770 per order. The incremental carrying cost of inventory of raw material is
Rs. 3 per kg per month. In addition, the cost of working capital finance on the investment in inventory
of raw material is Rs.20 per kg per annum. The annual production of the product is 1,50,000 units
and 3 units are obtained from one kg. of raw material. Assume 360 days in a year.
Required:
1) Calculate the economic order quantity of raw materials.
2) Determine, how frequently company should order for procurement be placed.
3) If the company proposes to rationalize placement of orders on quarterly basis, determine
the percentage of discount in the price of raw materials should be negotiated?
Solution
(i) Calculation of Economic Order Quantity (E.O.Q)
, ,
Annual requirement (usage) of raw material in kg. (A) = = 50,000kg.

Ordering Cost (Handling & freight cost) (O) = 1,470 + 770 = 2,240
Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capitalcost
=( 3 × 12 months) + 20 = 56 per kg.
, . ₹ ,
E.O.Q = √ = √ = 2,000 kg.
₹

(ii) Frequency of placing orders for procurement: Annual consumption (A) = 50,000 kg.
Quantity per order (E.O.Q) = 2,000 kg.
, .
No. of orders per annum = . .
= , .
= 25 𝑜𝑟𝑑𝑒𝑟

Frequency of placing orders (in days) = = 14.4 𝐷𝑎𝑦𝑠

(iii) Percentage of discount in the price of raw materials to be negotiated:

Particulars On Quarterly Basis On E.O.Q Basis
1. Annual Usage (in Kg.) 50,000 kg. 50,000 kg.
2. Size of the order 12,500 kg. 2,000 kg.
3. No. of orders (1 ÷ 2) 4 25
4. Cost of placing ordersor 8,960 56,000
Ordering cost
(No. of orders × Cost per (4 order × 2,240) (25 orders × 2,240)
order)
5. Inventory carrying cost 3,50,000 56,000
 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

(Average inventory ×Carrying (12,500 kg. × ½ × 56) (2,000 kg. × ½ × 56)

cost per unit)
6. Total Cost (4 + 5) 3,58,960 1,12,000
When order is placed on quarterly basis the ordering cost and carrying cost increased by
2,46,960 ( 3,58,960 - 1,12,000). So, discount required = 2,46,960
Total annual purchase = 50,000 kg. × 190 = 95,00,000
₹ , ,
So, Percentage of discount to be negotiated = ₹ , ,
𝑥 100 = 2.60%

2. EXE Limited has received an offer of quantity discounts on its order of materials as under:
Price per ton (Rs.) Ton (Nos.)
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above.

a) The annual requirement for the material is 5,000 tons. The ordering cost per order is
Rs.1,200 and the stock holding cost is estimated at 20% of material cost per annum. You are
required to compute the most economical purchase level.

b) What will be your answer to the above question if there are no discounts offered and the price per
ton is Rs.1,500?

Solution

Total Order No. of Cost of Orderin Carrying cost Total

annual size orders A/q inventory g cost p.t. p.a ½* q Cost
require (Tonne) A * Per tonne A/q * * 20% of cost (4+5+6)
ment (q) cost Rs. 1200 p.t. (Rs.)
(A) (Rs.) (Rs.) (Rs.)
1 2 3 4 5 6 7
5,000 400 12.5 (13)* 60,00,000 15,600 48,000 60,63,600

Ton (5,000*Rs.1200) (200 * Rs. 240)

500 10 59,00,000 12,000 59,000 59,71000
(5,000 * Rs. 1180) (250 * Rs. 236)
1,000 5 58,00,000 6,000 1,16,000 59,22,000
(5,000* Rs. 1160) (500 * Rs. 232)
2,000 2.5 (3)* 57,00,000 2,28,000
3,600 59,31,600
(5,000*Rs. 1140) (1,000*Rs.228)
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3,000 1.666 (2)* 56,00,000 3,36,000

2,400

(5,000*Rs. 1120) (1,500*Rs.224) 59,38,400

* Since number of orders cannot be in decimals, thus 12.5 orders are taken as 13 orders, 2.5 are
taken as 3 order and 1.66 orders are taken as 2 orders.
The above table shows that the total cost of 5,000 units including ordering and carrying cost is
minimum (Rs. 59,22,000) when the order size is 1,000 units. Hence the most economical purchase
level is 1,000 units.

3. M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption of raw
material for the production of “ESS” is 210 Kgs to 350 Kgs per week. Other information is as follows:
Procurement Time: 5 to 9 Days
Purchase price of Raw Materials: Rs. 100 per kg
Ordering Cost per Order: Rs. 200
Storage Cost: 1% per month plus Rs. 2 per unit per annum
Consider 365 days a year.
You are required to Calculate:
 Economic Order Quantity
 Re-Order Level (ROL)
 Maximum Stock Level
 Minimum Stock Level
 Average Stock Level
 Number of Orders to be placed per year
 Total Inventory Cost
 If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders,
whether offer is acceptable?
 If the answer is no, what should be the counteroffer w.r.t. percentage of discount?

Solution
As procurement time is given in days, consumption should also be calculated in days:
Maximum Consumption per Day: = 50𝐾𝑔𝑠

Minimum Consumption per Day: = 30𝐾𝑔𝑠

( )
Average Consumption per Day: = 40𝐾𝑔𝑠

(a) Calculation of Economic Order Quantity (EOQ)

Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs
Storage or Carrying Cost per unit per annum (C): (Rs. 100 x 1% x 12 months) + Rs. 2 = Rs. 14
Ordering Cost (O): Rs. 200 per Order
EOQ =√
Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

,
=√ = 646 Kgs.

(b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum Procurement Time)
= 50 kgs per day × 9 days
= 450 kgs
(c) Maximum Stock Level = Recorder Level + Recorder Quantity – (Minimum
Consumption Rate × Minimum Procurement Time)
= 450 kgs + 646 kgs - (30 kgs X 5 days)
= 946 kgs
(d) Minimum Stock Level = Recorder Level – (Average consumption Rate ×
Average Procurement Time)
= 450 kgs – (40 kgs X 7 days)
= 170 kgs

(e) Average Stock Level =

= 558 kgs
(f) Number of Orders to be placed per year

= 22.60 Orders or 23 Orders

(g) Total Inventory Cost
Cost of Materials (A x Purchase Price) (14600 kgs x Rs.100) = Rs. 14,60,000
Total Ordering Cost (No. of Orders x O) (23 Orders x 200) = Rs. 4,600
Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x Rs. 14) = Rs. 4,522
Total Inventory Cost Rs. 14,69,122

(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders:

Offer Price = Rs. 100 x 99% = Rs. 99

Revised Carrying Cost = (Rs. 99 x 1% x 12 months) + Rs.2 = Rs. 13.88

Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs

Total Inventory Cost at Offer Price
Cost of Materials (A x Purchase Price) (14600 kgs x Rs. 99) = Rs. 14,45,400
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = Rs. 400
 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x Rs. 13.88) = Rs. 50,662
Total Inventory Cost Rs. 14,96,462
Advice: As total inventory cost at offer price is Rs. 27,340 (14,96,462 – 14,69,122) higher, offer
should not be accepted.

(i) Counter-offer:
Let Discount Rate = z%
Counter-Offer Price = Rs. 100 – z% = Rs. 100 – z
Revised Carrying Cost = [(Rs. 100 – z) x 1% x 12 months] + Rs. 2 = Rs. 12 -0.12z + Rs. 2
= Rs. 14 – 0.12z
Total Inventory Cost at Counter-Offer Price
Cost of Materials (A x Purchase Price) [14600 kgs x (Rs. 100 – z)]
= Rs. 14,60,000 – 14,600z
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = Rs. 400
Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (Rs. 14 – 0.12z)] = Rs. 51,100 – 438z
Total Inventory Cost Rs. 15,11,500 – 15038z
Rs. 14,69,122 = Rs. 15,11,500 – 15038z
Or 15038z = 42,378
Or z = 2.82
Therefore, discount should be at least 2.82% in offer price.

4. Santram produces product 'S'. It uses annually 1,20,000 units of a material 'Fix' costing Rs. 10 per
unit. Other relevant information is as follows:

Cost of placing the order: Rs. 1,600 per order

Carrying cost: 15% p.a. of average inventory
Re-order period: 10 days
Safety Stock: 1,000 units
The company operated 300 days in a year
You are required to calculate:
a) Economic order quantity for material Fix
b) Re-order level
c) Maximum stock level
d) Average stock level
Solution
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5. A company uses four raw materials A, B, C and D for a particular product for which the
following data apply:–
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Raw Usage per Re-order Price Delivery period (in weeks) Re- order Minimum
Material unit of Quantity per Kg. level (Kg.) level
product (Kg.) (Rs.) Minimum Average Maximum (Kg.)
(Kg.)
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?

Weekly production varies from 550 to 1,250 units, averaging 900 units of the said
product. What would be the following quantities:–
1) Minimum Stock of A?
2) Maximum Stock of B?
3) Re-order level of C?
4) Average stock level of A?
5) Re-order level of D?
6) Minimum Stock level of D?
Solution
(i) Minimum stock of A
Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks) = 27,600 kg.

(ii) Maximum stock of B

Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg.+ 8,000 kg– (550units ×8 kg.× 5 weeks).
=78,000–22,000 = 56,000 kg.

(iii) Re-order level of C

Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR
= Minimum stock of C+(Average consumption × Average delivery time)
= 25,500 kg.+ [(900 units ×6 kg.)×5 weeks] =52,500 kg.

(iv) Average stock level of A

= (Refer to Working Note)

 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

, ,
= = 43,200 kg.

Working note
(i) Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(ii) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg.) = 18,750 kg
(iii) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks) = 9,750 kg.

6. A Ltd. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D is
required. As per the sales forecast conducted by the company, it will be able to sale 20,000 units
of X in the coming year.
The following are the information related to the raw material D:
1) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
2) Maximum consumption per day is 40 kg. more than the average consumption per day.
3) There is an opening stock of 2,000 kg.
4) Time required to get the raw materials from the suppliers is 4 to 8 days.
5) The purchase price is Rs. 250 per kg.
There is an opening stock of 1,800 units of the finished product X. The carrying cost of inventory
is 14% p.a.
To place an order company has to incur Rs. 1,340 on paper and documentation work. From the
above information FIND OUT the followings in relation to raw material D:
(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 300 days for a year]
Solution
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:

Sales forecast of the product ‘X’ 20,000 units

Less: Opening stock of ‘X’ 1,800 units
Fresh units of ‘X’ to be produced 18,200 units
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Raw material required to produce 18,200 units of ‘X’ 72,800 kg.

(18,200 units × 4 kg.)
Less: Opening Stock of ‘D’ 2,000 kg.
Annual demand for raw material ‘D’ 70,800 kg.
(ii) Computation of Economic Order Quantity (EOQ):

2Annualdemandof 'D' Ordering cost

EOQ =

, . ₹ , , . ₹ ,
= = = 2,328𝑘𝑔.
₹ % ₹

(iii) Re – Order level:

= (Maximum consumption per day x Maximum lead time)
, .
={ + 40 𝑘𝑔. 𝑥 8 𝑑𝑎𝑦𝑠 } = 2,261 𝑘𝑔.

(iv) Minimum consumption per day of raw material ‘D’:

Average Consumption per day = 243 Kg.
Hence, Maximum Consumption per day = 243 kg. + 40 kg. = 283 kg.
So Minimum consumption per day will be
. .
Average Consumption =
. .
Or, 243 kg. =

Or, Min. consumption = 486 kg – 283 kg. = 203 kg.

(a) Re-order Quantity :
EOQ – 400 kg. = 2,328 kg. – 400 kg.= 1,928 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 2,261 kg. + 1,928 kg. – (203 kg. × 4 days) = 4,189 kg. – 812 kg. = 3,377 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 2,261 kg. – (243 kg. × 6 days) = 803 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 1,928 kg. 2,328 kg.
II No. of orders a , .
= 36.72 or, 37 order
,
=30.41or 31orders
, . , .
year
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III Ordering Cost 37 orders × 1,340 31 orders × 1,340

= 49,580 = 41,540
IV Average Inventory 1,928 𝑘𝑔. 2,328 𝑘𝑔.
= 964 𝑘𝑔. = 1,164 𝑘𝑔
2 2
964 kg. × 35 = 33,740 1,164 kg. × 35 = 40,740
V Carrying Cost
VI Total Cost 83,320 82,280
Extra Cost incurred due to not ordering EOQ = 83,320 - 82,280 = 1,040

7. Sky & Co., an unregistered supplier under GST, purchased material from Vye 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 Rs. 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 Rs. 5,000
Freight and Insurance Rs. 17,000
Demurrage paid to transporter Rs. 5,000
Commission and brokerage on purchases Rs.10,000
Amount deposited for returnable containers Rs.30,000
Amount of refund on returning the container Rs.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 Sky & Co.

Solution

Calculation of cost per unit:

Particulars Units ( )
Listed Price of Materials 5,000 2,50,000
Less: Trade discount @ 10% on invoice 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
 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

Freight and Insurance 17,000

Commission and Brokerage Paid 10,000
Add: Cost of returnable containers:
Amount deposited 30,000
Less: Amount refunded 20,000 10,000
2,94,000

Add: Other Expenses @ 2% of Total Cost

, ,
𝑥2 6,000

Total cost of material 3,00,000

Less: Shortage material due to normal reasons @ 20% 1,000 -
Total cost of material of good units 4,000 3,00,000
Cost per unit ( 3,00,000/4,000 units) 75

Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off -loading of
materials. It is an abnormal cost and not included.
Shortage due to normal reasons should not be deducted from cost to ascertain totalcost of good units.

8. The purchase committee of A Ltd. has been entrusted to review the material procurement policy
of the company. The chief marketing manager has appraised the committee that the company at
present produces a single product X by using two raw materials A and B in the ratio of 3:2. Material
A is perishable in nature and has to be used within 10 days from Goods received note (GRN) date
otherwise material becomes obsolete. Material B is durable in nature and can be used even after
one year. Material A is purchased from the local market within 1 to 2 days of placing order. Material
B, on the other hand, is purchased from neighbouring state and it takes 2 to 4 days to receive the
material in the store.
The purchase price of per kilogram of raw material A and B is Rs.30 and Rs.44 respectively
exclusive of taxes. To place an order, the company has to incur an administrative cost of Rs.1,200.
Carrying cost for Material A and B is 15% and 5% respectively. At present material A is purchased
in a lot of 15,000 kg. to avail 10% discount on market price. GST applicable for both the materials
is 18% and the input tax credit is availed.
The sales department has provided an estimate that the company could sell 30,000 kg. in January
2024 and also projected the same trend for the entire year.
The ratio of input and output is 5:3. Company works for 25 days in a month and production is
carried out evenly.
The following queries/ calculations to be kept ready for purchase committees’ reference:
Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

i) For the month of January 2024, what would be the quantity of the materials to be
requisitioned for both material A and B

ii) The economic order quantity (EOQ) for both the material A & B

iii) What would the maximum stock level for material A

iv) Calculate saving/ loss in purchase of Material A if the purchase order quantity is
equal to EOQ.

v) What would the minimum stock level for material A

Solution
(i) Monthly Production of X = 30,000 kgs

Raw Material Required = 30,000 ×5 = 50,000 kgs.

3

Material A = 50,000 ×3/5 = 30,000 kg

Material B = 50,000 ×2/5 = 20,000 kg

(ii) Calculation of Economic Order Quantity (EOQ): Material A

2×(30,000×12)×1,200
=√ = 13,856 kg.
15% of 30
2×(20,000×12)×1,200
Material B =√ = 16,181 kg.
5% of 44

(iii) Calculation of Maximum Stock level: Since, the Material A is perishable in nature and it
required to be used within 10 days, hence, the Maximum Stock Level shall be
lower of two:
(a) Stock equal to 10 days consumption

=30000/25x10 days = 12,000 kg.

(b) Maximum Stock Level for Material A:

Re-order Quantity + Re-order level – (Min consumption* × Min. lead time)
Where, Re-order Quantity = 15,000 kg.
Re-order level = Max. Consumption* × Max. Lead time
= 30,000/25 × 2 days = 2,400 kg.
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Maximum stock Level = 15,000 kg. + 2,400 kg. -

(30,000/25 × 1 day)
= 17,400 – 1,200 = 16,200 kg.
Stock required for 10 days consumption is lower than the maximum stock level
calculated through the formula. Therefore, Maximum Stock Level will be 12,000
kg.
(*Since, production is processed evenly throughout the month hence material
consumption will also be even.)

(iv) (b) Calculation of Savings/ loss in Material A if purchase quantity equals to EOQ.

Purchase Quantity = Purchase Quantity =

15,000 kg. EOQ i.e. 13,856 kg.
Annual 3,60,000 kg. 3,60,000 kg.
consumption (30,000 × 12 months) (30,000 × 12 months)
No. of orders 30 30
[Note- (i)] (3,60,000 ÷ 12,000) (3,60,000 ÷ 12,000)
Ordering Cost Rs.36,000 Rs.36,000
(a) (Rs.1200 × 30) (Rs.1200 × 30)
Carrying Cost (b) Rs.30,375 Rs.31,176
[Note- (ii)] (15% of Rs.27 × 7,500) (15% of Rs.30 × 6,928)
Purchase Cost (c) Rs.97,20,000 Rs.1,08,00,000
(for good (Rs.27 × 3,60,000) (Rs.30 × 3,60,000)
portion)
Loss due to Rs.24,30,000 Rs.16,70,400
obsolescence (d) [Rs.27 × (30 × 3,000)] [Rs.30 × (30 × 1,856)]
[Note- (iii)]
Total Cost [(a) + Rs. 1,22,16,375 Rs. 1,25,37,576
(b) + (c) + (d)]

Purchasing of material -A at present policy of 15,000 kg. saves Rs. 3,21,201.

Notes: (i) Since, material gets obsolete after 10 days, the quantity in excess of
10 days consumption i.e. 12,000 kg. are wasted. Hence, after 12,000 kg. a fresh
order needs to be given.
(ii) Carrying cost is incurred on average stock of Materials purchased.
(iii) the excess quantity of material becomes obsolete and loss has to be
incurred.
(v) Minimum Stock Level for Material A
= Re-order level – (Average Consumption Rate x Average Re-order Period)
= 2400 – (1200 x 1.5) = 600 kgs
Re-order level = Max. Consumption* × Max. Lead time
= 30,000/25 × 2 days = 2,400 kg.
Average Consumption Rate = (30,000/25 + 30,000/25)/2
= 1,200 Kg
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Average Re-order Period = (1 + 2)/2 =1.5 Days

Stock required for 10 days consumption is lower than the maximum stock level
calculated through the formula. Therefore, Maximum Stock Level will be 12,000
kg.
(*Since, production is processed evenly throughout the month hence material consumption will also
be even.)

9. The following data are available in respect of material X for the year ended 31st March, 2021:
(Rs.)
Opening stock 9,00,000
Purchases during the year 1,70,00,000
Closing stock 11,00,000
CALCULATE:
1) Inventory turnover ratio, and
2) The number of days for which the average inventory is held.
3) INTERPRET the ratio calculated as above if the industry inventory turnover rate is 10.
Solution

(i) (a) Inventory turnover ratio (Refer to working note)

₹ 1,68,00,000
= = 16.8
₹ 10,00,000

(b) Average number of days for which the average inventory is held

= = = 21.73 days
.

Working Note:
Particulars ( )
Opening stock of raw material 9,00,000
Add: Material purchases during the year 1,70,00,000
Less: Closing stock of raw material 11,00,000
1,68,00,000

(ii) The Inventory turnover ratio for material X is 16.8 which mean an inventory item takes only 21.73 or
22 days to issue from stores for production process. The rate is better than the industry rate which is 10
time or 36.5 days. This inventory turnover ratio indicates better inventory management system and good
demand for the final product in market.
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10. From the following details, DRAW a plan of ABC selective control:
Item Units Unit cost (Rs.)
1 7,000 4.450
2 4,000 19.140
3 1,500 8.900
4 29,000 0.180
5 10,000 8.190
6 40,000 0.450
7 60,000 0.180
8 13,000 0.980
9 10,000 0.205
10 29,000 0.360
11 11,500 6.320
12 4,000 5.220

Solution
Statement of Total Cost and Ranking
Item Units % of Total Unit cost Total % of Total Ranking
units (`) cost (`) cost
1 7,000 3.1963 4.450 31,150 8.7557 4
2 4,000 1.8265 19.140 76,560 21.5195 2
3 1,500 0.6849 8.900 13,350 3.7524 7
4 29,000 13.2420 0.180 5,220 1.4672 11
5 10,000 4.5662 8.190 81,900 23.0205 1
6 40,000 18.2648 0.450 18,000 5.0594 6
7 60,000 27.3973 0.180 10,800 3.0357 9
8 13,000 5.9361 0.980 12,740 3.5810 8
9 10,000 4.5662 0.205 2,050 0.5762 12
10 29,000 13.2420 0.360 10,440 2.9345 10
11 11,500 5.2511 6.320 72,680 20.4289 3
12 4,000 1.8265 5.220 20,880 5.8690 5
2,19,000 100 3,55,770 100
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Basis for selective control (Assumed)

` 50,000 & above -- ‘A’ items
` 13,000 to 50,000 -- ‘B’ itemsBelow

` 13,000 -- ‘C’ items

On this basis, a plan of A B C selective control is given below:
Ranking Item % of Total Cost (`) % of Total Category
Nos. units Cost
1 5 4.5662 81,900 23.0205
2 2 1.8265 76,560 21.5195
3 11 5.2511 72,680 20.4289
Total 3 11.6438 2,31,140 64.9689 A
4 1 3.1963 31,150 8.7557
5 12 1.8265 20,880 5.8690
6 6 18.2648 18,000 5.0594
7 3 0.6849 13,350 3.7524
Total 4 23.9726 83,380 23.4365 B
8 8 5.9361 12,740 3.5810
9 7 27.3973 10,800 3.0357
10 10 13.2420 10,440 2.9345
11 4 13.2420 5,220 1.4672
12 9 4.5662 2,050 0.5762
Total 5 64.3836 41,250 11.5946 C

Grand Total 12 100 3,55,770 100

11. M/s Tyrotubes trades in four-wheeler tyres and tubes. It stocks enough tyres of almost every
vehicle. In year end 2021-22, the report of sales manager revealed that M/s Tyrotubes experienced
stock-out of tyres. The stock-out data is as follows:
Stock out of tyres No of times
100 2
80 5
50 10
20 20
10 30
0 33

M/s Tyrotubes loses Rs.150 per unit due to stock-out and spends Rs.50 per unit on carrying of
inventory. Determine optimum safest stock level
Solution
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Computation of Stock-out and Inventory carrying cost

Safety Stock- Probability Stock- Expected Inventory Total

Stock out (3) out cost stock-out carrying cost cost (Rs.)
Level (units) (Rs.) cost (Rs.) (Rs.) (7) =
(units) (2) (4) = (2) (5)=(3)x(4) (6) =(1)xRs. 50 (5)+(6)
(1) x Rs. 150

100 0 0.33 0 0 5,000 5,000

80 20 0.02 3,000 60 4,000 4,060
50 50 0.02 7,500 150
30 0.05 4,500 225
12,000 375 2,500 2,875
20 80 0.02 12,000 240
60 0.05 9,000 450
30 0.10 4,500 450
25,500 1,140 1,000 2,140
10 90 0.02 13,500 270
70 0.05 10,500 525
40 0.10 6,000 600
10 0.20 1,500 300
31,500 1,695 500 2,195
0 100 0.02 15,000 300
80 0.05 12,000 600
50 0.10 7,500 750
20 0.20 3,000 600
10 0.30 1,500 450
39,000 2,700 0 2,700

At safety stock level of 20 units, total cost is least i.e., Rs. 2,140.

Working Note:
Computation of Probability of Stock-out

Stock-out (units) 100 80 50 20 10 0 Total

Nos. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00
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12. IPL Limited uses a small casting in one of its finished products. The castings are purchased from
a foundry. IPL Limited purchases 54,000 castings per year at a cost of Rs. 800 per casting.
The castings are used evenly throughout the year in the production process on a 360- days-per-
year basis. The company estimates that it costs Rs.9,000 to place a single purchase order and
about Rs.300 to carry one casting in inventory for a year. The high carrying costs result 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:
(i) Compute the economic order quantity (EOQ).
(ii) 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?
(iii) 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?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory
for one year?
(v) Refer to the original data. Assume that using process re-engineering the company reduces
its cost of placing a purchase order to only Rs. 600. In addition, company estimates that
when the waste and inefficiency caused by inventories are considered, the true cost of
carrying a unit in stock is Rs. 720 per year.
a. Compute the new EOQ.
b. How frequently would the company be placing an order, as compared to the old purchasing
policy?
Solution
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13. Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is engaged
in creating Embedded products and Internet of Things (IoT) solutions for the Industrial market. It
is focused on innovation, design, research and development of products and services. One of its
embedded products is LogMax, a system on module (SoM) Carrier board for industrial use. It is a
small, flexible and embedded computer designed as per industry specifications. In the beginning
of the month of September 2021, company entered into a job agreement of providing 4800 LogMax
to NIT, Mandi. Following details w.r.t. issues, receipts, returns of Store Department handling
Micro-controller, a component used in the designated assembling process have been extracted for
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the month of September, 2021:

Sep. 1 Opening stock of 6,000 units @ Rs. 285 per unit
Sep. 8 Issued 4875 units to mechanical division vide material requisition no. Mech
009/20
Sep. 9 Received 17,500 units @ Rs. 276 per unit vide purchase order no. 159/2020
Sep. 10 Issued 12,000 units to technical division vide material requisition no. Tech
012/20
Sep. 12 Returned to stores 2375 units by technical division against material
requisition no. Tech 012/20.
Sep. 15 Received 9,000 units @ Rs. 288 per units vide purchase order no. 160/ 2020

Sep. 17 Returned to supplier 700 units out of quantity received vide purchase order
no. 160/2020.
Sep. 20 Issued 9,500 units to technical division vide material requisition no. Tech
165/20

On 25th September, 2021, the stock manager of the company expressed his need to leave for his
hometown due to certain contingency and immediately left the job same day. Later, he also
switched his phone off.
As the company has the tendency of stock-taking every end of the month to check and report for
the loss due to rusting of the components, the new stock manager, on 30th September, 2021, found
that 900 units of Micro-controllers were missing which was apparently misappropriated by the
former stock manager. He, further, reported loss of 300 units due to rusting of the components.
From the above information you are Required to prepare the Stock Ledger account using ‘Weighted
Average’ method of valuing the issues.
Solution

Store Ledger of Imbrios India Ltd. (Weighted Average Method)

Date Receipts Issues Balance of Stock

Qty Rate Amount Qty Rate Amount Qty Rate Amount

Sep.
(kg.) (Rs.) (Rs.) (kg.) (Rs.) (Rs.) (kg.) (Rs.) (Rs.)

1 - - - - - - 6,000 285.00 17,10,000

8 - - - 4,875 285.00 13,89,375 1,125 285.00 3,20,625

9 17,500 276.00 48,30,000 - - - 18,625 276.54 51,50,625

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10 - - - 12,000 276.54 33,18,480 6,625 276.54 18,32,145

12 2,375 276.54 6,56,783 - - - 9,000 276.54 24,88,928

15 9,000 288.00 25,92,000 - - - 18,000 282.27 50,80,928

17 - - - 700 288.00 2,01,600 17,300 282.04 48,79,328

20 - - - 9,500 282.04 26,79,380 7,800 282.04 2199948

30 - - - 900* 282.04 2,53,836 6,900 282.04 19,46,112

30 - - - 300** - - 6,600 294.87 19,46,112

* 900 units is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c.
** 300 units is normal loss; hence it will be absorbed by good units.
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1. Following information are available from the cost records of BMR Limited, CALCULATE Labour turnover
rate and Labour flux rate:
No. of Employees as on 01.04.2021 = 9,400
No. of Employees as on 31.03.2022 = 10,600
During the year, 160 Employees left while 640 Employees were discharged and 1,500 Employees were
recruited during the year; of these, 400 Employees were recruited because of exits and the rest were
recruited in accordance with expansion plans.

Solution

Employee turnover rate:

It comprises of computation of Employee turnover by using following methods:

(i) Separate Method: = 𝑥 100

OR = 𝑥 100

(
= 𝑥 100
( , , )÷

= 𝑥 100 = 8%
,

(ii) Replacement Method = 𝑥 100

= ,
𝑥 100 = 4%
( )
(iii) New Recruitment = 𝑥 100

= x 100

= ,
𝑥 100

,
= 𝑥 100 = 11%
,

Flux Method = 𝑥 100

( , )
=( , , )÷
𝑥 100

,
= 𝑥 100 = 23%
,

2. The Accountant of Y Ltd. has computed employee turnover rates for the quarter ended 31st March, 2023
as 10%, 5% and 3% respectively under ‘Flux method’, ‘Replacement method’ and ‘Separation method’
respectively. If the number of workers replaced during that quarter is 30, FIND OUT the number of
workers for the quarter (i) recruited and joined and (ii) left and discharged and (iii) Equivalent employee
turnover rates for the year.
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Solution

3. S The board of the J Ltd. has been appraised by the General Manager (HR) that the employee attrition
rate in the company has increased. The following facts has been presented by the GM(HR):
a) 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.
b) 20% of the output during training period was defective. Cost of rectification of a defective unit was
Rs. 25.
c) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
d) Selling price per unit is Rs. 180 and P/V ratio is 20%.
e) Settlement cost of the workers leaving the organization was Rs. 1,83,480.
f) Recruitment cost was Rs. 1,56,340
g) Training cost was Rs. 1,13,180
You being an associate finance to GM(HR), has been asked the following questions:
- How much quantity of output is lost due to labour turnover?
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- How much loss in the form of contribution, the company incurred due to labour turnover?
- What is the cost repairing of defective units?
- How much quantity of output is lost due to inexperience of the new worker?

Solution

4. Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) Rs.30,000
(ii) Bonus 25% of salary
(iii) Employer’s contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees’ welfare activities Rs.6,61,500per annum
(v) Total leave permitted during the year 30 days
(v) No. of employees 175
(vii) Normal idle time 70 hours per annum
(viii) Abnormal idle time (due to failure of power supply) 50 hours
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(ix) 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

Annual cost of each employee Rs.

1. Salary (30,000×12) 3,60,000

2. Bonus (25% of Salary) 90,000

3. Employees Contribution to PF (15% of Salary) 54,000

4. Employers welfare (661500/175) 3,780

Total Annual Cost 5,07,780

2.Effective Working hours (310 days × 8 hours) 2480 hours

Less: Leave days (30 days × 8 hours) 240 hours*

Available Working hours 2240 hours

Less: Normal Loss @ 70 hours

2170 hours

Employee Cost per hour = Rs. 234

*It is assumed 310 working days are without taking leave permitted into consideration
3. Cost of abnormal idle time per employee = Rs. 234× 50 hours= Rs. 11700

Alternative solution for Part (2) and (3)

(2) Calculation of Employee cost per hour:

Working hours per annum 2,480 *

Less: Normal Idle time hours 70

Effective hours 2,410

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Employee cost 5,07,780

Employee cost per hour 210.70

*It is assumed 310 working days are after adjusting leave permitted during the year.

(3) Cost of Abnormal idle time per employee:

Abnormal Idle time hours 50

Employee cost per hour 210.70

Cost of Abnormal idle time (210.70 ×50) 10,534.85

5. Wage negotiations are going on with the recognised employees’ union, and the management wants you
as an executive of the company to formulate an incentive scheme with a view to increase productivity.
The case of three typical workers A, B and C who produce respectively 180, 120 and 100 units of the
company’s product in a normal day of 8 hours is taken up for study.

Assuming that day wages would be guaranteed at Rs. 75 per hour and the piece rate would be based on
a standard hourly output of 10 units, CALCULATE the earnings of each of the three workers and the
employee cost per 100 pieces under (i) Day wages, (ii) Piece rate, (iii) Halsey scheme, and (iv) The Rowan
scheme.
Also CALCULATE under the above schemes the average cost of labour for the company to produce 100
pieces.

Solution
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6. Mr. A. 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
Employee 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 the assurance, the increase in productivity has been observed as revealed by the following
figures for the current month:

Hourly rate of wages (guaranteed) Rs.40

Average time for producing 1 piece by one worker at the previous 2 hours
performance (This may be taken as time allowed)

No. of working days in the month 25

No. of working hours per day for each worker 8

Actual production during the month 1,250 units

Required:
CALCULATE effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
CALCULATE the savings to Mr. A in terms of direct labour cost per piece under the schemes
Solution
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7. A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of Rs. 30 per hour. The standard time per
unit for a particular product is 4 hours. Mr. P, a machine man, has been paid wages under the Rowan
Incentive Plan and he had earned an effective hourly rate of Rs. 37.50 on the manufacture of that
particular product.
STATE what could have been his total earnings and effective hourly rate, had he been put on Halsey
Incentive Scheme (50%)?
Solution
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8. Two workmen, ‘A’ and ‘B’, produce the same product using the same material. Their normal wage rate
is also the same. ‘A’ is paid bonus according to the Rowan system, while ‘B’ is paid bonus according to
the Halsey system. The time allowed to make the product is 50 hours. ‘A’ takes 30 hours while ‘B’ takes
40 hours to complete the product. The factory overhead rate is Rs. 5 per man-hour actually worked.
The factory cost for the product for ‘A’ is Rs. 3,490 and for ‘B’ it is Rs. 3,600.
Required:
1. COMPUTE the normal rate of wages;
2. COMPUTE the cost of materials cost;
3. PREPARE a statement comparing the factory cost of the products as made by the two
workmen.

Solution
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9. In a factory, the basic wage rate is Rs.100 per hour and overtime rates are as follows:

Before and after normal working hours 175% of basic wage rate
Sundays and holidays 225% of basic wage rate

During the previous year, the following hours were worked

- Normal time 1,00,000 hours

- Overtime before and after working hours 20,000 hours

Overtime on Sundays and holidays 5,000 hours

Total 1,25,000 hours

The following hours have been worked on job ‘Z’

Normal 1,000 hours

Overtime before and after working hrs. 100 hours.

Sundays and holidays 25 hours.

Total 1,125 hours

You are required to CALCULATE the labour cost chargeable to job ‘Z’ and overhead in each of the
following instances:

(a) Where overtime is worked regularly throughout the year as a policy due to the workers’
shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
Solution
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10. It is seen from the job card for repair of the customer’s equipment that a total of 154 labour hours have
been put in as detailed below:

Worker ‘A’ paid at Worker ‘B’ paid at Worker ‘C’ paid at

Rs. 200 per day of 8 Rs. 100 per day of Rs. 300 per day of 8
hours 8 hours hours

Monday (hours) 10.5 8.0 10.5

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Tuesday (hours) 8.0 8.0 8.0

Wednesday (hours) 10.5 8.0 10.5

Thursday (hours) 9.5 8.0 9.5

Friday (hours) 10.5 8.0 10.5

Saturday (hours) -- 8.0 8.0

Total (hours) 49.0 48.0 57.0

In terms of an award in employee conciliation, the workers are to be paid dearness allowance on the
basis of cost of living index figures relating to each month which works out @ Rs. 968 for the relevant
month. The dearness allowance is payable to all workers irrespective of wages rate if they are present or
are on leave with wages on all working days.
Each worker has to work for 8 hours on weekdays. Saturday and Sunday will be weekly holiday, however
workers may work on Saturdays due to exigency of work for 4 hours, though full payment of 8 hours will
be made with no other payments.

Overtime is paid twice of ordinary wage rate if a worker works for more than nine hours in a day or fourty
eight hours in a week. Excluding holidays, the total number of hours works out to 176 in the relevant
month. The company’s contribution to Provident Fund and Employees State Insurance Premium are
absorbed into overheads.

CALCULATE the wages payable to each worker.

Solution
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11. The following expenditures were incurred in Aditya Ltd. For the month of March 2023:

(Rs.)

(i) Paid for power & fuel 4,80,200

(ii) Wages paid to factory workers 8,44,000

(iii) Bill paid to job workers 9,66,000

(iv) Royalty paid for production 8,400

(v) Fee paid to technician hired for the job 96,000

(vi) Administrative overheads 76,000

(vii) Commission paid to sales staffs 1,26,000

You are required to CALCULATE direct expenses for the month.

Solution

Calculation of Direct Expenses

(Rs.)

(i) Paid for power & fuel 4,80,200

(ii) Bill paid to job workers 9,66,000

(iii) Royalty paid for production 8,400

(iv) Fee paid to the technician 96,000

Total Direct expenses 15,50,600

Notes:

(i) Wages paid to factory workers is direct employee cost.

(ii) Administrative overhead is indirect expense.
(iii) Commission paid to sales staffs comes under selling expenses.
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1. The total overhead expenses of a factory is Rs. 4,46,380. Taking into account the normal working of the
factory, overhead was recovered in production at Rs. 1.25 per hour. The actual hours worked were
2,93,104. STATE how would you proceed to close the books of accounts, assuming that besides 7,800
units produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the
cost of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.

Solution
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2. During half year ending inter departmental review meeting of P Ltd., cost variance report was discussed
and the performance of the departments were assessed. The following figures were presented. For a
period of first six months of the financial year, following information were extracted from the books:

Actual production overheads Rs. 34,08,000

The above amount is inclusive of the following payments
made:
Paid as per court’s order Rs. 4,50,000
Expenses of previous year booked in current year Rs. 1,00,000
Paid to workers for strike period under an award Rs. 4,20,000
Obsolete stores written off Rs. 36,000
Production and sales data for the six months are as under:

Production:
Finished goods 1,10,000 units
Works-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
Machine worked during the period was 3,000 hours.
At the of preparation of revenue budget, it was estimated that a total of Rs. 50,40,000 would be required
for budgeted machine hours of 6,000 as production overheads for the entire year.
During the meeting, a data analytic report revealed that 40% of the over/under-absorption was due to
defective production policies and the balance was attributable to increase in costs.
You were also present at the meeting; the chairperson of the meeting has asked you to be ready with the
followings for the performance appraisal of the departmental heads:
- How much was the budgeted machine hour rate used to recover overhead?
- How much amount of production overhead has been recovered (absorbed) upto the end of half
year end?
- What is the amount of overhead under/ over absorbed?
- What is the supplementary rate for apportionment of over/under absorbed overheads over WIP,
Finished goods and Cost of sales?
- What is the amount of over/under absorbed overhead apportioned to Work in Progress?
Solution
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3. S Pretz Ltd. is a manufacturing company having two production departments, ‘A’ & ‘B’ and two
service departments ‘X’ & ‘Y’. The following is the budget for March, 2022:

Total (Rs.) A (Rs.) B (Rs.) X (Rs.) Y (Rs.)

Direct material 2,00,000 4,00,000 4,00,000 2,00,000
Direct wages 10,00,000 4,00,000 2,00,000 4,00,000
Factory rent 9,00,000
Power (Machine) 5,10,000
Depreciation 2,00,000
General Lighting 3,00,000
Perquisites 4,00,000
Additional information:
Area (Sq. ft.) 500 250 250 500
Capital value of assets (Rs. lakhs) 40 80 20 20
Light Points 10 20 10 10
Machine hours 1,000 2,000 1,000 1,000
Horse power of machines 50 80 40 15 25
A technical assessment of the apportionment of expenses of service departments is as under:
A B X Y
Service Dept. ‘X’ (%) 55 25 – 20
Service Dept. ‘Y’ (%) 60 35 5 –

You are required to:

(a) PREPARE a statement showing distribution of overheads to various departments.
(b) PREPARE a statement showing re-distribution of service departments expenses to
production departments using-
(i) Simultaneous equation method
(ii) Repeated Distribution Method.
Solution
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4. Deccan Manufacturing Ltd., have three departments which are regarded as production departments.
Service departments’ costs are distributed to these production departments using the “Step Ladder
Method” of distribution. Estimates of factory overhead costs to be incurred by each department in the
forthcoming year are as follows. Data required for distribution is also shown against each department:

Department Factory overhead Direct labour No. of Area in sq.m.

(Rs.) hours employees

Production:
X 1,93,000 4,000 100 3,000

Y 64,000 3,000 125 1,500

Z 83,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500

Q 75,000 5,000 50 1,500

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R 1,05,000 6,000 40 1,000

S 30,000 3,000 50 1,000

The overhead costs of the four service departments are distributed in the same order, viz.
P, Q, R and S respectively on the following basis.
Department Basis
P Number of employees
Q Direct labour Hours
R Area in square metres
S Direct Labour hours

You are required to:

PREPARE a schedule showing the distribution of overhead costs of the four service departments to the
three production departments; and
CALCULATE the overhead recovery rate per direct labour hour for each of the three production
departments.
Solution
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5. The ABC Company has the following account balances and distribution of direct charges on 31st March.

Total Production Depts. Service Depts.

Machine Packing Gen. Store &

shop Plant Maintenance

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Allocated Overheads:

Indirect labour 14,650 4,000 3,000 2,000 5,650

Maintenance material 5,020 1,800 700 1,020 1,500

Misc. supplies 1,750 400 1,000 150 200

Superintendent’s 4,000 – – 4,000 –

Salary

Cost & payroll 10,000 – – 10,000 –

salary

Overheads to be apportioned:

Power 8,000

Rent 12,000

Fuel and heat 6,000

Insurance 1,000

Trade License fees 2,000

Depreciation 1,00,000

1,64,420 6,200 4,700 17,170 7,350

The following data were compiled by means of the factory survey made in the previous year:
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Floor Space Radiator No. of Investment H.P

(Sqft) Sections Employees (Rs.) hours

Machine Shop 2,000 45 20 6,40,000 3,500

Packing 800 90 10 2,00,000 500

General Plant 400 30 3 10,000 -

Store & 1,600 60 5 1,50,000 1,000

Maintenance

4,800 225 38 10,00,000 5,000

Expenses charged to the stores and maintenance departments are to be distributed to the other
departments by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on the
basis of number of employees:
PREPARE

(a) An overhead distribution statement.

(b) Distribution of the service departments’ expense to production
departments.
Solution
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6. A manufacturing unit has purchased and installed a new machine at a cost of Rs. 24,90,000 to its
fleet of 5 existing machines. The new machine has an estimated life of 12 years and is expected to
realise Rs. 90,000 as scrap value at the end of its working life.
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Other relevant data are as follows:

a. 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.
b. An estimated cost of maintenance of the machine is Rs. 2,40,000 p.a.
c. The machine requires a component to be replaced every week at a cost of Rs. 2,400.
d. There are three operators to control the operations of all the 6 machines. Each operator is
paid Rs. 30,000 per month plus 20% fringe benefits.
e. 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 Rs. 6.
f. Departmental and general works overhead allocated to the operation during last year was Rs.
5,00,000. During the current year it is estimated to increase by 10%.
Required:
COMPUTE the machine hour rate.
Solution
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7. 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 Rs. 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 : Rs. 100
Production bonus estimated : 10% on wages
Power consumed : Rs. 40,250
Supervision and Indirect Labour : Rs. 16,500
Lighting and Electricity : Rs. 6,000

The following particulars are given for a year:

Insurance : Rs. 3,60,000
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Sundry work Expenses : Rs. 50,000

Management Expenses allocated : Rs. 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
Workings:

Particulars Six months 6 operators

(Hours)

Normal available hours per month (208 x 6 7,488

months x 6 operators)

Less: Absenteeism hours (18 x 6 operators) (108)

Paid hours (A) 7,380

Less: Leave hours (20 x 6 operators) (120)

Less: Normal idle time (10 x 6 operators) (60)

Effective working hours 7,200

Computation of Comprehensive Machine Hour Rate

Particulars Amount for six

months (Rs.)

Operators' wages (7,380/8 x 100) 92,250

Production bonus (10% on wages) 9,225

Power consumed 40,250

Supervision and indirect labour 16,500

Lighting and Electricity 6,000

Repair and maintenance {(5% x Rs. 32,00,000)/2} 80,000

Insurance (Rs. 3,60,000/2) 1,80,000

Depreciation {(Rs. 32,00,000 x 10%)/2} 1,60,000

Sundry Work expenses (Rs. 50,000/2) 25,000

Management expenses (Rs. 5,00,000/2) 2,50,000

Total Overheads for 6 months 8,59,225

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Comprehensive Machine Hour Rate = Rs.8,59,225/7,200 Rs.119.33

hours

(Note: Machine hour rate may be calculated alternatively. Further, presentation of

figures may also be done on monthly or annual basis.)
8. SE Limited manufactures two products- A and B. The company had budgeted factory overheads
amounting to Rs. 36,72,000 and budgeted direct labour hour of 1,80,000 hours. The company uses
pre-determined overhead recovery rate for product costing purposes.
The department-wise break-up of the overheads and direct labour hours were as follows:

Particulars Budgeted Budgeted direct Rate per

overheads labour hours direct
labour
hour
Department Pie Rs. 25,92,000 90,000 hours Rs. 28.80
Department Qui Rs. 10,80,000 90,000 hours Rs. 12.00
Total Rs. 36,72,000 1,80,000 hours

Additional Information:
Each unit of product A requires 4 hours in department Pie and 1 hour in department Qui.
Also, each unit of product B requires 1 hour in department Pie and 4 hours in department
Qui.
This was the first year of the company's operation. There was no WIP at the end of the year.
However, 1,800 and 5,400 units of Products A and B were on hand at the end of the year.
The budgeted activity has been attained by the company. You are required to:
(i) DETERMINE the production and sales quantities of both products 'A' and 'B' for the
above year.
(ii) ASCERTAIN the effect of using a pre-determined overhead rate instead of department-
wise overhead rates on the company's income due to its effect on stock value.
CALCULATE the difference in the selling price due to the use of pre-determined overhead rate
instead of using department-wise overhead rates. Assume that the direct costs (material and
labour costs) per unit of products A and B were Rs. 25 and Rs. 40 respectively and the selling
price is fixed by adding 40% over and above these costs to cover profit and selling and
administration overhead.
Solution
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9. A Ltd., manufactures two products A and B. The manufacturing division consists of two production
departments P1 and P2 and two service departments S1 and S2. Budgeted overhead rates are used in
the production departments to absorb factory overheads to the products. The rate of Department P1 is
based on direct machine hours, while the rate of Department P2 is based on direct labour hours. In
applying overheads, the pre-determined rates are multiplied by actual hours.
For allocating the service department costs to production departments, the basis adopted is as follows:

(i) Cost of Department S1 to Department P1 and P2 equally, and

(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.
The following budgeted and actual data are available:
Annual profit plan data:
Factory overheads budgeted for the year:
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Production Departments Service Departments

P1 P2 S1 S2

Rs. Rs. Rs. Rs.

25,50,000 21,75,000 6,00,000 4,50,000

Budgeted output in units:

Product A 50,000; B 30,000.
Budgeted raw-material cost per unit:
Product A Rs. 120; Product B Rs. 150.

Budgeted time required for production per unit:

Department P1 : Product A : 1.5 machine hours
Product B : 1.0 machine hour
Department P2 : Product A : 2 Direct labour hours
Product B : 2.5 Direct labour hours
Average wage rates budgeted in Department P2 are:
Product A - Rs. 72 per hour and Product B – Rs. 75 per
hour. All materials are used in Department P1 only.
Actual data: (for the month of July, 2022)
Units actually produced: Product A: 4,000 units
Product B: 3,000 units
Actual direct machine hours worked in Department P1:
On product A- 6,100 hours, Product B- 4,150 hours.
Actual direct labour hours worked in Department P2:
on product A- 8,200 hours, Product B- 7,400 hours.

Costs actually incurred: Product A Product B

Raw materials Rs. 4,89,000 Rs. 4,56,000

Wages Rs. 5,91,900 Rs. 5,52,000

Overheads: Department P1 Rs. 2,31,000 S1 Rs. 60,000

P2 Rs. 2,04,000 S2 Rs. 48,000

You are required to:
- COMPUTE the pre-determined overhead rate for each production department.
- PREPARE a performance report for July, 2022 that will reflect the budgeted costs and actual
costs.
Solution
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10. In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct
wages and the administrative overheads are absorbed on a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in a period:
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Job 101 Job 102

(Rs.) (Rs.)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Selling price 1,66,650 1,28,250
Profit percentage on Total Cost 10% 20%

Required:
COMPUTATION of percentage recovery rates of factory overheads and administrative overheads.
(i) CALCULATION of the amount of factory overheads, administrative overheads
and profit for each of the two jobs.
(ii) Using the above recovery rates DETERMINE the selling price of job 103. The
additional data being:
Direct materials Rs. 24,000
Direct wages Rs. 20,000
Profit percentage on selling price 12-½%
Solution
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11. Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a special
machine and also the use of a computer. The computer is hired and the hire charges work out to Rs.
4,20,000 per annum. The expenses regarding the machine are estimated as follows:
( )
Rent for a quarter 17,500
Depreciation per annum 2,00,000
Indirect charges per annum 1,50,000

During the first month of operation the following details were taken from the job register:
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Job
A B C
Number of hours the machine was used:
(a) Without the use of the computer 600 900 —
(b) With the use of the computer 400 600 1,000

You are required to Compute the machine hour rate:

a) For the firm as a whole for the month when the computer was used and when the computer was not
used.
b) For the individual jobs A, B and C.

Solution
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1. KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are as follows:

Cost pool Budgeted Cost driver Budgeted

overheads (Rs.) volume
Material procurement 18,42,000 No. or orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820

The company has produced a batch of 7,600 units, its material cost was Rs. 24,62,000 and
wages Rs. 4,68,500. Usage activities of the said batch are as follows:

Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.

Solution
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2. The following budgeted information relates to N Ltd. for the year 2021:

Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(Rs.) (Rs.) (Rs.)
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department (machine hours per 3 4 5
unit)
Assembly department (direct labour hours 6 4 3
per unit)
The estimated overhead expenses for the year 2021 will be as below:
Machine Department Rs. 73,60,000
Assembly Department Rs. 55,00,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost drivers
are found:

Cost Pool Amount (Rs.) Cost Driver Quantity

Machining services 64,40,000 Machine hours 9,20,000 hours
Assembly services 44,00,000 Direct labour hours 11,00,000 hours
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Set-up costs 9,00,000 Machine set-ups 9,000 set-ups

Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:

Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
a. Absorption costing method;
b. Activity-based method.

Solution
(i) Profit Statement using Absorption costing method:

Particulars Product Total

X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit 90 180 140
( )
C. Sales Value ( ) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit 50 90 95
( )
E. Direct Cost ( ) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads:
(i) Machine department 24,00,000 25,60,000 24,00,000 73,60,000
( ) (Working note-1)
(ii) Assembly department 30,00,000 16,00,000 9,00,000 55,00,000
( ) (Working note-1)
G. Total Cost ( ) [E+F] 1,04,00,000 1,13,60,000 90,00,000 3,07,60,000
H. Profit (C-G) (14,00,000) 30,40,000 (6,00,000) 10,40,000

(ii) Profit Statement using Activity based costing (ABC) method:

Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit 90 180 140
( )
C. Sales Value ( ) 90,00,000 1,44,00,000 84,00,000 3,18,00,000
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[A×B]
D. Direct cost per unit 50 90 95
( )
E. Direct Cost ( ) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services 21,00,000 22,40,000 21,00,000 64,40,000
( )
(ii) Assembly services 24,00,000 12,80,000 7,20,000 44,00,000
( )
(iii) Set-up costs ( ) 4,50,000 3,00,000 1,50,000 9,00,000
(iv) Order processing ( ) 2,20,000 2,40,000 2,60,000 7,20,000
(v) Purchasing ( ) 1,50,000 1,75,000 75,000 4,00,000
G. Total Cost ( ) [E+F] 1,03,20,000 1,14,35,000 90,05,000 3,07,60,000
H. Profit ( ) (C-G) (13,20,000) 29,65,000 (6,05,000) 10,40,000
Working Notes:1.

Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]
D. Rate per hour ( ) 8 8 8
E. Machine Dept. cost 24,00,000 25,60,000 24,00,000 73,60,000
[C×D]
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour ( ) 5 5 5
I Assembly Dept. cost 30,00,000 16,00,000 9,00,000 55,00,000
[G×H]

₹ , ,
Machine hour rate = = ₹8
, ,

₹ , ,
Labour hour rate = = ₹5
, ,
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2. Calculation of cost driver rate

Cost Pool Amount Cost Driver Quantity Driver rate

( ) ( )
Machining 64,40,000 Machine hours 9,20,000 hours 7.00
services
Assembly 44,00,000 Direct labour hours 11,00,000 hours 4.00
services
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups 100.00
Order processing 7,20,000 Customer orders 7,200 orders 100.00
Purchasing 4,00,000 Purchase orders 800 orders 500.00

3. Calculation of activity-wise cost

Products
X Y Z Total
A. Machining hours (Refer 3,00,000 3,20,000 3,00,000 9,20,000
Working note-1)
B. Machine hour rate 7 7 7
( )(Refer Working
note-2)
C. Machining services 21,00,000 22,40,000 21,00,000 64,40,000
cost ( ) [A×B]
D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000
Working note-1)
E. Labour hour rate 4 4 4
( )(Refer Working
note-2)
F. Assembly services 24,00,000 12,80,000 7,20,000 44,00,000
cost ( ) [D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up 100 100 100
( )(Refer
Working note-2)
I. Set-up cost ( ) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order ( ) 100 100 100
(Refer Working note-2)
L. Order processing cost 2,20,000 2,40,000 2,60,000 7,20,000
( ) [J×K]
M. Purchase orders 300 350 150 800
N. Rate per order ( ) 500 500 500
(Refer Working note-2)
O. Purchasing cost 1,50,000 1,75,000 75,000 4,00,000
( )
[M×N]
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3. PCP Limited belongs to the apparel industry. It specializes in the distribution of fashionable garments.
It buys from the industry and resells the same to the following two different supermarkets:

(i) Supermarket A dealing in Adults’ garments (Age group 15 - 30)

(ii) Supermarket B dealing in Kids’ garments (Age group 5 - 10)
The following data for the month of April in respect of PCP Limited has been reported:

Supermarket A (Rs.) Supermarket B (Rs.)

Average revenue per delivery 1,69,950 57,750
Average cost of goods sold per delivery 1,65,000 55,000
Number of deliveries 660 1,650
In the past, PCP Limited has used gross margin percentage to evaluate the relative profitability of its
supermarket segments.
The company plans to use activity –based costing for analysing the profitability of its supermarket
segments.
The April month’s operating costs (other than cost of goods sold) of PCP Limited are Rs. 16,55,995.
These operating costs are assigned to five activity areas. The cost in each area and Activity analysis
including cost driver for the month of April are as follows:

Activity Area Total costs (Rs.) Cost Driver

Store delivery 3,90,500 Store deliveries
Cartons dispatched to store 4,15,250 Cartons dispatched to a store
per delivery
Shelf-stocking at customer store 64,845 Hours of shelf-stocking
Line-item ordering 3,45,400 Line-items per purchase order
Customer purchase 4,40,000 Purchase orders by customers
order processing

Other data for the month of April include the following:

Supermarket A Supermarket B
Total number of store deliveries 1,100 2,805
Average number of cartons shipped per 250 50
store delivery
Average number of hours of shelf-stocking 6 1.5
per store delivery
Average number of line items per order 14 12
Total number of orders 770 1,980

Required:
(i) COMPUTE gross-margin percentage for each of its supermarket segments and compute PCP
Limited’s operating income.
(ii) COMPUTE the operating income of each supermarket segments using the activity- based
costing information.
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Solution
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4. MG Ltd. manufactures three types of products namely A, B and C. The data relating to a period are
as under:

Particulars A B C
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (Rs.) 1,350 1,200 1,800
Production (units) 3,000 5,000 20,000
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Currently the company uses traditional costing method and absorbs all production overheads on the
basis of machine hours. The machine hour rate of overheads is Rs. 90 per hour. Direct labour hour
rate is Rs. 300 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:

Particulars A B C
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:

Machine set up costs 20%

Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) CALCULATE the cost per unit of each product using traditional method of absorbing
all production overheads on the basis of machine hours.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.

Solution
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5. Equate bank offers 3 products, viz., deposits, Loans and Credit Cards. The bank has selected 4 activities
for a detailed budgeting exercise, following activity-based costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, so that prices
may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost Estimation for the budget period
(Rs.)
ATM Services:
(a) Machine Maintenance 5,20,000 All fixed, no change. Fully fixed,
(b) Rents 2,60,000 no change.
(c) Currency Replenishment Expected to double during budget period.
1,30,000
Cost
Total 9,10,000
Computer Processing 6,50,000 Half this amount is fixed, and no change is
expected.
The variable portion is expected to increase to
three times the current level.
Issuing Statements 23,40,000 Presently, 3.90 lakh statements are made. In
the budget period, 6.5 lakh statements are
expected.
For every single increase of statement, one
rupee is the budgeted increase.
Computer Inquiries 2,60,000Estimated to increase by 80% during the
budget period.
The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM Transactions 1,95,000 --- 65,000
No. of Computer Processing Transactions 19,50,000 2,60,000 3,90,000
No. of Statements to be issued 4,55,000 65,000 1,30,000
Telephone Minutes 4,68,000 2,34,000 2,34,000
The bank budgets a volume of 76,180 deposit accounts, 16,900 loan accounts, and 18,200 Credit
Card Accounts.
Required:
(i) Calculate the budgeted rate for each activity.
(ii) Prepare the budgeted cost statement activity wise.

(iii) Compute the budgeted product cost per account for each product using (i) and (ii) above
Solution
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6. SOFTHUG is a global brand created by Green-lush Ltd. The company manufactures three range of
beauty soaps i.e. SOFTHUG- Gold, SOFTHUG- Pearl, and SOFTHUG- Diamond. The budgeted costs
and production for the month of May, 2024 are as follows:

SOFTHUG- Gold SOFTHUG- Pearl SOFTHUG-

Diamond
Production of 4,000 3,000 2,000
soaps
(Units)
Resources Qty Rate Qty Rate Qty Rate
per Unit:
- Essential 60 ml Rs. 200/100 55 ml Rs. 300/100 65 ml Rs. 300/100
Oils ml ml ml
- Cocoa 20 g Rs. 200/100 20 g Rs. 200/100 20 g Rs. 200/100
Butter g g g
- Filtered 30 ml Rs. 15/100 30 ml Rs. 15/100 30 ml Rs. 15/100
Water ml ml ml
- Chemicals 10 g Rs. 30/100 g 12 g Rs. 50/100 15 g Rs. 60/100 g
g
- Direct 30 Rs. 10/hour 40 Rs. 10/hour 60 Rs. 10 / hour
Labour minutes minutes minutes
Green-lush Ltd. followed an Absorption Costing System and absorbed its production overheads, to its
products using direct labour hour rate, which were budgeted at Rs. 1,98,000.
Now, Green-lush Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:
Particulars (Rs.) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utility cost 80,000 Number of Machine operations

The number of machine operators per unit of production are 5, 5, and 6 for SOFTHUG- Gold, SOFTHUG-
Pearl, and SOFTHUG- 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 required 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
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 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

1. CT Limited is engaged in producing medical equipment. It has furnished following details related to
its products produced during a month:
Units Amount (Rs.)
Raw materials
Opening stock 1,000 90,00,000
Purchases 49,000 44,10,00,000
Closing stock 1,750 1,57,50,000
Works-in-progress
Opening 2,000 1,75,50,000
Closing 1,000 94,50,000
Direct employees' wages, allowances etc. 6,88,50,000
Primary packaging cost (per unit) 1,440
R&D expenses & Quality control expenses 2,10,60,000
Consumable stores, depreciation on plant 3,42,00,000
Administrative overheads related to production 3,15,00,000
Selling expenses 4,84,30,800
Royalty paid for production 3,64,50,000
Cost of web-site (for online sale) maintenance 60,75,000
Secondary packaging cost (per unit) 225
There was a normal scrap of 250 units of direct material which realized Rs. 5,400 per unit.
The entire finished product was sold at a profit margin of 20% on sales.
You are required to PREPARE a cost sheet showing:
(i) Prime cost
(ii) Gross works cost
(iii) Factory costs
(iv) Cost of production
(v) Profit
(vi) Sales
Solution

Particulars Units Amount

( )
Material
Opening stock 1,000 90,00,000
Add: Purchases 49,000 44,10,00,000
Less: Closing stock (1,750) (1,57,50,000)
48,250 43,42,50,000
Less: Normal wastage of materials realized @ (250) (13,50,000)
5,400per unit
Material consumed 43,29,00,000
Direct employee's wages and allowances 6,88,50,000
Direct expenses- Royalty paid for production 3,64,50,000
Prime cost 48,000 53,82,00,000
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Factory overheads - Consumable stores, depreciation etc. 3,42,00,000

Gross Works Cost 48,000 57,24,00,000
Add: Opening WIP 2,000 1,75,50,000
Less: Closing WIP (1,000) (94,50,000)
Factory/Works Cost 49,000 58,05,00,000
Administration Overheads related to production 3,15,00,000
R&D expenses and Quality control cost 2,10,60,000
Add: Primary packaging cost @ 1,440 per unit 7,05,60,000
Cost of production 49,000 70,36,20,000
Selling expenses 4,84,30,800
Cost of maintaining website for online sale 60,75,000
Secondary packaging cost @ 225 per unit 49,000 1,10,25,000
Cost of sales 76,91,50,800
Add: Profit @ 20% on sales or 25% of cost 19,22,87,700
Sales value 96,14,38,500

2. P Ltd. has gathered cost information from ledgers and other sources for the year ended 31st December
2023. The information are tabulated below:

Sl. Amount Amount

No. (Rs.) (Rs.)
(i) Raw materials purchased 5,00,00,000
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 40,000
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Plant & Machinery 28,200
- Factory building 18,800 47,000
(xi) Expenses paid for quality control 18,000
check activities
(xii) Research & development cost paid for 20,000
improvement in production process
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(xiii) Expenses paid for pollution control and 36,000

engineering & maintenance
(xiv) Salary paid to Sales & Marketing managers 5,60,000

(xv) Salary paid to General Manager 6,40,000

(xvi) Packing cost paid for:
- Primary packing necessary to 46,000
maintain quality
- For re-distribution of finished 80,000 1,26,000
goods
(xvii) Fee paid to independent directors 1,20,000
(xviii) Performance bonus paid to sales staffs 1,20,000
(xix) Value of stock as on 1stJanuary, 2023:
- Raw materials 10,00,000
- Work-in-process 8,60,000
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31stDecember, 2023:

- Raw materials 8,40,000

- Work-in-process 6,60,000
- Finished goods 10,50,000 25,50,000

Amount realized by selling of scrap and waste generated during manufacturing process –
Rs. 48,000/-
The board meeting is scheduled to be held in next week and you being an associate to the
chief cost controller of the company, has been asked to PREPARE a cost sheet.
Solution

Sl. Particulars Amount Amount

No. (Rs.) (Rs.)
(i) Material Consumed:
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
Add: Opening stock of raw materials 10,00,000
Less: Closing stock of raw materials (8,40,000) 5,10,80,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 25,20,000
(iii) Direct expenses:
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job workers 3,10,000 8,40,000
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Prime Cost 5,44,40,600

(iv) Works/ Factory overheads:
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid for plant & 40,000
machinery
- Insurance premium paid for plant & 28,200
machinery
- Insurance premium paid for factory 18,800
building
- Expenses paid for pollution control and
engineering & maintenance 36,000 2,33,000
Gross factory cost 5,46,73,600
Add: Opening value of W-I-P 8,60,000
Less: Closing value of W-I-P (6,60,000)
Factory Cost 5,48,73,600
(v) Quality control cost:
- Expenses paid for quality control check 18,000
activities
(vi) Research & development cost paid for 20,000
improvement in production process
(vii) Less: Realisable value on sale of scrap and (48,000)
waste
(viii) Add: Primary packing cost 46,000
Cost of Production 5,49,09,600
Add: Opening stock of finished goods 12,00,000
Less: Closing stock of finished goods (10,50,000)
Cost of Goods Sold 5,50,59,600
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
- Fee paid to independent directors 1,20,000 8,10,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales 20,000
office building
- Salary paid to Manager- Sales & 5,60,000
Marketing
- Performance bonus paid to sales staffs 1,20,000 7,00,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 80,000
Cost of Sales 5,66,49,600

3. M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys per
(i) Direct Material Rs. 40 per unit
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(ii) Direct Labour Rs. 30 per unit (subject to a minimum of

Rs. 48,000 p.m.)
(iii) Factory Overheads:
(a) Fixed Rs. 3,60,000 per annum
(b) Variable Rs. 10 per unit
(c) Semi-variable Rs. 1,08,000 per annum up to 50% capacity and
additional Rs. 46,800 for every 20% increase in
capacity or any part thereof.
(iv) Administrative Overheads Rs. 5,18,400 per annum (fixed)
(v) Selling overheads are incurred at Rs. 8 per unit
(vi) Each unit of raw material yields scrap which is sold at the rate of Rs. 5 per unit.
(vii) In year 2019, the factory worked at 50% capacity for the first three months but it was
expected that it would work at 80% capacity for the remaining nine months.
(viii) During the first three months, the selling price per unit was Rs. 145.

You are required to:

(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and Cost of
Sales.
(ii) Calculate the selling price per unit for remaining nine months to achieve the total annual
profit of Rs. 8,76,600.

Solution

Particulars 3 Months 9 Months

4,500 Units 21,600 units
Amount Cost per Amount Cost per
(Rs.) unit (Rs.) (Rs.) unit (Rs.)
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65
Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative overheads 1,29,600 28.80 3,88,800 18
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5
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Working Notes:
1. Calculation of Costs
Particulars 4,500 units 21,600 units
Amount (Rs.) Amount (Rs.)
Material 1,80,000 (Rs.40 x 4,500 units) 8,64,000 (Rs. 40 x 21,600 units)
Wages 1,44,000 (Max. of Rs.30 x 4,500 6,48,000 (21600 Units x 30)
units = Rs.1,35,000 and Rs.48,000 x
3 months = Rs.1,44,000)
Variable Cost 45,000 (Rs.10 x 4,500 units) 2,16,000 (Rs.10 x 21,600 units)
Semi-variable 27,000
. , ,
× 3 𝑀𝑜𝑛𝑡ℎ𝑠 1,51,200
. , ,
× 9 𝑀𝑜𝑛𝑡ℎ𝑠
Cost
+ 46,800 (for 20% increase)
+ 23,400 (for 10% increase)
Selling Overhead 36,000 (Rs. 8 x 4,500 units) 1,72,800 (Rs. 8 x 21,600 units)

Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general overhead. In that case,
Works Cost as well as Cost of Production will be same i.e. Rs. 4,63,500 and Cost of Sales will remain same
as Rs. 6,29,100.
(ii) Calculation of Selling price for nine months period
Particulars Amount (Rs.)
Total Cost of sales Rs. (6,29,100 + 26,02,800) 32,31,900
Add: Desired profit 8,76,600
Total sales value 41,08,500
Less: Sales value realised in first three months (Rs. 145 x 4,500 units) (6,52,500)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600

Selling price per unit (Rs. 34,56,000  21,600 units) 160

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4. XYZ a manufacturing firm, has revealed following information for September, 2019:
1st September 30th September
(Rs.) (Rs.)
Raw Materials 2,42,000 2,92,000
Works-in-progress 2,00,000 5,00,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the
month:
(Rs.)
Consumable Stores and spares of factory 3,50,000
Research and development cost for process improvements 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000
Administrative Expenses (General) 2,24,000
Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5,000 units
Defective output which is 4% of targeted production, realizes Rs. 61 per unit.
Closing stock is valued at cost of production (excluding administrative expenses)
Cost of goods sold, excluding administrative expenses amounts to Rs. 78,26,000.
Direct employees cost is 1/2 of the cost of material consumed.
Selling price of the output is Rs. 110 per unit.
You are required to:
(i) Calculate the Value of material purchased
(ii) Prepare cost sheet showing the profit earned by the firm.
Solution
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4% x 1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000

2. Calculation of Cost of Production

Particular Amount (Rs.)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods
. , ,
× 5,000 units 4,30,000
,
Cost of Production 82,56,000
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3. Calculation of Factory Cost

Particular Amount (Rs.)
Cost of Production 82,56,000
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/By-Products/ misc. income 2,44,000
(1,00,000 units x 4% x Rs. 61)
Factory Cost 80,50,000

4. Calculation of Gross Factory Cost

Particular Amount (Rs.)
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000
Cost of Gross Factory Cost 83,50,000

5. Calculation of Prime Cost

Particular Amount (Rs.)
Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
Prime Cost 78,00,000

6. Calculation of Cost of Materials Consumed & Labour cost

Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost
78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = Rs. 52,00,000 and
Labour Cost = Rs. 26,00,000

(i) Calculation of Value of Materials Purchased

Particular Amount (Rs.)
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000
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Cost Sheet
Sl. Particulars Total Cost (Rs.)
1. Direct materials consumed:
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as per 52,50,000
requirement (i)]
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000
3. Prime Cost (1+2) 78,00,000
4. Add: Works/ Factory Overheads
Consumable stores and spares 3,50,000
Lease rent of production asset 2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
9. Add: Quality Control Cost 2,00,000
10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. income (2,44,000)
12. Cost of Production (8+9+1 0-11) 82,56,000
13. Add: Opening stock of finished goods -
14. Less: Closing stock of finished goods (5000 Units) (4,30,000)
15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units @ Rs. 110 per unit 1,00,10,000

5. X Ltd. manufactures two types of pens 'Super Pen' and 'Normal Pen'.
The cost data for the year ended 30th September, 2019 is as follows:

(Rs.)

Direct Materials 8,00,000

Direct Wages 4,48,000

Production Overhead 1,92,000

Total 14,40,000

It is further ascertained that :

(1) Direct materials cost in Super Pen was twice as much of direct material in Normal Pen.
(2) Direct wages for Normal Pen were 60% of those for Super Pen.
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(3) Production overhead per unit was at same rate for both the types.
(4) Administration overhead was 200% of direct labour for each.
(5) Selling cost was Rs. 1 per Super pen.
(6) Production and sales during the year were as follow:

Production Sales

No. of units No. of units

Super Pen 40,000 Super Pen 36,000

Normal Pen 1,20,000

(7) Selling price was Rs. 30 per unit for Super Pen.
Prepare a Cost Sheet for 'Super Pen' showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit

Solution
Preparation of Cost Sheet for Super Pen
No. of units produced = 40,000 units
No. of units sold = 36,000 units
Particulars Per unit Total
(Rs.) (Rs.)
Direct materials (Working note- (i)) 8.00 3,20,000
Direct wages (Working note- (ii)) 4.00 1,60,000
Prime cost 12.00 4,80,000
Production overhead (Working note- (iii)) 1.20 48,000
Factory Cost 13.20 5,28,000
Administration Overhead* (200% of direct 8.00 3,20,000
wages)
Cost of production 21.20 8,48,000
Less: Closing stock (40,000 units - 36,000 - (84,800)
units)
Cost of goods sold i.e. 36,000 units 21.20 7,63,200
Selling cost 1.00 36,000
Cost of sales/ Total cost 22.20 7,99,200
Profit 7.80 2,80,800
Sales value (Rs. 30 x 36,000 units) 30.00 10,80,000
Working Notes:
(i) Direct material cost per unit of Normal pen = M
Direct material cost per unit of Super pen = 2M
Total Direct Material cost = 2M x 40,000 units+ M x 1,20,000 units
Or, Rs. 8,00,000 = 80,000 M + 1,20,000 M
. , ,
Or, M = , ,
= Rs. 4
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Therefore, Direct material Cost per unit of Super pen = 2 x Rs. 4 = Rs. 8
(ii) Direct wages per unit for Super pen =W
Direct wages per unit for Normal Pen = 0.6W
So, (W x 40,000) + (0.6W x 1,20,000) = Rs. 4,48,000
W = Rs. 4 per unit
. , ,
(iii) Production overhead per unit = ( , , , )
= Rs. 1.20
Production overhead for Super pen = Rs. 1.20 x 40,000 units = Rs. 48,000

* Administration overhead is specific to the product as it is directly related

to direct labour as mentioned in the question and hence to be considered in
cost of production only.
Assumption: It is assumed that in point (1) and (2) of the Question, direct
materials cost and direct wages respectively is related to per unit only.
Note: Direct Material and Direct wages can be calculated in alternative ways.

6. The following information is available from SN Manufacturing Limited’s books for the month of April
2023.
April 1 April 30
Opening and closing inventories data:
Stock of finished goods 2,500 units ?
Stock of raw materials Rs.42,500 Rs.38,600
Work-in-progress Rs.42,500 Rs.42,800
Other data are:
Raw materials purchased Rs.6,95,000

Carriage inward Rs.36,200

Direct wages paid Rs.3,22,800

Royalty paid for production Rs.35,800

Purchase of special designs, moulds and patterns (estimated life 12 Rs.1,53,600

production cycles)
Power, fuel and haulage (factory) Rs.70,600
Research and development costs for improving the production Rs.31,680
process (amortized)
Primary packing cost (necessary to maintain quality) Rs.6,920
Administrative overhead Rs.46,765
Salary and wages for supervisor and foremen Rs.28,000

Other Information:
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- Opening stock of finished goods is to be valued at Rs.8.05 per unit.

- During the month of April, 1,52,000 units were produced and 1,52,600 units were sold.
The closing stock of finished goods is to be valued at the relevant month’s cost of
production. The company follows the FIFO method.
- Selling and distribution expenses are to be charged at 20 paisa per unit.
- Assume that one production cycle completed in one month.

Required:
Prepare a cost sheet for the month ended on April 30, 2023, showing the various elements of
cost (raw material consumed, prime cost, factory cost, cost of production, cost of goods sold, and
cost sales.)

Calculate the selling price per unit if profit is charged at 20 percent on sales.

Solution
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7. A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at varying
levels of production is as under:

Level Works cost per unit (Rs.)

10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310

Its fixed administration expenses amount to Rs.1,50,000 and fixed marketing expenses amount to
Rs.2,50,000 per month respectively. The variable distribution cost amounts to Rs. 30 per unit.

It can sell 100% of its output at Rs.500 per unit provided it incurs the following further expenditure:

(a) it gives gift items costing Rs. 30 per unit of sale;

(b) it has lucky draws every month giving the first prize of Rs. 50,000; 2nd prize of Rs. 25,000, 3rd
prize of Rs. 10,000 and three consolation prizes of Rs. 5,000 each to customers buying the
product.
(c) it spends Rs.1,00,000 on refreshments served every month to its customers;
(d) it sponsors a television programme every week at a cost of Rs. 20,00,000 per month.
It can market 30% of its output at Rs.550 per unit without incurring any of the expenses referred
to in (a) to (d) above.
PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity
level.

Solution
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1. As on 31st March, the following balances existed in a firm’s Cost Ledger:

Dr. Cr.

(Rs.) (Rs.)

Stores Ledger Control A/c 3,01,435

Work-in-Process Control A/c 1,22,365

Finished Stock Ledger Control A/c 2,51,945

Manufacturing Overhead Control A/c 10,525

Cost Ledger Control A/c 6,65,220

6,75,745 6,75,745

During the next three months the following items arose:

(Rs.)

Finished product (at cost) 2,10,835

Manufacturing Overhead incurred 91,510

Raw Materials purchased 1,23,000

Factory Wages 50,530

Indirect Labour 21,665

Cost of Sales 1,85,890

Material issued to production 1,27,315

Sales returned at Cost 5,380

Material returned to suppliers 2,900

Manufacturing Overhead charged to production 77,200

You are required to PASS the Journal Entries; write up the accounts and schedule the balances,
stating what each balance represents.
Solution
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2. 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 for the month
of January:
Incomplete Ledger Entries:
Materials Control A/c
(Rs.) (Rs.)
To Balance b/d 32,000

Work-in-Process Control A/c

(Rs.) (Rs.)
To Balance b/d 9,200 By Finished Goods 1,51,000
Control A/c

Payables (Creditors) A/c

(Rs.) (Rs.)
To Balance c/d 19,200 By Balance b/d 16,400

Manufacturing Overheads Control A/c

(Rs.) (Rs.)
To Bank A/c (Amount 29,600
spent)

Finished Goods Control A/c

(Rs.) (Rs.)
To Balance b/d 24,000 By Balance c/d 30,000

(i) Additional Information:

(1) The bank-book showed that Rs. 89,200 have been paid to creditors for raw-
material.
(2) Ending inventory of work-in-process included materials of Rs. 5,000 on which
300 direct labour hours have been booked against wages and overheads.
(3) The job card showed that workers have worked for 7,000 hours. The wage rate
is Rs. 10 per labour hour.
(4) Overhead recovery rate was Rs. 4 per direct labour hour.
You are required to COMPLETE the above accounts in the cost ledger of the company.
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Solution
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3. X Ltd. maintains a non-integrated accounting system for the purpose of management information.
The following are the data related with year 2021 -22:
Particulars Amount (‘000)
Opening balances:
- Stores ledger control A/c 48,000
- Work-in-process control A/c 12,000
- Finished goods control A/c 2,58,000
- Building construction A/c 6,000
- Cost ledger control A/c 3,24,000
During the year following transactions took place:
Materials:
- Purchased 24,000
- Issued to production 30,000
- Issued to general maintenance 3,600
- Issued to building construction 2,400
Wages:
- Gross wages paid 90,000
- Indirect wages paid 24,000
- For building construction 6,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 96,000
- Absorbed in building construction 12,000
- Under-absorbed 4,800
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000

At the end of the year, the stock of raw material and work-in-process was Rs.3,30,00,000 and
Rs.15,00,000 respectively. The loss arising in the raw material account is treated as factory overheads.
The building under construction was completed during the year. Gross profit margin is 20% on sales.
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger of the
company.
Solution
Cost Ledger Control Account
Particulars ( in Particulars ( in
‘000) ‘000)
To Costing P&L A/c 2,70,000 By Balance b/d 3,24,000
To Building Construction A/c 26,400 By Stores Ledger Control 24,000
A/c
To Balance c/d 2,89,800 By Wages Control A/c 90,000
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By Factory overhead control 96,000

A/c
By Royalty A/c 3,000
By Selling, Distribution and 15,000
Administration overheads
By Costing P&L A/c 34,200
5,86,200 5,86,200

Stores Ledger Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Balance b/d 48,000 By WIP control A/c 30,000
To Cost Ledger control A/c 24,000 By Factory overheads 3,600
control A/c
By Building construction A/c 2,400
By Factory overhead control 3,000
A/c (loss) (Bal. fig)
By Balance c/d 33,000
72,000 72,000

Work-in-process Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Balance b/d 12,000 By Finished goods control 1,99,800
A/c
To Stores Ledger control A/c 30,000
To Wages Control A/c 60,000
To Factory overhead control 1,09,800
A/c
To Royalty A/c 3,000 By Balance c/d 15,000
2,14,800 2,14,800

Finished Goods Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800

Cost of Sales Account

Particulars ( in ‘000) Particulars ( in
‘000)
To Cost of Goods Sold A/c 2,16,000 By Costing P&L A/c 2,31,000
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To Selling, Distribution and 15,000

Administration A/c
2,31,000 2,31,000

Costing P&L Account

Particulars ( in Particulars ( in ‘000)
‘000)
To Cost of Sales A/c 2,31,000 By Cost Ledger control A/c 2,70,000
To Factory overhead control A/c 4,800
To Cost Ledger control A/c 34,200
2,70,000 2,70,000

Building Construction Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Balance b/d 6,000 By Cost Ledger control A/c 26,400
To Stores Ledger control A/c 2,400
To Wages Control A/c 6,000
To Factory overhead control A/c 12,000
26,400 26,400

Factory Overhead Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Stores Ledger control A/c 3,600 By Building Construction A/c 12,000
To Wages Control A/c 24,000 By WIP Control A/c 1,09,800
To Cost Ledger control A/c 96,000 By Costing P&L A/c 4,800
To Stores Ledger control A/c 3,000
(loss)
1,26,600 1,26,600

Wages Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Cost Ledger control A/c 90,000 By Factory overhead control 24,000
A/c
By Building Construction A/c 6,000
By WIP Control A/c 60,000
90,000 90,000

Royalty Account
Particulars ( in Particulars ( in
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‘000) ‘000)
To Cost Ledger control A/c 3,000 By WIP Control A/c 3,000
3,000 3,000

Cost of Goods Sold Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Finished Goods control A/c 2,16,000 By Cost of sales A/c 2,16,000
2,16,000 2,16,000

Selling, Distribution and Administration Overhead Control Account

Particulars ( in Particulars ( in
‘000) ‘000)
To Cost Ledger control A/c 15,000 By Cost of sales A/c 15,000
15,000 15,000

Trial Balance
Particulars Dr. Cr.
( in ( in ‘000)
‘000)
Stores Ledger Control A/c 33,000
WIP Control A/c 15,000
Finished Goods Control A/c 2,41,800
Cost Ledger Control A/c 2,89,800
2,89,800 2,89,800

Working Note:
Cost of Goods sold = 2,70,000 × 80/100 = 2,16,000

4. The financial books of a company reveal the following data for the financial year ending on 31st
March, 2022:
(Rs.)
Opening Stock:
Finished goods 875 units 1,48,750
Work-in-process 64,000
01.04.2021 to 31.3.2022
Raw materials consumed 15,60,000
Direct Labour 9,00,000
Factory overheads 6,00,000
Goodwill written off 2,00,000
Administration overheads 5,90,000
Dividend paid 1,70,000
Bad Debts 24,000
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Selling and Distribution Overheads 1,22,000

Interest received 90,000
Rent received 36,000
Sales 14,500 units 41,60,000
Closing Stock: Finished goods 375 units 82,500
Work-in-process 77,334
The cost records provide as under:
 Factory overheads are absorbed at 60% of direct wages.
 Administration overheads are recovered at 20% of factory cost.
 Selling and distribution overheads are charged at Rs. 8 per unit sold.
 Opening Stock of finished goods is valued at Rs. 208 per unit.
 The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.
Required:
(i) PREPARE statements for the year ended 31st March, 2022 showing-
 the profit as per financial records
 the profit as per costing records.
PRESENT a statement reconciling the profit as per costing records with the profit as per
Financial Records.

Solution
Statement of Profit as per financial records
(for the year ended March 31, 2022)

To Opening stock: By Sales 41,60,000

Finished Goods 1,48,750 By Closing stock:
Work-in-process 64,000 Finished Goods 82,500
To Raw materials consumed 15,60,000 Work-in-Process 77,334
To Direct labour 9,00,000 By Rent received 36,000
To Factory overheads 6,00,000 By Interest received 90,000
To Goodwill written off 2,00,000
To Administration overheads 5,90,000
To Selling & distribution 1,22,000
overheads
To Dividend paid 1,70,000
To Bad debts 24,000
To Profit 67,084
44,45,834 44,45,834

Statement of Profit as per costing records

(for the year ended March 31,2022)
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Sales revenue (14,500 units) (A) 41,60,000

Cost of Sales:
Opening stock (875 units x 208) 1,82,000
Add: Cost of production of 14,000 units 35,84,000
(Refer to Working Note 1& 2)
Less: Closing stock
. , , (96,000)
,

Production cost of goods sold (14,500 units) 36,70,000

Selling & distribution overheads (14,500 units x 8) 1,16,000
Cost of sales: (B) 37,86,000
Profit: {(A) – (B)} 3,74,000

(ii) Statement of Reconciliation

(Reconciling the profit as per costing records with the profit as per
financial records)

Profit as per Cost Accounts 3,74,000

Add: Admin. overheads over absorbed 7,333
( 5,97,333 – 5,90,000)
Opening stock overvalued 1,82,000 – 33,250
1,48,750)
Interest received 90,000
Rent received 36,000 1,66,583
5,40,583
Less: Factory overheads under recovery 60,000
( 6,00,000 – 5,40,000)
Selling & distribution overheads under recovery 6,000
( 1,22,000 – 1,16,000)
Closing stock overvalued ( 96,000 – 82,500) 13,500
Goodwill written off 2,00,000
Dividend 1,70,000
Bad debts 24,000 4,73,500
Profit as per financial accounts 67,083
Working Notes:
1. Number of units produced Units
Sales 14,500
Add: Closing stock 375
Total 14,875
Less: Opening stock 875
Number of units produced 14,000

2. Cost Sheet
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Raw materials consumed 15,60,000

Direct labour 9,00,000
Prime cost 24,60,000
Factory overheads (60% of direct wages) 5,40,000
Factory cost 30,00,000
Add: Opening work-in-process 64,000
Less: Closing work-in-process 77,334
Factory cost of goods produced 29,86,666
Administration overheads (20% of factory cost) 5,97,333
Cost of production of 14,000 units 35,83,999

, ,
Cost of production per unit: = = = 256
. ,
5. The financial records of Riva Private Limited showed a net profit of Rs.1,69,500 for the year ended 31st
March, 2022. The cost accounts, however, disclosed a net loss of Rs. 88,500 for the same period. The
following information were revealed as a result of scrutiny of the figures of cost accounts and financial
accounts:
(Rs.)
(i) (Administrative overhead under recovered 63,750.0
(ii) Factory overhead over recovered 3,37,500.0
(iii) Depreciation under charged in Cost Accounts 65,000.0
(iv) Dividend received 50,000.0
(v) Loss due to obsolescence charged in Financial Accounts 42,000.0
(vi) Income tax provided 1,09,000.0
(vii) Bank interest credited in Financial Accounts 34,000.0
(viii) Value of opening stock:
In Cost Accounts 4,12,500.0
In Financial Accounts 3,62,500.0
(ix) Value of closing stock:
In Cost Accounts 3,13,750.0
In Financial Accounts 3,30,000.0
(x) Goodwill written-off in Financial Accounts 62,500.0
(xi) Notional rent of own premises charged in Cost Accounts 1,50,000.0
(xii) Provision for doubtful debts in Financial Accounts 37,500.0

Prepare a reconciliation statement by taking costing net loss as base.

Solution
Statement of Reconciliation
Sl. No. Particulars
Net loss as per Cost Accounts (88,500)
Additions
1 Factory O/H over recovered 3,37,500
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2 Dividend Received 50,000

3 Bank Interest received 34,000
4 Difference in Value of Opening Stock 50,000
(4,12,500 – 3,62,500)
5 Difference in Value of Closing Stock 16,250
(3,30,000 – 3,13,7500)
6 Notional Rent of own Premises 1,50,000 6,37,750
Deductions
1 Administration O/H under recovered 63,750
2 Depreciation under charged 65,000
3 Loss due to obsolescence 42,000
4 Income tax Provided 1,09,000
5 Goodwill written-off 62,500
6 Provision for doubtful debts 37,500 (3,79,750)
Net Profit as per Financial A/c. 1,69,500

6. 'X' Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company show a Net
Profit of Rs. 5,50,000 for the year ended 31° March, 2022. The chief accountant of the company has
provided following information from the Financial Accounts and Cost Accounts

Sr. No. Particulars Rs.

(i) Legal Charges provided in financial accounts 15,250
(ii) Interim Dividend received credited in financial accounts 4,50,000
(iii) Preliminary Expenses written off in financial accounts 25.750
(iv) Over recovery of selling overheads in cost accounts 11,380
(v) Profit on sale of capital asset credited in financial accounts 30,000
(vi) Under valuation of closing stock in cost accounts 25,000
(vii) Over recovery of production overheads in cost accounts 10,200
(viii) Interest paid on Debentures shown in financial accounts 50,000

Required :
Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement.

Solution
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7. 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 (15000 units) 15,00,000

To Direct Wages 3,50,000 By Dividend received 9,000

To Factory overheads 2,60,000
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.
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• Notional rent of own premises charged in Cost Accounts is amounting to Rs. 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.

Prepare a Memorandum Reconciliation Account.

Solution
Cost Sheet
(for the year ended 31st March, 2021)
(Rs.) (Rs.)
Direct material 6,50,000
Direct wages 3,50,000
Prime cost 10,00,000
Factory Overheads:
Variable (50% of Rs. 2,60,000) 1,30,000
Fixed (Rs. 1,30,000 x 15,000/20,000) 97,500 2,27,500
Works cost 12,27,500
Administrative Overheads (Rs. 1,05,000 x 15,000/20,000) 78,750
Notional Rent 12,000
Cost of production 13,18,250
Selling Overheads 85,000
Cost of Sales 14,03,250
Profit (Balancing figure) 96,750
Sales revenue 15,00,000

(ii) Statement of Reconciliation

(Reconciling profit shown by Financial and Cost Accounts)
(Rs.) (Rs.)
Profit as per Cost Account 96,750
Add: Dividend received 9,000
Add: Notional Rent 12,000 21,000
Less: Factory Overheads under-charged in Cost Accounts 32,500
(Rs. 2,60,000 - Rs. 2,27,500)
Less: Administrative expenses under-charged in Cost 26,250
Accounts (Rs. 1,05,000 - Rs. 78,750)
Less: Loss on sale of Investments 2,000 (60,750)
Profit as per Financial Accounts 57,000
(Note: Solution can be done considering base profit as per Financial Accounts)

8. A manufacturing company disclosed a net loss of Rs. 3,47,000 as per their cost accounts for
the year ended March 31,2024. The financial accounts however disclosed a net loss of Rs.
5,10,000 for the same period. The following information was revealed as a result of scrutiny of
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the figures of both the sets of accounts.

(Rs.)
(i) Factory Overheads under-absorbed 40,000
(ii) Administration Overheads over-absorbed 60,000
(iii) Depreciation charged in Financial Accounts 3,25,000
(iv) Depreciation charged in Cost Accounts 2,75,000
(v) Interest on investments not included in Cost Accounts 96,000
(vi) Income-tax provided 54,000
(vii) Interest on loan funds in Financial Accounts 2,45,000
(viii) Transfer fees (credit in financial books) 24,000
(ix) Stores adjustment (credit in financial books) 14,000
(x) Dividend received 32,000
PREPARE a memorandum Reconciliation Account

Solution

Memorandum Reconciliation Accounts

Dr. Cr.
(Rs.) (Rs.)
To Net Loss as per 3,47,000 By Administration 60,000
Costing books overheads over
recovered in cost
accounts

To Factory overheads 40,000 By Interest on investment 96,000

under absorbed in not included in Cost
Cost Accounts Accounts

To Depreciation under 50,000 By Transfer fees in 24,000

charged in Cost financial books
Accounts

To Income-Tax not 54,000 By Stores adjustment 14,000

provided in Cost (Credit in financial
Accounts books)

To Interest on Loan 2,45,000 By Dividend received in 32,000

Funds in Financial financial books
Accounts
By Net loss as per 5,10,000
financial books

7,36,000 7,36,000
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1. Solar Power Ltd. has a power generation capacity of 1000 Megawatt per day. On an average it operates
at 85% of its installed capacity. The cost structure of the plant is as under:

Cost particulars Amount (Rs. in Lakh)

1. Employee cost per year 2500
2. Solar panel maintenance cost per year 250
3. Site maintenance cost per year 150
4. Depreciation per year 5940

Calculate cost of generating 1kW of power. [ 1 Megawatt = 1,000 kW]

Solution

2. Sanziet Lifecare Ltd. operates in life insurance business. Last year it launched a new term insurance
policy for practicing professionals ‘Professionals Protection Plus’. The company has incurred the
following expenditures during the last year for the policy:

Rs.
Policy development cost 11,25,000
Cost of marketing of the policy 45,20,000
Sales support expenses 11,45,000
Policy issuance cost 10,05,900
Policy servicing cost 35,20,700
Claims management cost 1,25,600
IT cost 74,32,000
Postage and logistics 10,25,000
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Facilities cost 15,24,000

Employees cost 5,60,000
Office administration cost 16,20,400

Number of policy sold- 528

Total insured value of policies- Rs. 1,320 crore
Required:
(i) Calculate total cost for Professionals Protection Plus’ policy segregating the costs into four
main activities namely (a) Product development, Marketing and Sales support, (b)
Operations, (c) IT and (d) Support functions.
(ii) Calculate cost per policy.
(iii) Calculate cost per rupee of insured value.

Solution

3. AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary
classes, but for accounting purpose it treats higher secondary as a separate responsibility centre. The
Managing committee of the school wants to revise its fee structure for higher secondary students. The
accountant of the school has provided the following details for a year:
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Amount (Rs.)
Teachers’ salary (25 teachers × Rs. 35,000 × 12 months) 1,05,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × Rs. 15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × Rs. 10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000

Other information:
(i)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinations in a 2 2 2 2
year
Time spent at library by 180 hours 120 hours 240 hours 60 hours
students per year
Time spent by 208 hours 312 hours 480 hours 1,400 hours
Principal for
administration
Teachers for 11 & 12 4 5 6 10
standard
(ii) One teacher who teaches economics for Arts stream students also teaches commerce
stream students. The teacher takes 1,040 classes in a year, it includes 208 classes for
commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also
teaches business mathematics to commerce stream students. She takes 1,100 classes a
year, it includes 160 classes for commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15%
time for higher secondary section.
(v) All school students irrespective of section and age participates in annual functions and
sports activities.

Required:
(a) Calculate cost per student per annum for all three streams.
(b) If the management decides to take uniform fee of Rs. 1,000 per month from all higher
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secondary students, Calculate stream wise profitability.

(c) If management decides to take 10% profit on cost, Compute fee to be charged from the
students of all three streams respectively.

Solution
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4. ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more
beds can be added, if required.

Rent per month - Rs. 75,000

Supervisors – 2 persons – Rs. 25,000 Per month – each
Nurses – 4 persons – Rs. 20,000 per month – each
Ward Boys – 4 persons – Rs. 5,000 per month – each
Doctors paid Rs. 2,50,000 per month – paid on the basis of number of patients attended and the time
spent by them

Other expenses for the year are as follows:

Repairs (Fixed) – Rs. 81,000
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Food to Patients (Variable) – Rs. 8,80,000

Other services to patients (Variable) – Rs. 3,00,000
Laundry charges (Variable) – Rs. 6,00,000
Medicines (Variable) – Rs. 7,50,000
Other fixed expenses – Rs. 10,80,000
Administration expenses allocated – Rs. 10,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are
occupied.
The hospital hired 750 beds at a charge of Rs. 100 per bed per day, to accommodate the flow of patients.
However, this does not exceed more than 5 extra beds over and above the normal capacity of 35 beds
on any day.
You are required to –
(1) Calculate contribution per Patient day, if the hospital recovers on an average Rs. 2,000 per day
from each patient
(2) Find Out Breakeven point for the hospital.

Solution
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5. A company runs a holiday home. For this purpose, it has hired a building at a rent of Rs. 10,000 per
month along with 5% of total taking. It has three types of suites for its customers, viz., single room,
double rooms and triple rooms.

Following information is given:

Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%

The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of triple
rooms suite as twice of the double rooms suite.

The other expenses for the year 2020-21 are as follows:

(Rs.)
Staff salaries 14,25,000
Room attendants’ wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to Calculate the rent to be charged for each type of suite.

Solution
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6. A lodging home is being run in a small hill station with 100 single rooms. The home offers concessional
rates during six off- season (Winter) months in a year when numbers of visitor are limited. During this
period, half of the full room rent is charged. The management’s profit margin is targeted at 20% of the
room rent. The following are the cost estimates and other details for the year ending on 31st March.
[Assume a month to be of 30 days].
Occupancy during the season is 80% while in the off- season it is 40% only.
(i) Total investment in the home is Rs. 200 lakhs of which 80% relate to buildings and
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balance for furniture and equipment.

(ii) Expenses:
o Staff salary [Excluding room attendants] : Rs. 5,50,000
o Repairs to building : Rs. 2,61,000
o Laundry charges : Rs. 80, 000
o Interior : Rs. 1,75,000
o Miscellaneous expenses : Rs. 1,90,800
(iii) Annual depreciation is to be provided for buildings @ 5% and on furniture and
equipment @ 15% on straight-line basis.
(iv) Room attendants are paid Rs. 10 per room day on the basis of occupancy of the rooms
in a month.
(v) Monthly lighting charges are Rs. 120 per room, except in four months in winter when it
is Rs. 30 per room.
You are required to WORK OUT the room rent chargeable per day both during the season and
the off-season months on the basis of the foregoing information.
Solution
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7. RST Toll Plaza Limited built a 80 kilometer long highway between two cities and operates a toll plaza
to collect tolls from passing vehicles using the highway. The company has estimated that 50,000 light
weight, 12,000 medium weight and 10,000 heavy weight vehicles will be using the highway in one
month in outward journey and the same number for return journey.
As per government notification, vehicles used for medical emergencies, members of parliament, and
essential services are exempt from toll charges. It is estimated that 10% of light weight vehicles will
pass the highway for such use.

It is the policy of the company that if vehicles return within 24 hours of their outward journey. The toll
fare will be reduced by 25 percent automatically. It is estimated 30% of chargeable light weight vehicles
return within the specified time frame.

The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles and
that of heavy weight vehicles as 2 times of the medium weight vehicles.

The toll operating and maintenance cost for a month is Rs.59,09,090. The company requires a profit
of 10% over the total cost to cover interest and other costs.

Solution
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8. Following are the data pertaining to Infotech Pvt. Ltd, for the year 2020-21:
Amount (Rs.)
Salary to Software Engineers (5 persons) 15,00,000
Salary to Project Leaders (2 persons) 9,00,000
Salary to Project Manager 6,00,000
Repairs & maintenance 3,00,000
Administration overheads 12,00,000

The company executes a Project XYZ, the details of the same as are as follows: Project duration – 6
months
One Project Leader and three Software Engineers were involved for the entire duration of the project,
whereas Project Manager spends 2 months’ efforts, during the execution of the project.
Travel expenses incurred for the project – Rs. 1,87,500
Two Laptops were purchased at a cost of Rs. 50,000 each, for use in the project and the life of the same
is estimated to be 2 years
Prepare Project cost sheet considering overheads are absorbed on the basis of salary.

Solution
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9. ABC Transport Company has given a route 40 kilometers long to run bus.
(a) The bus costs the company a sum of Rs. 10,00,000
(b) It has been insured at 3% p.a. and
(c) The annual tax will amount to Rs. 20,000
(d) Garage rent is Rs. 20,000 per month.
(e) Annual repairs will be Rs. 2,04,000
(f) The bus is likely to last for 2.5 years
(g) The driver’s salary will be Rs. 30,000 per month and the conductor’s salary will be Rs. 25,000 per
month in addition to 10% of takings as commission [To be shared by the driver and conductor equally].
(h) Cost of stationery will be Rs. 1,000 per month.
(i) Manager-cum-accountant’s salary is Rs. 17,000 per month.
(j) Petrol and oil will be Rs. 500 per 100 kilometers.
(k) The bus will make 3 up and down trips carrying on an average 40 passengers on each trip.
The bus will run on an average 25 days in a month.
Assuming 15% profit on takings, Calculate the bus fare to be charged from each passenger.

Solution
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10. Mr. X owns a bus which runs according to the following schedule:
(i) Delhi to Chandigarh and back, the same day.
Distance covered: 250 km. one way.
Number of days run each month : 8
Seating capacity occupied 90%.
(ii) Delhi to Agra and back, the same day.
Distance covered: 210 km. one way
Number of days run each month : 10
Seating capacity occupied 85%
(iii) Delhi to Jaipur and back, the same day.
Distance covered: 270 km. one way
Number of days run each month : 6
Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus Rs. 12,00,000
Salary of the Driver Rs. 24,000 p.m.
Salary of the Conductor Rs. 21,000 p.m.
Salary of the part-time Accountant Rs. 5,000 p.m.
Insurance of the bus Rs. 4,800 p.a.
Diesel consumption 4 km. per litre at Rs. 56 per litre
Road tax Rs. 15,915 p.a.
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Lubricant oil Rs. 10 per 100 km.

Permit fee Rs. 315 p.m.
Repairs and maintenance Rs. 1,000 p.m.
Depreciation of the bus @ 20% p.a.
Seating capacity of the bus 50 persons

Passenger tax is 20% of the total takings. Calculate the bus fare to be charged from each passenger to
earn a profit of 30% on total takings. The fares are to be indicated per passenger for the journeys:
(i) Delhi to Chandigarh
(ii) Delhi to Agra and
(iii) Delhi to Jaipur.

Solution
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11. VPS is a public school having 25 buses each plying in different directions for the transport of its school
students. In view of large number of students availing of the bus service, the buses work two shifts
daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of
the students has been so arranged that in the morning, the first trip picks up senior students and the
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second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes
the junior students and an hour later the second trip takes the senior students home.
The distance travelled by each bus, one way is 8 km. The school works 22 days in a month and remains
closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12
months in a year.

The details of expenses for a year are as under:

Driver's salary – payable for all the 12 in months Rs. 12,000 per month per driver
Cleaner's salary payable for all the 12 months Rs. 8,000 per month per cleaner
License fees, taxes etc. Rs. 8,400 per bus per annum
Insurance Premium Rs. 15,600 per bus per annum
Repairs and Maintenance Rs. 20,500 per bus per annum
Purchase price of the bus Rs. 20,00,000 each
Life of the bus 16 years
Scrap value Rs. 1,60,000
Diesel Cost Rs. 78.50 per litre

Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is 40 students.

The school follows differential transportation fees based on distance travelled as under:
Students picked up and Transportation fee Percentage of students
dropped within the range of availing this facility
distance from the school
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%

Due to a pandemic, lockdown imposed on schools and the school remained closed from April 2020 to
December 2020. Drivers and cleaners were paid 75% of their salary during the lockdown period.
Repairing cost reduced to 75% for the year 2020. Ignore the interest cost.
Required:
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
(ii) Find Out transportation fee per student per month in respect of:
(a) Students coming from a distance of upto 2 km. from the school.
(b) Students coming from a distance of upto 4 km. from the school; and
(c) Students coming from a distance of upto 8 km. from the school.
(iii) Calculate the minimum bus fare that has to be recovered from the students for the year 2020.

Solution
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12. GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city B for a particular
vendor. It charges Rs. 2,400 per ton from city ‘A’ to city ‘B’ and Rs. 2,200 per ton for the return journey
from city ‘B’ to city ‘A’. Goods are also delivered to an intermediate city ‘C’ but no extra charges are
billed for unloading goods in-between destination city and no concession in rates is given for reduced
load after unloading at intermediate city. Distance between the city ‘A’ to ‘B’ is 300 km and distance
from city ‘A’ to ‘C’ is 140 km.
In the month of January, the truck made 12 journeys between city ‘A’ and city ‘B’. The details of
journeys are as follows:
Outward journey No. of journeys Load (in ton)
‘A’ to ‘B’ 10 6
‘A’ to ‘C’ 2 6
‘C’ to ‘B’ 2 4
Return journey No. of journeys Load (in ton)
‘B’ to ‘A’ 5 8
‘B’ to ‘A’ 6 6
‘B’ to ‘C’ 1 6
‘C’ to ‘A’ 1 0
Annual fixed costs and maintenance charges are Rs. 6,00,000 and Rs. 1,20,000 respectively. Running
charges spent during the month of January are Rs. 2,94,400 (includes Rs. 12,400 paid as penalty for
overloading).
You are required to:
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i) Calculate the cost as per (a) Commercial ton-kilometre. (b) Absolute ton- kilometre
ii) Calculate Net Profit/ loss for the month of January
Solution
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13. A transport company has 20 vehicles, the capacities are as follows:

No. of Vehicles Capacity per vehicle
5 9 MT
6 12 MT
7 15 MT
2 20 MT
The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between
these stations is 100 kilometers. Each vehicle makes one round trip per day on an average. Vehicles
are loaded with an average of 90 per cent of capacity at the time of departure from station ‘A’ to station
‘B’ and at the time of return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid
up for repairs every day. The following information is related to the month of August, 2020:

Salary of Transport Manager Rs. 60,000

Salary of 30 drivers Rs. 20,000 each driver
Wages of 25 Helpers Rs. 12,000 each helper
Loading and unloading charges Rs. 850 each trip
Consumable stores (depends on running of vehicles) Rs. 1,35,000
Insurance (Annual) Rs. 8,40,000
Road Licence (Annual) Rs. 6,00,000
Cost of Diesel per litre Rs. 78
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. Rs. 1,15,000
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Cost of replacement of Tyres, Tubes, etc. (on running basis) Rs. 4,25,000
Garage rent (Annual) Rs. 9,00,000
Routine mechanical services Rs. 3,00,000
Electricity charges (for office, garage and washing station) Rs. 55,000
Depreciation of vehicles (on time basis) Rs. 6,00,000

There is a workshop attached to transport department which repairs these vehicles and other
vehicles also. 40 per cent of transport manager’s salary is debited to the workshop. The transport
department has been apportioned Rs. 88,000 by the workshop during the month. During the
month operation was for 25 days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Determine the freight to be charged per ton-km, if the company earned a profit of 25 per
cent on freight.

Solution
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14. Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices
of Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering
to upgrade these into Electric vehicle (EV). The details related with the owning of CNG & EV propelled
cars are as tabulated below:

Particulars CNG Car EV Car

Car purchase price (Rs.) 9,20,000 15,20,000
Govt. subsidy on purchase of car (Rs.) -- 1,50,000
Life of the car 15 years 10 years
Residual value (Rs.) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge -- 30 Kwh
CNG cost per Kg (Rs.) 60 --
Power cost per Kwh (Rs.) -- 7.60
Annual Maintenance cost (Rs.) 8,000 5,200
Annual insurance cost (Rs.) 7,600 14,600
Tyre replacement cost in every 5 -year (Rs.) 16,000 16,000
Battery replacement cost in every 8- year (Rs.) 12,000 5,40,000
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Apart from the above, the following are the additional information:

Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (Rs.) 20,000 p.m
Garage rent per car (Rs.) 4,500 p.m
Share of Office & Administration cost per car (Rs.) 1,500 p.m
Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options.

Solution
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 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

1. A jobbing factory has undertaken to supply 200 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 Rs. 80 per
piece. From the following data.

COMPUTE the cost and profit per piece of each batch order and overall position of the order for 1,200
pieces.

Month Batch Output Material cost Direct wages Direct labour

(Pieces) (Rs.) (Rs.) (Hours)
January 210 6,500 1,200 240
February 200 6,400 1,400 280
March 220 6,800 1,500 280
April 180 6,300 1,400 270
May 200 7,000 1,500 300
June 220 7,200 1,600 320

The other details are:

Month Chargeable expenses Direct labour
(Rs.) Hours
January 1,20,000 4,800
February 1,05,600 4,400
March 1,20,000 5,000
April 1,05,800 4,600
May 1,30,000 5,000
June 1,20,000 4,800

Solution
Particulars Jan. Feb. March April May June Total
( ) ( ) ( ) ( ) ( ) ( ) ( )
Batch output 210 200 220 180 200 220 1,230
(in pieces)
Sale value @ 80 16,80 16,00 17,60 14,40 16,00 17,60 98,40

Material cost 6,500 6,400 6,800 6,300 7,000 7,200 40,20

Direct wages 1,200 1,400 1,500 1,400 1,500 1,600 8,600

Chargeable 6,000 6,720 6,720 6,210 7,800 8,000 41,45
expenses*
Total cost 13,70 14,52 15,02 13,91 16,30 16,80 90,25

Profit per batch 3,100 1,480 2,580 490 (300) 800 8,150
Total cost per piece 65.2 72.6 68.3 77.3 81.5 76.4 73.4
Profit per piece 14.8 7.4 11.7 2.7 (1.5) 3.6 6.6
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Overall position of the order for 1,200 pieces

Sales value of 1,200 pieces @ 80 per piece 96,000
Total cost of 1,200 pieces @ 73.4 per piece 88,080
Profit 7,920

Chargeable expenses
𝑥 Direct labour hours for batch
Direct labour hour for the month

2. A Ltd. manufactures mother boards used in smart phones. A smart phone requires one mother board.
As per the study conducted by the Indian Cellular Association, there will be a demand of 180 million
smart phones in the coming year. A Ltd. is expected to have a market share of 5.5% of the total market
demand of the mother boards in the coming year. It is estimated that it costs Rs.6.25 as inventory
holding cost per board per month and that the set-up cost per run of board manufacture is Rs.33,500.
(i) COMPUTE the optimum run size for board manufacturing?
(ii) Assuming that the company has a policy of manufacturing 80,000 boards per run, CALCULATE
how much extra costs the company would be incurring as compared to the optimum run suggested in
(i) above?

Solution
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3. Arnav Ltd. operates in beverages industry where it manufactures soft- drink in three sizes of Large (3
litres), Medium (1.5 litres) and Small (600 ml) bottles. The products are processed in batches. The
5,000 litres capacity processing plant consumes electricity of 90 Kilowatts per hour and a batch takes
1 hour 45 minutes to complete. Only symmetric size of products can be processed at a time. The
machine set-up takes 15 minutes to get ready for next batch processing. During the set-up power
consumption is only 20%.
A) The current price of Large, Medium and Small are Rs. 150, Rs. 90 and Rs. 50 respectively.
B) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required
which costs Rs. 0.50 and Rs. 1,000 per litre respectively.
C) 20 direct workers are required. The workers are paid Rs. 880 for 8 hours shift of work.
D) The average packing cost per bottle is Rs. 3
E) Power cost is Rs. 7 per Kilowatt -hour (Kwh)
F) Other variable cost is Rs. 30,000 per batch.
G) Fixed cost (Administration and marketing) is Rs. 4,90,00,000.
H) The holding cost is Rs. 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of the product:

Large Medium Small

3,00,000 7,50,000 20,00,000

You are required to CALCULATE profit/ loss per batch and also COMPUTE Economic Batch Quantity
(EBQ)
Solution
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4. SM Motors Ltd. is a manufacturer of auto components. Following are the details of expenses for the
year 2019-20:

(Rs.)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2020-21, the company has received an order from a car manufacturer where it estimates
that the cost of material and labour will be Rs. 80,00,000 and Rs. 40,50,000 respectively. The company
charges factory overhead as a percentage of direct labour and administrative overheads as a percentage
of factory cost based on previous year's cost.

Cost of delivery of the components at customer's premises is estimated at Rs. 4,50,000. You are required
to:
(i) CALCULATE the overhead recovery rates based on actual costs for 2019-20.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the desired profit is
25% on sales.

Solution
1. (i) Calculation of Overhead Recovery Rate:
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Calculation of Factory Cost in 2019-20

Particulars Amount ( )
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Direct Labour 90,50,000
Prime Cost 2,66,00,000
Factory Overhead 30,80,000
Factory Cost 2,96,80,000
(ii) Job Cost Sheet for the order received in 2020-21

Particulars Amount
( )
Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of 40,50,000) 13,77,000
Factory Cost 1,34,27,000
Administrative Overhead (6.91% of 1,34,27,000) 9,27,806
Cost of delivery 4,50,000
Total Cost 1,48,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 49,34,935
Sales value (Price to be quoted for the order) 1,97,39,741

Hence the price to be quoted is 1,97,39,741

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5. AP Ltd. received a job order for supply and fitting of plumbing materials. Following are the details
related with the job work:
Direct Materials
AP Ltd. uses a weighted average method for the pricing of materials issues.

Opening stock of materials as on 12th August 2020:

- 15mm GI Pipe, 12 units of (15 feet size) @ Rs.600 each
- 20mm GI Pipe, 10 units of (15 feet size) @ Rs. 660 each
- Other fitting materials, 60 units @ Rs. 26 each
- Stainless Steel Faucet, 6 units @ Rs. 204 each
- Valve, 8 units @ Rs. 404 each
Purchases:
On 16th August 2020:
- 20mm GI Pipe, 30 units of (15 feet size) @ Rs. 610 each
- 10 units of Valve @ Rs. 402 each

On 18th August 2020:

- Other fitting materials, 150 units @ Rs. 28 each
- Stainless Steel Faucet, 15 units @ Rs. 209 each

On 27th August 2020:

- 15mm GI Pipe, 35 units of (15 feet size) @ Rs. 628 each
- 20mm GI Pipe, 20 units of (15 feet size) @ Rs. 660 each
- Valve, 14 units @ Rs. 424 each

Issues for the hostel job:

On 12th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units

On 17th August 2020:

- 15mm GI Pipe, 8 units of (15 feet size)
- Other fitting materials, 30 units

On 28th August 2020:

- 20mm GI Pipe, 2 units of (15 feet size)
- 15mm GI Pipe, 10 units of (15 feet size)
- Other fitting materials, 34 units
- Valve, 6 units

On 30th August 2020:

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- Other fitting materials, 60 units

- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ Rs.100 per hour (includes 12 hours overtime)
Helper: 192 hours @ Rs.70 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ Rs.26 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on sales
price.
You are required to
(a) CALCULATE the total cost of the job.
(b) CALCULATE the price to be charged from the customer.
Solution
(a) Calculation of Total Cost for the Job:
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Working Note:
1. Cost of 15mm GI Pipe

2. Cost of 20mm GI Pipe

3. Cost of Other fitting materials

6. A shop floor supervisor of a small factory presented the following cost for Job No. 303, to determine the
selling price.

Per unit (Rs.)

Materials 70
Direct wages 18 hours @ Rs. 2.50 45
(Deptt. X 8 hours; Deptt. Y 6 hours; Deptt. Z 4 hours)
Chargeable expenses 5
120
Add : 33-1/3 % for expenses cost 40
160

Analysis of the Profit/Loss Account (for the current financial year)

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(Rs.) (Rs.)
Materials used 1,50,000 Sales less returns 2,50,000
Direct wages:
Deptt. X 10,000
Deptt. Y 12,000
Deptt. Z 8,000 30,000
Special stores items 4,000
Overheads:
Deptt. X 5,000
Deptt. Y 9,000
Deptt. Z 2,000 16,000
Works cost 2,00,000
Gross profit c/d 50,000 _______
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000 ______
50,000 50,000

It is also noted that average hourly rates for the three Departments X, Y and Z are similar.

You are required to:

(i) Prepare a job cost sheet.
(ii) Calculate the entire revised cost using current financial year actual figures as basis.
(iii) Add 20% to total cost to Determine selling price.

Solution
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 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

1. A product passes through three processes. The output of each process is treated as the raw material
of the next process to which it is transferred and output of the third process is transferred to finished
stock.
Process-I (Rs.) Process-II (Rs.) Process-III (Rs.)
Materials issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing overhead 10,000 10,000 15,000
10,000 units have been issued to the Process-I and after processing, the output of each process is as
under:
Process Output Normal Loss
Process-I 9,750 units 2%
Process-II 9,400 units 5%
Process-III 8,000 units 10%
No stock of materials or of work-in-process was left at the end. Calculate the cost of the finished articles.
Solution
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2. A Manufacturing unit manufactures a product 'XYZ' which passes through three distinct Processes - X,
Y and Z. The following data is given:

Process X Process Y Process Z

Material consumed (in Rs.) 2,600 2,250 2,000

Direct wages (in Rs.) 4,000 3,500 3,000

• The total Production Overhead of Rs. 15,750 was recovered@ 150% of Direct wages.
• 15,000 units at Rs. 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 (Rs.)

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 Rs. 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z.
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Solution

Dr. Process-X Account Cr.

Particulars Units (Rs.) Particulars Units (Rs.)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units)
x Rs. 1.1]
" Additional -- 2,600 " Process-Y A/c 14,100 41,610
material (Rs. 2.951* x 14,100
units)
" Direct wages -- 4,000
" Production OH -- 6,000
15,000 42,600 15,000 42,600

*Cost per unit of completed units

. , .
= = ,
= Rs. 2.951

Process-Y Account
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of 14,100
units) x Rs. 2]
" Additional -- 2,250 " Process-Z A/c 12,205 48,820
material (Rs. 4 x 12,205 units)
" Direct wages -- 3,500
" Production OH -- 5,250
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
Now, =4
. , – .
,
= Rs. 4
Rs. 52,610 - Rs. 2A = Rs. 56,400 - Rs. 4A
2A = Rs. 3,790 => A = 1,895 units
,
% of wastage = ,
= 13.44 %

Dr. Process-Z Account

Cr.
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610
[(5% of 12,205
units) x Rs. 1]
" Additional material -- 2,000 " Finished Stock A/c 12,000 59,726
(Rs. 4.9771 x 12,000
$

units)
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" Direct wages -- 3,000

" Production OH -- 4,500
" Abnormal gain 405 2,016
(Rs. 4.9771$ x 405
units)
12,610 60,336 12,610 60,336

$cost per unit of completed units

. , – .
= = ,
= Rs. 4.9771

Alternative Solution
Dr. Process· X Account
Cr.
Particulars Units (Rs.) Particulars Units (Rs.)
To Material introduced 15,000 30,000 By Normal Loss A/c 900 900
[(6% of 15,000
units) x Rs. 1.1]
" Additional material -- 2,600 " Process-Y A/c 14,100 41,610
(Rs. 2.951* x 14,100
units)
" Direct wages -- 4,000
" Production OH -- 6,000
15,000 42,600 15,000 42,600
*Cost per unit of completed units
. , – .
= = ,
= Rs. 2.951

Dr. Process-Y Account

Cr.
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of
14,100
units) x Rs. 2]
" Additional material -- 2,250 " Process-Z A/c 12,631 50,524
(Rs. 4 x 12,631@
units)
" Direct wages -- 3,500
" Production OH -- 5,250
" Abnormal gain 426 1,704
(Rs. 4 x 426 units)
14,526 54,314 14,526 54,314

Working Notes:
@1. Units Transferred from Process Z Account to Finished Stock = 12,000 Units
i.e. 95% of Inputs.
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So, Input of Z or Output of Y is 12,000 x 100/95 = 12,631 Units and Normal

Loss (5%) is 631 units.
2. Let's consider number of units lost under process 'Y' as:
For Normal loss =A
For Abnormal loss =B
Now, A + B = 1,469 [i.e. 14,100 - 12,631] ... (I)
(A x Rs. 2 per unit) + (B x Rs. 4 per unit) = [52,610 - 50,524]
2A + 4B = 2,086 ... (II)
Now, putting the values of (I) in (II), we get,
2(1,469 - B) + 4B = 2,086
2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units.
Further, A (i.e. normal loss) = 1,469 + 426 = 1,895 units

,
#3. % of wastage in Process Y Account = ,
= 13.44%
Dr. Process-Z Account
Cr.
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-Y A/c 12,631 50,524 By Normal Loss A/c 631 631
[(5% of 12,631
units) x Rs. 1]
" Additional material -- 2,000
" Direct wages -- 3,000
" Production OH -- 4,500 " Finished Stock A/c 12,000 59,393
(Rs. 4.9494$ x 12,000
units)
12,631 60,024 12,631 60,024

$Cost per unit of completed units

. , – .
= = ,
= Rs. 4.9494

3. RST Limited processes Product Z through two distinct processes – Process- I and Process- II. On
completion, it is transferred to finished stock. From the following information for the current year,
Prepare Process- I, Process- II and Finished Stock A/c:

Particulars Process- I Process- II

Raw materials used 7,500 units --
Raw materials cost per unit Rs. 60 --
Transfer to next process/finished stock 7,050 units 6,525 units

Normal loss (on inputs) 5% 10%

Direct wages Rs. 1,35,750 Rs. 1,29,250
Direct Expenses 60% of Direct wages 65% of Direct wages
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Manufacturing overheads 20% of Direct wages 15% of Direct wages

Realisable value of scrap per unit Rs. 12.50 Rs. 37.50

6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no opening or
closing stock of work-in-process.
Solution
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4. KT Ltd. produces a product EMM which passes through two processes before it is completed and
transferred to finished stock. The following data relate to May 2019:

Particulars Process Finished stock

A B
(Rs.) (Rs.) (Rs.)

Opening Stock 5,000 5,500 10,000

Direct Materials 9,000 9,500

Direct Wages 5,000 6,000

Factory Overheads 4,600 2,030

Closing Stock 2,000 2,490 5,000

Inter-process profit included in opening stock 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process
B is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at prime
cost. Finished stock is valued at the price at which it is received from Process B. Sales during the period
are Rs. 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each stage.
Solution
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Process-A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Opening stock 5,000 5,000 - Process B A/c 28,800 21,600 7,200
Direct materials 9,000 9,000 -
Direct wages 5,000 5,000 -
19,000 19,000 -
Less: Closing stock (2,000) (2,000) -
Prime Cost 17,000 17,000 -
Overheads 4,600 4,600 -
Process Cost 21,600 21,600 -
Profit (33.33% of 7,200 - 7,200
total cost)
28,800 21,600 7,200 28,800 21,600 7,200

Process-B A/c
Particulars Total Cost Profit Particulars Total Cost Profit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Opening stock 5,500 4,500 1,000 Finished 61,675 41,550 20,125
stock A/c
Process A A/c 28,800 21,600 7,200
Direct materials 9,500 9,500 -
Direct wages 6,000 6,000 -
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 -
Process Cost 49,340 41,550 7,790
Profit (25% of total 12,335 - 12,335
cost)
61,675 41,550 20,125 61,675 41,550 20,125

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Opening stock 10,000 6,000 4,000 Closing 75,000 44,181 30,819
P&L A/c
Process B A/c 61,675 41,550 20,125
71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494
Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819
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5. The following data are available in respect of Process-I for January 2024:
(i) Opening stock of work in process: 600 units at a total cost of Rs. 4,200.
(2) Degree of completion of opening work in process:

Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of Rs. 55,200 for 9,200 units.
(4) Direct wages incurred Rs. 18,600
(5) Overheads Rs. 8,630.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is Rs. 6 per unit.

You are required to:

(i) PREPARE using FIFO method, Statement of equivalent production,

(ii) PREPARE Statement of cost,

(iii) CALCULATE cost of closing WIP,
(iv) CALCULATE the cost of the units to be transferred to the next process.

Solution
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6. Following details are related to the work done in Process-I by ABC Ltd. during the month of May 2019:

(Rs.)

Opening work in process (3,000 units)

Materials 1,80,500

Labour 32,400

Overheads 90,000

Materials introduced in Process-I (42,000 units) 36,04,000

Labour 4,50,000

Overheads 15,18,000

Units Scrapped : 4,800 units

Degree of completion
Materials : 100%
Labour & overhead : 70%
Closing Work-in-process : 4,200 units
Degree of completion :
Materials : 100%
Labour & overhead : 50%

Units finished and transferred to Process-II : 36,000 units

Normal loss:
4% of total input including opening work-in-process
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Scrapped units fetch Rs. 62.50 per piece.

Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit.
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account
Solution
Statement of Equivalent Production (Weighted Average method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour & O.H.
% Units % Units
Opening WIP 3,000 Completed and 36,000 100 36,000 100 36,000
transferred to
Process-II
Units 42,000 Normal Loss (4% 1,800 -- - -- --
introduced of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200

(ii) Statement showing cost for each element

Particulars Materials (Rs.) Labour (Rs.) Overhead (Rs.) Total (Rs.)
Cost of opening 1,80,500 32,400 90,000 3,02,900
work-in-process
Cost incurred 36,04,000 4,50,000 15,18,000 55,72,000
during the month
Less: Realisable (1,12,500) -- -- (1,12,500)
Value of normal
scrap (Rs. 62.50 x
1,800 units)
Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400
Equivalent units: 43,200 40,200 40,200
(B)
Cost per 85.00 12.00 40.00 137.00
equivalent unit:
(C) = (A  B)

Statement of Distribution of cost

Particulars Amount (Rs.) Amount (Rs.)
1. Value of units completed and 49,32,000
transferred:
(36,000 units x Rs. 137)
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2. Value of Abnormal Loss:

- Materials (3,000 units x Rs. 85) 2,55,000
- Labour (2,100 units x Rs. 12) 25,200
- Overheads (2,100 units x Rs. 40) 84,000 3,64,200
3. Value of Closing W-I-P:
- Materials (4,200 units x Rs. 85) 3,57,000
- Labour (2,100 units x Rs. 12) 25,200
- Overheads (2,100 units x Rs. 40) 84,000 4,66,200

(iii) Process-I A/c

Particulars Units (Rs.) Particulars Units (Rs.)
To Opening W.I.P:
- Materials 3,000 1,80,500 By Normal Loss (Rs. 62.5 1,800 1,12,500
- Labour -- 32,400 x 1,800 units)
- Overheads -- 90,000

To Materials 42,000 36,04,000 By Abnormal loss 3,000 3,64,200

introduced
To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900

(iv) Normal Loss A/c

Particulars Units (Rs.) Particulars Units (Rs.)
To Process-I A/c 1,800 1,12,500 By Cost Ledger Control 1,800 1,12,500
A/c
1,800 1,12,500 1,800 1,12,500
(v) Abnormal Loss A/c
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-I A/c 3,000 3,64,200 By Cost Ledger Control 3,000 1,87,500
A/c (Rs. 62.5 x 3,000
units)
By Costing Profit & Loss 1,76,700
A/c (Bal. Figure)
3,000 3,64,200 3,000 3,64,200

7. From the following Information for the month ending October, 2005 prepare Process Cost accounts for
Process III. Use First-out (FIFO) method to value equivalent production.
Opening WIP 2,000 units at Rs.25,750
Transfer from Process II 53,000 units at Rs.4,11,500
Transferred to Process IV 48,000
Closing stock of Process III 5,000 units
Units scrapped 2,000 units
Direct material added on Process III Rs.1,97,600
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Direct wages Rs.97,600

Production Overheads Rs.48,800
The normal loss in the process was 5% of production and scrap and sold at Rs.3 per unit.
The degree of completion is :

Opening WIP Closing WIP Scrap

Material 80% 70% 100%
Labour 60% 50% 80%
Overheads 60% 50% 60%

Solution
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8. A company produces a component, which passes through two processes. During the month of
November, 2020, materials for 40,000 components were put into Process- I of which 30,000 were
completed and transferred to Process- II. Those not transferred to Process- II were 100% complete as
to materials cost and 50% complete as to labour and overheads cost. The Process- I costs incurred
were as follows:

Direct Materials Rs. 3,00,000

Direct Wages Rs. 3,50,000
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Factory Overheads Rs. 2,45,000

Of those transferred to Process II, 28,000 units were completed and transferred to finished goods
stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800
units, remained unfinished in the process with 100% complete as to materials and 25% complete as
regard to wages and overheads.
Costs incurred in Process-II are as follows:

Packing Materials Rs. 80,000

Direct Wages Rs. 71,125
Factory Overheads Rs. 85,350
Packing material cost is incurred at the end of the second process as protective packing to the
completed units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Solution
Process I
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Particulars Materials Labour Overhead Total

Cost incurred ( ) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit ) 7.50 10.00 7.00 24.50

Process-I Account

Particulars Units ( ) Particulars Units ( )

To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units ×
24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000
To Overhead 2,45,000
40,000 8,95,000 40,000 8,95,000
* (Material 10,000 units × 7.5) + (Labour 5,000 units × 10) + (Overheads 5,000 units ×
7)
= 75,000 + 50,000 + 35,000 = 1,60,000

Process II
Statement of Equivalent Production and Cost
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Input Particulars Output Equivalent Production

(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450

Particulars Materials Labour Overhead Total

Process-I Cost 7,35,000 -- -- 7,35,000
Cost incurred ( ) -- 71,125 85,350 1,56,475
Equivalent units 29,800 28,450 28,450 --
Cost per equivalent unit ) 24.6644 2.5000 3.0000 30.1644

Process-II Account
Particulars Units ( ) Particulars Units ( )
To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 --
To Packing Material -- 80,000 By Finished Goods 28,000* 9,24,604
Stock A/c
To Direct Wages -- 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead -- 85,350
30,000 9,71,475 30,000 9,71,475
* 28,000 × 30.1644 = 8,44,603 + 80,000 (Packing Material Cost) = 9,24,604
** 1,800 units × 24.6644 + 450 units × ( 2.5 + 3) = 46,871

9. Arnav Ltd. manufactures chemical solutions used in paint and adhesive products. Chemical solutions
are produced in different processes. Some of the processes are hazardous in nature which may results
in fire accidents.
At the end of the last month, one fire accident occurred in the factory. The fire destroyed some of the
paper files containing records of the process operations for the month.
You being an associate to the Chief Manager (Finance), are assigned to prepare the process accounts
for the month during which the fire occurred. From the documents and files of other sources, following
information could be retrieved:
Opening work-in-process at the beginning of the month was 500 litres, 80% complete for labour and
60% complete for overheads. Opening work-in- process was valued at Rs. 2,78,000.
Closing work-in-process at the end of the month was 100 litres, 20% complete for labour and 10%
complete for overheads.
Normal loss is 10% of input (fresh) and total losses during the month were 800 litres partly due to the
fire damage.
Output transferred to finished goods was 3,400 litres.
Losses have a scrap value of Rs. 20 per litre.
All raw materials are added at the commencement of the process.
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The cost per equivalent unit is Rs. 660 for the month made up as follows: Raw Material Rs. 300
Labour Rs. 200 Overheads Rs. 160
The company uses FIFO method to value work-in-process and finished goods. The following
information are required for managerial decisions:

- How much quantity of raw material introduced during the month?

- The Quantity of normal loss and abnormal loss are:
- Value of raw material added to the process during the month is:
- Value of labour and overhead in closing Work-in-process are:
- Value of output transferred to finished goods is:

Solution
i)

ii)

iii)
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1. A Factory produces two products, 'A' and 'B' from a single process. The joint processing costs during a
particular month are:
Direct Material Rs. 30,000
Direct Labour Rs. 9,600
Variable Overheads Rs. 12,000
Fixed Overheads Rs. 32,000
Sales: A- 100 units@ Rs. 600 per unit; B - 120 units @ Rs. 200 per unit.
I. Apportion joints costs on the basis of:
(i) Physical Quantity of each product.
(ii) Contribution Margin method, and
II. Determine Profit or Loss under both the methods.

Solution
Total Joint Cost
Amount
(Rs.)
Direct Material 30,000
Direct Labour 9,600
Variable Overheads 12,000
Total Variable Cost 51,600
Fixed Overheads 32,000
Total joint cost 83,600

Apportionment of Joint Costs:

Product-A Product-B
I. (i) Apportionment of Rs. 38,000 Rs. 45,600
Joint Cost on the Rs. 83,600 Rs. 83,600
× 100 × 120
basis of 'Physical 100 + 120units 100 + 120units
Quantity'
(ii) Apportionment of
Joint Cost on the
basis of
'Contribution
Margin Method':
- Variable Costs Rs. 23,455 Rs. 28,145
(on basis of Rs. 51,600 Rs. 51,600
× 100 × 120
physical units) 100 + 120units 100 + 120units
Contribution 36,545 -4,145
Margin (Rs. 600 x 100 - (Rs. 200 x 120 -
23,455) 28,145)
Fixed Costs* Rs. 32,000
Total apportioned Rs. 55,455 Rs. 28,145
cost
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II. (iii)
Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value Rs. 60,000 Rs. 24,000
B. Apportioned joint Rs. 38,000 Rs. 45,600
cost on basis of
'Physical
Quantity':
A-B Profit or (Loss) 22,000 (21,600)
When Joint cost apportioned on basis of 'Contribution Margin Method'
C Apportioned joint Rs. 55,455 Rs. 28,145
cost on basis of
'Contribution
Margin Method'
A-C Profit or (Loss) Rs. 4,545 Rs. (4,145)
* The fixed cost of Rs. 32,000 is to be apportioned over the joint products A and B
in the ratio of their contribution margin but contribution margin of Product B is
Negative so fixed cost will be charged to Product A only.

2. A company produces two joint products A and B from the same basic materials. The processing is
completed in three departments.
Materials are mixed in Department I. At the end of this process, A and B get separated. After
separation, A is completed in the Department II and B in Department III. During a period, 4,00,000
kg of raw material was processed in Department I at a total cost of Rs. 17,50,000, and the resultant
50% becomes A and 40% becomes B and 10% normally lost in processing.
In Department II, 1/5th of the quantity received from Department I is lost in processing. A is further
processed in Department II at a cost of Rs. 2,60,000.
In Department III, further new material is added to the material received from Department I and
weight mixture is doubled, there is no quantity loss in the department III. Further processing cost
(with material cost) in Department III is Rs. 3,00,000.
The details of sales during the said period are:

Product A Product B
Quantity sold (kg) 1,50,000 3,00,000
Sales price per kg (Rs.) 10 4

There were no opening stocks. If these products sold at split-off-point, the selling price of A and B
would be Rs. 8 and Rs. 4 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint cost to A and B in
proportion of sales value at split off point.
(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost,
processing cost and total cost separately.
(iii) PREPARE a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product A and B, give your
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COMMENT that products should be further processed or not.

Solution

Calculation of quantity produced

Dept I (kg) Dept II (kg) Dept III (kg)

Input 4,00,000 2,00,000 1,60,000
(50% of 4,00,000 kg.) (40% of 4,00,000 kg.)
Weight (lost) or (40,000) (40,000) 1,60,000
added (10% of 4,00,000 kg.) (1/5th of 2,00,000 kg.)
3,60,000 1,60,000 3,20,000
Production of A 2,00,000 1,60,000 --
Production of B 1,60,000 -- 3,20,000

(i) Statement of apportionment of joint cost of dept I

Product A Product B
Output (kg) 2,00,000 1,60,000
Selling price per kg ( ) 8 4
Sales value ( ) 16,00,000 6,40,000
Share in Joint cost (5:2) 12,50,000 5,00,000
( 17,50,000 × 5 ÷ 7) ( 17,50,000 × 2 ÷ 7)

(ii) Statement of cost per kg

Product A Product B
Output (kg) 1,60,000 3,20,000
Share in joint cost ( ) 12,50,000 5,00,000
Joint Cost per kg ( ) (A) 7.8125 1.5625
Further processing cost ( ) 2,60,000 3,00,000
Further processing cost per kg ( ) (B) 1.625 0.9375
Total cost per kg ( ) {(A)+(B)} 9.4375 2.5000

(iii) Statement of profit

Product A Product B
Output (kg) 1,60,000 3,20,000
Sales (kg) (1,50,000) (3,00,000)
Closing stock (kg) 10,000 20,000

Sales 15,00,000 12,00,000

(1,50,000 kg × 10) (3,00,000 kg × 4)
Add: closing stock (at full cost) 94,375 50,000
(10,000 kg × 9.4375) (20,000 kg × 2.5)
Value of production 15,94,375 12,50,000
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Less: Share in joint cost 12,50,000 5,00,000

Further processing cost 2,60,000 3,00,000
Profit 84,375 4,50,000

(iv) Profitability statement before and after processing

Product A Product B
Before ( ) After ( ) Before ( ) After ( )
Sales Value 16,00,000 6,40,000
Share in joint 12,50,000 5,00,000
costs
84,375 4,50,000
Profit 3,50,000 (as per iii above) 1,40,000 (as per iii above)

Product A should be sold at split off point and product B after processing because of higher profitability.

3. ABC Company produces a Product ‘X’ that passes through three processes: R, S and T. Three types of
raw materials, viz., J, K, and L are used in the ratio of 40:40:20 in process R. The output of each process
is transferred to next process. Process loss is 10% of total input in each process. At the stage of output
in process T, a by-product ‘Z’ is emerging and the ratio of the main product ‘X’ to the by-product ‘Z’ is
80: 20. The selling price of product ‘X’ is ₹ 60 per kg. The company produced 14,580 kgs of product ‘X’.

Material price: Material J @ Rs.15 per kg; Material K @ Rs.9 per kg; Material L @ Rs.7 per kg. Process
costs are as follows:

Process Variable cost per kg (Rs.) Fixed cost of Input (Rs.)

R 5.00 42,000

S 4.50 5,000

T 3.40 4,800

The by-product ‘Z’ cannot be processed further and can be sold at Rs.30 per kg at the split-off stage.
There is no realizable value of process losses at any stage.

Present a statement showing the apportionment of joint costs on the basis of the sales value of product
‘X’ and by-product ‘Z’ at the split-off point and the profitability of product ’X’ and by-product ‘Z’.

Solution
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4. JP Ltd. uses joint production process that produces three products at the split -off point. Joint
production costs during the month of July, 2022 were Rs. 33,60,000.

Product information for the month of July is as follows:

Particulars Product A Product B Product C

Units produced 3,000 6,000 9,000
Sales prices:
At the split-off Rs. 200
After further processing Rs. 300 Rs. 350 Rs. 100
Costs to process after split-off Rs. 6,00,000 Rs. 6,00,000 Rs. 6,00,000
Other information is as follows:
Product C is a by-product and the company accounts for the by-product at net realizable value as a
reduction of joint cost. Further, Product B & C must be processed further before they can be sold. FIND
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OUT the joint cost allocated to Product A in the month of July if joint cost allocation is based on Net
Realizable Value.
Solution

Product A
As the question says that "Products B and C must be processed further before they canbe
sold", it means Product A can be sold at the split-off point.
Cost to process Product A after the split-off point = 6,00,000
Additional revenue to be earned by processing further = 3,00,000
( 100 increase in selling price perunit x
3,000 units)
Therefore, Product A will not be processed further, and the sales value at split -off for A will be
used for allocating the joint costs.
Sales value at the split-off for A = 6,00,000
( 200 × 3,000 units)
Product B
Since Product B must be processed further, we use its net realizable value for the jointcost
allocation.
Net realizable value of Product B = 15,00,000
[( 350 × 6,000 units) – 6,00,000
further processing costs]
Product C
Product C, the by-product, must also be processed further to be sold.
Net realizable value of Product C = 3,00,000
[( 100 × 9,000 units) – 6,00,000
in further processing costs]
Joint Cost Allocation
Joint production cost = 33,60,000

Since, by-product C is accounted for as a reduction to the joint costs, the joint costs to be
allocated
= 30,60,000
( 33,60,000 - 3,00,000 NRV of Product C)
Allocation of joint costs between Product A and B will be on the basis of 6,00,000:
15,00,000

` , ,
Joint Cost allocated to Product A = 30,60,000 x ` , ,
= 8,74,286
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5. A factory producing article A also produces a by-product B which is further processed into finished
product. The joint cost of manufacture is given below:
Material Rs. 5,000
Labour Rs. 3,000
Overhead Rs. 2,000
Rs. 10,000

Subsequent cost in Rs. are given below:

A B
Material 3,000 1,500
Labour 1,400 1,000
Overhead 600 500
5,000 3,000

Selling prices are A Rs. 16,000

B Rs. 8,000
Estimated profit on selling prices is 25% for A and 20% for B.
Assume that selling and distribution expenses are in proportion of sales prices. Show how you would
apportion joint costs of manufacture and prepare a statement showing cost of production of A and B.

Solution
Apportionment of Joint Costs
Particulars A( ) B( )
Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of 16,000) (20% of 8,000)
Cost of sales 12,000 6,400
Less: Selling & Distribution exp. 267 133
(Refer working note) ( 400 × 2/3) ( 400 × 1/3)
Less: Subsequent cost 5,000 3,000
Share of Joint cost 6,733 3,267
So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267

Statement showing Cost of Production of A and B

Elements of cost Joint Cost Subsequent Cost Total Cost
A B A B A B
Material 3,367 1,633 3,000 1,500 6,367 3,133
Labour 2,020 980 1,400 1,000 3,420 1,980
Overheads 1,346 654 600 500 1,946 1,154
Cost of production 11,733 6,267
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Working Note:
Calculation of Selling and Distribution Expenses
Particulars ( )
Total Sales Revenue ( 16,000 + 8,000) 24,000
Less: Estimated Profit ( 4,000 + 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs ( 5,000 + 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400
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1. The information of Z Ltd. for the year ended 31st March 2020 is as below:

Amount (Rs.)
Direct materials 17,50,000
Direct wages 12,50,000
Variable factory overhead 9,50,000
Fixed factory overhead 12,00,000
Other variable costs 6,00,000
Other fixed costs 4,00,000
Profit 8,50,000
Sales 70,00,000

During the year, the company manufactured two products, X and Y, and the output and cost were:
X Y
Output (units) 8,000 4,000
Selling price per unit (Rs.) 600 550
Direct material per unit (Rs.) 140 157.50
Direct wages per unit (Rs.) 90 132.50
Variable factory overheads are absorbed as a percentage of direct wages and other variable
costs are computed as:
Product X – Rs.40 per unit and Product Y- Rs.70 per unit.
For the FY 2020-21, due to a pandemic, it is expected that demand for product X and Y will
fall by 20% & 10% respectively. It is also expected that direct wages cost will raise by 20%
and other fixed costs by 10%. Products will be required to be sold at a discount of 20%.
You are required to:
(i) PREPARE product- wise profitability statement on marginal costing method for the FY
2019-20 and
(ii) PREPARE a budget for the FY 2020-21
Solution
Product-wise Profitability Statement for the FY 2019-20:

Particulars Product-X ( ) Product-Y ) Total (

Output (units) 8,000 4,000
Selling price per unit 600 550
Sales value 48,00,000 22,00,000 70,00,000
Direct material 11,20,000 6,30,000 17,50,000
( 140×8,000) ( 157.50×4,00
0)
Direct wages 7,20,000 5,30,000 12,50,000
( 90×8,000) ( 132.5×4,00
0)
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Variable factory overheads 5,47,200 4,02,800 9,50,000

(76%of 7,20,000) (76%of 5,30,000)
Other variable costs 3,20,000 2,80,000 6,00,000
( 40×8,000) ( 70×4,000)
Contribution 20,92,800 3,57,200 24,50,000
Fixed factory overheads - - 12,00,000
Other fixed costs - - 4,00,000
Profit 8,50,000
(ii) Preparation of Budget for the FY 2020-21:

Particulars Product-X ( ) Product-Y ( ) Total ( )

Output (units) 6,400 3,600
(8,000×80%) (4,000×90%)
Selling price per unit 480 440
(600×80%) (550×80%)
Sales value 30,72,000 15,84,000 46,56,000
Direct material 8,96,000 5,67,000 14,63,000
( 140×6,400) ( 157.50×3,60
0)
Direct wages per unit 6,91,200 5,72,400 12,63,600
( 108×6,400) ( 159×3,600
)
Variable factory overheads 5,25,312 4,35,024 9,60,336
(76%of 6,91,200) (76%of 5,72,400)
Other variable costs 2,56,000 2,52,000 5,08,000
( 40×6,400) ( 70×3,600)
Contribution 7,03,488 (2,42,424) 4,61,064
Fixed factory overheads - - 12,00,000
Other fixed costs (110%of - - 4,40,000
4,00,000)
Profit/ (Loss) (11,78,936)

2. Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process
of preparing its revenue budget for the year 2022. The company has the following information which
can be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.
(ii) The sales price of Rs.23,000 per tonne will be increased by 10% provided Wholesale
Price Index (WPI) increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw
material cost is Rs.4,500 per tonne. The price of raw material will also increase by 10%
if WPI increase by 5%.
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(iv) The projected increase in WPI for 2022 is 4%

(v) A total of 6,000 employees works for the company. The company works 26 days in a
month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year wage
agreement. The earnings per manshift (means an employee cost for a shift of 8 hours)
is Rs. 3,000 (excluding terminal benefits). The new wage agreement will be implemented
from 1st July 2022 and it is expected that a 15% increase in pay will be given.
(vii) The casual employees are getting a daily wage of Rs. 850. The wages in linked to
Consumer Price Index (CPI). The present CPI is 165.17 points and it is expected to be
173.59 points in year 2022.
(viii) Power cost for the year 2021 is Rs. 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60%
of power is used for production purpose (directly related to production volume) and
remaining are for employee quarters and administrative offices.
(ix) During the year 2021, the company has paid Rs. 60,00,000 for safety and maintenance
works. The amount will increase in proportion to the volume of production.
(x) During the year 2021, the company has paid Rs. 1,20,000 for the purchase of diesel to
be used in car hired for administrative purposes. The cost of diesel will increase by 15%
in year 2022.
(xi) During the year 2021, the company has paid Rs. 6,00,000 for car hire charges
(excluding fuel cost). In year 2022, the company has decided to reimburse the diesel
cost to the car rental company. Doing this will attract 5% GST on Reverse Charge
Mechanism (RCM) basis on which the company will not get GST input credit.
(xii) Depreciation on fixed assets for the year 2021 is Rs. 80,40,00,000 and it will be 15%
lower in 2022.
Required:
From the above information PREPARE Revenue (Flexible) budget for the year 2022 and also show the
budgeted profit/ loss for the year.
Solution

Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022

Particulars PY 2021 CY 2022

A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne ( ) 23,000 23,000
( in lakh) ( in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material 9,66,000 10,81,920
[2.3 tonnes × A] (tonnes)
(ii) Price per tonne ( ) 4,500 4,500
(iii) Total raw material cost 43,470 48,686.40
( in lakh) [(i)×(ii)]
E Wages & Salary Cost:
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(i) Wages to casual employees 2,386.80 2,508.47

(15% × 6,000 = 900 employees) [900 × 26 × 12 × [900 × 26 × 12 ×
850] 893.33]
(ii) Salary to permanent employees 47,736 51,316.20
(85% × 6,000 = 5,100 employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
3,000] 3,000) + (5100 × 26
×6× 3,450)]
(iii) Total wages & salary [(i)+(ii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) 2,80,000 2,80,000
[40% × 7,00.000]
(iii) Total Power consumption (units) 7,00,000 7,50,400
[(i)+(ii)]
(iv) Power rate per unit 6.00 6.00
( )[ 42,00,000 ÷
7,00,000]
(v) Total power cost [(iii)×(iv)] 42 45.024
G Safety and maintenance Cost 60 67.20
[112% × 60,00,000]
H Diesel cost 1.2 -
I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis - 0.369
[5%×(i+ii)]
(iv) Total Car hire charge cost 6 7.749
[(i)+(ii)+(iii)]
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C-L] (5,142) (1273.043)

3. PQR Limited manufactures three products – X, Product Y and Product Z. The output for the current
year is 2,50,000 units of Product X, 2,80,000 units of Product Y and 3,20,000 units of Product Z
respectively.
Selling price of Product X is 1.25 times of Product Z whereas Product Y can be sold at double the price
at which product Z can be sold. Product Z can be sold at a profit of 20% on its marginal cost.

Other information are as follows:

Product X Product Y Product Z

Direct Materials Cost (per unit) Rs.20 Rs.20 Rs.20

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Direct Wages Cost (per unit) Rs.16 Rs.24 Rs.16

Raw materials used for manufacturing all the three products is the same. Direct Wages are paid @ Rs.4
per labour hour. Total overhead cost of the company is Rs.52,80,000 for the year, out of which Rs.1
per labour is variable and the rest is fixed.

In the next year it is expected that sales of product X and product Z will increase by 12% and 15%
respectively and sale of product Y will decline by 5%. The total overhead cost of the company for the
next year is estimated at Rs.55,08,000. The variable cost of Rs.1 per labour hour remains unchanged.
It is anticipated that all other costs will remain same for the next year and there is no opening and
closing stock. Selling Price per unit of each product will remain unchanged in the next year.

Prepare a budget showing the current position and the position for the next year clearly indicating
the total product-wise contribution and profit for the company as a whole.
Solution
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4. The Accountant of KPMR Ltd. has prepared the following budget for the coming year 2022 for its two
products 'AYE' and 'ZYE' :
Particulars Product ’AYE’ Product 'ZYE*

Production and Sales (in Units) 4,000 3,000

Amount (in Rs.) Amount (in Rs.)

Selling Price per unit 200 180

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Direct Material per unit 80 70

Direct Labour per unit 40 35

Variable Overhead per unit 20 25

Fixed Overhead per unit 10 10

After reviewing the above budget, the management has called the marketing team for suggesting some
measures for increasing the sales. The marketing team has suggested that by promoting the products
on social media, the sales quantity of both the products can be increased by 5%. Also, the selling price
per unit will go up by 10%. But this will result in increase in expenditure on variable overhead and fixed
overhead by 20% and 5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media.
Solution
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5. An electronic gadget manufacturer has prepared sales budget for the next few months. In this respect,
following figures are available:
Months Electronic gadgets’ sales
January 5000 units
February 6000 units
March 7000 units
April 7500 units
May 8000 units
To manufacture an electronic gadget, a standard cost of Rs. 1,500 is incurred and it is sold through
dealers at an uniform price of Rs. 2,000 per gadget to customers. Dealers are given a discount of 15% on
selling price.
Apart from other materials, two units of batteries are required to manufacture a gadget. The company
wants to hold stock of batteries at the end of each month to cover 30% of next month’s production and to
hold stock of manufactured gadgets to cover 25% of the next month’s sale.
3250 units of batteries and 1200 units of manufactured gadgets were in stock on 1st January.

Required:
(i) Prepare production budget (in units) for the month of January, February, March and April.
(ii) Prepare purchase budget for batteries (in units) for the month of January, February and
March and calculate profit for the quarter ending on March.
Solution
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(i) Preparation of Production Budget (in Units)

January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% of 1,500 1,750 1,875 2,000
next month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)
Production of electronic 5,300 6,250 7,125 7,625
Gadgets

(ii) Preparation of Purchase budget

January February March April
Consumption/production of Batteries (@ 10,600 12,500 14,250 15,250
2 per Gadget)
Add: Closing Stock (30% of next month’s 3750 4275 4575
production)
Less: Opening Stock 3,250 3,750 4275
Purchase of Batteries 11,100 13,025 14,550
Statement Showing Profit
Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per Rs. 2,000 Rs. 2,000 Rs. 2,000 Rs. 2,000
unit*
Less: Discount @15% 300 300 300 300
of selling price

Less: Standard cost 1500 1500 1500 1500

of Manufacturing per
gadget Cost

Profit (B) (selling 200 200 200 200

Price-discount-
cost)
Total Profit (A × B) Rs.10,00,000 Rs.12,00,000 Rs.14,00,000 Rs.36,00,000

6. A Limited has furnished the following information for the months from 1st January to 30th April, 2023:

January February March April

Number of Working days 25 24 26 25
Production (in units) per working day 50 55 60 52
Raw Material Purchases (% by weight to 21% 26% 30% 23%
total of 4 months)
Purchase price of raw material (per kg) ₹ 10 ₹ 12 ₹ 13 ₹ 11
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Quantity of raw material per unit of product : 4 kg.

Opening stock of raw material on 1st January : 6,020 kg. (Cost ₹ 63,210)
Closing stock of raw material on 30th April : 5,100 kg.
All the purchases of material are made at the start of each month.
Required:
1) Calculate the consumption of raw materials (in kgs) month-by-month and in total.
2) Calculate the month-wise quantity and value of raw materials purchased.
3) Prepare the priced stores ledger for each month using the FIFO method.
Solution
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7. PSV Ltd. manufactures and sells a single product and estimated the following related information for
the period November, 2020 to March, 2021.

Particulars November, December, January, February, March,

2020 2020 2021 2021 2021

Opening Stock of 7,500 3,000 9,000 8,000 6,000

Finished Goods (in
Units)

Sales (in Units) 30,000 35,000 38,000 25,000 40,000

Selling Price per unit 10 12 15 15 20

(in Rs.)

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 Rs.)
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material 'A' and 'B' separately (in units)

Solution
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(i) Sales Budget (in Rs.)

Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in 30,000 35,000 38,000 25,000 40,000 1,68,000
Units)
Selling Price 10 12 15 15 20 -
per unit
(Rs.)
Total Sales 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000
(Rs.)

(ii) Production Budget (in units)

Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales 30,000 35,000 38,000 25,000 40,000 1,68,000
Add: Closing stock of 3,000 9,000 8,000 6,000 10,000 36,000
finished goods
Total quantity required 33,000 44,000 46,000 31,000 50,000 2,04,000
Less: Opening stock of 7,500 3,000 9,000 8,000 6,000 33,500
finished goods
Units to be produced 25,500 41,000 37,000 23,000 44,000 1,70,500

(iii) Raw material budget (in units)

For Raw material 'A'
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material 2 2 2 2 2 -
consumption p.u. (kg.):
(b)
Total raw material 51,000 82,000 74,000 46,000 88,000 3,41,000
consumption (Kg.): (a x b)

For Raw material 'B'

Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: 25,500 41,000 37,000 23,000 44,000 1,70,500
(b)
Raw material 3 3 3 3 3 -
consumption p.u.
(kg.): (b)
Total raw material 76,500 1,23,000 1,11,000 69,000 1,32,000 5,11,500
consumption (Kg.): (a x
b)

8. SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23 commencing
on 1st April 2022, production will be constrained by direct labour. It is estimated that only 12,000 hours
of direct labour hours will be available in each month.
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For market reasons, production of either of the two garments must be at least 25% of the production of
the other. Estimated cost and revenue per garment are as follows:

Shirt (Rs.) Short (Rs.)

Sales price 60 44
Raw Materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22

From the month of July 2022 direct labour will no longer be a constraint. The company expects to be
able to sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock at the
beginning of July 2022.
Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the year.
Following additional information is available:
• The company intends to carry stock of finished garments sufficient to meet 40% of the next
month's sale from July 2022 onwards.
• The estimated selling price will be same as above.

Required:
I. Calculate the number of shirts and shorts to be produced per month in the first
quarter of financial year 2022-2023 to maximize company's profit.
II. Prepare the following budgets on a monthly basis for July, August and September
2022:
(i) Sales budget showing sales units and sales revenue for each product.
(ii) Production budget (in units) for each product.

Solution
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9. A company is engaged in the manufacture of specialised sub-assemblies required for certain electronic
equipment. The company envisages that in the forthcoming month, December, the sales will be in the
ratio of 3 : 4 : 2 respectively of sub-assemblies, ACB, MCB and DP.

The following is the schedule of components required for manufacture:

Component requirements

Sub-assembly Selling Price Base board IC08 IC12 IC26

ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price (Rs.) 60 20 12 8

The direct labour time and variable overheads required for each of the sub- assemblies are:

Labour hours Variable overheads (Rs.)

Grade A Grade B

ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (Rs.) 5 4 —

The labourers work 8 hours a day for 25 days a month.

The opening stocks of sub-assemblies and components for December are as under:

Sub-assemblies Components
ACB 800 Base Board 1,600

MCB 1,200 IC08 1,200

DP 2,800 IC12 6,000
IC26 4,000

Fixed overheads amount to Rs. 7,57,200 for the month and a monthly profit target of Rs. 12 lacs
has been set.

The company is eager for a reduction of closing inventories for the month of December of sub-
assemblies and components by 10% of quantity as compared to the opening stock. Prepare the
following budgets for the month of December:
(a) Sales budget in quantity and value.
(b) Production budget in quantity
(c) Component usage budget in quantity.
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(d) Component purchase budget in quantity and value.

(e) Manpower budget showing the number of workers and the amount of wages payable.

Solution
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10. B Ltd manufactures two products viz., X and Y and sells them through two divisions, East and West.
For the purpose of Sales Budget to the Budget Committee, following information has been made
available for the year 2020-21:

Product Budgeted Sales Actual Sales

East Division West Division East Division West Division
X 800 units at 1,200 units at 1,000 units at 1,400 units at Rs. 18
Rs.18 Rs.18 Rs.18
Y 600 units at 1,000 units at 400 units at Rs.42 800 units at Rs.42
Rs.42 Rs.42

Adequate market studies reveal that product X is popular but underpriced. It is expected that if the
price of X is increased by Rs. 2, it will, find a ready market. On the other hand, Y is overpriced and if
the price of Y is reduced by Rs. 2 it will have more demand in the market. The company management
has agreed for the aforesaid price changes. On the basis of these price changes and the reports of
salesmen, following estimates have been prepared by the Divisional Managers:
Percentage increase in sales over budgeted sales

Product East Division West Division

X + 12.5% + 7.5%
Y + 22.5% + 12.5%

With the help of intensive advertisement campaign, following additional sales (over and above the
above-mentioned estimated sales by Divisional Mangers) are possible:

Product East Division West Division

X 120 units 140 units
Y 80 units 100 units

You are required to Prepare Sales Budget for 2021-22 after incorporating above estimates and also
Show the Budgeted Sales and Actual Sales of 2020-21.

Solution
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11. P Ltd. manufactures two products called ‘X’ and ‘Y’. Both products use a common raw material Z. The
raw material Z is purchased @ Rs. 72 per kg from the market. The company has decided to review
inventory management policies for the forthcoming year.
The following forecast information has been extracted from departmental estimates for the year ended
31st March 2025 (the budget period):

Product X Product Y
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg

Material Z wastage (%) 10 5

Additional information:
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material cost.
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- The cost of placing an order is Rs. 15,600 per order.

- The management of P Ltd. has decided that there should not be more than 40 orders in
a year for the raw material Z.
Required:
- Prepare Production budget for Products X and Y (in units) for the year ended 31st March
2025.
- Calculate the Economic Order Quantity for Material Z (in kgs).
- Prepare Purchases budget for Material Z (in kgs and value) for the year ended 31st March
2025.
- If there is a sole supplier for the raw material Z in the market and the supplier do not sale
more than 4,000 kg. of material Z at a time. Keeping the management purchase policy
and production quantity mix into consideration, calculate the maximum number of units
of Product X and Y that could be produced.
Solution
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 Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman

1. The following information pertains to ZB Limited for the year:

Profit volume ratio 30%

Margin of Safety (as % of total sales) 25%
Fixed Cost Rs.12,60,000

You are required to calculate:

A) Break even sales value (Rs.),
B) Total sales value (Rs.) at present,
C) Proposed sales value (Rs.) if company wants to earn the present profit after reduction of 10% in fixed
cost,
D) Sales in value (Rs.) to be made to earn a profit of 20% on sales assuming fixed cost remains unchanged,
E) New Margin of Safety if the sales value at present as computed in (b) decreased by 12.5%. [May 2023]

Solution
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2. Following figures have been extracted from the books of M/s. RST Private Limited:
Financial Year Sales (Rs.) Profit/Loss (Rs.)
2016-17 4,00,000 15,000(loss)
2017-18 5,00,000 15,000 (Profit)

You are required to calculate

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(i) Price Volume Ratio

(ii) Fixed cost
(iii) Break Even point
(iv) Sales required to earn a profit of Rs. 45,000
(v) Margin of safety in financial year 2017-18

Solution

Sales (Rs.) Profit (Rs.)

Year 2016 4,00,000 15,000 (loss)
Year 2017 5,00,000 15,000 (profit)
Difference 1,00,000 30,000
,
(i) P/V Ratio = × 100 = , ,
× 100 = 30 %

(ii) (Rs.)
Contribution in 2016 (4,00,000 × 30%) 1,20,000
Add: Loss 15,000
Fixed Cost* 1,35,000
*Contribution = Fixed cost + Profit
∴ Fixed cost = Contribution – Profit

, ,
(iii) Break-even point = /
= %
= Rs. 4,50,000

(iv) Sales to earn a profit of Rs. 45,000

, , ,
= = Rs. 6,00,000
/ %

(v) Margin of safety in 2017 -18

Margin of safety = Actual sales - Break-even sales
= 5,00,000 - 4,50,000 = Rs. 50,000.

3. During a particular period ABC Ltd has furnished the following data:
Sales Rs. 10,00,000
Contribution to sales ratio 37% and
Margin of safety is 25% of sales.
A decrease in selling price and decrease in the fixed cost could change the "contribution to sales ratio" to
30% and "margin of safety" to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost
(ii) Revised Sales and
(iii) New Break-Even Point.
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Solution

Contribution to sales ratio (PV ratio) = 37%

Variable cost ratio = 100% - 37% = 63%
Variable cost = Rs. 10,00,000 x 63% = Rs. 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost is
Rs. 6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% - 30% = 70%
. , ,
Thus, Revised sales = %
= Rs. 9,00,000

Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety)

= 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to sales ratio
= Rs. 5,40,000 (Rs. 9,00,000 x 60%) x 30%
= Rs. 1,62,000
(ii) Revised sales = Rs. 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= Rs. 9,00,000 x 60%
= Rs. 5,40,000
4. A dairy product company manufacturing baby food with a shelf life of one yearfurnishes the
following information:
a. On 1st April, 2023, the company has an opening stock of 20,000 packets whosevariable cost is
180 per packet.
b. In 2022-23, production was 1,20,000 packets and the expected production in2023-24 is 1,50,000
packets. Expected sales for 2023-24 is 1,60,000 packets.
c. In 2022-23, fixed cost per unit was 60 and it is expected to increase by 10% in 2023-24. The
variable cost is expected to increase by 25%. Selling price for 2023-24 has been fixed at 300
per packet.
You are required to calculate the Break-even volume in units for 2023-24.

Solution

Working Notes:
Particulars 2022-23 ( ) 2023-24 ( )
Fixed Cost 72,00,000 79,20,000
( 60 × 1,20,000 (110% of
units) 72,00,000)
Variable Cost 180 225
(125% of 180)

Calculation of Break-even Point (in units):

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Since, shelf life of the product is one year only, hence, opening stock is to be soldfirst.
(
)
Total Contribution required to recover total fixed cost in 2023-24 and 79,20,000
to reach break-even volume.
Less: Contribution from opening stock 24,00,000
{20,000 units × ( 300 – 180)}
Balance Contribution to be recovered 55,20,000

Units to be produced to get balance contribution

₹ , ,
= ₹ ₹
= 73,600 packets.

Break-even volume in units for 2023-24

Packets
From 2023-24 production 73,600
Add: Opening stock from 2022-23 20,000
93,600

5. J Ltd. manufactures a Product-Y. Analysis of income statement indicated a profit of 250 lakhs
on a sales volume of 5,00,000 units. Fixed costs are 1,000 lakhs which appears to be high. Existing
selling price is 680 per unit. The company is considering revising the profit target to 700 lakhs. You
are required to Compute –
a. Break- even point at existing levels in units and in rupees.
b. The number of units required to be sold to earn the target profit.
c. Profit with 10% increase in selling price and drop in sales volume by 10%.
d. Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above, if a
reduction of 10% in the variable costs and 170 lakhs in the fixed cost is envisaged.
Solution

Computation of existing contribution

Particulars Per unit ( ) Total ( In
lakhs)
Sales 680 3,400
Fixed Cost 200 1,000
Profit 50 250
Contribution 250 1,250
Variable Cost (Sales – Contribution) 430 2,150
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(iii) Profit if selling price is increased by 10% and sales volume drops by
10%:Existing Selling Price per unit = 680
Revised selling price per unit = 680 × 110% =
748 Existing Sales Volume = 5,00,000 units
Revised sales volume = 5,00,000 units – 10% of 5,00,000 = 4,50,000 units.
Statement of profit at sales volume of 4,50,000 units @ 748 per unit

Particulars Per unit ( ) Total ( In

lakhs)
Sales 748 3,366
Less: Variable Costs 430 1,935
Contribution 318 1,431
Less: Fixed Cost 1,000
Profit 431
(iv) Volume to be achieved to earn target profit of 700 lakhs with revised selling price and
reduction of 10% in variable costs and 170 lakhs in fixed cost:
Revised selling price per unit = 748
Variable costs per unit existing = 430

Revised Variable Costs

Reduction of 10% in variable costs = 430 – 10% of 430
= 430 – 43
= 387
Total Fixed Cost (existing) = 1,000 lakhs
Reduction in fixed cost = 170 lakhs
Revised fixed cost = 1,000 lakhs – 170 lakhs = 830 lakhs
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Revised Contribution (unit) = Revised selling price per unit – Revised

Variable Costs per units
Revised Contribution per unit = 748 – 387 = 361
Desired Contribution = Revised Fixed Cost + Target Profit
= 830 lakhs + 700 lakhs = 1,530 lakhs
₹ , , ,
No. of units to be sold = = ₹
= 4,23,823 units

6. The analysis of cost sheet of A Ltd. for the last financial year has revealed the following information for it’s
product R:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of cost of goods sold --
Direct Labour 15% of cost of goods sold --
Factory Overhead 10% of cost of goods sold Rs. 2,30,000
General & Administration 2% of cost of goods sold Rs. 71,000
Overhead
Selling & Distribution 4% of cost of sales Rs. 68,000
Overhead

Last year 5,000 units were sold at Rs.185 per unit.

You being an associate to cost controller of the A Ltd., CALCULATE :
(i) Break-even Sales (in rupees),
(ii) Profit earned during last year,
(iii) Margin of safety (in %) and
(iv) the profit if the sales were 10% less than the actual sales
Solution
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7. An Indian soft drink company is planning to establish a subsidiary company in Bhutan to produce mineral
water. Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produced the
following estimates for the Bhutanese subsidiary:

Total annual costs Percent of Total Annual

Cost which is variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%
The Bhutanese production will be sold by manufacturer’s representatives who will receive a commission of 8%
of the sale price. No portion of the Indian office expenses is to be allocated to the Bhutanese subsidiary. You
are required to
a) COMPUTE the sale price per bottle to enable the management to realize an
estimated 10% profit on sale proceeds in Bhutan.
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b) CALCULATE the break-even point in rupees sales as also in number of bottles

for the Bhutanese subsidiary on the assumption that the sale price is Rs. 14 per
bottle.
Solution
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8. Aditya Limited manufactures three different products and the following information has been collected
from the books of accounts:

Products
S T U
Sales Mix 35% 35% 30%
Selling Price 300 400
200
Variable Cost 150 200
120
Total Fixed Costs 18,00,000
Total Sales 60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of Product U and
replace it with Product M, when the following results are anticipated:

Products
S T M
Sales Mix 50% 25% 25%
Selling Price 300
400 300
Variable Cost 150
200 150
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Total Fixed Costs 18,00,000

Total Sales 64,00,000
Required
a. COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
b. COMPUTE the PV ratio, total contribution, profit and Break-even sales for theproposed
product mix. (RTP May 2021)
Solution
(i) Computation of PV ratio, contribution and break-even sales for existing productmix

Products
Total
S T U
Selling Price ( ) 300 400 200
Less: Variable Cost ( ) 150 200 120
Contribution per unit ( ) 150 200 80
P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 35% 35% 30%
Contribution per rupee of sales
17.5% 17.5% 12% 47%
(P/V Ratio × Sales Mix)
Present Total Contribution ( 60,00,000 × 47%)
28,20,000
Less: Fixed Costs
18,00,000
Present Profit
10,20,000
Present Break Even Sales ( 18,00,000/0.47)
38,29,787
(ii) Computation of PV ratio, contribution and break-even sale for proposed productmix

Products
S T M Total
Selling Price ( ) 300 400 300
Less: Variable Cost ( ) 150 200 150
Contribution per unit ( ) 150 200 150
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 50% 25% 25%
Contribution per rupee of sales
25% 12.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution 64,00,000 x
50%) 32,00,000
Less: Fixed Costs
18,00,000
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Proposed Profit
14,00,000
Proposed Break Even Sales 18,00,000/0.50)
36,00,000

9. X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates
production of any one spare part for a particular period of time. The following are the cost and other
information for the production of the two different spare parts A and B:

Part A Part B
Per unit
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine P 0.6 hrs 0.25 hrs.
Machine Time: Machine Q 0.5 hrs. 0.55 hrs.
Target Price (Rs.) 145 115
Total hours available Machine P 4,000 hours
Machine Q 4,500 hours

Alloy available is 13,000 kgs. @ Rs. 12.50 per kg.

Variable overheads per machine hours Machine P: Rs. 80
Machine Q: Rs. 100
Required

(i) IDENTIFY the spare part which will optimize contribution at the offered price.
(ii) If Y Ltd. reduces target price by 10% and offers Rs. 60 per hour of unutilized machine hour,
CALCULATE the total contribution from the spare part identified above?

Solution

Part A Part B
Machine “P” (4,000 hrs) 6,666 16,000
Machine “Q” (4,500 hrs) 9,000 8,181
Alloy Available (13,000 kg.) 8,125 8,125
Maximum Number of Parts to be manufactured (Minimum of 6,666 8,125
the above three)

(Rs.) (Rs.)
Material (Rs.12.5 × 1.6 kg.) 20.00 20.00
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Variable Overhead: Machine “P” 48.00 20.00

Variable Overhead: Machine “Q” 50.00 55.00
Total Variable Cost per unit 118.00 95.00
Price Offered 145.00 115.00
Contribution per unit 27.00 20.00
Total Contribution for units produced (I) 1,79,982 1,62,500

Spare Part A will optimize the contribution.

Part A
Parts to be manufactured numbers 6,666

Machine P : to be used 4,000

Machine Q : to be used 3,333

Underutilized Machine Hours (4,500 hrs. – 3,333 hrs.) 1,167

Compensation for unutilized machine hours (1,167hrs. × Rs.60) (II) 70,020

Reduction in Price by 10%, Causing fall in Contribution of Rs.14.50 96,657

per unit (6,666 units × Rs.14.5) (III)
Total Contribution (I + II – III) 1,53,345

10. The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture
of a toy. The following information is available:

Particulars Process A (Rs.) Process B (Rs.)

Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
Suggest:
1. Identify the process which gives more profit.
2. Would you change your answer as given above, if you were informed that the
capacities of the two processes are as follows:
A - 6,00,000 units; B - 5,00,000 units?
Solution
Comparative Profitability Statements

Particulars Process- A ( ) Process- B ( )

Selling Price per unit 20.00 20.00
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Less: Variable Cost per unit 12.00 14.00

Contribution per unit 8.00 6.00
Total Contribution 32,00,000 24,00,000
( 8 × 4,00,000) ( 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
Capacity (units) 4,30,000 5,00,000
Total Contribution at full capacity 34,40,000 30,00,000
( 8 × 4,30,000) ( 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000

Process - B gives more profit.

Particulars Process- A ( ) Process- B ( )

*Capacity (units) 6,00,000 5,00,000
Total contribution 48,00,000 30,00,000
( 8 × 6,00,000) ( 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000

Process-A be chosen.
*Note: It is assumed that capacity produced equals sales.

11. Two manufacturing companies A and B are planning to merge. The details are as follows:

A B

Capacity utilisation (%) 90 60

Sales (Rs.) 63,00,000 48,00,000

Variable Cost (Rs.) 39,60,000 22,50,000

Fixed Cost (Rs.) 13,00,000 15,00,000

Assuming that the proposal is implemented, calculate:

(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of Rs. 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of Rs.60,00,000, what
percentage of increase in selling price is required to sustain an increase of 5% in fixed
overheads.
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Solution
Statement showing computation of Breakeven of merged plant and other
required information

Particulars Plant A Plant B Merged

Plant
Before After Before After (100%) (Rs.)
(90%) (100%) (60%) (100%)
(Rs.) (Rs.) (Rs.) (Rs.)

(i) Sales 63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000

(ii) Variable cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000

(iii) Contribution 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000

(i - ii)

(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000

(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000

PV ratio of merged plant = x 100

. , ,
= . , , ,
x 100 = 45.67%

(i) Break even sales of merged plant = /

. , ,
= . %

= Rs. 61,30,939.34 (approx.)

. , , .
Capacity utilisation = . , , ,
x 100 = 40.88%

(ii) Profitability of the merged plant at 80% capacity utilisation

= (Rs. 1,50,00,000 x 80%) x P/v ratio - fixed cost
= Rs. 1,20,00,000 X 45.67% - Rs. 28,00,000
= Rs. 26,80,400
(iii) Sales to earn a profit of Rs. 60,00,000

Desired sales = /
. , , . , ,
= . %

= Rs. 1,92,68,666 (approx.)

(iv) Increase in fixed cost
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= Rs. 28,00,000 x 5% = Rs. 1,40,000

Therefore, percentage increase in sales price
𝐑𝐬.𝟏,𝟒𝟎,𝟎𝟎𝟎
= 𝐑𝐬.𝟏,𝟗𝟐,𝟔𝟖,𝟔𝟔𝟔
x 100 = 0.726% (approx.)

12. NN Ltd. manufactures automobiles accessories and parts. The following are the total cost of processing
2,00,000 units:

Direct materials cost Rs. 375 per unit

Direct labour cost Rs. 80 per unit
Variable factory overhead Rs. 16 per unit
Fixed factory overhead Rs. 500 lakhs
The purchase price of the component is Rs. 485. The fixed overhead would continue to be incurred
even when the component is bought from outside.
REQUIRED:

(a) Should the part be made or bought from outside considering that the present facility when
released following a buying decision would remain idle?
(b) In case the released capacity can be rented out to another manufacturer for Rs. 32,00,000 having
good demand. What should be the decision?
Solution

The present cost structure is as follows:

Variable cost per unit is:
Direct materials cost Rs.
375
Direct labour cost Rs. 80
Variable factory overhead Rs. 16
Total variable cost per unit Rs.
471
The fixed cost of Rs. 500 lakhs is irrelevant for decision making as it would incur in either case.
(a) The decision shall be made comparing the marginal cost of making and buying the component.
Here the variable cost of making the component is Rs. 471 as compared to buying cost of Rs. 485.
The component shall be made by using own production facility as it would save the company Rs.
14 per unit.
(b) If by releasing the production facility the company can earn a rental income of Rs. 32,00,000, then
the additional cost of buying from outside and the rental income from releasing the capacity shall
be compared for making decision.

(i) Rental income Rs. 32,00,000

(ii) Additional cost of buying (Rs. 14 × 2,00,000 units) Rs. 28,00,000
Additional Income {(i)-(ii)} Rs. 4,00,000
The component should be bought from outside as it would save the companyRs. 4,00,000 in fixed
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cost.

13. PQR Ltd. manufactures medals for winners of athletic events and other contests. Its manufacturing plant
has the capacity to produce 10,000 medals each month. The company has current production and sales
level of 7,500 medals per month. The current domestic market price of the medal is Rs. 150.
The cost data for the month of August 2021 is as under:
(Rs.)
Variable costs:
- Direct materials 2,62,500
- Direct labour cost 3,00,000
- Overhead 75,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,75,000
10,87,500

PQR Ltd. has received a special one-time only order for 2,500 medals at Rs. 120 per medal.
Required:

(i) Should PQR Ltd. accept the special order? Why? EXPLAIN briefly.
(ii) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each
month. The special order must be taken either in full or rejected totally. ANALYSE
whether PQR Ltd. should accept the special order or not.

Solution

In this question, the existing demand for the medals is 7,500 units per month against the 10,000
units capacity. There is an idle capacity for 2,500 medals in a month. Since, the capacity of the
plant (supply) is more than the demand, any additional order could increase the existing profit
provided the offered price is more than the marginal cost.
The existing cost and profit structure is as under:

Particulars Amount (Rs.) Amount (Rs.)

A. Selling price per unit 150.00
B. Variable Cost per unit:
- Direct material (Rs. 2,62,500 ÷ 7,500 units) 35.00
- Direct labour (Rs. 3,00,000 ÷ 7,500 units) 40.00
- Overhead (Rs. 75,000 ÷ 7,500 units) 10.00 85.00
C. Contribution per unit (A-B) 65.00
D. Total Contribution (Rs. 85 × 7,500 units) 4,87,500
E. Fixed Costs:
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4,50,000
- Fixed manufacturing costs
- Fixed marketing costs
F. Profit (D-E) 37,500

i) The offered price for the additional demand of 2,500 medals is more than the variable cost
per unit. Any additional demand will contribute towards fixed costs and profit.
Particulars Amount Amount
(Rs.) (Rs.)
A. Sales Value {(Rs. 150 × 7,500) + (Rs. 120 × 2,500)} 14,25,000
B. Variable Cost (Rs. 85 × 10,000) 8,50,000
C. Contribution (A-B) 5,75,000
D. Fixed Costs:
- Fixed manufacturing costs 2,75,000
- Fixed marketing costs 1,75,000 4,50,000
E. Profit (C-D) 1,25,000
The offer for 2,500 unit be accepted as it increases the profit by Rs. 87,500 (Rs. 1,25,000 – Rs. 37,500).

ii) In this instant case, the capacity to produce medals is decreased by 1,000 unit per month
and the existing demand for the medals is 7,500. The spare capacity is for 1,500 medals only
but the special demand is for 2,500 medals. By accepting the offer, the company has to lose
contribution on 1,000 medals from existing customers. The offer will only be acceptable if the
gain from the new offer supersedes the loss from the existing customers.
Particulars Amount Amount
(Rs.) (Rs.)
A. Sales Value {(Rs. 150 × 6,500) + (Rs. 120 × 2,500)} 12,75,000
B. Variable Cost (Rs. 85 × 9,000) 7,65,000
C. Contribution (A-B) 5,10,000
D. Fixed Costs:
- Fixed manufacturing costs 2,75,000
- Fixed marketing costs 1,75,000 4,50,000
E. Profit (C-D) 60,000
By accepting the special order at Rs. 120 per unit, the total profit of the company is increased
by Rs. 22,500 (Rs. 60,000 – Rs. 37,500) hence the order may be accepted, however, other
qualitative factors may also be taken care-off.

14. XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that
the unit contribution of Y is onefifth less than the unit contribution of X, that the total of F 1 and F2 is
Rs. 1,50,000, that the BEP of X is 1,800 units (for BEP of X, F2 is not considered) and that 3,000 units
is the indifference point between X and Y.(i.e. X and Y make equal profits at 3,000 unit volume,
considering their respective fixed costs). There is no inventory buildup as whatever is produced is sold.
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Solution
Let Cx be the Contribution per unit of Product X.
Therefore, Contribution per unit of Product Y =Cy=4/5Cx = 0.8Cx Given F1 + F2 = 1,50,000,
F1 = 1,800Cx (Break even Volume × Contribution per unit)
Therefore, F2 = 1,50,000 – 1,800Cx.
3,000Cx –F1 =3,000 × 0.8Cx – F2 or 3,000Cx – F1 =2,400 Cx-F2 (Indifference Point) i.e.,
3,000Cx – 1,800Cx = 2,400Cx – 1,50,000 + 1,800Cx
i.e., 3,000Cx = 1,50,000, Therefore, Cx = Rs. 50/- (1,50,000 / 3,000)
Therefore, Contribution per unit of X = Rs. 50 Fixed Cost of X = F1 = Rs. 90,000 (1,800 × 50)
Therefore, Contribution per unit of Y is Rs. 50 × 0.8 = Rs. 40 and Fixed Cost of Y = F2 = Rs.
60,000 (1,50,000 – 90,000)
The Value of F1 = Rs. 90,000, F2 = Rs. 60,000 and X = Rs. 50 and Y = Rs. 40

15. The following are cost data for three alternative ways of processing the clerical work for cases brought
before the LC Court System:

A B C
Manual (Rs.) Semi- Fully-
Automatic Automatic
(Rs.) (Rs.)
Monthly fixed costs:
Occupancy 15,000 15,000 15,000
Maintenance contract --- 5,000 10,000
Equipment lease --- 25,000 1,00,000
Unit variable costs (per report):
Supplies 40 80 20
Labour Rs.200 Rs.60 Rs.20
(5 hrs × Rs.40) (1 hr × Rs.60) (0.25 hr × Rs.80)

Required:

(i) CALCULATE cost indifference points. Interpret your results.

(ii) If the present case load is 600 cases and it is expected to go up to 850 cases in near
future, SELECT most appropriate on cost considerations?

Solution

(i) Cost Indifference Point

A and B A and C B and C

(Rs.) (Rs.) (Rs.)
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Differential Fixed Cost (I) Rs.30,000 Rs.1,10,000 Rs.80,000

(Rs.45,000 – (Rs.1,25,000 (Rs.1,25,000 –
Rs.15,000) – Rs.45,000)
Rs.15,000)
Differential Variable Costs (II) Rs.100 Rs.200 Rs.100
(Rs.240 – (Rs.240 – (Rs.140 –
Rs.140) Rs.40) Rs.40)
Cost Indifference Point (I/II) 300 550 800
(Differential Fixed Cost / Cases Cases Cases
Differential Variable Costs per
case)

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

No. of Cases Alternative to be Chosen

Cases ≤ 300 Alternative ‘A’
300 ≥ Cases ≤ 800 Alternative ‘B’
Cases ≥ 800 Alternative ‘C’

(ii) Present case load is 600. Therefore, alternative B is suitable. As the number of cases is
expected to go upto 850 cases, alternative C is most appropriate.

16. Mr. X has Rs. 2,00,000 investments in his business firm. He wants a 15 per cent return on his money.
From an analysis of recent cost figures, he finds that his variable cost of operating is 60 per cent of
sales, his fixed costs are Rs. 80,000 per year. Show COMPUTATIONS to answer the following
questions:
(i) What sales volume must be obtained to break even?
(ii) What sales volume must be obtained to get 15 per cent
return on investment?
Mr. X estimates that even if he closed the doors of his business, he would incur Rs. 25,000 as expenses
per year. At what sales would he be better off by locking his business up?

Solution

Particulars (Rs.)

Suppose sales 100

Variable cost 60

Contribution 40
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P/V ratio 40%

Fixed cost = Rs. 80,000

(i) Break-even point = Fixed Cost  P/V ratio =80,000  40% or Rs. 2,00,000

(ii) 15% return on Rs. 2,00,000 30,000

Fixed Cost 80,000
Contribution required 1,10,000
Sales volume required = Rs. 1,10,000  40% or Rs. 2,75,000
(iii) Avoidable fixed cost if business is locked up = Rs. 80,000 - Rs. 25,000
= Rs. 55,000
Minimum sales required to meet this cost: Rs. 55,000/40%
or Rs. 1,37,500

Mr. X will be better off by locking his business up, if the sale is less than
Rs. 1,37,500

17. XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilisation is reckoned
as 90%. Standard variable production costs are Rs. 11 per unit. The fixed costs are Rs.3,60,000 per
year. Variable selling costs are Rs. 3 per unit and fixed selling costs are Rs.2,70,000 per year. The unit
selling price is Rs. 20.
In the year just ended on 31st March, the production was 1,60,000 units and sales were 1,50,000
units. The closing inventory on 31st March was 20,000 units. The actual variable production costs for
the year were Rs. 35,000 higher than the standard.

a. CALCULATE the profit for the year

i. by absorption costing method and
ii. by marginal costing method.
b. EXPLAIN the difference in the profits.

Solution
Income Statement (Absorption Costing) for the year ending 31st March

(Rs.) (Rs.)
Sales (1,50,000 units @ Rs.20) 30,00,000
Production Costs:
Variable (1,60,000 units @ Rs.11) 17,60,000
Add: Increase 35,000 17,95,000
Fixed (1,60,000 units @ Rs.2*) 3,20,000
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Cost of Goods Produced 21,15,000

Add: Opening stock (10,000 units @ Rs.13)* 1,30,000
22,45,000
2,64,375
Less: Closing stock  Rs. 21,15,000 ×20,000 units
 1,60,000 units 
 
Cost of Goods Sold 19,80,625
Add: Under absorbed fixed production overhead 40,000
(3,60,000 – 3,20,000)

20,20,625
Add: Non-production costs:
Variable selling costs (1,50,000 units @ Rs.3) 4,50,000
Fixed selling costs 2,70,000
Total cost 27,40,625
Profit (Sales – Total Cost) 2,59,375

* Working Notes:
1. Fixed production overhead is absorbed at a pre-determined rate based on normal
capacity, i.e. Rs.3,60,000 ÷ 1,80,000 units = Rs. 2.
2. Opening stock is 10,000 units, i.e., 1,50,000 units + 20,000 units – 1,60,000 units. It is
valued at Rs.13 per unit, i.e., Rs.11 + Rs.2 (Variable + fixed).

Income Statement (Marginal Costing) for the year ended 31st March

(Rs.) (Rs
.)
Sales (1,50,000 units @ Rs.20) 30,00,000
Variable production cost (1,60,000 units @ 17,95,000
Rs.11 + Rs.35,000)
Variable selling cost (1,50,000 units @ Rs.3) 4,50,000
22,45,000
Add: Opening Stock (10,000 units @ Rs.11) 1,10,000
23,55,000
Less: Closing stock
 Rs.17,95,000 ×20,000 units 2,24,375
 1,60,000 units 
 

Variable cost of goods sold 21,30,625

Contribution (Sales – Variable cost of goods 8,69,375
sold)
Less: Fixed cost – Production 3,60,000
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– Selling 2,70,000 6,30,000

Profit 2,39,375

Reasons for Difference in Profit: (Rs.)

Profit as per absorption costing 2,59,375
Add: Op. stock under –valued in marginal costing (Rs.1,30,000 – 20,000
1,10,000)

2,79,375
Less: Cl. Stock under –valued in marginal closing (Rs.2,64,375 – 40,000
2,24,375)

Profit as per marginal costing 2,39,375

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1. Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials namely Material P
and Material Q. The Standard Cost of Mixture is as under:
Material P 150 ltrs. @ Rs.40 per ltr.
Material Q 100 ltrs. @ Rs.60 per ltr.
Standard loss @ 20% of total input is expected during production.
The cost records for the period exhibit following consumption:
Material P 140 ltrs. @ Rs.42 per ltr,
Material Q 110 ltrs. @ Rs.56 per ltr,
Quantity produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Usage Variance.
(iii) Material Price Variance
Solution

Take the good output of 195 ltr. The standard quantity of material required
for 195 ltr. of output is × 100 = 243.75 ltr.
Statement showing computation of Standard Cost/Actual Cost/ Revised
Actual Quantity
Material Standard Cost Actual Cost
Quantity Rate Amount Quantity Rate Amount

[SQ] [SP] [SQ × SP] [AQ] [AP] [AQ × AP]

(Kg.) (Rs.) (Rs.) (Kg.) (Rs.) (Rs.)

A (60% of 146.25 40 5,850.00 140 42 5,880
243.75 ltr.)
B (40% of. 97.50 60 5,850.00 110 56 6,160
243.75 Kg.)
243.75 11,700.00 200 12,040

Note: SQ = Standard Quantity = Expected Consumption for Actual Output

AQ = Actual Quantity of Material Consumed
SP = Standard Price Per Unit
AP = Actual Price Per Unit
Computation of Variances:
Material Cost Variance = SQ × SP - AQ × AP
A = Rs. 146.25 Itr. × Rs. 40- 140 Itr. × Rs. 42 = Rs. 30.00 (A)
B = Rs. 97.50 ltr. × Rs. 60 - 110 ltr. × Rs. 56 = Rs. 310.00 (A)
Total = Rs. 30.00 (A) + Rs. 310.00 (A) = Rs. 340.00 (A)

Material Usage Variance = SP × (SQ - AQ)

A = Rs. 40 × (146.25 ltr. -140 ltr.) = Rs. 250.00 (F)
B = Rs. 60 × (97.50 ltr. - 110 ltr.) = Rs. 750.00 (A)
Total = Rs. 250.00 (F) + Rs. 750.00 (A) = Rs. 500.00 (A)
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Material Price Variance = AQ × (SP - AP)

A = 140 Kg. × (Rs. 40 - Rs. 42) = Rs. 280 (A)
B = 110 Kg. × (Rs. 60 - Rs. 56) = Rs. 440 (F)
Total = Rs. 280 (A) + Rs. 440 (F) = Rs. 160 (F)

2. ABC Ltd. produces an article by lending two basic raw materials. It operates a standard costing system
and the following standards have been set for raw materials:
Material Standard mix Standard price (Rs. per kg)
A 40% 4
B 60% 3
The standard loss in processing is 15%. During April 2021, the company produced 1,700 kgs. of finished
output.
The position of stock and purchases for the month of April 2021 are as under:

Material Stock on Stock on Purchased during April 2021

01.04.2021 30.04.2021
(Kg.) (Kg.) (Kg.) (Rs.)
A 35 5 800 3,400
B 40 50 1,200 3,000
Opening stock of material is valued at standard price. CALCULATE all the relevant variances.

Solution
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3. One kilogram of product K requires two chemicals A and B. The following were the details of
product K for the month of June 2021:
(a) Standard mix for chemical A is 50% and chemical B is 50%.
(b) Standard price kilogram of chemical A is Rs. 12 and chemical B is Rs. 15.
(c) Actual input of chemical B is 70 kilograms.
(d) Actual price per kilogram of chemical A is Rs. 15
(e) Standard normal loss is 10% of total input
(f) Total Material cost variance is Rs. 650 adverse.
(g) Total Material yield variance is Rs. 135 adverse.
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You are required to CALCULATE:

(i) Total Material mix variance

(ii) Total Material usage variance
(iii) Total Material price variance
(iv) Actual loss of actual input
(v) Actual input of chemical A
(vi) Actual price per kg. of chemical B
Solution
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4. Following data is extracted from the books of XYZ Ltd. for the month of January:
a. Estimation-

Particulars Quantity (kg.) Price (Rs.) Amount (Rs.)

Material-A 800 ? --
Material-B 600 30.00 18,000
--

Normal loss was expected to be 10% of total input materials.

b. Actuals-
1480 kg of output produced.

Particulars Quantity (kg.) Price (Rs.) Amount (Rs.)

Material-A 900 ? --
Material-B ? 32.50 --
59,825

c. Other Information-
Material Cost Variance = Rs. 3,625 (F)

Material Price Variance = Rs. 175 (F)

You are required to CALCULATE:

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(i) Standard Price of Material-A;

(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance.
Solution
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5. J.K. Ltd. manufactures NXE by mixing three raw materials. For every batch of 100 kg. of NXE,
125 kg. of raw materials are used. In the month of April, 60 batches were prepared to produce an
output of 5,600 kg. of NXE. The standard and actual particulars for the month of April, are as
follows:

Standard Actual Quantity of Raw

Raw Materials
Materials Mix Price per kg. Mix Price per Kg. Purchased

(%) (Rs.) (%) (Rs.) (Kg.)

A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
You are required to CALCULATE:
a. Material Price variance
b. Material Usage Variance

Solution
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6. NPX Ltd. uses standard costing system for manufacturing of its product X. Following is the budget
data given in relation to labour hours for manufacture of 1 unit of Product X :

Labour Hours Rate (Rs.)

Skilled 2 6
Semi-Skilled 3 4
Un- Skilled 5 3
Total 10

In the month of January, total 10,000 units were produced following are the details:

Labour Hours Rate (Rs.) Amount (Rs.)

Skilled 18,000 7 1,26,000
Semi-Skilled 33,000 3.5 1,15,500
Un- Skilled 58,000 4 2,32,000
Total 1,09,000 4,73,500

Actual Idle hours (abnormal) during the month:

Skilled: 500
Semi- Skilled: 700
Unskilled: 800
Total 2,000
CALCULATE:
(a) Labour Variances.
(b) Also show the effect on Labour Rate Variance if 5,000 hours of Skilled Labour
are paid @ Rs. 5.5 per hour and balance were paid @ Rs. 7 per hour
Solution
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7. 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 Rs.
6.20, Rs. 6.00 and Rs. 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 Rs. 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 [Jul 2021].
Solution
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4. Calculation of Standard wage Rate:

Labour Efficiency Variance = 240F
(Standard hours for Actual production -Actual Hours) x SR = 240F
(3,840- 3,800) x SR = 240
Standard Rate (SR) = Rs. 6 per hour
(i) Total Labour Cost Variance
= (Standard hours x Standard Rate) - (Actual Hours x Actual rate)
= (3,840 x 6) - 23,360 = 320A
(ii) Total Labour Rate Variance
= (Standard Rate - Actual Rate) x Actual Hours
Group 'A' = (6 - 6.2) 400 = 80A
Group 'B' = (6 - 6) 1,200 = 0
Group 'C' = (6 - 5.7) 2,400 = 720F
640F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) x {Average Standard Rate per hour
of
Standard Gang - Average Standard Rate per hour of Actual Gang@}
@ on the basis of hours worked
, ×
= 3 800 x 6 − ,

=0
(iv) Total Labour Yield Variance
= Average Standard Rate per hour of Standard Gang x {Total Standard
Time (hours) - Total Actual Time worked (hours)}
= 6 x (3,840 - 3,800)
= 240F
(v) Total Labour idle time variance
= Total Idle hours x standard rate per hour
= 200 hours x 6
= 1,200 A
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8. The following standards have been set to manufacture a product:

Direct Material: (Rs.)

2 units of A @ Rs. 4 per unit 8.00
3 units of B @ Rs. 3 per unit 9.00
15 units of C @ Rs. 1 per unit 15.00
32.00
Direct Labour: 3 hours @ Rs. 8 per hour 24.00
Total standard prime cost 56.00
The company manufactured and sold 6,000 units of the product during the year. Direct material
costs were as follows:
12,500 units of A at Rs. 4.40 per unit 18,000 units of B at Rs. 2.80
per unit 88,500 units of C at Rs. 1.20 per unit
The company worked 17,500 direct labour hours during the year. For 2,500 of these hours, the
company paid at Rs. 12 per hour while for the remaining, the wages were paid at standard rate.
CALCULATE
(i) Materials price variance & Usage variance
(ii) Labour rate & Efficiency variances.
Solution
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9. The following data for Pijee Ltd. is given:

Budget Actual
Production (in units) 400 360
Man hours to produce above 8,000 7,000
Variable overheads (in Rs.) 10,000 9,150

The standard time to produce one unit of the product is 20 hours. CALCULATE relevant
Variable overhead variances.
Solution
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10. From the following information of G Ltd., CALCULATE (i) Variable Overhead Cost Variance; (ii)
Variable Overhead Expenditure Variance and (iii) Variable Overhead Efficiency Variance:

Budgeted production 6,000 units

Budgeted variable overhead Rs. 1,20,000
Standard time for one unit of output 2 hours
Actual production 5,900 units
Actual overhead incurred Rs. 1,22,000
Actual hours worked 11,600 hours
Solution
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11. A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a
month. The fixed overheads are budgeted at Rs. 1,44,000 per month. The standard time required
to manufacture one unit of product is 4 hours.
In April 2021, the company worked 24 days of 840 machine hours per day and produced 5,305
units of output. The actual fixed overheads were Rs. 1,42,000.
COMPUTE the following Fixed Overhead variance:

1. Efficiency variance
2. Capacity variance
3. Calendar variance
4. Expenditure variance
5. Volume variance
6. Total Fixed overhead variance
Solution
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12. ABC Ltd. has furnished the following information regarding the overheads for the month of June 2020:

(i) Fixed Overhead Cost Variance Rs. 2,800 (Adverse)

(ii) Fixed Overhead Volume Variance Rs. 2,000 (Adverse)

(iii) Budgeted Hours for June, 2020 2,400 hours

(iv) Budgeted Overheads for June, 2020 Rs. 12,000

(v) Actual rate of recovery of overheads Rs. 8 Per Hour

From the above given information

Calculate:
(1) Fixed Overhead Expenditure Variance
(2) Actual Overheads Incurred
(3) Actual Hours for Actual Production
(4) Fixed Overhead Capacity Variance
(5) Standard hours for Actual Production
(6) Fixed Overhead Efficiency Variance [Nov 2020]
Solution
(1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads - Actual Fixed Overheads
= Rs. 12,000- Rs. 12,800 (as calculated below) = Rs. 800 (A)
(2) Fixed Overhead Cost Variance = Absorbed Fixed Overheads - Actual
Fixed Overheads
2,800 (A) = Rs. 1 0,000 - Actual Overheads
Actual Overheads = Rs. 12,800
(3) Actual Hours for Actual Production = Rs. 12,800/ Rs. 8 = 1,600 hrs.
(4) Fixed Overhead capacity Variance
= Budgeted Fixed Overheads for Actual Hours - Budgeted Fixed Overheads
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= Rs. 5 x 1600 hrs. - Rs. 12,000 = Rs. 4,000 (A)

(5) Standard Hours for Actual Production
= Absorbed Overheads/ Std. Rate
= Rs. 10,000/ Rs. 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance
= Absorbed Fixed Overheads - Budgeted Fixed Overheads for Actual Hours
= Rs. 10,000 - Rs. 5 x 1,600 hrs. = Rs. 2,000 (F)
Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads - Budgeted
Fixed Overheads
2,000 (A) = Absorbed Fixed Overheads - Rs. 12,000
Absorbed Fixed Overheads = Rs. 10,000
(ii) Standard Rate/ Hour = Rs. 5 (Rs. 12,000/2,400 hrs.)

13. Premier Industries has a small factory where 52 workers are employed on an average for 25 days a
month and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard
costing for cost control. Its monthly budget for November, 2020 shows that the budgeted variable and
fixed overhead are Rs. 1,06,080 and Rs. 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end of
the month:

Actual hours worked 8,100 hrs.

Actual production expressed in standard hours 8,800 hrs.

Actual Variable Overheads Rs. 1,02,000

Actual Fixed Overheads Rs. 2,00,000

You are required to calculate:

(i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
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(c) Activity ratio [Jan 2021]

Solution
Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours - Actual variable Overhead
. , ,
= ,
× 8,100 – Rs. 1,02,000)

= 4800 A

(b) Variable overhead efficiency variance

Std. rate per hour x (Std. hours for actual production - Actual hours)
. , ,
= ,
(8,800 hours - 8,100 hours)

= 8,840 F

(ii) Fixed overhead variances

(a) Fixed overhead budget variance
= Budgeted overhead - Actual overhead
= Rs. 2,21,000 - Rs. 2,00,000
= 21,000 F

(b) Fixed overhead capacity variance

= Std rate x (Actual hours - budgeted hours)
. , ,
= ,
x (8,100 – 8,840)

= 18,500 A

(c) Fixed overhead efficiency variance

= Std rate x (Std hours for actual production - Actual hours)
. , ,
= ,
x (8,800 – 8,100)

= 17,500 F

(iii) Control Ratios

(a) Capacity Ratio
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= x 100
,
= ,
x 100 = 91.63%

(b) Efficiency Ratio

= x 100
,
= ,
x 100 = 108.64%

(c) Activity Ratio

= x 100
,
= ,
x 100 = 99.55%

14. NC Limited uses a standard costing system for the manufacturing of its product ‘X’. The following
information is available for the last week of the month:
25,000 kg of raw material were actually purchased for Rs.3,12,500. The expected output is 8 units of
product ‘X’ from each one kg of raw material. There is no opening and closing inventories. The material
price variance and material cost variance, as per cost records, are Rs.12,500 (F) and Rs.1800 (A),
respectively.
The standard time to produce a batch of 10 units of product ‘X’ is 15 minutes. The standard wage rate
per labour hour is Rs.50. The company employs 125 workers in two categories, skilled and semi-skilled,
in a ratio of 60:40. The hourly wages actually paid were Rs.50 per hour for skilled workers and Rs.40
per hour for semi-skilled workers. The weekly working hours are 40 hours per worker. Standard wage
rate is the same for skilled and semi-skilled workers.
The monthly fixed overheads are budgeted at Rs.76,480. Overheads are evenly distributed throughout
the month and assume 4 weeks in a month. In the last week of the month, the actual fixed overhead
expenses were Rs.19,500.
Required:
- Calculate the standard price per kg and the standards quantity of raw material.
- Calculate the material usage variance, labour cost variance, and labour efficiency variance.
- Calculate the fixed overhead cost variance, the fixed overhead expenditure variance and
the fixed overhead volume variance.
Note: Indicate the variance of variance i.e favourable or adverse. [May 2023]
Solution
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15. Following are the standard cost for a product-X:

(Rs.)

Direct materials 10 kg @ Rs. 90 per kg 900

Direct labour 8 hours @ Rs.100 per hour 800
Variable Overhead 8 hours @ Rs.15 per 120
hour
Fixed Overhead 400
2,220
Budgeted output for the year was 2,000 units. Actual output is 1,800 units. Actual cost for
year is as follows:
(Rs.)

Direct Materials 17,800 Kg @ Rs. 92 per Kg. 16,37,600

Direct Labour 14,000 hours @ Rs. 104 per hour 14,56,000
Variable Overhead incurred 2,17,500
Fixed Overhead incurred 7,68,000

You are required to CALCULATE:

a. Material Usage Variance
b. Material Price Variance
c. Material Cost Variance
d. Labour Efficiency Variance
e. Labour Rate Variance
f. Labour Cost Variance
g. Variable Overhead Cost Variance
h. Fixed Overhead Cost Variance. (RTP NOV 2020)

Solution
(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= 90 (18,000 kg. – 17,800 kg.)
= 18,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 17,800 kg. ( 90 – 92) = 35,600 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (18,000 kg. × 90) – (17,800 kg. × 92)
= 16,20,000 – 16,37,600
= 17,600 (Adverse)
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(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= 100 (1,800 units × 8 – 14,000 hrs.)
= 100 (14,400 hrs. – 14,000 hrs.)
= 40,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 14,000 hrs. ( 100 – 104)
= 56,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (14,400 hrs. × 100) – (14,000 hrs. × 104)
= 14,40,000 – 14,56,000
= 16,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (14,400 hrs. × 15) – 2,17,500
= 1,500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed
Overhead
= (1,800 units × 400) - 7,68,000
= 7,20,000 – 7,68,000 = 48,000 (Adverse)

16. BabyMoon Ltd. uses standard costing system in manufacturing one of its product ‘Baby Cap’. The
details are as follows:
Direct Material 1 Meter @ Rs. 60 per meter Rs. 60
Direct Labour 2 hour @ Rs. 20 per hour Rs.40
Variable overhead 2 hour @ Rs. 10 per hour Rs.20

Total Rs. 120

During the month of August, 10,000 units of ‘Baby Cap’ were manufactured. Details are as
follows:
Direct material consumed 11,400 meters @ Rs. 58 per meter
Direct labour Hours ? @ ? Rs. 4,48,800
Variable overhead incurred Rs. 2,24,400
Variable overhead efficiency variance is Rs. 4,000 A. Variable overheads are based on Direct Labour
Hours.
You are required to Calculate the following Variances:
a. Material Variances- Material Cost Variance, Material Price Variance and Material Usage
Variance.
b. Variable Overheads variances- Variable overhead Cost Variance, Variable overhead Efficiency
Variance and Variable overhead Expenditure Variance.
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c. Labour variances- Labour Cost Variance, Labour Rate Variance and Labour Efficiency Variance.
Solution
(i) Material Variances

Budget Std. for actual Actual

Quantity Price Amount Quantity Price Amount Quantity Price Amount
(Meter) ( ( ) (Meter) ( ( ) (Meter) ( ( )
) ) )
1 60 60 10,000 60 6,00,000 11,400 58 6,61,200
Material Cost Variance = (SQ × SP – AQ × AP)
= 6,00,000 – 6,61,200 = 61,200 (A)
Material Price Variance = (SP – AP) AQ
= (60 - 58) 11,400 = 22,800 (F)
Material Usage Variance = (SQ – AQ) SP
= (10,000 – 11,400) 60 = 84,000 (A)
(ii) Variable Overheads variances Variable
overhead cost Variance
= Standard variable overhead – Actual Variable Overhead
= (10,000 units × 2 hours × 10) – 2,24,400 = 24,400 (A)
Variable overhead Efficiency Variance
= (Standard Hours – Actual Hours) × Standard Rate per Hour
Let Actual Hours be ‘X’, then:
(20,000 – X) × 10 = 4,000 (A)
2,00,000 – 10X = - 4,000
X = 2,04,000 ÷ 10
Therefore, Actual Hours (X) = 20,400
Variable overhead Expenditure Variance
= Variable Overhead at Actual Hours - Actual Variable Overheads
= 20,400 × 10 – 2,24,400 = 20,400 (A)
(iii) Labour variances

Budget Std. for actual Actual

Hours Rate Amount Hours Rate Amount Hours Rate Amount
( ( ) ( ( ) ( ( )
) ) )
2 20 40 20,000 20 4,00,000 20,400 22* 4,48,800
*Actual Rate = 4,48,800 ÷ 20,400 hours = 22
Labour Cost Variance = (SH × SR) – (AH × AR)
= 4,00,000 – 4,48,800 = 48,800 (A)
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Labour Rate Variance = (SR – AR) × AH

= (20 – 22) × 20,400 = 40,800 (A)
Labour Efficiency Variance = (SH – AH) × SR
= (20,000 – 20,400) × 20 = 8,000 (A)

17. EML operates in coal mining through open cast mining method. Explosives and detonators are used
for excavation of coal from the mines. The following are the details of standard quantity of explosives
materials used for mining:

Particulars Rate (Rs.) Standard Qty. Standard Qty. for

for Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic-
meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic- meter
The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get one
tonne of coal).
During the month of December 2023, the company produces 20,000 tonnes of coal and 58,000 cubic-
meter of OB. The quantity of explosive materials used and paid for the month is as below:

Material Quantity Amount (Rs.)

SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200
Explosive suppliers are paid for the explosive materials on the basis of performance of the explosives
which is termed as powder factor. One of the suppliers has presented their bill for explosive supplied for
the month of December 2023. You being a bill passing officer of EML is required to COMPUTE the
material price variance, material quantity variance and material cost variance.
Solution
Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman
Fasttrack revision by CA Aman Agarwal https://t.me/costingwithcaaman