Subject : Cost and Management Accounting [ By : Padam Bhandari]

Chapter one : Concepts of Management Accounting

During the 1950s, the emphasis shifted from external users to the internal users of cost accounting data. As a
result, the cost data for use by management was accumulated in different manner from different sources of
financial accounting. This shift in emphasis led to the emergence of the management accounting.

The cost accounting is concerned with cost accumulation for stock valuation but the management accounting
relates to the provision of appropriate information for people within the organization for helping them to make
better decision.

In an ordinary language, any system of accounting which assists management in carrying-out its functions more
efficiently may be termed as Management Accounting. The term management accounting refers to accounting
for management. Management accounting as an accounting discipline provides essential information to every
hierarchy of management for discharging its functions. It is concerned with the provision of information to people
within the organization to help them make better decision. Management Accounting is the presentation of
accounting information in such a way as to assist management in the creation of policy and in the day-to-day
operation of undertaking. It provides information to management for planning, controlling and decision making
which can be done in an orderly manner. It does not confine itself merely to financial data to assist the
management in the decision making process. It furnishes data and statistical information required for the
managerial decision-making that affects the survival and the success of the business. It provides information at
periodical intervals to meet the varying requirements of the different levels of management.

Management Accounting involves forecasting and planning future operations of the business considering the past
as well as present achievement. Virtually all managers plan and control operations and make decisions using
information contained in managerial accounting.

Management Accounting is concerned with the allocation and fixation of responsibilities, the evaluation of future
development and the analysis and interpretation of data that provide a vista to the management. It establishes
standards of performance in different forms of activities.

"Management Accounting is the term used to describe the accounting method, systems, and techniques that
coupled with special knowledge and ability, assist management in its tasks of maximizing profits and minimizing
losses."– J Bathy

Management Accounting is concerned with accounting information that is useful to management.

– Robert N. Anthony

Managerial Accounting involves the preparation and use of accounting information for planning and controlling
the operation of business. – Meigs and Meigs

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The purpose of management accounting is to provide quantitative information that managers need for planning
and controlling the activities of an organization in order to reach the organization's goal.– Smith, Keith and
Stephens

Any form of accounting which enables a business to be conducted more efficiently can be regarded as
management accounting.

– Institute of Charters Accountants of England & Wales.

Management Accounting is accounting for effective management. – Bose

Management Accounting includes the methods and concepts necessary for effective planning, for choosing
among alternative business actions and for control through the evaluation and interpretation of performance.–
The American Accounting Association

Management Accounting is primarily concerned with data gathering (from internal and external sources)
analyzing, processing, interpreting and communicating the resulting information for use within the organization
so that management can more effectively plan, make decisions and control operations.–T. Lucy

Managerial Accounting is concerned with providing information to managers – that is, to those who are inside an
organization and who direct and control its operation.– Garrison & Noreen

Management Accounting reports to those inside the organization for planning, directing and motivating,
controlling, decision making and perforation evaluation. It is a part of an organization's management information
system. And managers rely on managerial accounting information to plan and control on organization's
operations. So it is an accounting service to management

Management accounting is the provision of information required by management for such purposes as

Formulation of policies,

Planning and controlling the activities of the enterprise,

Decision taking on alternative courses of action,

Disclosure to those external to the entity (shareholders and others),

Disclosure to employees,

Safeguarding assets.

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SCOPE OF MANAGEMENT ACCOUNTING

The scope or field of management accounting is very wide and broad based and it includes a variety of aspects of
business operations. The main aim of management accounting is to help management in its functions of planning,
directing, controlling and areas of specialization included within the bounds of management accounting:

1. Financial Accounting 2. Cost Accounting

3. Budgeting & forecasting4. Inventory Control

5. Statistical Method 6. Interpretation of data

7. Reporting to Management 8. Internal Audit and Tax

9. Methods and Procedures Accounting

Financial Accounting

It forms the basis for analysis and interpretation for furnishing meaningful data to the management. The control
aspect is based on financial data and performance evaluation on recorded facts and figures. So management
accounting is closely related to financial accounting in many respects.

Cost Accounting

It is the process and technique of ascertaining cost. Planning, decision-making, and controls are the basic
managerial functions. The cost accounting system provides the necessary tool for carrying out such functions
efficiently. The tools include standard costing, inventory management and variable costing technique, etc.

Budgeting & Forecasting

Budgeting refers expressing the plans, policies and goals of the firm for a definite period in future.
Forecasting, on the other hand, is a predication of what will happen as a result of a given set of circumstances.
Forecasting is a judgment whereas the budgeting is an organizational object. These are useful for management
accounting in planning various activities.

Inventory Control

Inventory is necessary to control from the time it is acquired till its final disposal as it involves large sum of
investment. For controlling inventory, management should determine different levels of stock – maximum,
minimum, average. The inventory control technique will be helpful for taking managerial decisions.

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Statistical Method

Statistical tools not only make the information more impressive, comprehensive and intelligible but also they are
highly useful for planning and forecasting.

Interpretation of Data

Analysis and interpretation of financial statements are important parts of management accounting. After
analyzing the financial statements, the interpretation is made and the reports drawn from this analysis are
presented to the management. Interpreting the accounting data to the authorities in the management is the
principle task of the management accounting.

Reporting to Management

The interpreted information must be communicated to those who are interested in it. The report may cover
Profit & Loss Account, Cash Flow & Fund Flow Statement, etc.

Internal Audit & Tax Accounting

Management Accounting studies all the tax matters to assist the management in investment decisions vis-à-vis
tax planning as recourse to enjoy tax relief.

Internal audit system is necessary to judge the performance of every department. Management is able to know
deviations in performance through internal audit. It also helps management in fixing responsibility of different
individuals.

Methods and Procedures

This includes maintenance of proper data processing and other office management services. It may have to deal
with filing, copying, duplicating, communicating and management information system and also may have to
report about the utility of different office machines.

OBJECTIVES OF MANAGEMENT ACCOUNTING

The management of a firm is concerned with the formulation of policies and its execution in managing the whole
affairs of the business. The principal objectives of Management Accounting are to assist the management for
achieving the goal of the organization, i.e., maximization of profit. Management Accounting supplies accounting
information to the management for planning, formulating policies, controlling business operations and making
decisions. The major objectives/purposes of management accounting can be summarized as follows:

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1. Planning & Policy Formulation

Management is mainly concerned with planning. Planning is one of the primary functions of management. It
involves forecasting, setting goals, framing policies, determination of alternative courses of action and deciding
on the programs of activities to be undertaken. Management Accounting helps management greatly in these
processes. It facilitates for the preparation of statement in the light of past results and gives estimation for the
future.

2. Help in Controlling Performance

Management accounting devices like standard costing and budgetary control are helpful in controlling
performance. The actual results are compared with predetermined objectives. The management is able to find
out the deviations and take the necessary corrective measures. Thus management is able to control performance
of each and every individual with the help of management accounting devices.

3. Help in Organizing

Organizing is related to the establishment of relationship among different individuals in the concern. It also
includes the delegation of authority and fixing of responsibility. Management accounting is connected with the
establishment of cost centers, preparation of budgets, and preparation of cost control account and fixing of
responsibilities for different functional departments. All these aspects are helpful in setting up an effective and
efficient organizational framework.

4. Helpful in Interpreting Financial Information

Management accountings present the financial information to management. It helps the management in
analyzing and interpreting different accounting information for selecting the most profitable course of action.

5. Motivating Employees

Management accounting helps the management in selecting best alternatives to do the things. Targets are laid
down for the employees. They feel motivated in achieving their targets and further incentives may be given for
improving their performance.

6. Reporting to Management

The performance of various departments is to communicate regularly to the management. One of the primary
functions of management accounting is to keep the management fully informed about the performance of the
organization. This helps management in taking proper & timely decision and action. Management accounting
prepares report to communicate the management on the feasibility of various alternatives and makes an
assessment of their financial implications and also of the organizational performance.

7. Helps in Decision-making

Decision-making is an important and prime function of management. The management has to take certain
important decisions. Decision-making implies the choosing of alternative cause of action among various courses

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of actions. Management accounting may make the decision making process more modern and scientific by
providing significant information relating to various alternatives in terms of cost and revenue. It prepares a report
on the feasibility of various alternatives and makes an assessment of their financial implications. It also deals with
a number of techniques, which could be used, in judging the profitability and feasibility of the alternative
selected on the basis of cost and revenue data. Thus management accounting helps the management in selecting
suitable alternative and taking correct decision by providing necessary information.

Management accounting, i.e., internal/operational accounting system serves following two purposes:

(a) To provide knowledge to management necessary for planning and decision making.

(b)To help motivate and monitor people in organization

FEATURES OF MANAGEMENT ACCOUNTING

Following are the features management accounting

1. Management accounting is directed at internal users of accounting information

2. Management accounting Management accounting may present more detailed information

3. May deviate from generally accepted accounting principles (GAAP)

4. Management accounting may present more non-monetary information

5. Management accounting places emphasis on the future

Managers have to plan operations, evaluate subordinates, and make a variety of decisions using accounting
information provided by firm’s balance sheet, income statement; statement of retained earnings and statement
of cash flows. But the information in these statements is more relevant to external users of accounting
information. And the firm will need information prepared specifically for its managers, the internal users of
accounting information which is referred to as managerial accounting information. Managerial accounting helps
in decision-making process of management by providing accounting information required for making decision.
Managerial accounting stresses accounting concepts and procedures that are relevant to preparing reports for
internal users of accounting information. The goal of managerial accounting is to provide the information to
managers need for planning, control and decision making. Management accounting is important as

It provides the information necessary to identify the most profitable products and for pricing and
marketing strategies to achieve the desired production volume level.

It provides information to detect production inefficiencies to ensure that the proposed products and
volumes are produced at minimum cost.

It creates, when combined with the performance evaluation and reward system, incentives for managers
to maximize firm's value.

It supports the financial accounting and tax accounting reporting functions.

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STRATEGIC MANAGEMENT ACCOUNTING

Strategic Management accounting is relatively new concept of in accounting field Management accounting has
meets criticism being focused too much on a business’s internal activities and too little on a business’s external
environment as such failed to respond to changing environmental circumstances. Business strategy is concern
with where a business is now and where it wants to be in future. Strategic Management Accounting attempts to
involve management accountants in strategic decisions and in planning of a business’s future long term direction.
It is a form management accounting which considers both an organization‘s internal and external environment.

Strategic Management Accounting is defined by Chartered Institute of Management Accountants (CIMA) as, “The
preparation and presentation of information for decision making, laying particular stress on external factors. It is
a form of management accounting in which emphasis is placed on information which relates to factors external
to the firm as well as non-financial information and internally-generated information.”

Strategic Management Accounting has been defined by Mark Lee Inman as"a form of management accounting in
which emphasis is placed on information which relates to factors external to the firm, as well as non-financial
information and internally generated information."

As such Strategic Management accounting is external oriented and concerns with future long term strategy of a
business. That means it concern business’s future long term direction.

The important elements of strategic management accounting as emphasizes by Wilson and Chua are:

real costs and prices;

volume;

market share;

cash flows;

proportionate demand of an enterprise’s total resources

The strategic management accounting emphasis the external and future environment of business but also takes
into account the internal environment of a business. There involves three stages of strategic management
accounting. They are:

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1. Assessment of the current position of the business.

2. Appraisal of the current position of the business, and

3. Strategic choice of future direction of the business

The assessment of the current position of the business is concerned with both the external and internal
environment. The external environment includes:

Political and legal environment

Economic environment

Social and cultural environment

Technological changes

Interest and pressure group

Environmental issues, and

Competitors

Like wise the internal environment includes:

Resources

Current products

Operating system

Internal organization

Customers, and

Sources of finance

For assessing the current position of the business value chain analysis, life cycle analysis, and the product
portfolio matrix techniques may be used.

And the appraisal of the current position of the business may use SWOT analysis, the balanced scorecard and
benchmarking.

Likewise, the strategic choice may involve exploiting inherent strengths such as the business’s products or
customer base and or external diversification through acquisition or merger.

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LIMITATIONS OF MANAGEMENT ACCOUNTING

Though management accounting is a helpful tool to the management as it provides information for planning,
controlling and decision taking, still its effectiveness is limited by a number of reasons. Some of the limitations of
management accounting are listed as follows:

(a) Based on Accounting Information

Management accounting is based on data and information provided or supplied by financial and cost accounts. As
such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided by
financial and cost accounts. So the effectiveness of management account is limited to the reliability of sources of
information.

(b) Lack of Knowledge

The use of management accounting requires the knowledge of a number of related subjects. Deficiency in
knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will
limit the use of management accounting.

(c) Intuitive Decisions

Decision taking based on management accounting that provides scientific analysis of various situations will be
time consuming one. As such management may avoid systematic procedures for taking decision and arrive at
decision using intuitive. And intuitive decisions limit the usefulness of management accounting.

(d) Management Accounting is Only a Tool

The tools and techniques of management accounting provide only information and not decisions. Decisions are to
be taken by the management and implementations of decisions are also done by management.

(e) Evolutionary Stage

Management accounting is still in a developmental stage and has not yet reached a final stage. The techniques
and tools used by this system give varying and differing results. It is still named as internal accounting and/or
operational accounting.

(f) Personal Prejudices and Bias

The interpretation of financial information may differ from person to person depending upon the capability of the
interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such, the
objectivity of decision may be affected by personal prejudices and bias.

(g) Psychological Resistance

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Changes in traditional accounting practices and organizational set up are required to install the management
accounting system. It calls for a rearrangement of the personnel and their activities and framing of new rules and
regulations which generally may not be liked by the people involved.

ADVANTAGES OF MANAGEMENT ACCOUNTING

The appraisal of performance of different levels of activities has become an inseparable proposition. For this, the
interpretation of financial results has proved essential. To interpret results and to report to the management,
management accountants have become important members on the body of managerial decision-maker. As a result
of this, following advantages from the management accounting system may enjoy by a business.

1. Management accountings analyze and interpret systematically the information collected from within and
outside the business and communicate the result to the management. This helps in implementing managerial
policy decision effectively.

2. Management accounting helps in comparing actual performance with the budgeted standard and reporting
management any deviations for corrections.

3. All the business activities are planned well ahead based on the accounting information applying budgeting and
forecasting techniques. As such, all the activities are expected to be interwoven and well integrated to achieve
the set goal. The said budgeting and forecasting techniques are efficiently applied with the help of
management accounting.

4. Management accounting techniques help the business control its activities efficiently. It helps in utilizing its
capital in an optimal way.

5. The management accounting often takes cognizance of the changes in the economic environment caused by
government policies and other economic forces. This helps the business combat and accommodate itself to
such changes. Even the management accounting helps the business to get rid of the seasonal and cyclical
fluctuations.

6. Management accounting facilitates coordination between difference departments and helps in attaining the
objectives of the business as a whole.

7. Management accounting plays a significant role in organizing the business on a sound footing. It assists the
management with the help of internal control and internal audit in fixing targets, responsibilities, appraisal of
performances, problem and solutions of these cost and profit centres and executing overall control of business
activities.

8. Management accounting often compares the actual performance with the standard and analyze the reasons for
any deviation there have and offers suggestions to take corrective measures.

Cost concept , classification and Segregation Of Cost

Meaning of cost

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Cost is the amount of resources given up in exchange for some goods or services. In other words, cost is
the amount of resources sacrificed or forgone to achieve a specific objective or thing. The specific
objective may be a product, job service, process or any other activity.

Classification of costs
A) On the basis of functions
i) Manufacturing cost / Production cost / Factory cost
ii) Office and Administration cost
iii) Selling and distribution cost
iv) Research and development cost

B) On the basis of Elements

i) Direct cost [ i.e Direct material , Direct labor , Direct Expenses]
 Total Sum of Direct cost is called Prime cost.
ii) Indirect Cost [i.e Indirect material , Indirect labor , Indirect Expenses]
 Total sum of indirect cost is called Overhead cost .
C) on the Basis of managerial decision making
Relevant Cost and Revenue:

Cost information to be relevant must possess following characteristics. It must

1. be associated with the decision, or question under consideration,

2. be important to a decision maker,

3. Have a connection to or bearing on some future endeavor.

Consider the following Cost:

(a) Future cost and past cost

(b) Opportunity cost

(c) Incremental cost and differential cost

(d) Relevant and irrelevant cost

(e) Avoidable and unavoidable cost

(f) Sunk cost

(g) Out-of pocket cost

Future Costs

Relevant costs (revenues) are future costs (revenues). It is a cost which incurs in future business activities. All

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decisions related to the future, accordingly, only future costs can be relevant to decisions. But a future cost
that is same for more than one alternative has no effect on the decision. Such a future cost is an irrelevant
cost. So only relevant future costs are considered for the purpose of decision making.

Past Costs

Costs that are already ascertained after its incidence are past costs. Past costs are the result of past decisions
and considered as irrelevant costs. As they are always the same across alternatives, are therefore always
irrelevant.

Opportunity Cost

An opportunity cost is the potential benefit given up when the choice of one action precludes a different
action. It represents the benefits foregone because one course of action is chosen over another. Opportunity
cost is the value of benefits foregone by selecting one decision alternative over another. It is a value scarified
in favor of one alternative course of action. As such, it is defined as the value of the next best alternative, i.e.
it is the net receipts forgone by not accepting the best alternative available. Opportunity costs are relevant
costs, extremely important in decision making, but they are not included in the accounting records. The
concept of opportunity cost recognizes that resources are scarce and have alternative uses.

Incremental Cost

The difference of costs of various alternatives is termed as differential cost. It may be higher or lower. If the
cost is higher, then it is called incremental costs. Incremental costing techniques are considered incremental
costs and incremental revenue arising out of decisions to change the level of activity. Incremental costing is
confined to decision regarding changes in the activity level.

Differential Costing

It is a difference of cost between completely new projects. To be relevant, a cost must be a differential cost
which means that it varies in amount among the alternatives being considered.

i) Relevant & Irrelevant Cost

In order to evaluate cost information, managers must be able to distinguish between relevant costs and
irrelevant costs. Costs that are affected by the decision are relevant costs and those that are not affected are
irrelevant ones. Irrelevant costs should be ignored.

Decisions are futuristic in nature and therefore, only expected future costs are relevant. Moreover, as decision
making involves choice between alternatives, only those costs that are different from each alternative are the
relevant costs for decision making. That is, costs that are uniform/remain unchanged for all the alternatives
are irrelevant costs and might be ignored.

ii) Avoidable and Unavoidable Cost

Avoidable costs are defined as those costs which can be identified with an activity or sector of a business and
which would be avoided if that activity or sector did not exist.

Common costs apportioned to a particular activity or segment of business are usually unavoidable because
total common cost cannot be avoided or reduced even if that activity or sector does not exist.

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 iii) Sunk Cost
Sunk costs are those costs that already have been incurred in the past time based on past decision. They are
past costs and hence irretrievable by managerial actions. That is, costs incurred in the past for the acquisition
of an asset or an asset or resources are called Sunk costs because they can not be changed no matter what
future course of action is taken. Sunk costs cannot be changed by any current or future action. Sunk costs are
irrelevant/not relevant to current decision making.

Cost of a fixed asset already acquired is an example of Sunk cost.

Generally, book value - Salvage value = Sunk cost

Or, Book value of asset = Sunk cost

Salvage value = Opportunity cost

Cost Summary

 The relevant costs must be expected future costs.

 The relevant costs must be different for each alternative.
 All past costs are irrelevant. They can however be used in projecting future costs.
 In decision making, the total costs should be considered and not the unit cost.
 Differential costs are different in total costs under each alternative.
 It is wrong to conclude that all variable costs are relevant and the fixed costs are irrelevant. Fixed
costs are relevant if they are expected to be changed by the decision under consideration.

D) On the basis of Controllability

a) Controllable: Cost which can be influenced by the action of a specified member [ or manager] of an
organization are called controllable costs. [i.e indirect labour , Power and fuel etc.]
b) Uncontrollable: Cost which can be influenced by the action of a specified member [ or manager] of
an organization are called controllable costs. Most of Fixed cost are Uncontrollable, [i.e Rent , salary etc.]
 Total sum of indirect cost is called overhead cost
C ) On the basis of Behavioral / Nature
i) Variable cost
ii) Fixed cost
iii) Semi-variable cost / Mixed cost

i) Variable cost
 It is activity base cost ( i.e units or hour )
 Per unit cost is not changed even activity level is changed.
 Total cost is changed with the changing ratio of activities.
 Variable cost is always calculated per unit cost at first
 It is denoted by “b” for per unit cost and “b.X” for total variable cost. [ X =
Activity level ]

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 i.e All Direct cost or Prime cost

Example:

Particular 10000 units 20000 units 30000 units ?

Direct material Rs.20000@2 40000@2 @2 = 60000
Direct Labor / Wages 15000 30000
Direct Expenses 10000 20000

Fixed Cost

 It is capacity base cost .

 Total cost is not change within normal capacity even change in Activity level
(i.e. production units or Hour )
 Per unit cost is changed if activity level is changed.
 Fixed cost is always calculated in Total
( i.e Fixed cost = Normal capacity X rate of Fixed cost )
 It is denoted by “a”
i.e Rent , salary , Depreciation , insurances etc.

Example:

Particular 10000 units 20000 units 30000 units ( ?)

Depreciation Rs. 20000 Rs.20000 20000
Rent 15000 15000 15000
salary 10000 10000 10000

Semi- Variable Cost / Mixed cost/ Hybrid cost

 It is hybrid cost of Variable cost and Fixed Cost.
 Total cost and per unit cost both are changed if activity levels are changed.
 Total semi- Variable cost = Fixed cost + Variable cost
 Variable cost of activity = Rate of variable cost X Activity level
 It is denoted by “Y”
In equation, Total semi variable cost (Y) = Fixed cost (a) + rate of variable cost (b) x Activity level ( X)
[i.e Y = a + b.X]
 Without segregate Semi-variable cost in to Variable and fixed cost , we can’t
Calculate total cost of new activities .
i.e Power and supply , supervision cost , all overhead cost , Water and electricity charge ,
telephone charge etc.
Example;

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 Particular 10000 units 20000 units 30000 units ( ?)
Manufacturing Overhead Rs. 20000 @Rs.2 Rs. 15000 @0.75 ?
Supervision cost 15000 25000 ?
Electricity charge 7500 10000 ?

Segregation methods of Semi-variable cost

A) High – Low method / Two points method

High cost−low cost Total differentialCost
Variable cost per unit / hour = Highunits−Low units = Total differential units = Rs. -- / units or hour

Total semi-variable cost = Fixed cost + (Rate of variable cost X activities cost) ( i.e Rate of variable cost
x activities = Total variable cost )

Fixed cost = [Total cost – (Rate of variable cost X activity level)]

Estimated total cost of Activity level = [Fixed cost + (Rate of variable cost X Activity level)]

B) Least square method / Algebraic equation method or [Y = a + b.x formula method]

Let , Activity level ( i.e units or hour = X , Total cost of activity = Y

No. of observation / items = n or N

Units / Hour ( X) Cost ( Y) X.Y X2

XXX XXXX XXXXX XXXX
XXX XXXX XXXXX XXXX
XXX XXXX XXXXX XXXX
XXX XXXX XXXXX XXXX
XXX XXXX XXXXX XXXX
∑ X= XXX ∑ Y = XXXX ∑ X.Y = XXXXX ∑ X2 = XXXX
N ∑ XY −∑ X . ∑ Y
Variable cost per units / hour (b) = N ∑ X 2−(∑ X )2 = Rs. ---- / units or hour

∑ Y −b ∑ X
Fixed cost (a) =
N
= Rs . ---- # [Total cost of activity level (Y) = a + b.X]

Segregation of cost
Q.no.1] The following are the maintenance cost in the factory for 4 months with corresponding machine
hours:

Month Baishakh Jestha Ashadh Shrawan

Machine Hours 400 500 600 700

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 Maintenance cost (Rs.) 600 700 780 920

Required: Segregation of cost in to Variable and Fixed cost under High-low and least square method Algebraic
question Method. [Ans: Rs. 1.04, Rs. 178]
Q. NO.2] The indirect wages and labor hours of a workshop are given below:

Direct Labor Hour 200 300 400 500 600

Indirect Expenses [ Rs] 800 900 1000 1100 1200
Required: Segregation of cost in to Variable and Fixed cost under Two points and least square method or Algebraic
question Method
Q. no .3 ) The repair and maintenance expenses of a workshop along with operating machine hours are as
follows:
Machine Hour 150 250 350 450 550
R & M cost [ Rs] 350 450 550 650 750
Required: i) Variable cost per machine hour ii) Fixed cost of the workshop iii) Estimated repair and maintenance
expenses for 475 operating machine hours by using Two points and y = a + bx equation method [Ans: (i) Rs. 1
(ii) Rs. 200 (ii) Rs. 675]
Q NO.4] The total cost at different levels of output is follows:

Month Jan Feb Mar Aprl May

Production Units 400 500 800 1000 1200
Factory Expenses [ Rs] 500 600 900 1100 1400
Required Segregation of cost using Algebraic question Method [Ans: VC = Rs. 1 and FC = Rs. 100]
Q. no. 5] The following information were extracted from the records of a company:

Month Jan Feb Mar Aprl May

Production Units 500 600 700 800 900
Factory Expenses [ Rs] 800 900 1000 1100 1200
Required: (i) Find out variable and fixed components by using least square method. (ii) Estimation of total cost
for 720, 850 and 1050 units.

Q. no. 6] (A) The indirect wages and labor hours of a workshop are given below:

Month Jan Feb Mar Aprl May Jun

DLH ( ‘000) 20 22 17 24 18 19
Indirect labour cost ( ‘000) (Rs) 30 32 27 34 28 29
Required: i) variable and fixed indirect wages by applying least square method. (Rs.10, 1000)
ii) Estimate the total cost for 40000, 55000 and 75000 DLT
iii) Estimate the total cost for 45, 35 and 65 DLH
B) The Machine cost and Machine hour of a workshop are given below:
Month Jan Feb Mar Aprl May
MH ( ’00) 70 80 100 120 150
R&M cost [ ‘000] [ Rs] 80 92 105 110 120
Required: i) Segregation of cost using least square method

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 iii) Estimate the total cost for 40000, 13000 and 75000 DLT iii) Estimate the total cost for 45, 35 and 65 DLH
[Ans: VC = Rs. 4.69 and FC = Rs. 52624]
Q.no.7)

A) The Differential Cost between 1000 DLH and 20000 DLH is Rs. 80000 and the Total cost for 10000 DLH is
Rs. 140000.

i) find out Rate of Variable cost per hour and Total Fixed cost .ii) Total cost for 15000 DLH.

B) Differential cost per MH is Rs. 0.40 between 8000 MH and 18000 MH. Total cost for 18000 MH is Rs. 10000.
Estimate the total cost for 10000 MH.

C) An assembly units has incurred total cost of Rs. 50000 for the production of 20000 units in the month of
January 2020 and Rs 65000 for the production of 30000 units in 2021.

i) Variable cost per unit ii) Fixed Cost iii) Estimate the total cost for 25000 units.
D) The following information are provided to you
Production units 1000 units 2000 units
Indirect Labor 20000 40000
Indirect Labor 42000 84000
Supervision 24000 30000
Power 18000 26000
Depreciation 50000 50000
Salary 30000 30000
Required: i) identify the Semi-variable cost ii) Segregate cost in to Variable and Fixed cost
iii) Total cost for 4000 units and 5000 units.

Chapter Two: Income measurement [Absorption costing and Variable costing]

Q. No. 1] The cost abstract of an undertaking was as follows:

Particulars Units cost in Rs.
Direct material 12
Direct labor 3

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Variable manufacturing cost 2
Variable selling and distribution expenses 1
Budgeted normal output was 100,000 units with Rs. 200,000 fixed manufacturing cost. The fixed selling and
distribution expenses were Rs 50,000
The operations of the year ended Dec. of the last year was;
Opening stock 10,000 units
Production 90,000 units
Sales 80,000 units
Sales price per unit Rs. 30 units
Required: Income statement under absorption and Variable costing. [Rs. 730,000. Rs. 710,000]

Q. No. 2 ] The summarized data of a manufacturing concern for a capacity output of 50,000 units for a year is
reported as:
Items Unit cost
Direct materials Rs. 14
Direct labour Rs. 6
Variable manufacturing overhead Rs. 4
Variable selling expenses Rs. 2
Sales price per unit Rs. 30
Fixed manufacturing overhead Rs. 75,000 annual
Fixed selling expenses Rs. 50,000 annual
Production 45,000 units
Sales 40,000 units
Required: Absorption costing and variable costing income statement [Rs. 42,500, 35,000]
Q.no.3) The cost abstract of an undertaking was as follows
Particular Amount ( Rs)
Material 4
Wages 3
Variable factory expenses 2
Variable selling expenses 1
Fixed Factory overhead 36000
Fixed office overhead 24000
Operating statues for the year :
Production units 10000 units
Closing stocks 4000 units
Opening sticks 2000 units
Normal Capacity 12000 units
Selling Price per units Rs.20
Required: Absorption costing and variable costing income statement

[Q. no.4] ABC Nepal Ltd has the following transaction during the year 2076.
Particular Amount ( Rs)
Material 5
Wages 4
Variable factory expenses 2

18
 Variable selling expenses 1
Fixed Factory overhead 320000
Fixed office overhead 70000
Operating statues for the year :
Sales 80000 units
Closing stock 30000 units
Production units 100000 units
Normal Capacity 80000 units
Selling Price per units Rs.20

Required: Income statement based on Variable absorption costing

Q. no.5] The fixed manufacturing overhead of an industry for last year was Rs. 200,000. The fixed administrative
overhead was Rs. 150,000 and fixed selling and distribution overhead was Rs. 75,000.The variable costs per unit of
the industry are as follows:
Material cost Rs. 8
Direct wages Rs. 6
Variable manufacturing overhead Rs. 7
Variable selling and distribution overhead Rs. 4
The normal capacity output was 40,000 units.
The industry realized 44,000 units of output during the period and it has 5,000 units of beginning finished
goods in that period.
The industry sold 45,000 units during the period at Rs. 36 per unit.
Required: Income statement based on Variable absorption costing.[Ans: Net income = Rs. 65,000]

Q. no 6) A manufacturing company with normal capacity of 50,000 units supplied you with the following
particulars for the year ending Chaitra 30………
Production 55,000 units
Sales 60,000 units
Closing stock 5,000 units
Unit variable manufacturing cost Rs. 6.00
Unit fixed manufacturing overhead Rs. 3.00
Unit variable selling and administrative cost Rs. 2.00
Fixed selling and administrative cost Rs. 90,000
Unit selling price Rs. 15.00
Required : Variable and absorption costing income statement.[Ans: a) Rs. 180,000 b) Rs. 165,000]

Q. no 7]. On the basis of the following details

Normal capacity 200,000 units per year
Standard variable manufacturing expenses Rs 20 per unit
Fixed manufacturing overhead Rs 300,000
Variable selling expenses Rs 2 per unit

19
Fixed selling expenses Rs 100,000
Unit sale price Rs 25
The operating result for the year ending Dec of the, last year were as follows;
Sales 150,000 units
Production 180,000 units
Required: i) Prepare Absorption costing income statement ii) Reconciliation statement
[Ans: Rs. 50,000, Rs. 95,000 ]
Q. No 8] The estimated annual fixed costs for the capacity output of 20,000 units are as follows:
Factory overheads Rs. 100,000
Office overheads Rs. 50,000
S & D overheads Rs. 75,000
The estimated variable cost per unit
Material cost Rs. 5
Labour cost Rs. 3
Factory overheads Rs. 2
S & D overheads Rs. 2
The selling price per unit fixed is Rs. 25. The factory has beginning inventory of 5,000 units and finalized
the production schedule for 25,000 units with a sales forecast of 28,000 units.
Required : Budgeted absorption costing income statement. ii) Reconciliation statement [Ans: Rs. 1,24,000]

Q. no9] A mill has provided the cost for the annual normal capacity output of 50,000 kg.
Direct material cost per kg is Rs. 10
Direct labour cost per kg is Rs. 8.
Manufacturing overheads per kg is Rs. 10 (50% fixed)
Selling and distribution overheads per kg are Rs. 4 (25% variable).
The selling price per kg is Rs.35. The annual fixed administrative expenses incurred Rs. 100,000.
The mill sold 50,000 kg in the last year.
The store ledger recorded 10,000 kg of beginning inventory and 15,000 kg of ending inventory in the period.
Required Income statement based on Absorption costing ii) Reconciliation statement

[Q. no. 10] A) The cost abstract of an undertaking was as follows:

Particulars Units cost in Rs.
Direct material 10
Direct labor 4
Variable manufacturing cost 3
Variable selling and distribution expenses 10 % of sales.

20
Budgeted normal output was 100,000 units with Rs. 200,000 fixed manufacturing cost. The fixed selling and
distribution expenses were Rs 50,000 .
Particular 2018 2019 2020
Production units 90000 80000 60000
Sales units 80000 70000 50000
Sales price per unit Rs. 30 units
Required a) Income statement under absorption costing. [ Ans : 570000 , 470000 , 270000]

B) A Manufacturing company furnishes the following information:

Particulars Units cost in Rs.

Direct material 10
Direct labor 4
Variable manufacturing cost 3
Variable selling and distribution expenses 10 % of sales.
Budgeted normal output was 10,000 units with Rs. 40,000 fixed manufacturing cost. The fixed selling and
distribution expenses were Rs 20,000 .
Particular 2020 2021 2022
Production units 8000 11000 12000
Sales units 7000 9000 13000
Sales price per unit Rs. 30 units
Required a) Income statement under absorption costing. b) Income statement under variable costing.

C] The cost abstract of an undertaking was as follows:

Particulars Units cost in Rs.
Direct material per unit
Material A | 4ltr @ Rs.0.50
Material B | 4 kg @ Rs.1.00
Material C | 2 units @ Rs.2
Direct labor @ Rs.8
Variable manufacturing cost @ Rs.2
Variable selling and distribution expense@ Rs.3
Budgeted normal output was 20,000 units with Rs. 80,000 fixed manufacturing cost. The fixed selling and
distribution expenses were Rs 80,000
The operations of the year ended Dec. of the last year were;
Production 25,000 units
Sales 30,000 units
Sales price per unit Rs. 35 units
Required: i)I/S under absorption costing. & variable costing.

Q. no 11] XYZ company manufactures a single product. The normal level of operation is 40,000 units. Data for the
last financial year were as follows:
Production units 30,000
Sales units 35,000
Fixed manufacturing overhead Rs. 200,000
Fixed selling overhead Rs. 105,000
Selling price per unit Rs. 25

21
Variable cost per unit:
Direct material Rs. 5
Direct labor Rs. 4
Other direct expenses Rs. 2
Selling overhead 4% of selling price
Required Income statement under absorption costing [Ans: Net income = Rs. 1,25,000]

Q. no. 12] A) XYZ Company uses direct costing for internal control purposes and absorption costing for external
reporting purposes. The following differences are located while comparing the two statements:
Particular Variable costing (Rs.) Absorption Costing (Rs.
Manufacturing cost (for 6000 units of output) 60000 60000
Fixed manufacturing cost 25000 30000
Fixed selling expanses 40000 40000
Variable selling expenses 2 2
Selling price per unit 30 30
Other details:
Beginning stock 1000
Sales units 5000
Required: Income statement by using absorption costing and Variable costing approach

B) XYZ Company uses direct costing for internal control purposes and absorption costing for external reporting
purposes. The following differences are located while comparing the two statements, Sales during the Year 15000
units
Particular Variable costing (Rs.) Absorption Costing (Rs.
Manufacturing cost (for 10000 units of output) 6 6
Fixed manufacturing cost 50000 60000
Fixed selling expanses 30000 30000
Variable selling expenses 3 3
Selling price per unit 40 40
Required: Income statement by using absorption costing and Variable costing approach

Q. no.13] The following statement of a company under absorption costing technique is given below:
Particular Details Amount ( Rs.)
Sales revenue @ Rs. 40 400000
Less : Cost of goods sold
Opening stock @ 25 50000
Direct Material @10 90000

22
 Direct Wages @10 90000
Variable Factory Overhead @ 2 18000
Fixed Factory overhead @ 3 27000
Less : closing stock (25000)
Unadjusted cost of goods sold 250000
Add: under Adjusted Fixed cost 3000

Adjusted Cost of Goods sold 253000

147000
Gross Profit

Less : Other cost : 40000

Variable selling 20000
Fixed selling
Total non mfg cost 60000
Net income 87000

Consider normal capacity 10,000 units

Required (a) Income statement for internal reporting
(b) Reconciliation statement showing reasons for differences in profit.

Q. no.14] The following statement of a company under variable costing technique is given below:
Particular Details Amount ( Rs.)
Sales revenue @ Rs. 20 360000
Less : Variable cost of production@ 12 252000
Add : opening stock 12000
Less : closing stock (48000)
Variable cost of goods sold 216000
Contribution margin 144000
Less : Non- production cost :
Fixed factory overhead 50000
Fixed S & D overhead 10000
Total non mfg cost 60000
Net income 84000
Consider normal capacity 20,000 units
Required (a) Income statement for external reporting [Rs. 91,500] (b) Reconciliation

[ Q. no.15] A manufacturing company has reported its income statement under absorption costing techniques as
under:
Sales revenue (Rs. (45x10,000 units) 450,000
Less: Cost of goods sold:
Beginning inventory (2,000× 27) 54,000
Variable cost (9,000 × Rs. 23) 207,000

23
 Fixed cost (9,000 × Rs. 4) 36,000
Ending inventory (1,000 × Rs. 27) (27,000 270,000
)
Gross margin before adjustment 180,000
Less: Fixed cost under absorbed 4,000
Gross margin 176,000
Less: Other cost 50,000
Net income before tax 126,000
Required: Income statement under variable costing technique. [Ans: Rs. 130,000]

Q.no16)The following statement of K&K company under Absorption costing technique is given below:
Particular Details Amount ( Rs.)
Sales revenue @ Rs. 30 840000
Less : cost of production@ 22 594000
Add : opening stock 66000
Less : closing stock (44000)
Un adjusted cost of goods sold 616000
Less: Favorable capacity Variance (2000 x4) 8000
Adjusted Cost of goods sold 608000
Gross profit
Less : Non- production cost : 232000

Fixed office overhead 25000

Fixed S & D overhead 56000
Total non mfg cost 81000
Profit Before tax under absorption Costing
151000
Consider normal capacity 20,000 units
Required (a) Conversation of above I/S under Variable Costing [Rs. 155000]

Q17) i) R& D company provide following information: The difference in net income between absorption and variable costing
is Rs. 1,50,000 for the first year , but it is minus R. 1,50,000 in the second year. The variable cost per unit for manufacturing
the goods is Rs. 15 and selling price per unit is Rs. 25. The annual fixed overhead is expected to be Rs.7, 50,000 for normal
capacity of 1, 50,000 units. The fixed selling and administrative expected is Rs. 3, 25,000 per year and variable for these
departments are expected 2.5% each on the sales amount. All costs incurred are coinciding with the budget. The sales volume
for the first and second year is
1,40,000 units and 1, 60,000 units respectively. The opening stock for the first year is nil and second year is 30,000 units.
Required: prepare income statement by using both variable and absorption costing and reconcile the profit between them.

ii) K&K Company provide following information: When the company converted absorption costing income statement in
Variable costing. Much to its surprise it found as difference in net income reporting under these system as follows:
a) First year showed less profit of Rs. 15000 with closing stock of 4000 units.
b) Second year shows as excess profit of Rs. 10000 with 2000 units closing stock.
c) Third year showed profit of Rs. 5000 with closing stock 1000 units. The standard variable cost of Rs. 5 per unit and
Standard fixed rate Rs. 5 per unit have been used for all these conversion process.
Required: reconcile the profit and stock level.

24
Unit three : Cost Volume Profit Analysis

Assumption of CVP analysis

i) Production units = Sales unit

ii) Selling price per unit and Variable cost per unit is remaining constant within Decision period.

iii) Company running at full capacity so Fixed cost is not change if activity level is change.

iv) Total cost of production can easily be segregated in to Fixed cost and variable cost.

Formula Method

i) Sales (Rs.) = Fixed cost + Variable cost + Profit before tax.

ii) Profit Before tax = Sales ( Rs) – Variable cost – Fixed cost .
iii) Profit Before Tax = Sales (Rs.) – Total cost ( i.e Total cost = Variable cost + fixed cost.)

what is Break-even Point?

Break even sales is Sales (Rs.) or Sales units at which a business earns a profit or loss of zero. This sales
amount or sales units exactly covers the underlying fixed expenses of a business, plus all of the variable
expenses associated with the sales. It is useful to know the break even sales level, so that management has
a baseline for the minimum amount of sales that must be generated in each reporting period to avoid
incurring losses. For example, if a business downturn is expected, the break- even level can be used to
pare back fixed expenses to match the expected future sales level.

Since, Break-even point (BEP) is a term in accounting that refers to the situation where a company’s
revenues and expenses were equal within a specific accounting period. It means that there were no net
profits or no net losses for the company – it “broke even”. BEP may also refer to the revenues that are
needed to be reached in order to compensate for the expenses incurred during a specific period.

It is calculated as follows :

¿ cost
BEP sales (units) = = xxxx units
CMPU

BEP (Rs .)
Or, BEP (Units) = = xxx
SPPU
¿ cost
BEP sales (Rs) = = Rs. Xxx
P /Vratio
Or BEP sales ( Rs.) = BEP ( Units ) x SPPU

FC + DPBT
i) Required sales units to earn desire profit before tax = = xxx units .
CMPU

25
 OR, DPBT = [(Sales units x CMPU) – Fixed Cost] = xxx units

FC + DPBT
ii) Required sales (Rs) to earn desire profit before tax = = Rs. xxx
P /Vratio
OR, DPBT = [(Sales (Rs.) x P/V ratio) – Fixed Cost] = Rs.xxx

DPAT
Fc +
iii) Required sales units to earn desire profit After tax = (1−t) = xxx units .
CMPU
DPAT
OR, = [(Sales units x CMPU) – Fixed Cost] = xxx units
(1−t)
DPAT
FC +
Iv) Required sales (Rs) to earn desire profit After tax = (1−t ) = Rs. xxx
P/Vratio
DPAT
OR = [(Sales (Rs.) x P/V ratio) – Fixed Cost] = Rs.xxx
(1−t)

V)Required sales units to earn Desire profit per unit or Profit (%) on selling price =
¿ cost ¿ cost
= --- units or = --- units
[SPPU −VCPU −PPU ] [CMPU −PPU ]
# PPU = Profit per unit = SPPU x Profit (%) = Rs.

# Definition of Margin of Safety

In break-even analysis, the term margin of safety indicates the amount or units of sales that are above the break-even
point. In other words, the margin of safety indicates the amount or units by which a company's sales could decrease
before the company will have no profit.
It is calculate as follows:
i)Margin of safety (Rs/ units) = [Actual sales (units or Rs) - BEP (units or Rs.) ] = Rs or Units xxx

PBT PBT
# Margin of Safety (Rs.) = = Rs. Xxx # Margin of Safety (units) = = xxx units
P /Vratio CMPU
# PBT = [Margin of safety (Rs.) X P/V ratio ] = Rs.

Margin of Safety (units∨Rs)

ii) Safety Margin Ratio = X 100 %=¿ xxx %
Actual sales (units∨Rs .)

Total Variable cost V

iii) Cost volume Ratio (CV ratio) = X 100 % or x 100 % = xxx %
Actual sales ( Rs) S
[Current Period Total cost− prevous period Total cost ]
Or Cost volume Ratio (CV ratio) = X 100 % = xxx
[Current Period sales ( Rs )−Previous period sales ( Rs ) ]
Or, Cost volume Ratio (CV ratio) = [1 – P/V ratio ] = 0.xxx

26
# Calculation of Profit Volume Ration ( P/ V ratio) or Contribution Margin Ratio ( CM ratio)

Variable cost V
i) P/ V ratio or CM ratio = [ 1 - ] or [1 - ] = 0.xxx = %
Sales(Rs) S
Total Contribution Margine CMPU
ii) P/ V ratio or CM ratio = = 0.xxx or = 0.xxx
Actual sales(Rs) SPPU
[Current Period PBT − prevous period PBT ] Diff . Profit before tax
iii) P/ V ratio or CM ratio = = =
[Current Period sales ( Rs )−Previous period sales ( Rs ) ] Diff . Sales (Rs .)
0.xxx

PBT
iv) P/ V ratio or CM ratio = = 0.xxx
Margin of Safety ( Rs .)
v) P/ V ratio or CM ratio = [1 – cost volume ratio] or [1 – C.V ratio] = 0.xxx

# Calculation of Contribution Margin Per Unit( CMPU)

i)Amount of Contribution Margin ( CM) = Total sales – Total variable cost or SPPU – VCPU = Rs.xxx

Total amount of Contribution

ii) Contribution margin per unit (CMPU) = = Rs.
Total sales (units)
iii) Contribution margin per unit (CMPU) = SPPU – VCPU = Rs.

iv) Contribution margin per unit (CMPU) = SPPU x P/V ratio. = Rs.

PBT
iv) Contribution margin per unit (CMPU) = = Rs.
Margineof safety (units)
# [Variable cost = Variable mfg. cost + Variable non mfg. cost .]

# Fixed cost = [Fixed mfg. cost + Fixed non mfg. cost ]

For Single Product

Q. no. 1] The cost and sales figures available are:

Sales during the year Rs. 1,000,000, Variable Cost Rs. 600,000 and Fixed Cost Rs 250,000.

Required (a) BEP (b) P/V Ratio (c) Safety margin

(d) Sales figure to earn after tax profit of Rs. 240,000 at 40% corporate tax.

Ans: a) Rs. 625,000 b) 0.4 c) Rs. 375,000 d) Rs. 1,625,000

Q. no 2] You are provided the following information

27
 Fixed cost for the year Rs. 120,000, Variable cost@ Rs. 100, selling price @ Rs. 250

Required (a) P/V Ratio (b) BEP sales in unit and in Rs.

(c) Sales volume in Rs. to earn after tax profit of Rs. 450,000 at a current tax rate 25%

Q. no. 3] The following are the information given by a trader:

Total Sales Rs. 360,000

Sales Unit 3,600 units

Variable cost per unit Rs. 60

Fixed Cost Rs. 100,000

Required (a) P/V Ratio (b) BEP in units and Rs. (c) BEP in Units if selling price is reduced by 15%.

[Ans: a) 0.40 b) Rs. 250,000 c) 4,000 units]

Q.no.4) A Company sells its energy brass product to wholesale supermarkets for Rs. 45 per piece in which it
incurred Rs. 20 as variable cost. The annual fixed costs of company amount to Rs. 100,000.
Required (a) Determine the BEP sales units (b) Determine the rupee sales volume required to earn profit of Rs.
120,000. (c) Determine the sales volume in units to earn 20% return on sales. (d) If the company can sell 5,500 of
its product, what price would it have to charge to earn Rs. 120,000 profit?
[Ans: (a) 4,000 units (b) Rs. 396,000 (c) 6,250 units (d) Selling price increased by Rs. 15]
Q. no. 5] The following data of a company for a year are given below:

Fixed Cost Rs. 200,000 , Net ProfitRs. 40,000 , Profit Volume Ratio 60%

Variable cost Rs. 4

Required i) Amount of sales made during the year ii) Selling price per unit

a) Required sales for earning Rs. 5,200 Net profit. [Ans: a) Rs. 400,000 b) Rs. 10 c) Rs. 342,000]

Q .no. 6] The cost accountant of X Co. Ltd. furnishes the following information:

Profit-volume ratio: 40%

Margin of safety ratio: 60%

Sales Rs. 500,000

28
 Required (a) Margin of safety (b) Profit (c) Fixed cost [ a) Rs. 300,000 b) Rs. 120,000 c) Rs. 80,000]

Q. no. 7] A firm purchased a certain item for Rs. 80,000 and sold the same to a customer for Rs. 100,000. Form
charge a profit a 10% on sales value.

Required (a) Fixed Cost, (b) BEP in Rs. (c) Required sales volume to earn after tax profit of Rs. 18,000, if tax
rate is 40% [Ans: a) Rs. 10,000 b) Rs. 50,000 c) Rs. 200,000 ]

[ Q. no. 8] A company sells its product at Rs. 20 per unit in which it incurred variable cost of Rs. 7.60 per
unit. The annual fixed costs of company amounted to Rs. 49,600.

Required : i) Sales units to earn after tax profit of Rs. 30,000 if tax rate is 45%.

ii) Compute BEP value assuming the fixed cost will increase by 20%

iii)Compute the contribution margin ratios assuming that variable cost is reduced to Rs. 7.50 per unit
iv) If the company can sell 5,200 units, what price would it have to charge to
earn a profit of Rs. 18,000 [ Ans: (1) 8,398.827 units (Approx) (2) Rs. 96,000 (3) 0.625 (4) Rs. 20.60 ]

Q. no.9) ] The accounts of a company made available the following information:

Annual fixed cost is Rs. 90,000.

Material cost per kg is Rs. 3 and 7 kg of input material is consumed by one unit of output.
Each unit needs four direct labor hours and wage per hour is Rs. 4.
The variable overhead is 50% of direct labor cost.
The sales price per unit is Rs. 60.
Required (a) P/V ratio (b) BEP sales in rupees (c) Sales units to realize Rs. 3 per unit profit
(d) Sales in rupees to realize after tax profit of Rs. 36,000 at a tax rate of 40%.
[ Ans: (a) 0.25 (b) Rs. 3,60,000 (c) 7,500 units (d) Rs. 6,00,000 ]

[Q. no. 10] The annual fixed cost of a company Rs. 80,000. The selling price per unit is Rs. 10 and contribution
margin is 40% of sales.

Required: (a) Contribution margin per unit (b) Break - even sales in units.

(c) Break even sales in value (Rs.) if fixed cost increased by 10% (d) Required sales in value (Rs.) to earn after
tax profit of Rs. 10,000, tax rate is assumed to be 50%.

[Ans: (1) Rs. 4 (2) 20,000 units (3) Rs. 220,000 (4) Rs. 250,000]

Q. no. 11] A) XYZ manufacturing company record has the following trading results for two periods
Particular Period I Period II
Sales ( Rs) 500000 800000
Net Profit ( Rs) 35000 110000

29
Required : P/V Ratio (b) Variable cost for period I and II (c) BEP (d) Sales required to earn after tax profit of
Rs.300,000 at 40 % corporate tax. [ Ans: a) 0.25 b) Rs. 3, 75,000 , Rs. 6, 00,000 c) Rs. 360,000 d) Rs. 2,360000 ]

B)The operating results of an industry of the last year are:

Particular 1st half year 2nd Half year

Sales ( Rs) 400000 900000
Net Profit ( Rs) 50000 175000

Required: i) Contribution margin ratio ii) Annual fixed cost iii) BEP sales volume for the year

iv) Sales volume required to earn after tax profit of Rs. 84,000 at 40% tax rate.
[ Ans: a) 0.25 b) Rs. 1, 00,000 c) Rs. 400,000 d) Rs. 960,000 ]

C) The operating results of an industry of the last year are:

Particular 2073 2074
Sales ( Rs) 500000 800000
Net Profit ( Rs) (15000) 45000

Required (a) P/V Ratio (b) Amount of fixed expenses (c) Break even points (Rs)
(d) Sales required earning a desired profit of Rs. 75,000.
[Ans: a) 0.20 (b) Rs. 115,000 c) Rs. 575,000 d) Rs. 950,000]

Q. no. 12] A company provides the following trading results:

Year Sales Total costs (Rs.)

amount

2011 Rs. 200,000 160,000

2012 Rs. 240,000 180,000

Required a) Profit volume ratio b) Annual fixed overhead c) Margin of safety for year 1 and 2 d) Sales to earn a

profit of Rs. 80,000 [Ans: (1) 0.5 (2) Rs. 60,000 (3) Rs. 80,000 and Rs. 120,000 (4) Rs. 280,000 ]

30
Q. No. 10] The following details relate to a manufacturing firm:

Fixed Cost Rs. 300000, Variable cost 100000, Material 400000, Wages Rs. 300000, and Sales Revenue Rs.
1200000 Required: i) P.V. Ratio ii)) BEP in Rupee iii) Sales at a desire after tax profit of Rs. 30,000 (Tax
Rate 50%) [Ans: (i) 33.33%, (ii) Rs. 900,000, (iii) Rs. 10, 80,000]

[Q. no. 11] The income statement of a company has been given below:

Sales units 20,000

Sales revenue Rs. 600,000
Less cost of goods sold
Variable manufacturing cost 300,000
Fixed manufacturing cost 200,000
Total cost of goods sold 500,000
Gross margin 100,000
Variable selling cost 100,000
Fixed selling cost 50,000
Total selling cost 150,000
Net Income Before Tax (50,000)

Required i) Cost volume ratio ii) breakeven sales volume in Rs. iii) Sales volume to earn 20% on sales (units)
Sales volume to earn Rs. 100,000 after tax profit (Rs.) Tax rate 50%
[Ans: (i) 2/3 or 0.6, (ii) Rs. 750,000 (iii) 62,500 units (iv) Rs. 13, 50,000]

31
Multi-product firm
 Profit before tax = Total sales – Total Variable cost – Total Fixed cost
¿
 Overall BEP (Units) / BEP of company = Overall ¿ cost Weighted CMPU = ---- units
¿
 Overall BEP ( Rs) / BEP of company = Overall ¿ cost WeightedP /Vratio = Rs.xxx
¿
 Required sales unit for earning desire profit before tax = Overall ¿ cost + DPBT Weighted CMPU
= --- units .
 Or DPBT = [(Total sales units X weighted CMPU) – Total Fixed cost]
 Required sales (Rs.) for earning desire profit before tax =
Overall ¿ cost + DPBT ¿
WeightedP/Vratio = Rs. xxx
Or, DPBT = [(Total sales (Rs.) X weighted P/V ratio) – Total Fixed cost]
 Sales units or Rs of each product = Total sales Units or Rs. X Weight of each product.
 Weighted CMPU = ∑ [( Weight of each product X CMPU of each product)]
 Weighted P/V ratio = ∑ [( Weight of each product X P/V ratio of each product)]
 Overall fixed cost / Total fixed cost = [Departmental ( separate) fixed cost of all product + Joint
Fixed cost(or unallocated Fixed cost]
Sales of each product Sales Ratio of each product
 Weight of each product (W) =
Total sales
or
Total sales ratio . of all product
=0.xxx

[Q. no. 12.) A multi-product company follows standard sales mixed policy for its product. The reported
income and expenditure for the last year are presented below:

Particular Product X Product Y Total ( Rs)

Sales units 20000 30000 50000
Sales revenue 300000 300000 500000
Less : Variable Cost 200000 150000 350000
Contribution margin 100000 150000 250000
Less : Fixed Cost :
Departmental fixed cost 50000 50000 100000
32
 Join fixed cost ---- ---- 50000
Profit before tax ------ ------ 50000

Required: i) Break even sales volume in units [40,000 units]

(ii) Required sales in units to earn after tax profit of Rs. 40,000 (Corporate tax rate is 50%) [ 56,000 units]

(iii) Break- even sales in units when the sales mix are reversed. 40,000 units]

[Q. no. 13The XYZ Company produces two types of exercise machines, pump up (X 1) and Tread mix (X2).
Relevant data are as follows:

Product CMPU sales mix ( in unit)

X1 Rs. 10,000 60%

X2 Rs. 20,000 40%

The company total fixed cost amount to Rs. 28, 00,000.

Required: (i) Determine the number of units of each product the company needs to produce and sell to break-even.

(ii) Determine the number of units of each product needed to generate net income after tax Rs.
350,000. Assume a tax rate of 50%

(iii) Break even sales volume if standard sales units is changed to one unit to one unit.

[Ans: (i) 120 units , 80 units (ii) 150 units, 100 units (iii) 187 units ]

[Q. no. 14]. The Everest company produces and sells three products X , Y and Z . The financial data relating to
these products are presented below.

Products X Y Z

Sales units 4000 8000 16000

Unit selling price Rs. 15 Rs. 10 Rs. 20

Unit variable cost Rs. 10 Rs. 5 Rs. 10

Total annual fixed cost amount to Rs. 100,000

Required: (i) Overall Break- even units (ii)Total sales amount for earning Rs. 70,000 profit.

33
 (iii) Revised break- even units if sales mix is changed to 4: 2 : 1 [Ans: (i) 12727 units (ii) Rs. 355649 (iii) 17500 units]

[Q. no. 15) Marpha manufacturing Company produces beer, soft drink and soda water. Sales manager of the
company has projected total sales of Rs. 450,000 for coming month. The sales-mix in value, comprises 30%,
40% and 30% for products respectively. Other information are as follows:

Products VC Ratio

Beer 40%

Soft drink 60%

Soda water 30%

Fixed costs Rs. 130,000 per month.

Required: Determine the break even sales volume for each product and for the company as a whole

[Ans: Overall BEP = Rs. 236363.63, Product wise Rs. 70909, Rs. 94545, Rs. 165454]

[Q. no. 16] A company produces three products S1, S2 and S3. The following information are available.

Products SPPU CM Ratio Sales Units

S1 Rs. 20 40% 8000

S2 Rs. 30 30% 6000

S3 Rs. 40 50% ?

The overall fixed cost for the period Rs. 198000

Required: (i)Sales units of S3 for achieving breakeven point at present mix.

(ii) New break-even - point if, sales mix is changed to 2: 3: 4

[Ans: (i) 4000 units (ii) 3219 units, 4829 units and 6438 units ]

34
[Q.no. 17]. Data relating to sales mix and other information of a multi-product company has been presented below:

Particulars Product A Product B Total

Sales units 40,000 20,000 60,000

Sales revenue Rs. 320,000 Rs. 200,000 Rs. 520,000

Less: Variable cost 200,000 120,000 320,000

Contribution Margin 120,000 80,000 200,000

Less: Separate fixed cost 70,000 30,000 100,000

Joint fixed cost - - 25000

Net income 75,000

Required:

(a) Overall break- even point in units and break- even for each product:

(b) % change in selling price of Product A, when selling price of product B is reduced by 10%

(c) Break even sales in units when the sales mix are reversed.

(d) The margin of safety in units and in Rs. [Ans: (a) 37500 units, 25000 units and 12500 units (b) 6.25% (c)
34090 units ]

[Q. no. 18] A small biscuit factory produces two types of biscuits under the brand name of Glucose

And Sugar free and the data on these products is given below.

Products CMPU SPPU Sales mix in units

Glucose Biscuit (G) 10 15 60%

Sugar Free (S) 15 25 40%

35
 The overall fixed cost for the firm is Rs. 120,000.

Required: (i)Overall break –even - point in units at present sales mix. [10,000 units ]

(ii) Sales mix ratio in Rs. at present [9 : 10]

(iii) Profit or loss if sales mix ratio in units revised to 4000:6000. [Rs. 10,000 ]

(iv) The proposed sales mix to earn a profit of Rs. 5000, with the total sales of two products being 10,000 units.
[5000 : 5000]

[Q.no.31]

(A)The I/S of D&M mfg. company and other necessary details have been summarized below:

Particular X Y Total
Sales Units 2000 3000 5000
Sales Revenue [ A] 300000 600000 Rs. 900000
Less : Variable Cost
Direct material @ Rs. 40 / kg 160000 360000 520000
Direct labor @ Rs 20 / DLH 80000 60000 140000
Total Variable COGS [ B] 240000 420000 660000
Contribution Margin [ A - B] 60000 180000 240000
Less: Fixed cost
Departmental Fixed cost 40000 30000 70000
Join Fixed cost ( Unallocated fixed cost) - - 80000
Total Fixed Cost [ C] 150000
Net profit before Tax [ GP – C] 90,000
Required: i) Overall BEP in Rs. ii) Overall sales (Rs.) of the company to Earn Profit Rs. 100000 iii) Profit if
Sales is Rs. 1000,000.
(B) The I/S of D&M mfg. company and other necessary details have been summarized below:

Particular P Q Total
Sales Units 10000 10000 20000
Sales Revenue [ A] 200000 200000 Rs. 400000
Less : Variable Cost of goods sold
Direct material @ Rs. 5/ kg 100000 50000 150000
Direct labor @ Rs6 / DLH 60000 120000 180000
Total Variable COGS [ B]
160000 170000 330000
Contribution Margin [ A - B]
40000 30000 70000
Less: Fixed cost
Separate Fixed cost
Join Fixed cost ( Unallocated fixed cost) 13000 12000 25000
- - 24000
Total Fixed Cost [ C]
49000

36
 Net profit before Tax [ GP – C] 21000
Required:

i) Overall BEP in Rs. ii) Overall sales (Rs.) of the company to Earn Profit Rs. 40000
ii) Overall sales ( Rs) to earned Netprofit after Tax Rs. 10000 [ if Tax @ 50%]

(C) The I/S of D&M mfg. company and other necessary details have been summarized below:

Particular P Q Total
Sales Units 10000 10000 20000
Sales Revenue [ A] 300000 400000 Rs. 700000
Less : Variable Cost of goods sold
Direct material @ Rs. 4 80000 160000 240000
Direct labor @ Rs 4 120000 80000 200000
Total Variable COGS [ B] 200000 240000 440000
Contribution Margin [ A - B] 100000 160000 160000
Less: Fixed cost
Allocated Fixed cost 40000 40000 80000
Join Fixed cost ( Unallocated fixed cost) - - 50000
Total Fixed Cost [ C]
130000
Net profit before Tax [ GP – C] 130000
Required: i) Overall BEP in units and Rs. ii) Overall sales units & (Rs.) of the company to Earn Profit Rs.150000

Iii Profit after tax if Sales is Rs. 15,00,000. [ tax @40

37
Unit IV) Planning and Control

Meaning:
The master budget is the aggregation of all lower-level budgets produced by a company's various functional
areas, and also includes budgeted financial statements, cash forecast, and a financing plan. The master budget is
typically presented in either a monthly or quarterly format, or usually covers a company's entire fiscal year. An
explanatory text may be included with the master budget, which explains the company's strategic direction, how
the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the
budget. There may also be a discussion of the headcount changes that are required to achieve the budget.
A master budget is the central planning tool that a management team uses to direct the activities of a
corporation, as well as to judge the performance of its various responsibility centers. It is customary for the
senior management team to review a number of iterations of the master budget and incorporate modifications
until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses
participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior
management, with little input from other employees .
The budgets that roll up into the master budget include:

38
 A) Sales and Cost budget.
a) Sales Budget b) Production Budget c) Material Purchase Budget or Merchandise
[( Inventory ) Purchase Budget ] d) Direct labor cost budget e) Manufacturing overhead
budget f) Selling and administrative expense budget
B) Cash Collection and Disbursement Budget [ i.e Cash Budget ]
C) Budgeted Income statement D) Budgeted Balance sheet.

 [Closing balance or stock of Previous Period = Opening balance or Stock of Next

period]
 [Closing Stock / Closing Cash balance of Current period is transfer to B/S ]

1) Master Budget For Manufacturing Company

A) Sales Budget for ----- month
b) Variable Manufacturing Cost Budget
i) Production Budget ii) Direct or Material Purchase Budget iii) Direct Labor Cost Budget

iv) Variable Mfg. OH cost budget v) Variable non Mfg cost budget

39
B) Cash Budget: Under this budget we should consider the items of All cash receive and Cash
Disbursements within the Particular Period.

C) Budgeted Income statement for ---- month: Under this Budget we should record only all
income and expenses of the particular month.

D) Budgeted B/S as on -----

Liabilities Amount Assets Amount( Rs)
( Rs.)
Share Capital [ O + N] Xxx Fixed assets ( O +N) = xxx
% preference Share capital Xxx Less: Depreciation ( xxx) Xxx
Undistributed profit [ O + N] Xxx Current assets [ New or Current)
Long Term Debt Xxx Inventory [ R/M + FG] Xxx
Current liabilities Xxx Account Receivable Xxx
Outstanding loan and Expenses xxx Advance Paid / Prepaid expenses Xxx
Accrued Income Xxx
Cash balance Xxx
Other Current assets items Xxx
Intangible assets xxx
Total Liabilities xxx Total Assets xxx

2) Master Budget for Non Manufacturing Company

a) Merchandise Purchase Budget [Inventory Purchase Budget] for ---- months
Particular Jan Feb Mar Aprl ( Ref)
Sales Budget ( Rs.) [ 100%] Xxx Xxx Xxx Xxx
Less : Gross profit or Margin [ % of sales ] xxx xxx xxx xxx
Cost of Goods Sold [ 100% - GP (%)] Xxx Xxx Xxx Xxx
Add : Closing Stock [ on the basis of COGS] Xxx Xxx Xxx xxx
Less : Opening stock xxx xxx xxx
Merchandise Purchase Budget ( Rs.) xxx xxx xxx
 Closing Stock is calculated on the basis of COGS, however, question is called c/s on the basis
of Sales . [ i.e Closing stick is valued on Cost Price or Selling Price whichever is lower.]

b) Variable Administrative and Marketing Exp Budget = Sales (Rs) x Rate ( %) = Rs.xxx

A) Cash Budget: Same as Manufacturing Cash Budget.

B) Budgeted Income statement iii)) Budgeted B/S as on ----ending --- : Same as Mfg company.
40
 Q. No 1) The balance sheet on 31st Dec. 2019 and the sales and production budgets of Nepal Manufacturing Ltd.
have been summarized below:

Liabilities Rs. Assets Rs.

Inventory
Finished goods : 30,000 units @ Rs.14 420,000
Equity capital 1,000,000 Raw Materials : 80,000 units @ 3 240,000
Accounts receivable 320,000
Accounts Payable 240,000 Plant & Machinery 480,000
Retained earning 240,000 Cash at bank 20,000

1,480,000 1,480,000
Sales and Production Budget:

Months Nov. Dec. Jan Feb March April

Sales unit 25,000 30,000 30,000 40,000 45,000 40,000
Production unit 30,000 30,000 40,000 45,000 40,000 40,000
One unit of finished product would need 2 units of raw materials and one unit of raw material would cost Rs.3.
Each unit of finished product would need one DLH and cost per DLH would be Rs.5. The desired ending inventory
of finished product and the raw material would be sufficient to meet next month's sales and production need
respectively.

Required: (a) Material Purchase Budget (b Labor Cost Budget budget [Ans: (a) Rs.270, 000, Rs.240, 000 and
Rs.240,000 ]

Q.no. 2) A sales forecasting relating to a mfg. company are summarized below:

Months Shrawan Bhadra Aswin Kartick Marga

Sales(units) 20000 30000 40,000 30000 30000

Selling price per unit would be Rs.20, 20% of the sales would be in cash and 80% on credit. Credit sales would realize 50% in
the month of sales, and the balance would be in the next month of sales. One unit of finished product would need 2 units of raw
materials and one unit of raw material would cost Rs.2. Each unit of finished product would need two DLH and cost per DLH
would be Rs.3. factory overhead is Rs. 6 per unit . Selling and distribution expenses are 20 % of sales. The desired ending
inventory of finished product and the raw material would be sufficient to meet next month's sales and production need
respectively. Inventory of raw material and finished goods of last month is 30000 units. A minimum balance of cash would be
Rs.20,000 and Ending Cash balance of Last year is Rs 25000.

All purchase and expenses including direct labor cost would be payable in the month when they become due..

Req. a) Production budget for first 3 month ending Aswin. b) Materials purchase budget first 3 month

41
 Q. no 3) The balance sheet on 31st December 2017 and the sales and production budgets of Nepal Manufacturing
Ltd. have been summarized below:

Liabilities Rs. Assets Rs.

Inventory:
Finished goods , 30,000 units @ 420,000
Equity capital 1,000,000 Rs.14
Raw Materials 80,000 units @ 3 240,000
Accounts Payable 240,000
Retained earning 240,000 Accounts receivable 320,000
Plant & Machinery 480,000
Cash at bank 20,000

1,480,000 1,480,000
Sales and Production Budget:

Months Nov. Dec. Jan Feb March April

Sales unit 25,000 30,000 30,000 40,000 45,000 40,000
Production unit 30,000 30,000 40,000 45,000 40,000 40,000
Manufacturing overhead cost budget:

Particulars/Months Jan. Feb. March

Production units 40,000 45,000 40,000
Variable manufacturing cost:
Indirect materials @ Re.1 Rs.40,000 Rs.45,000 Rs.40,000
Indirect labour @ Rs.2 80,000 90,000 80,000
Depreciation 8,000 8,000 8,000
Rent and others 22,000 32,000 22,000
Total 150,000 175,000 150,000
Selling price per unit would be Rs.20, 20% of the sales would be in cash and 80% on credit. Credit sales would
realize 50% in the month of sales, 30% in the next month and the balance would be in the following next month of
sales. One unit of finished product would need 2 units of raw materials and one unit of raw material would cost
Rs.3. Each unit of finished product would need one DLH and cost per DLH would be Rs.5. The desired ending
inventory of finished product and the raw material would be sufficient to meet next month's sales and production
need respectively. All expenses including direct labor cost would be payable in the month when they become due.
Purchases would be paid in the next month of purchase.

Required: (a) Material Purchase Budget (b Labor Cost Budget budget C) Direct cost budget .

d Variable manufacturing cost Budget e) Total Variable cost budget f) Fixed cost Budget.

Ans: (a) Rs.270,000, Rs.240,000 and Rs.240,000

Q. no 4) The Beginning balance sheet and the other related information of ABC Manufacturing Ltd. have been
summarized below:

Liabilities Rs. Assets Rs.

Inventory:
Account Payable 100000 Finished goods , 30,000 units 280,000
Equity capital 494000
Raw Materials 50,000 units 100,000

42
 Accounts receivable 208,000
Debenture capital 100,000 Plant & Machinery 96,000
Cash at bank 10,000

694,000 694,000
Sales and Production Budget:

Months Nov. Dec. Jan Feb March April May

Sales unit 15,000 20,000 20,000 25,000 30,000 35,000 40000
Sales ( Rs.) 300000 400,000 400,000 500,000 600,000 700,000 800000
Manufacturing overhead cost budget:

Particulars/Months Jan. Feb. March

Indirect materials Rs.50,000 Rs.60,000 Rs.70,000
Indirect labour 25,000 30,000 35,000
Depreciation 2,000 2,000 2,000
Others 48,000 48,000 48,000
Total 125,000 140,000 155,000
20% of the sales would be in cash and 80% on credit. Credit sales would realize 50% in the month of sales, 30% in
the next month and the balance would be in the following next month of sales. Bad debt and Uncollectible debts
will be negligible. Each unit of finished product would need 2 units of raw materials and one unit of raw material
would cost Rs.4. Each unit of finished product would need 2 DLH and cost per DLH would be Rs.3.5. The selling
expenses will be 10 % of gross sales. The desired ending inventory of finished product and the raw material would
be sufficient to meet next month's sales and production need respectively. All expenses including labor cost would
be payable in the month when they become due. Purchases would be paid in the next month of purchase.

Required: (a) Material Purchase Budget (b Labor Cost Budget budget C) Direct cost budget .

d) Variable manufacturing cost Budget e) Total Variable cost budget f) Fixed cost Budget

Q.no.5) Sales and Production Budget:

Months Nov. Dec. Jan Feb March April May

Sales unit 15,000 20,000 25,000 25,000 30,000 30,000 20000
Sales ( Rs.) 300000 400,000 500,000 500,000 600,000 600,000 400000
50% of the sales would be in cash and Balance on credit. Credit sales would realize 60% in the month of sales,
40% in the next month. Of the credit sales collected in the month of Sales 50% of the customer will enjoy a
discount facility of 2% for Payment with in fifteen days of Sales and Remaining will be the full amount. Each unit
of finished product would need 2 units of raw materials and 3 DLH. raw material would cost per unit Rs.4.and
cost per DLH would be Rs.3 . The selling expenses will be 10 % of gross sales. The Manufacturing overhead cost
including Depreciation cost of Rs.5000 will be Rs. 30000 per month. The desired ending inventory of finished
product and the raw material would be sufficient to meet next month's sales and production need respectively. A
minimum balance of cash would be Rs.20,000. All expenses including material and labor cost would be payable in
the month when they become due.

Required: (a) Material Purchase Budget (b Labor Cost Budget budget C) Direct cost budget.

43
 d) Variable manufacturing cost Budget e) Total Variable cost budget f) Fixed cost Budget

Q.no6) The balance sheet as the end of December 2019 and the other related information of XYZ Manufacturing
Ltd. have been summarized below:

Liabilities Rs. Assets Rs.

Account Payable 100000 Inventory:
Equity capital 400000 Finished goods (20,000 units) 280,000
Retained Earning 194000
Debenture capital 60,000 Raw Materials ( 50,000 units) 100,000

Accounts receivable 208,000

Fixed Assets 150000
Cash at bank 16,000

754,000 754,000
Sales and Production Budget:

Months Nov. Dec. Jan Feb March April May

Sales unit 15,000 20,000 20,000 25,000 30,000 35,000 40000

 Selling Price per unit Rs 20. , 20% of the sales would be in cash and 80% on credit. Credit sales would
realize 50% in the month of sales, 30% in the next month and the balance would be in the following next
month of sales.
 All expenses expect the purchase materials will be paid in the same month .The Purchase will be next
month of purchase. Minimum Cash balance will be Rs. 20000. The desired ending inventory of finished
product and the raw material would be sufficient to meet next month's sales and production need
respectively. Each unit of finished product would need 2 units of raw materials and one unit of raw
material would cost Rs.2. Each unit of finished product would need 2 DLH and cost per unit Rs.8. The
Variable selling expenses Rs.3 per unit. Annual Fixed Manufacturing Cost Rs. 120000. The Company will
be purchased new fixed assets during the January for Cash Rs. 100,000.
 Depreciation on Fixed Assets @ 15% .
Required: Required: (a) Material Purchase Budget (b Labor Cost Budget budget C) Direct cost budget .

d) Variable manufacturing cost Budget e) Total Variable cost budget f) Fixed cost Budget

Q.no7.) The summary Balance Sheet of a company as on 31st December last year was as under:

Liabilities Rs. Assets Rs.

Share capital 400,000 Fixed assets 150,000
Retained earning 60,000 Inventory 270,000
Accounts payable 270,000 Accounts receivable 280,000
Cash in hand 30,000
Total 730,000 Total 730,000
Additionally, you are informed: Actual and budget sales for different months are:

Months Nov. Dec. Jan Feb March April

Actual sales (Rs.) 500,000 500,000 - - - -
Budgeted sales (Rs.) - - 450,000 400,000 500,000 450,000
Sales are 20% for cash and 80% on credit. 50% of credit sales will be realized in the month of sale, 30% in the next
month of sales and the balance in the next following month of sales. Gross profit averages 40% of sales. Operating
expenses and selling expenses will be 15% and 5% of sales respectively. All expenses are paid for at the time when

44
 they are due. Desired ending balance of inventory at the end of each month will be sufficient inventory to meet the
following month sales. All purchases will be paid in the next month of purchase.

Req: (a) Inventory purchase budget for 3 months ending March (b) Variable cost

Q.no8.) The summary Balance Sheet of a company as on 31st December last year was as under:

Liabilities Rs. Assets Rs.

Share capital 400,000 Fixed assets 150,000
Retained earning 60,000 Inventory 270,000
Accounts payable 270,000 Accounts receivable 280,000
Cash in hand 30,000
Total 730,000 Total 730,000
Additionally, you are informed:

Actual and budget sales for different months are:

Months Nov. Dec. Jan Feb March April

Actual sales (Rs.) 500,000 500,000 - - - -
Budgeted sales (Rs.) - - 450,000 400,000 500,000 450,000
Sales are 20% for cash and 80% on credit. 50% of credit sales will be realized in the month of sale, 30% in the next
month of sales and the balance in the next following month of sales. Cost of goods sold averages 60% of sales.
Operating expenses and selling expenses will be 10% of sales each. Salary and rent per month will be Rs. 12000 and
Rs. 10000 resp. All expenses are paid for at the time when they are due. Desired ending balance of inventory at the
end of each month will be sufficient inventory to meet the following month sales. All purchases will be paid in the
next month of purchase. Fixed assets costing Rs.150, 000 will be acquired on Jan 20th.

Required: (a) Inventory purchase budget for 3 months ending March (b) Variable cost Budget

Q.no. 9 ) A) Nepal Trading Ltd, a company engaged in a real business seeks for assistance to prepare it’s material
budget for next 3 months. The company has gathered some pertinent information to make your job simple. The
data relating to the past and current sells are presented below: The balance sheet on last year and the sales and
production budgets of Nepal Manufacturing Ltd. have been summarized below:

Liabilities Rs. Assets Rs.

Equity capital 1,000,000 Accounts receivable 208000
Cash at bank 20,000
Accounts Payable 200,000

Sales and Production Budget:

Months Falgun Chaitra Baishak Jesta Ashad Shrawan

Sales (Rs) 150000 200000 400,000 450000 400,000 500,000
20% of the sales would be in cash and 80% on credit. Credit sales would realize 60% in the next month of
sales, and the balance would be in the following next month of sales. All purchase is credit purchase and
credits are paid in the following month of purchase. The desired ending inventory of finished product would be
sufficient to meet next month's sales. Gross profit margin is 50 % of sales. Other operating expenses are Rs.
30000 per month. The expenses are payable in the month they become due. A minimum balance of cash would be
Rs.20, 000.

Required: (a) Inventory purchase budget for 3 months ending Ashad.

45
 B) A new company has the following transactions :

Months Jan Feb March

Sales (Rs) 80,000 90,000 100,000
Purchase ( Rs) 60000 65000 70000
Salaries and Wages 10000 10000 10000
Selling expenses 5000 5000 5000

Sales commission @ 5% of sales, Leg in payments of Salary and wages is half month.

All expenses expect the purchase merchandise will be paid in the same month .The Purchase will be next
month of purchase. Required: a) Total Variable cost budget b) Fixed cost Budget.

C) Given bellow the balance sheet on 31st December 2019

Liabilities Amount (Rs) Assets Amount (Rs)
Share capital 450,000 Fixed Assets 500,000
P /L 100,500 Stock 40,000
10% Debenture 120000 Account Receivable 188,000
Account payable 77,500 Cash 20,000

Total 748,000 Total 748000

Salary and rent per year will be Rs. 144000 and Rs. 120000 resp. Variable selling expenses 10% of sales which
will be paid same month. Depreciation on fixed assets is 15 % per year. Total sales for six months (including
November and December) are Rs. 1,000,000, which are apportioned as:

Months Nov. Dec. Jan. Feb. Mar. April

% 17 15 16 18 16 18
Out of total sales 20% of are on cash and rest on credit which will be collected equally during the following two
month of sales. Gross margin will be 50% of sales. Ending inventory of merchandize will be 50% of need of next
month sales. Purchase will be paid next month of purchase. Minimum cash balance per month will be Rs. 30000.

Required: (a) Sales Budget For three month ending March. (b) Inventory purchase budget for 3 months ending March

Unit Five : Decision Making

Related Cost :

Relevant Cost and Revenue:

Cost information to be relevant must possess following characteristics. It must

1. be associated with the decision, or question under consideration,

2. be important to a decision maker,

3. have a connection to or bearing on some future endeavor.

Consider the following Cost:

46
(a) Future cost and past cost

(b) Opportunity cost

(c) Incremental cost and differential cost

(d) Relevant and irrelevant cost

(e) Avoidable and unavoidable cost

(f) Sunk cost

(g) Out-of pocket cost

Future Costs

Relevant costs (revenues) are future costs (revenues). It is a cost which incurs in future business activities. All
decisions related to the future, accordingly, only future costs can be relevant to decisions. But a future cost
that is same for more than one alternative has no effect on the decision. Such a future cost is an irrelevant
cost. So only relevant future costs are considered for the purpose of decision making.

Past Costs

Costs that are already ascertained after its incidence are past costs. Past costs are the result of past decisions
and considered as irrelevant costs. As they are always the same across alternatives, are therefore always
irrelevant.

Opportunity Cost

An opportunity cost is the potential benefit given up when the choice of one action precludes a different
action. It represents the benefits foregone because one course of action is chosen over another. Opportunity
cost is the value of benefits foregone by selecting one decision alternative over another. It is a value scarified
in favor of one alternative course of action. As such, it is defined as the value of the next best alternative, i.e.
it is the net receipts forgone by not accepting the best alternative available. Opportunity costs are relevant
costs, extremely important in decision making, but they are not included in the accounting records. The
concept of opportunity cost recognizes that resources are scarce and have alternative uses.

Incremental Cost

The difference of costs of various alternatives is termed as differential cost. It may be higher or lower. If the
cost is higher, then it is called incremental costs. Incremental costing techniques are considered incremental
costs and incremental revenue arising out of decisions to change the level of activity. Incremental costing is
confined to decision regarding changes in the activity level.

Differential Costing

It is a difference of cost between completely new projects. To be relevant, a cost must be a differential cost
which means that it varies in amount among the alternatives being considered.

iv) Relevant & Irrelevant Cost

47
 In order to evaluate cost information, managers must be able to distinguish between relevant costs and
irrelevant costs. Costs that are affected by the decision are relevant costs and those that are not affected are
irrelevant ones. Irrelevant costs should be ignored.

Decisions are futuristic in nature and therefore, only expected future costs are relevant. Moreover, as decision
making involves choice between alternatives, only those costs that are different from each alternative are the
relevant costs for decision making. That is, costs that are uniform/remain unchanged for all the alternatives
are irrelevant costs and might be ignored.

v) Avoidable and Unavoidable Cost

Avoidable costs are defined as those costs which can be identified with an activity or sector of a business and
which would be avoided if that activity or sector did not exist.

Common costs apportioned to a particular activity or segment of business are usually unavoidable because
total common cost cannot be avoided or reduced even if that activity or sector does not exist.

vi) Sunk Cost

Sunk costs are those costs that already have been incurred in the past time based on past decision. They are
past costs and hence irretrievable by managerial actions. That is, costs incurred in the past for the acquisition
of an asset or an asset or resources are called Sunk costs because they can not be changed no matter what
future course of action is taken. Sunk costs cannot be changed by any current or future action. Sunk costs are
irrelevant/not relevant to current decision making.

Cost of a fixed asset already acquired is an example of Sunk cost.

Generally, book value - Salvage value = Sunk cost

Or, Book value of asset = Sunk cost

Salvage value = Opportunity cost

Cost Summary

 The relevant costs must be expected future costs.

 The relevant costs must be different for each alternative.
 All past costs are irrelevant. They can however be used in projecting future costs.
 In decision making, the total costs should be considered and not the unit cost.
 Differential costs are different in total costs under each alternative.
 It is wrong to conclude that all variable costs are relevant and the fixed costs are irrelevant. Fixed
costs are relevant if they are expected to be changed by the decision under consideration.

TYPE OF DECISIONS
There are so many types of decisions. But here, we are related with the following type of decisions only.

 Make or buy decisions.

 Drop or continue decisions

48
  Accept or reject a special offer/order decisions

MAKE OR BUY DECISIONS

(a) Considering only the relevant costs

(b) Showing the total relevant cost and irrelevant cost.

Relevant Cost for 'Make': The additional or relevant cost that will have to be incurred for
manufacturing the product comprises:

Direct material cost

Direct labour cost

Salaries of additional supervisor engaged

Rent for premises, if required

Interest on additional capacity employed

Loss of opportunity cost of using surplus capacity for any other purpose arises in case the firm decides to
manufacture the product by itself. That is, potential uses of available capacity should be considered.

Relevant Cost for Buy: The relevant cost for the 'make' alternative would be avoided if the products
were not made, i.e. if products were bought from outside suppliers. Other relevant costs comprise:

Purchase price of the product, discount on purchase, if any, shipping charges etc. That is, the price/cost
quoted by the supplier under the buy alternative.

In case a firm decides to get a product manufactured from outside, besides the saving in cost, it must also
take into account the following qualitative factors:

 Ability of the supplier to maintain the quality of the product

 Reliability of supplier (or sources of supply) for regularity in supply
 Perception regarding possible future price changes
 Financial and technical soundness of the supplier.
The decision regarding make or buy will be made showing the calculation through an incremental analysis
which uses three columns format. Under differential cost analysis, the first two columns present the costs of
the two alternatives, while the third column presents the incremental costs. Another option is to use a single-
column format that concentrates only on the incremental costs and benefit.

Differential costs are material, labour, and variable overhead. This cost will definitely be saved if the
parts/components are bought. And the direct fixed manufacturing overhead is a differential cost if product
ceases to produce.

The sunk costs are not incremental costs because the have already been incurred and will not change no
matter which decision alternatives is selected. The sunk costs are irreverent costs as such need not be

49
 considered.

DROP OR CONTINUE DECISION

The management of the company may face a problem of dropping/shutdown or continuing the manufacturing
and marketing facilities. It is always in the interest of company to continue to operate the facilities as long as
products or services sold recover variable cost and make a contribution toward recovery of fixed cost.

But the problem of drop or continue arises when the income statement regarding the product shows a loss.
Then management of the company attempts to find out the reasons for loss and makes decision regarding drop
or continue the manufacturing and marketing facilities.

In deciding whether to continue or drop, expected future revenue should be compared with the relevant cost.
For this, the relevant cost must be separated into variable/avoidable and fixed/unavoidable cost. Certain cost –
fixed cost – does not eliminate by dropping facilities, like depreciation, interest, property tax and insurance.
These costs continue during complete inactivity also.

If operations are continued, certain expenditure connected with shutting down will be saved. Such expenditure
includes reopening cost/expenses, cost for recreating and training the new workers, etc.

For taking decision to drop or continue the product or facilities, income statements should be prepared under
contribution margin format.

Income statements for drop or continue the product/facilities will show:

 Contribution margin
 Net profit, and
 Percentage of net income to net sales.
Alternative which has higher contribution margin should be chosen as it will absorb the fixed cost and give
higher profit. Facilities with high amount of fixed cost cannot be dropped as the fixed cost is irrelevant cost
and fixed cost will not decrease by dropping the particular facilities.

Fixed cost imposed by dropping the facilities will have to be paid cumulatively in total resulting extra burden
of fixed cost to continuing facilities and thereby reduce overall profit of the company. Fixed costs may be
direct fixed costs and allocated fixed costs. Direct fixed costs are fixed costs that are directly traceable to a
product line. And allocated fixed costs are those fixed costs that are not directly traceable to an individual
product line. These costs are also referred to as common costs as they are incurred for the common benefit of
all products lines. And allocated common fixed costs are not avoidable.

Dropping a product line is a very significant decision and one that receives a great deal of attention. So the
decision of dropping or continuing the facilities should be judged on the basis of overall company profit. The
proper approach to analyzing the problem is to calculate the change in income that will result from dropping
the product line. If income will increase, the product line should be dropped. If income will decrease the
product line should be kept. This deals on to comparing the incremental revenues and costs that result from
dropping the product line.

50
 NUMERICAL PROBLEMS

Problem 1) The cost controller assembled the following cost data, which disclose that annual
manufacturing costs for internal production of plates are 10,000 with following details units.
Raw materials Rs 8,500

Direct labour 8,000

Variable factory overheads 10,500

General fixed overheads 14,000

41,000

The purchase manager has an offer from a supplier who is willing to supply the component at Rs 35.

Should the component be purchased and production stopped?

Problem 2) The Managing Director of a company asks for your assistance in arriving at a decision as to whether to
continue manufacturing a component A or to buy it from an outside supplier. The following data are supplied: The
annual requirement of component 'A' is 10,000 units. The lowest cost from an outside supplier is Rs 8 per unit.
During the year, the Machine Shop Manufactured 10000 units of 'A'. The following expenses of the Machine Shop
apply to manufacture the component 'A'.

Direct Materials Rs 35,000 Direct wages Rs 30,000

Indirect labour 12,000 Depreciation Rs. 13000

Salary 10,000

Required: A statement showing annual costs to make or buy the component “A”

Problem no 3) A Parts Ltd. has an annual production of 9,000 units for a component. The cost structure of the
components is given below:
Materials Rs 27 per unit

51
 Labour Rs 18 per unit

Expenses: variable Rs 9 per unit

Fixed Rs 13 per unit

Rs 67 per unit

The purchase manager has an offer from a supplier who is willing to supply the component at Rs 54.

Should the component be purchased and production stopped ?

Pronlem4) One of the products of a company is souvenir clock. The company is considering subcontracting with
the manufacturer of this item offer at a cost of Rs 8 per unit. At present 5,000 units are produced each year.
The standard cost of manufacturing a clock is

Rs

Direct materials 4.00

Direct Wages 1.50

Variable overhead 0.50

Fixed overhead 4.00

Total cost 10.00

Required:

(i) Calculate the effect of subcontracting on the company's profit. Do you recommended to accept the offer?
[Ans: (i) Increase cost and reduced profit by Rs 10,000 with buying option]

52
Problem 5) The following costs were reported by a company for the parts

Cost for 20,000 units Cost per unit

Rs Rs

Direct material 20,000 1

Direct labour 80,000 4

Variable overhead 40,000 2

Fixed factory overhead 80,000 4

Total 220,000 11

Another manufacturer offered to sell the parts for Rs 10 per unit.

Should the company make or buy the parts if the fixed factory overhead amounting Rs 20,000 can be avoided
by not making the units.

[Ans: Should make the product as it save Rs 40,000]

Problem 6.) Sujan Metal Industry is now producing a part that is used in the production of one of the industry's
main product lines. The industry's accounting department reports the following cost of producing 10,000 units
per annum parts internally.

Details Unit cost (Rs.) Total cost (Rs.)

Direct materials 5 50,000

Direct Wages 6 60,000

VMOH 2 20,000

Supervisor's salary (annual contract basis) 4 40,000

Depreciation of equipment 5 50,000

Joint cost 8 80,000

Total 30 300,000

The company has just received an offer from an outside supplier who will provide 10,000 parts a year at a
firm price of Rs.20 per part.

53
 Required:

(i) Should the company stop producing the parts internally and start purchasing from the outside supplier?

Ans: (i) Make, cost saved by Rs.30,000

Problem 7) . A company has prepared the following cost estimates for the manufacturing of a part:

Details Per unit

Materials Rs.10

Direct Wages 8

Variable overhead 8

Depreciation and other fixed cost 4

Total cost 30

The same part is available in the market at Rs.27 each. One half of fixed cost represents executive salaries,
rent and other expenses and continues regardless of the decision.

Required: Should the company make or buy the product?

Ans: Decision: Cost saved by Rs.1 per unit while buying the product from the market

Problem 8) ABC Company has prepared the following cost estimates for the manufacturing of part 20000 units

Details Total cost ( Rs)

Materials Rs.500000

Direct labour 190000

Variable overhead 110000

Depreciation and other fixed cost 250000

Total cost 1050000

The same part is available in the market at Rs.50 each. If the company makes component, the material cost
increased by 10% . If the company buys the components, 40% of fixed cost will be avoided.

Required: a) should the company make or buy the product?

b) If the company purchase component then the making space can rented to a local electronic firm for Rs.

54
 90000 per year, should company change the decision?

Accepts or Reject the special offer

Problem 9). XYZ Manufacturing Company has installed capacity of 50,000 Machine hours (MH). The production
and sales volume at present have given below:

 Regular Production and sales in unit: 30,000 units

Cost of producing one unit:

Direct material Rs. 6.00

Direct labour 2 labour hours Rs. 8.00

Manufacturing overhead @1 MH Rs. 6.00

Total cost Rs. 2.00

 Selling price per unit: Rs.24

 Budgeted fixed overhead at capacity volume: Rs.200,000
The company received an offer to supply 10,000 units at a price of Rs.15 per unit.

Required: (i) Statement showing differential cost analysis to decide whether the company should or should
not accept the offer (ii) The opportunity cost of offer if the company accepts the offer.

Problem 10) Typical Manufacturing Company has installed capacity of 30,000 direct machine hours (DMH). The
production and sales volume at present have given below:

 Production and sales in unit: 100,000 units

Cost of producing one unit:

Direct material Rs. 6.00

Direct Wages [ 0.5 hours ] Rs. 6.00

Manufacturing overhead [0.25 DMH ] Rs. 4.00

Total cost Rs. 16.00

 Selling price per unit: Rs.20

 Budgeted fixed overhead at capacity volume: Rs.360,000
The company received an offer to supply 45,000 units at a price of Rs.15 per unit.

Required:

(i) Statement showing differential cost analysis to decide whether the company should or should not accept
the offer.

55
 (ii) The opportunity cost of offer if the company accepts the offer.

Ans: (i) Reject (ii) Total opportunity cost is Rs. 175,000 units
Problem 9) Problem no 11) The manufacturing cost abstracts of XYZ Company are as under.

Direct Material Rs. 5.00 per unit

Direct Labour Rs. 4.00 per unit

Manufacturing Overhead Rs. 7.00 per unit

(Fixed Cost for Rs. 5 per unit)

Total Cost Rs. 16.00 per unit

Company received an offer to supply 15,000 units at a price of Rs. 12 per unit and company has sufficient
capacity to accept the offer.

Required: (i)Analysis of changes in profit of the company after accepting the offer. (ii)Should the company
accept the offer? [Ans: Accept the special offer to increase profit by Rs. 15,000 by utilizing idle capacity ]

Problem 12) The Typical Furniture Industries produces a single product, the name revolving chair; its. Currently,
it is producing at an annual rate of 750,000 direct machine hours. Normal volume (the basis of absorption of fixed
overheads) is 900,000 direct machine hours.

The company has received an offer of 120,000 units at a special price of Rs. 13 per units. The regular selling
price is Rs. 20 per unit.

The standard cost sheet of one unit of the product is as follows:

Direct material Rs. 5.00

Direct labor [0.5 hrs. @ Rs. 6.00] Rs. 3.00

Manufacturing overheads [1.5 hrs. @ Rs. 3.00] Rs. 4.50

Total costs Rs. 12.50

The budgeted fixed overhead cost is Rs. 600,000.

Required: (i)In the short run would it be profitable to accept the offer?

[ Ans (i) Accept the offer company's profit by Rs. 180,000 ]

56
Problem 13) CG Company has a maximum productive capacity of 100,000 machine hours per year. Normal
capacity is regarded as 80% of its maximum capacity. Standard variable manufacturing costs are Rs. 11 per
unit. Fixed factory overheads amount to Rs. 600,000 per year. Variable selling expenses are Rs. 3 per unit and
fixed selling expenses are Rs. 300,000 per year. The produced unit is priced at Rs.20.

One unit of output requires 0.5 direct machine hour.

The company received an offer of 50,000 units at a price of Rs. 12 per unit.

Required:

(i) Should the company accept the offer?

(ii) Opportunity cost of the offer, if any?

(iii) Suppose the company received an offer of 90,000 units instead of 50,000 units, what will be your
decision? Opportunity cost of offer, if any. [Ans: (i) accept the offer ]

Problem 14) Samsung Electronics makes 150,000 starters that sell at Rs.12 each. Their last operating statement
was:

Sales 150,000 starters @ Rs.12 1,800,000

Less: Material 150,000 starters @ Rs.3.5 525,000

Labour 150,000 starters @ Rs.4 600,000

Contribution margin 675,000

Less: Fixed costs 450,000

Profit 225,000

A contractor has placed an offer for 50,000 starters at Rs.10 each. Acceptance of this special offer would
increase fixed costs by Rs.50, 000 and would mean paying an overtime premium of 20% for the extra labour
required. However, because of bulk purchasing a discount of 3% can be obtained for all material purchases.
Required: Should Samsung Electronics accept the offer?

[ Ans: Acceptance of offer would increase profit by Rs.56,000 ]

Problem 15) CG Company has a maximum productive capacity of 25,000 DLH per year. Using capacity is
regarded as 80% of its Normal capacity.

57
The production and sales volume at present have given below:

Cost of producing one unit:

Direct material Rs. 5.00

Direct labour 0.25 DLH Rs. 5.00

Manufacturing overhead 0.25 DLH Rs. 6.00

Total cost Rs. 16.00

Selling price per unit: Rs.20

Budgeted fixed overhead at capacity volume: Rs.300,000

The selling and distribution expenses would be Rs.2.

The company received an offer to supply 30,000 units at a price of Rs.15 per unit.

Required:

(i) Statement showing differential cost analysis to decide whether the company should or should not accept the
offer.

(ii) The opportunity cost of offer if the company accepts the offer.

Problem 16) A Topy manufacturing company earns net profit Rs.3 per unit in selling price of Rs.15 by producing
and selling 60000 units at 60% capacity.

The production and sales volume at present have given below:

Cost of producing one unit:

Direct material Rs. 4.00

Direct labour [ 1.5 DLH] Rs. 1.00

Work overhead [ 50% Variable ] Rs. 6.00

Sales overhead [25% Variable] Rs. 1

Total cost Rs.12

During the current year he intended to produce the same types of toy but anticipated that

His fixed cost increased by 10%, Labour cost increased by 20% , Material cost increased by 5% .

58
Offer units 20% of Normal capacity.

Required: What minimum price will you recommend for accepting the offer to ensure the Toy Company an overall
profit Rs. 180500? [ Ans : Rs. 10.75 or 11 per units ]

Drop or Continue Decision

Problem 17) A company manufactures three different products. The company’s budgeted profit or loss has been
abstracted as:

Particular Product A Product B Product C Total

Sales Revenue (Rs) 40000 50000 45000 135000
Total Cost
Variable 20000 30000 35000 85000
Fixed 5000 10000 15000 30000
Net profit / Loss 15000 10000 (5000) 20000
The director considers that as product ‘C’ shows loss it should be discontinued. Based on the above cost data
should Product C be dropped?

Problem 18) A company manufactures three different products. The company’s budgeted profit or loss has been
abstracted as:

Particular Product A Product B Product C Total

Sales Revenue ( Rs.) 45000 225000 30000 300000
Product cost
Variable 24000 144000 12000 180000
Fixed 3000 48000 9000 60000
Total product cost 27000 192000 21000 240000
Office and Selling expenses
Variable 8100 8100 7800 24000
Fixed cost 2100 1800 2100 6000
Total office and selling cost 10200 9900 9900 30000
Profit and Loss 7800 23100 (900) 30000
On the basis of above statement, The director considers had decided to eliminate product “C”, on which a loss was
budgeted . Do you agree with the company? [Ans : No]

Problem 19)

i) A company manufactures three different products. The company’s budgeted profit or loss has been abstracted
as:

Particular Product W Product Y Product Z

Capacity engaged ( % ) 20% 40% 40%
Production units 2000 5000 6000

59
 Product cost per unit
Material 20 32 36
Wages 10 12 16
Variable overhead 7 9 11
Fixed overhead 6 9 10
Total product cost 43 62 73
Selling price per units 40 75 85
Profit and Loss per unit (3) 13 12
On the basis of above statement, The Management proposed to discontinue to product X as loss. For few years,
further prospects of the other two products being good, it is intended to utilize the disengaged capacity of product
X in Product Y and Z Equally.

Expected rise in price and Cost Product Y Product Z

Material 10% 10%
Wages 5% 5%
Selling price 2% 5%
Do you agree with the company?

ii) A company manufactures three different products. The company’s budgeted profit or loss has been abstracted
as:

Particular Product A Product B Product C Total

Capacity engaged ( % ) 40% 30% 30% 100%
Production units 5000 4000 4000 13000
Sales Revenue ( Rs) 400000 240000 200000 840000
Less : Variable Cost 200000 80000 160000 440000
Contribution Margin 200000 160000 40000 400000
Less : Fixed Cost
Joint fixed Cost 80000 60000 60000 200000
Departmental Fixed Cost 40000 30000 30000 100000
Net profit / loss ( Rs) 80000 70000 (50000) 100000
On the basis of above statement, The Management proposed to discontinue to product C and take the following
alternative.

i) To dropped C , and keep capacity idle and avoid departmental fixed cost By cent percent .
ii) To transfer the available capacity of C to A and increase in production of A by 2000 units and increase
in Departmental fixed cost of A by Rs. 40000.
iii) To transfer the available capacity of C to B and increase in production volume by 100% and increase
in Variable cost for addition product by Rs. 10 per unit over and Departmental fixed cost of B by Rs.
20000.
Should the company drop the product C in each different alternative?

60
Chapter 9 :Flexible budget and Overhead variance
Methods : a) Statement of Flexible budget [ under Table Method ]
b) Under question or Formula Method
Total Estimated cost (Y) = Total fixed cost + Total VCPU x Activity level]
Total Estimated profit = Total sales – (Total VCPU X Activity Level) – Total fixed cost

Or Total estimated Profit / Loss = [(Activity level X Total CMPU) – Total Fixed cost]

[Total CMPU = SPPU – Total VCPU = Rs. xxx]

Q.no.1) The details regarding the mfg. overhead cost and other information have been presented below:
Particular 10,000 units 20000 units
Indirect material Rs10000 Rs.20000
Indirect wages 20000 40000
Supervision 20000 30000
Heat and Light 10000 15000
Maintenances exp. 10000 15000
Depreciation 30000 30000
Required Flexible budget for 15000 and 25000 units.

Q. no. 2) The manufacturing overhead cost of a company is detailed below:

61
 Production cost 20,000 units 40,000 units

Indirect materials Rs. 20,000 Rs. 40,000

Indirect labor Rs. 40,000 Rs. 80,000

Supervision (y = a + bx) Rs. 30,000 Rs. 50,000

Maintenance (y = a + bx) Rs. 40,000 Rs. 70,000

Depreciation Rs. 50,000 Rs. 50,000

Rent and rates Rs. 10,000 Rs. 10,000

Required Budget for 15,000 units and 45000 by using table method.

Q. no. 3) Costs at two different levels of output are as follows

Output in units 3,000 5,000

Direct material (Rs.) 15,000 25,000

Direct labor (Rs.) 30,000 50,000

Manufacturing overhead (Rs.) 16,000 20,000

Office overhead (Rs.) 8,000 10,000

Selling overhead (Rs.) 3,500 4,500

Selling price per unit (Rs.) 25 25

Required Flexible budget for 4000 and 7000 units by showing profit.

Q. no.4) .The cost of two different levels of output is as follows:

Output in units 25,000 35,000
Direct material Rs. 50,000 Rs. 70,000
Direct labor 25,000 35,000
Direct expenses 25,000 35,000
Depreciation 6,000 6,000
Insurance 4,000 4,000
Supervision 14,500 19,500

62
 Selling price per unit Rs.20 Rs. 20
Required Flexible budget for 28,000 and 30,000 units
Q. no.5) Out of the following expenses for a normal capacity of 10,000 units, prepare flexible budget for 80% and
90% output to be attained in the next months.
Particulars Rs.

Direct material 400,000

Direct labor 300,000

Prime cost 700,000

Mixed overhead:

Indirect expenses (30% variable and 70% fixed) 100,000

Maintenance expenses (60% variable and 40% fixed) 300,000

Salaries (100% fixed) 25,000

Depreciation (fixed) 50,000

Power and fuel (Variable 70% and fixed 30%) 400,000

[Ans: Total cost; Rs. 1,337,000, Rs. 1,456,000]
Q.no.6) 25,000 units of output at 100% of capacity attained with following cost details:

Item of cost Unit Cost Rs.

Materials 10

Labor 5

Manufacturing expenses (25% variable, 75% fixed) 8

Administrative expenses (50% variable, 50% fixed) 6

Selling expense (75% variable, 25% fixed) 4

Required Flexible budget for 75% and 90% output level for next month. [Ans: Total cost: Rs. 681,250, Rs. 767,500]

Q.no 7) East and West Enterprises are currently working at 50% capacity and produce 10,000 units. Estimate the
profits for the company when it works at 60% and 70 % capacity. At 60% capacity the raw material cost increases
by 2% and the selling price falls by 3%. At 70% capacity the raw material cost increases by 4% and the selling
price falls by 5%. At 50% capacity working the product costs Rs. 180 per unit and is sold at Rs.200 per unit. The
cost of Rs. 180 is making up as follows:

Material Rs.100
Wages Rs.30
Factory Overhead Rs. 20 (40% fixed)
Administration Overhead Rs. 30 (50% fixed)

63
Q.no.8) A company manufactures a single product for which market demand exists for additional quantity. At
present the company is utilizing only 70% of the plant capacity and the following data are available:
Particulars Rs.
Sales revenue 35,000
Selling price per unit 10
Variable fixed per unit 4
Fixed cost 10,000
Step fixed cost 6,000
Additional information:
i)At above 70% working capacity the selling price falls by 10%
ii)The step fixed cost will remain unchanged at 60% to 80% capacity but will increase by Rs.1,000 between 80% to
100% capacity.
Required Flexible budget for 80% and 90% of capacity.[Ans: Total cost: Rs. 32,000, Rs. 35,000 Profit: Rs. 4,000,
Rs. 5,500]

OVERHEAD VARIANCE
1) Capacity variance = A – B = + ve ( F) , -Ve ( A/ UF)
2) Efficiency Variance = B –C = + ve ( F) , -Ve ( A/ UF) Three Variance
3) Spending Variance = C – D = + ve ( F) , -Ve ( A/ UF)
4) Budgeted Variance = B – D = + ve ( F) , -Ve ( A/ UF)
Calculation

A = SOR X ST = xxx

B = FC + VOR x ST = xxx

C = FC + VOR X AT

D = Total actual Overhead / incurred = Actual Fixed overhead + Actual Variable OH

[Actual Variable cost = VOR X AT ]

Where,

Total standard oh cost

SOR = Standard overhead rate per hour = 0r FOR + VOR
Normal capacity (¿ hour )

¿
FOR = Standard Fixed OH rate per hour = Total standard ¿ cost
Normal capacity ( ¿ hour ) = xxx / hour

64
 Total standard Variable cost
VOR = Standard variable OH rate per hour = =
Normal capacity ( ¿ hour )

ST = Standard time or Hour produce

AT= Actual time worked , Hour spent , Hour paid

Note :

i) If ST is given and AT is not given then ST = AT

ii) If AT is given and ST is not given then AT ≠ ST and we should calculate ST as follows
Base hour
ST = Base units
X Actual outputs = --- hour

# Y = a + b.X is given then the Equation is used for standard data .

OVERHEAD VARIANCE

Q. no. 1) The flexible budgeting formula at a normal capacity volume of 10,000 machine hours is Rs. 50,000 + Rs.
2 ´ MH , One unit of output will need 0.5 MH

In the year a company produced 23,000 units of output, by working for 11,000 machine hours. The total overhead
costs of the company for the year amounted to Rs. 74,200.
Required: Fixed manufacturing overhead cost capacity variance
· Variable manufacturing overheads efficiency and spending variance
Ans: (1) CV = Rs. 7,500 (F) (2) EV = Rs. 1,000 (F) and SV = Rs. 2,200 (U)
Q. no 2) Calculate three overhead variances form the date given below:
a. Budgeted allowance = Rs.100,000 + Rs.3 times labor hour.
b. Normal capacity 20,000 direct labor hour.
c. Standard time allowed is 2 units per labor hour.
d. Actual output recorded 45,000 units
e. Actual labor paid 23,000 hours
Actual overhead incurred Rs. 166,000 [Ans: SV: Rs. 3,000 (F), EV: Rs. 1,500 (A) , CV: Rs. 12,500 (F)

Q. no. 3) The flexible budgeting data and other information have been presented below:
BA = Rs.400, 000+ Rs.5Í DLH

Normal capacity 100,000 DLH

Standard time per unit of output 2 DLH

Actual output 52,000 units

Actual hours worked 98,000 DLH

Actual overhead paid Rs. 865,500

65
Required Overhead three variance. [Ans: SV: Rs. 24,500 (F), EV: Rs. 30,000 (F), C V: Rs. 16,000 (F)]

Q. no. 4) The flexible budgeting data and other information have been presented below:
BA = Rs.150, 000+ Rs.10Í units

Normal capacity 100,000 DLH

Standard time per unit of output 4DLH

Actual output 27,500 units

Actual hours worked 105,000 DLH

Actual overhead paid Rs.423000

Required Overhead three variance. (SV= Rs.10500, EV= Rs.12500, CV=Rs.15000)

Q. no. 5) The details regarding the mfg. overhead cost and other information have been presented below:

Particular 10,000 units 20000 units

Indirect material Rs10000 Rs.20000
Indirect wages 20000 40000
Supervision 20000 30000
Heat and Light 10000 15000
Maintenances exp. 10000 15000
Depreciation 30000 30000
Additional information:

Normal capacity 10,000 DLH

Standard time per unit of output 0.5 DLH

Actual output 22,000 units

Actual hours worked 9500 DLH

Actual overhead paid Rs.14690

Required Overhead three variance.

Ans: Spending Variance: Rs. 1900 (U), Efficiency Variance: Rs. 15000 (F), Capacity Variance: Rs. 5000 (F)

Q.no.6) Following information is provided by a manufacturing company.

Budgeted data:
Budgeted activity level 10,000 DLH

Budgeted OH cost: Fixed Rs. 7,000

Variable Rs. 13,000
Total Rs. 20,000
Actual data:

66
 OH cost incurred Fixed Rs. 7,500
Variable Rs. 14,500
Total Rs. 22,000
Actual LHs used: 11,800 hours
Actual production volume 5,500 units
Required Overhead three variance [Ans: CV Rs. 700 (F); EV Rs. 1,040 (U); SV Rs. 340 (F) ]

[(Q.no.7), A)] Following information is provided by a manufacturing company

Normal capacity 40,000 DLH

Standard time per unit of output 5 DLH

Fixed overhead Rs. 200000

Actual output 9000 units

Standard overhead cost per unit Rs. 45

Actual hours worked 46000 DLH

Actual overhead paid

Fixed overheads = 220000
Variable @ Rs. 4.5 per DLH
Required: Overhead three variance [ CV= 25000 (F) , EV= Rs. 4000 ( U) , SV = Rs. 43000
(U)

Q.o.7) B) XYZ company operates a standard costing system and showed the following data
for the month ofKartik , 20xxx
Particular Actual Standard
No. of working days 22 20
Man-hour 4300 4000
Overhead rate per hour - Rs.0.50
Hour per unit of output - 10
Budgeted Fixed overhead - 1800
incurred
425 -
Number of units produced
Rs.2100 -
Actual overhead incurred
Required Overhead three variance [Ans: CV Rs. 112.5 (F); EV =Rs. 2.5 (F); SV Rs.85 (U) ]

67