PAPER – 4: COST AND MANAGEMENT

ACCOUNTING

Part I MCQs

Case Scenario-I
ABC Company produces three products X. Y and Z. Similar type of material is used
in the production of all the three products. The company has been using
traditional absorption costing method, using direct labour hours to allocate
overheads to its products. The Cost Accountant has suggested considering an
activity based costing system. The following information is available in the
records of the company.

X Y Z
Production Volume p.a. (In units) 16,000 17,000 15,000
Direct Material per unit 3 kg 4 kg 5 kg
Labour hours per unit 0.10 0.15 0.20
Machine hours per unit 0.5 0.7 0.9
No. of Production runs p.a 50 65 60
No. of purchase orders p.a 5 10 15
No. of order shipped p.a 25 35 32

Activity Cost (`) Cost Driver

Machine setup costs 49,000 Production Runs
Machine running costs 64,128 Machine hours
Purchase cost 52,050 Purchase orders
Delivery cost 46,460 Orders shipped

The price of Raw Material is ` 2 per kg.

Direct labour cost per hour is ` 20.
On the basis of above Case Scenario, you are required to answer the following
MCQs 1 to 5:

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

1. What is overhead absorption rate per hour as per traditional absorption

costing method?
(A) ` 29.60
(B) ` 29.32
(C) ` 13.78
(D) ` 15.82
2. What is full cost per unit of product Y under traditional absorption costing
method?
(A) ` 19.92
(B) ` 4.44
(C) ` 46.32
(D) ` 15.44
3. Under an activity based costing system, what is the cost driver rate for
machine set up costs?
(A) ` 280
(B) ` 1.467
(C) ` 6.85
(D) ` 230
4. Under an activity based costing system, the amount of allocated overheads
attributable to machine running hours to product X is:
(A) ` 22,848
(B) ` 15,360
(C) ` 25,920
(D) ` 14,000
5. The total cost of product Z as per activity based costing method is :
(A) ` 2,86,073
(B) ` 2,94,905
(C) ` 84,905
(D) ` 2,60,660

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Case Scenario - II
XYZ Limited produces the product P. The cost accountant of the company has to
prepare its budget for a particular year.
The following information are made available for this purpose:
The expected sales of the product P is 1,00,000 units during the year at a selling
price of ` 50 per unit.
Each unit of product P requires 3 kgs of raw material Q and 4 kgs of raw material R.
The expected stock levels are as follows:

Beginning of year End of year

Finished product P in units 12,000 15,000
Raw material Q in kgs 26,000 20,000
Raw material R in kgs 36,000 42,000
Raw material Q costs ` 2 per kg and R costs ` 3 per kg.
It requires 10 minutes of direct labour time to produce one unit of product P.
Labour cost is ` 50 per hour.
Variable manufacturing overheads are ` 10 per unit.
Fixed manufacturing cost is ` 3,00,000 per year.
Fixed Administration and selling expenses are ` 25,000 per year.
On the basis of above Case Scenario, you are required to answer the
following MCQs 6 to 10:
6. The total number of units to be produced of product P is:
(A) 1,03,000 units
(B) 97,000 units
(C) 92,000 units
(D) 1,27,000 units
7. The total quantity of raw material R to be purchased during the year -
(A) 4,06,000 kgs
(B) 4,18,000 kgs

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

(C) 3,82,000 kgs

(D) 3,75,000 kgs
8 The total cost of purchase of Raw Material Q during the year is -
(A) ` 6,00,000
(B) ` 6,06,000
(C) ` 5,88,000
(D) ` 6,12,000
9. The budgeted variable cost of production of one unit of product P is -
(A) ` 46.33
(B) ` 36.38
(C) ` 25.33
(D) ` 36.33
10. What is the budgeted net income for the year?
(A) ` 10,41,667
(B) ` 13,66,650
(C) ` 10,67,000
(D) ` 10,37,000
11. AB limited has furnished the following data:

Budget Actual (for the month of March)

Production in units 40,000 48,000
Fixed overheads (`) 78,000 84,000

Calculate fixed overhead volume variance.

(A) ` 15,600 F
(B) ` 15,600 A
(C) ` 6,000 A
(D) ` 14,000 A

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

12. Two products Y and Z are obtained in a crude form and require further
processing at a cost of ` 6 for Y and ` 5 for Z per litre before the products
can be sold in the market. The final prices of product Y and Z are ` 15 and `
8.75 per litre respectively. The company earns a net margin of 25% on Cost.
The following data is available for output of both the products for the year
Y 8,000 Litres
Z 6,000 Litres
A joint cost of ` 60,000 was incurred for the year and company apportions
the joint costs on the basis of net realisable value after further processing.
Calculate the joint cost per unit of product Y.
(A) ` 4.74
(B) ` 5.00
(C) ` 5.625
(D) ` 6.00
13. The data pertaining to the worker C in a factory depicts that he is paid at a
rate of ` 100 per hour and a week comprises 48 hours for a 6 days’ work. The
allowed absence time is 15 minutes per day for maintenance etc. The job
card of C indicates, his chargeable time is scattered for 2 different jobs J1-21
hours and J2-24 hours. Any unaccounted time is attributable for power
failure.
Calculate cost of normal idle time and abnormal idle time.
(A) ` 100 and ` 150
(B) ` 150 and ` 150
(C) ` 150 and ` 100
(D) ` 100 and ` 100
14. During a certain period, 4,000 labour hours were utilized, and the standard
hours for actual production were 5,500 hours. The Variable Overhead
Efficiency Variance amounted to ` 15,000 (Favourable).
Calculate the Standard Variable Overhead Rate per hour.
(A) ` 15 per hour

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

(B) ` 20 per hour

(C) ` 10 per hour
(D) ` 25 per hour
15. A company is analysing its inventory management practices and has
determined that the Economic Order Quantity (EOQ) is 400 units. The cost
incurred for placing a single order is` 25, while the total demand for the year
amounts to 8,000 units.
Calculate the Carrying Cost per unit.
(A) ` 2.80 per unit
(B) ` 1.85 per unit
(C) ` 1.58 per unit
(D) ` 2.50 per unit
Answer Key

MCQ No. Correct Option

1. (A)
2. (D)
3. (A)
4. (B)
5. (B)
6. (A)
7. (B)
8. (B)
9. (D)
10. (A)
11. (A)
12. (D)
13. (B)
14. (C)
15. (D)

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Part II

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and
above the required number, then only the requisite number of questions first
answered in the answer book shall be valued and subsequent extra
question(s) answered shall be ignored.
Working notes should form part of the answer.
Question 1
(a) XYZ Company has an option to buy any one of the two machines N or M to
manufacture its unique industrial component P. Each of the machines have
the capacity to produce same quality of component P and are almost
identical except for the fact that they are being manufactured by a different
manufacturers. The specifications for each Machine are:
Machine M: It has the capacity to produce 50,000 components of P per
annum, the fixed costs being 1,50,000 and could generate a profit of 2,25,000
on the sale of all the components produced.
Machine N: It is also having the equal capacity to produce same number of
components as that of Machine M per annum and all the components thus
produced could be sold in the open market without any difficulty. Fixed cost
of Machine N is 60,000 less than that of Machine M and yield a profit of
1,60,000 by selling all the components that are produced.
The selling price of each component of P is 100.
Required:
(i) Calculate break even sales in value for each machine. (3 Marks)
(ii) Calculate sales levels in units where both the machines are equally
profitable. (2 Marks)
(b) PQR Ltd. manufactures a product in batches of 2,000 units.

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

The following costs are incurred for each batch

Particulars Amount (in`)

Direct Material Cost per Batch 2,40,000
Direct Labour Cost per Batch 1,65,000
Overhead Absorption Rate (variable) 120 per machine hour
Expected Rejection Rate 3%
Scrap Value per Rejected Unit 75

Other Information:

Particulars Details
Selling Price per Good Unit ` 250
Total Available Machine Hours per month 3,000 hours
Fixed Overheads per Month ` 1,25,000
Batches Manufactured per Month 10 batches

Required:
(i) Calculate contribution per unit of good units after adjusting rejected
units. (3 Marks)
(ii) Calculate the company's total monthly profit. (2 Marks)
(c) The Cost Accountant of a Manufacturing concern has given the following
details in respect of a raw material X:
Difference between Minimum lead time and Maximum lead time is 4 days.
Average Lead time to procure the Raw Material X is 7 days.
Reorder Level 1,80,000 units
Reorder Quantity 90,000 units
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Required to Calculate:
(1) Maximum Consumption per day (2 Marks)

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(2) Minimum Consumption per day (2 Marks)

Answer
(a) (i)
Machine M Machine N
Quantity Price Amount (`) Quantity Price Amount (`)
Sales 50,000 100 50,00,000 50,000 100 50,00,000
Variable cost 50,000 92.5 46,25,000 50,000 95 47,50,000
Contribution 7.5 3,75,000 5 2,50,000
Fixed Cost 1,50,000 90,000
Profit 2,25,000 1,60,000
P/V Ratio

Contribution x 100 3,75,000 x100 2,50,000 x100

Sales 50,00,000 50,00,000
7.5% 5%
Break even Sales

FixedCost 20,00,000 18,00,000

P / V Ratio

(ii) Let the units be x

7.5x – 1,50,000 = 5x – 90,000
2.5x = 60,000
X = 24,000 Units
(b) (i) Calculation of Contribution per unit of good units

Total Amount Per Unit

(`) (`)
Selling Price 48,50,000 250.00
Direct Material Cost 24,00,000
Direct Labour Cost 16,50,000
Variable Overhead (`120 x 3,000 hours) 3,60,000
Total Variable Cost 44,10,000 220.50

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Less: Scrap Value of Rejected Units (` 75 x

45,000
20,000 x 3%)
Net Variable Cost 43,65,000 225.00
Contribution per good units 4,85,000 25.00

Working Note:
Number of units manufactured in a month = Number of batches x
number of units in a batch
= 10 x 2,000 = 20,000 units
Number of good units sold = 20,000 units x 97% = 19,400 units
(ii) Calculation of Company’s total monthly profit
Total Amount
(`)
Contribution 4,85,000
Less: Fixed Cost 1,25,000
Total Monthly Profit 3,60,000

(c) Let the Minimum lead time be A and Maximum lead time be B
B-A=4 …1
Average lead time of X = 7

A +B
=7
2
A + B = 14 …2
From equation 1 and 2, we get
A (Minimum lead time) = 5
B (Maximum lead time) = 9
(i) Re-order level = Maximum re-order period/lead time × Maximum
consumption
1,80,000 units = 9 × Maximum consumption
Maximum consumption = 20,000 units

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(ii) Maximum stock of A = Re-order level + Re-order quantity –

(Minimum consumption × Minimum re-order period/lead time)
1,90,000 unit = 1,80,000 units+90,000 units – (Min. Consumption x 5)

80,000 units
Min. Consumption = = 16,000 units
5
Part (ii) can also be done in following way:
(ii) Minimum Stock Level = Re-order level – (Average Consumption X
Average Lead time
1,00,000 = 1,80,000 – (Average Consumption X 7)
Average Consumption per day = 11,428.57
Average Consumption per day = (Maximum consumption +
Minimum consumption)/ 2
11,428.57 = (20,000 + X) /2
Minimum Consumption per day = 2,858 units
Question 2
(a) The following information relates to a manufacturing concern A Ltd. for the
year ended 31stMarch, 2024.

Particulars As on 1st April,2023 As on 31st March,2024

Raw Material (in `) 3,40,000 1,80,000
Work in Progress (in `) 5,50,000 3,50,000

Particulars Amount
Raw Material Purchased 8,00,000
[Inclusive of GST@18% (Ineligible for ITC)]
Packaging Cost (primary) 3,00,000
Fee Paid to Independent Directors 5,00,000
Production bonus paid to factory workers 10% of Wages paid
to factory workers
Job charges paid to job workers 41,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Salary paid to Supervisor 6,17,900

Wages paid to factory workers 6,30,000
Salary paid to Production Control Manager 7,20,000
Sale of Scrap generated during Manufacturing 50,000
Selling Overheads per unit 2
Salary paid to General Manager 12,40,000
Freight Inwards 2% on Raw
Material Purchased
Expenses Paid for Quality Control check activities 4,30,000

Particulars Cost Price WDV as on Depreciation Insurance

(`) 1st April, Rate Cost per
2023 (`) annum
Factory 25,00,000 21,87,000 10% 2% of Cost
Building Price
Plant and 15,00,000 11,56,000 15% 2% of Cost
Machinery Price
Office 40,00,000 36,00,000 10% Nil
Building

Additional information:
(i) Depreciation is charged on the written down value method.
(ii) Stock of finished goods as on 1st April, 2023 was 80,000 units having a
total cost of 8,00,000. The entire stock of opening finished goods is sold
during the year, closing stock is 70,000 units. During the period, 4,50,000
units were sold.
(iii) A Ltd. wants a profit of 20% on Total Sales.
Required:
Prepare a Cost statement showing the various elements of cost and profit
earned for the year ended 31stMarch, 2024. (9 Marks)

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(b) A skilled worker has assigned a work. The relevant data is given as follows:
Time rate per hour ` 25
Time allowed 9 hours
Time taken 6 hours
The worker has given an option to choose either Halsey (50% plan) or Rowan
plan.
You are required to calculate earnings under both plans and which plan is
more beneficial for a worker. (5 Marks)
Answer
(a) Cost Sheet
Particulars (`) (`)
Material Consumed:
Raw materials purchased 8,00,000
Freight inwards (2% of Raw materials purchased) 16,000
Add: Opening stock of raw materials 3,40,000
Less: Closing stock of raw materials (1,80,000) 9,76,000
Direct employee (labour) cost:
Wages paid to factory workers 6,30,000
Production bonus paid to factory workers (10%) 63,000 6,93,000
Direct expenses:
Job charges paid to job workers 41,000 41,000
Prime Cost 17,10,000
Works/ Factory overheads:
Depreciation on factory building (21,87,000 x 10%) 2,18,700
Depreciation on plant & machinery (11,56,000 x 15%) 1,73,400
Insurance premium paid for plant & machinery 30,000
(15,00,000 x 2%)
Insurance premium paid for factory building 50,000
(25,00,000 x 2%)
Salary paid to supervisors 6,17,900 10,90,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Gross factory cost 28,00,000

Add: Opening value of W-I-P 5,50,000
Less: Closing value of W-I-P (3,50,000)
Factory Cost 30,00,000
Quality control cost:
Expenses paid for quality control check activities 4,30,000 4,30,000
Administration cost related with production:
Salary paid to Production control manager 7,20,000 7,20,000
Less: Realisable value on sale of scrap and waste (50,000)
Add: Primary packing cost 3,00,000
Cost of Production 44,00,000
Add: Opening stock of finished goods (80,000 units) 8,00,000
Less: Closing stock of finished goods (70,000 units) (7,00,000)
Cost of Goods Sold 45,00,000
Administrative overheads:
Depreciation on office building (36,00,000 x 10%) 3,60,000
Salary paid to General Manager 12,40,000
Fee paid to independent directors 5,00,000
Selling Overheads (4,50,000 units x `2): 9,00,000 30,00,000
Cost of Sales 75,00,000
Profit (25% on cost) 18,75,000
Sales 93,75,000

Working Note: Calculation of value of closing finished goods.

Number of units produced = units sold + closing stock – opening stock
= 4,50,000 + 70,000 – 80,000
= 4,40,000 units

Cost of production
Per unit cost =
Number of units produced
` 44,00,000
= = ` 10 per unit
4,40,000 units

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Value of Closing stock = ` 10 x 70,000 units = ` 7,00,000

(b) Earning under Halsey Plan
Total Wages = (Time taken × Time rate) + (50% of time saved × time rate)
= (6 hrs x ` 25) + ((9 hrs - 6 hrs) x 50% x ` 25)
= `150 + `37.5 = `187.5
Earning under Rowan Plan
Total Wages
Time saved
= (Time taken × Time Rate)+ ( Time allowed × Time taken × Time Rate)
(9 hrs - 6 hrs)
= (6 hrs x ` 25) + ( x 6 hrs x ` 25)
9 hrs

= `150 + `50 = `200

Note: Rowan Plan is more beneficial for a worker since he is more earning
under this plan i.e. 200-187.5 = ` 12.50
Question 3
(a) A chemical compound manufactured through two processes namely Process
X and Process Y. Process Y is dependent on the output generated by Process
X and the semi-finished chemical compound received from Process X shall be
mixed up with further materials in Process Y. The details of costs and other
particulars for each process are given as follows:

Process X Process Y
Direct Material 1,000 kgs @ ` 50 700 kgs @ ` 90
per kg per kg
Direct Labour ` 35,000 ` 35,000 ` 25,000
Process Plant time 200 hrs @ ` 60/hr 120 hrs @ ` 80/hr
Expected output 75% of input 80% of input
Actual output kgs 700 1150
Realizable value of Normal ` 8 per kg ` 5per kg
Loss

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Notes:
(i) The departmental overhead for the period was 30,000 and is absorbed
in each process on direct labour cost.
(ii) Process plant time represents the attributable plant run time with respect
to each process and is a part of direct process cost.
(iii) Assume no finished stock and work in progress either at the beginning
and end of the period.
Required:
Prepare Process X Account, Process Y Account, Normal Loss Account and
Abnormal Gain Account. (2 + 2 + 2 + 2 = 8 Marks)
(b) SW Limited manufactures Lenin bed covers. The present cost data are as
below:
Variable Cost of manufacturing per unit : ` 200
Variable cost of selling and distribution per unit : ` 100
Fixed costs : ` 16,00,000
Selling price per unit : ` 800
Expected Profit for the coming year : ` 8,00,000
The management could sense a stage of stagnation/deterioration in future
sales with the new entrant RK Enterprises. The SW limited has approached to
one marketing consulting firm for the study of cost volume profit analysis.
The firm suggested three alternatives to fuel the sales growth by tinkering
with the selling price.
Alternatives Reduce selling Projected increase in sales (units) % (from
price % the sales level that would generate
` 8,00,000 profit)
1 10.00 15
2 12.50 20
3 15.00 25

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Required:
Calculate the effect on profits under each alternative and recommend which
alternative is most likely to be adopted to get the maximum profit.
(6 Marks)
Answer
(a) Process X Account
Particulars Kg Amount Particulars Kg Amount
(`) (`)
To Material 1,000 50,000 By Normal Loss 250 2,000
(250 kg × `8 per kg)
To Direct Labour 35,000 By Abnormal loss A/c 50 7,500
(50 kg × ` 150 per kg)
To Process Plant 12,000 By Process Y 700 1,05,000
Time (700 kg × ` 150 per
200 hrs @ ` 60/hr kg)
To Departmental 17,500
Overhead
1,000 1,14,500 1,000 1,14,500

` 1,14,500 - ` 2,000
Cost per kg = = `150.00 per kg
1,000 kg-250 kg

Process Y Account
Particulars Kg Amount Particulars Kg Amount
(`) (`)
To Process X 700 1,05,000 By Normal Loss 280 1,400
(280 kg × ` 5 per
kg)
To Material 700 63,000 By Finished stock 1,150 2,19,424
(1,150 kg ×
`190.803 per kg)
To Direct Labour 25,000
To Process Plant 9,600
Time
120 hrs @` 80/hr

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

To Departmental 12,500
Overheads
To Abnormal Gain 30 5,724
A/c
(30 kg × ` 190.803
per kg)
1,430 2,20,824 1,430 2,20,824
` 2,15,100-` 1,400
Cost per kg = = `190.803 per kg
1,400 kg-280 kg

Normal Loss Account

Particulars Units Amount Particulars Units Amount

(`) (`)
To Process X A/c 250 2,000 By Cash (Sales) 250 2,000
(250 kg × `8 per kg)
To Process Y A/c 280 1,400 By Cash (Sales) 250 1,250
(250 kg × `5 per kg)
By Abnormal Gain 30 150
A/c
(30 kg × `5 per kg)
430 3,400 430 3,400
Abnormal Gain Account

Particulars Units Amount Particulars Units Amount

(`) (`)
To Normal 30 150 By Process Y 30 5,724
Loss A/c
(30 kg × ` 5
per kg)
To Costing 5,574
Profit and Loss
30 5,724 30 5,724

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(b) Calculation of Profit under each Alternative

Particulars Present Alternative 1 Alternative Alternative 3
Situation (`) 2 (`)
(`) (`)
Selling Price per unit 800 720 700 680
Less: Variable Cost
per unit
Manufacturing Cost 200 200 200 200
Selling and 100 100 100 100
Distribution Cost
Contribution per unit 500 420 400 380
No. of units sold 4,800 5,520 5,760 6,000
Total Contribution 24,00,000 23,18,400 23,04,000 22,80,000
Less: Fixed Cost 16,00,000 16,00,000 16,00,000 16,00,000
Profit 8,00,000 7,18,400 7,04,000 6,80,000
Change in profit (81,600) (96,000) (1,20,000)
Percentage change -10.2% -12% -15%
in profit

Among the various alternatives, alternative 1 is giving maximum profit.

However, in each of the alternative (alternative 1,2,3) maximum profit is
reducing. Accordingly, SW limited should continue to sell at current selling
price to get the maximum profit.
Question 4
(a) XYZ Transport is running a bus between town A and town B which are 25
kms apart. The bus will make 4 round trips every day carrying on an average
30 passengers on each trip. The bus costs the company a sum of ` 5,00,000.
It has been insured at 2% per annum and the annual tax will amount to
` 2,000 and the garage rent is ` 500 per month. Annual repairs will be
` 8,000 and the bus is likely to last for 5 years. The driver's salary will be
` 15,000 per month and the conductor's salary will be ` 12,000 per month in
addition to 10% of the takings as commission (to be shared by the driver and
conductor equally). Cost of stationery will be ` 800 per month.
Manager-cum-accountant's salary is ` 35,000 per month. Petrol and Oil will

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

be ` 1,000 per 100 km. Assuming 15% profit on takings. Depreciation will be
charged at straight line method.
You are required to calculate the bus fare to be charged for per passenger
kilometer. The bus will run on an average 25 days in a month.
(b) LMN Foods is a manufacturer of organic snacks. For the year ending 2023,
the company compiled the following financial data: (8 Marks)

Item Amount (in `)

Opening inventory of raw materials 2,00,000
Closing inventory of raw materials 2,50,000
Raw material purchases 12,00,000
Labour costs 5,00,000
Production overheads 2,50,000
Marketing and distribution expenses 1,52,000

In 2024, LMN Foods accepted a request for a bulk supply of their best-selling
snacks. The estimated costs for fulfilling this order are as follows:
• Estimated raw material cost: ` 3,00,000
• Estimated labour cost: ` 1,50,000
• Packaging and transportation costs: ` 49,400
LMN Foods allocates production overhead based on direct labour costs and
marketing and distribution expenses as a percentage of the total production
cost based on the previous year's data.
Required:
(i) Calculate the overhead recovery rates for 2023 based on actual costs.
(2 Marks)
(ii) Prepare a comprehensive cost statement for the bulk order and
determine the Sales required for achieving a profit margin of 20% on the
final sales amount. (4 Marks)

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Answer
(a) Statement of Cost per Passenger – Km
Particulars Cost per Per month
annum (`) (`)
Standing Charges (A):
Taxes 2,000
Insurance (5,00,000 × 0.02) 10,000
Garage Rent (500 × 12) 6,000
Salary of Driver (15,000× 12) 1,80,000
Salary of Conductor (12,000× 12) 1,44,000
Stationery (800 × 12) 9,600
Salary of Manager cum Accountant (35,000 × 12) 4,20,000
Total 7,71,600
Monthly Standing Charges: (7,71,600/12) 64,300.00
Running Charges (B):
Depreciation [(5,00,000/5/12] 8,333.33
Diesel and oil [(4 × 2 × 25 × 25) × 10] 50,000.00
Monthly Running Charges 58,333.33
Maintenance Charges (C):
Repairs 8,000 666.67
Total cost before commission 1,23,300.00
Commission: (D) 16,440.00
Total cost (A+B+C+D) 1,39,740.00
Profit 24,660.00
Total takings (Total Cost + Profit) 1,64,400.00

Total passenger-km = 4 × 2 × 25 × 25 × 30 = 1,50,000 passenger km

Hence, Fare per passenger-km = 1,64,400.00/ 1,50,000 = ` 1.09

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Working Note:
Calculation of Commission and Profit:
Let total takings = `x
Commission = 0.10 x
Profit = 0.15 x
Takings = Cost before commission and profit + Commission +
Profit
Therefore, x = 1,23,300 + 0.10 x + 0.15 x
0.75x = 1,23,300
x = ` 1,64,400
Commission = 0.10 × ` 1,64,400 = ` 16,440
Profit = 0.15 × ` 1,64,400 = ` 24,660
(b) (i) Calculation of Overhead Recovery Rate:
Production Overhead recovery rate based on Direct Labour Costs
Production Overhead
= ×100
Direct Labour Cost
2,50,000
= ×100 = 50% of Direct Labour
5,00,000
Marketing & Distribution Overhead recovery rate based on Total
Production Costs
Marketing & Distribution Overhead
= ×100
Total Production Cost
1,52,000
=
19,00,000
×100 = 8% of Total Production Costs

Working Note:
Statement showing Total Cost for 2023

Particulars Amount (`)

Opening stock of raw material 2,00,000
Add: Purchases 12,00,000

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Less: Closing stock of raw material (2,50,000)

Direct Material Consumed 11,50,000
Direct Labour Cost 5,00,000
Prime Cost 16,50,000
Add: Production Overhead 2,50,000
Production cost 19,00,000
Add: Marketing & Distribution Cost 1,52,000
Total Cost 20,52,000

(ii) Cost Statement for the Bulk Order and Determination of Sales in
2024:

Particulars Amount
(`)
Direct Material Cost 3,00,000
Direct Labour Cost 1,50,000
Prime Cost 4,50,000
Add: Production Overhead (50% of Direct Labour Cost) 75,000
Production cost 5,25,000
Add: Marketing & Distribution Cost (8% of Production 42,000
Cost)
Packaging and Transportation Costs 49,400
Total Cost 6,16,400
Add: Profit @ 25% on cost 1,54,100
Sales value (Price to be quoted for the order) 7,70,500

Hence the price to be quoted is `7,70,500

Question 5
(a) The following information has been provided by a company:
Number of units produced and sold : 7,000
Standard labour rate per hour : `9

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

Actual hours worked : 17,820 hours

Labour efficiency : 106.8%
Labour rate variance : 71,280 (A)
You are required to calculate :
(i) Actual labour rate per hour (1 Marks)
(ii) Standard hours required for 7,000 units (2 Marks)
(iii) Labour Efficiency variance (1 Marks)
(iv) Standard labour cost per unit (1 Marks)
(v) Actual labour cost per unit (1 Marks)
(b) Journalise the following transactions assuming that cost and financial
accounts are integrated: (4 Marks)
Particulars Amount (in `)

Wages paid (20% indirect) 2,00,000

Selling and Distribution Overheads incurred 50,000
Deficiency found in stock of Raw Material (Normal) 80,000
Factory Overheads (Under Absorbed) 60,000

(c) Define spoiled work and defective work and discuss the treatment of defective
work in the following circumstances: (1 + 3 Marks)

Circumstances Treatment
Where a percentage of defective work is allowed in a
particular batch as it cannot be avoided.
Where the defect is due to bad workmanship
Where defect is due to the Inspection Department wrongly
accepting incoming material of poor quality.

Answer
(a) (i) Actual Hours Worked 17,820
Standard Rate Per hour 9
Labour Rate Variance 71280 (A)

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Labour Rate Variance = (Standard Rate – Actual Rate) Actual Hours

(9 – Actual Rate) 17,820 = -71,280
(9 – Actual Rate) =-4
Actual Rate = 13

Standard Hours x 100

(ii) Labour Efficiency =
Actual Hours
Standard Hours
106.8% =
17,820
Standard Hours = 19,031.76
(iii) Labour Efficiency Variance = (Standard Hours – Actual Hours) x
Standard Rate
= (19,031.76 – 17,820) x 9
= 10,905.84 (F)

(iv) Standard Labour Cost per unit= 19,031.76 x 9 = 24.47

7,000

(v) Actual Labour cost per unit = 17,820 x 13 = 33.09

7,000

(b) Journal Entries under Integrated system of accounting

Particulars (`) (`)
(i) Work-in Progress Ledger Control A/c Dr. 1,60,000
Factory Overhead control A/c Dr. 40,000
To Wages Control A/c 2,00,000
(Being allocation of Direct and Indirect wages)
(ii) Wages Control A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being wages paid)
(iii) Cost of Sales A/c Dr. 50,000
To Selling & Distribution Overhead Control 50,000
A/c
(Being selling & distribution overhead allocated)

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

(iv) Selling & Distribution Overhead Control A/c Dr. 50,000

To Bank A/c 50,000
(Being selling & distribution overhead paid)
(v) Factory overhead control A/c Dr. 80,000
To Stores Ledger Control A/c 80,000
(Being normal deficiency found in stock of raw
material)
(vi) Costing Profit & Loss A/c Dr. 60,000
To Factory Overhead Control A/c 60,000
(Being transfer of under absorption of factory
overhead)

(c) Spoiled work is the quantity of production that has been totally rejected
and cannot be rectified.
Defective work refers to production that is not as perfect as the saleable
product but is capable of being rectified and brought to the required
degree of perfection provided some additional expenditure is incurred

Circumstances Treatment
Where a percentage of If the actual number of defectives is
defective work is allowed within the normal limit or is near thereto
in a particular batch as it the cost of rectification will be
cannot be avoided. charged to the whole job and spread
over the entire output of the batch. If,
on the other hand, the number of
defective units substantially exceeds the
normal, the cost of rectification of the
number which exceeds the normal will be
written off as a loss in the Costing Profit
and Loss Account.
Where the defect is due to In this case cost of rectification will be
bad workmanship. abnormal cost and shall be written off
as a loss. However, if the management
did provide for a certain proportion of
defectives on account of bad
workmanship as an unavoidable feature
of production. If that be the case, the cost

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

of rectifying to the extent provided for by

the management will be treated as a
normal cost and charged to the batch.
Where defect is due to the In this case the cost of rectification will
Inspection Department be charged to the department and will
wrongly accepting not be considered as cost of
incoming material of poor manufacture of the batch. Being an
quality. abnormal cost, it will be written off to the
Costing Profit and Loss Account.

Question 6
(a) Explain the steps involved in procedure for reconciliation of Cost & Financial
accounts. Also explain the circumstances where reconciliation statement can
be avoided. (3+2 = 5 Marks)
(b) State cost unit of the following Industry Sector:

Industry Sector Cost Unit

Oil
Professional services
Education
Brick-making
Education
Brick-making
Engineering
Electricity
Hotel/Catering
Coal mining
Brewing
Hospitals
(5 Marks)
(c) Explain the methods that can be used for controlling Selling and Distribution
Overheads. (4 Marks)

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 SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

OR
(c) Suggest any one basis of re-apportionment of service department overheads
over production departments in the following contexts:

Cost of the Service Departments Basis

Planning and progress
Transport Department
Personnel Department
Fire Protection
Power House (electric lighting cost)
Computer Section
Canteen and Welfare
Hospital and Dispensary
(4 Marks)
Answer
(a) There are 3 steps involved in the procedure for reconciliation.
i. Ascertainment of profit as per Financial Accounts
ii. Ascertainment of profit as per Cost Accounts
iii. Reconciliation of both the profits
Circumstances where reconciliation statement can be avoided: When
the Cost and Financial Accounts are integrated - there is no need to have a
separate reconciliation statement between the two sets of accounts.
Integration means that the same set of accounts fulfil the requirement of
both i.e., Cost and Financial Accounts.
(b)

Service industry Cost Unit

Oil Cost per barrel, Cost per gallon/litre
Professional Services Per service/project, per hour

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 SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Education Per course, per student, per batch, per lecture etc.
Brick-making Per brick, per thousand bricks
Engineering Per project, per hour, per job, per contract
Electricity Per kilowatt-hour (kWh)
Hotel/Catering Guest Days or Room Days, Per item, per meal etc.
Coal Mining Per ton, per quintal
Brewing per gallon/litre, per barrel
Hospital Patient per day, room per day or per bed, per
operation etc.

(c) The problem of controlling selling & distribution overheads can be tackled
by adopting the following steps:
(a) Comparison with past performance - Comparing the figures of selling
& distribution overhead with the figures of previous period.
(b) Budgetary Control-Selling & distribution overhead budgets may be
used to control such overhead expenses by making a comparison of
budgetary figures with actual figures of overhead expenses,
ascertaining variances and finally taking suitable actions,
(c) Standard Costing - Standards of selling & distribution expenses may
be set up for salesmen, territories, products etc. The laid down
standards on comparison with actual overhead expenses will reveal
variances, which can be controlled by suitable action.
OR
(c)

Cost of the Service Departments Basis

Planning and progress Direct labour hours, Machine hours,
Direct labour wages, Asset value x
Hours worked
Transport Department Crane hours, Truck hours, Truck
mileage, Truck tonnage, Truck ton-

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: JANUARY 2025

hours, Tonnage handled. No. of

packages of Standard size
Personnel Department No of direct workers
No. of employees etc.
Fire Protection Capital values
Power House (electric lighting cost) Floor area, Cubic content, No. of
electric Points, Wattage.
Computer Section Computer hours, Specific allocation
to departments
Canteen and Welfare No of direct workers
No. of employees etc.
Hospital and Dispensary No of direct workers
No. of employees etc.

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