MATERIAL COST By: CA PRAKASH PATEL

Chapter 1: Material Cost

1. Material Cost & Its Allocation
A. QUESTION FROM STUDY MATERIAL
Study Material - ILLUSTRATION 1
An invoice in respect of a consignment of chemicals A and B provides the following
information:
(₹)
Chemical A: 10,000 kgs. at ₹ 10 per kg. 1,00,000
Chemical B: 8,000 kgs. at ₹ 13 per kg. 1,04,000
Basic custom duty @ 10% (Credit is not allowed) 20,400
Railway freight 3,840
Total cost 2,28,240
A shortage of 500 kgs. in chemical A and 320 kgs. in chemical B is noticed due to
normal breakages. You are required to COMPUTE the rate per kg. of each chemical,
assuming a provision of 2% for further deterioration.
Hints: ₹12.04, ₹15.43
Study Material - ILLUSTRATION 2
At WHAT price per unit would Part No. A 32 be entered in the Stores Ledger, if the
following invoice was received from a supplier:
Invoice (₹)
200 units Part No. A 32 @ ₹ 5 1,000.00
Less: 20% discount (200.00)
800.00
Add: CGST @ 12% 96.00
896.00
Add: Packing charges (5 non-returnable boxes) 50.00
946.00
(i) A 2 per cent cash discount will be given if payment is made in 30 days.
(ii) Documents substantiating payment of CGST is enclosed for claiming Input
credit.

Hints: ₹4.25

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MATERIAL COST By: CA PRAKASH PATEL

Study Material - ILLUSTRATION 3

SKD Company Ltd., not registered under GST, purchased material P from a company
which is registered under GST. The following information is available for the one lot
of 1,000 units of material purchased:
Listed price of one lot ₹ 50,000
Trade discount @ 10% on Listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @10%
(Will be given only if payment is made within 30 days.)
Freight and Insurance ₹ 3,400
Toll Tax paid ₹ 1,000
Demurrage ₹ 1,000
Commission and brokerage on purchases ₹ 2,000
Amount deposited for returnable containers ₹ 6,000
Amount of refund on returning the container ₹ 4,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases.
You are required to calculate cost per unit of material purchased to SKD Company
Ltd.
Hints: Cost per unit (₹ 60,000/800 units) = 75

B. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (RTP Nov 2019 Q1)

HBL Limited produces product 'M' which has a quarterly demand of 20,000 units.
Each product requires 3 kg. and 4 kg. of material X and Y respectively. Material X is
supplied by a local supplier and can be procured at factory stores at any time, hence,
no need to keep inventory for material X. The material Y is not locally available, it
requires to be purchased from other states in a specially designed truck container with
a capacity of 10 tons.

The cost and other information related with the materials are as follows:
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) ₹140 ₹640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - ₹28,000

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MATERIAL COST By: CA PRAKASH PATEL

Loss of materials in transit* - 2%

Loss in process* 4% 5%
*On purchased quantity Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(i) Calculate cost per kg. of material X and Y
(ii) Calculate the Economic Order quantity for both the materials.

Solution:
1. Working Notes:
(a) Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units

Particulars Mat-X Mat-Y

Quantity required for per unit of product M 3 kg. 4 kg.
Net quantity for materials required 2,40,000 kg. 3,20,000 kg.
Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg.
Purchase quantity 2,50,000 kg. 3,44,085 kg.

Note- Input credit on GST paid is available; hence, it will not be included in cost
of material.
(i) Calculation of cost per kg. of material X and Y:

Particulars Mat-X Mat-Y

Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. ₹140 ₹640
Purchase price ₹3,50,00,000 ₹22,02,14,400
Add: Freight 0 ₹9,80,000*
Total cost ₹3,50,00,000 ₹22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. ₹145.83 ₹691.23
(ii) *No. of trucks = 3,44,085 kg = 34.40 trucks or 35 trucks
10 ton x 1,000
Therefore, total freight = 35 trucks × ₹28,000 = ₹9,80,000

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MATERIAL COST By: CA PRAKASH PATEL

(iii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:

EOQ =

Particulars Mat-X Mat-Y

Annual Requirement 2,50,000 kg. 3,44,085 kg.
Ordering cost 0 ₹28,000
Cost per unit ₹145.83 ₹691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* ₹103.68
EOQ 0 13,632.62 kg.

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MATERIAL COST By: CA PRAKASH PATEL

2. Inventory Level, EOQ & Valuation of offer

A. QUESTION FROM STUDY MATERIAL

Study Material - ILLUSTRATION 4
CALCULATE the Economic Order Quantity from the following information. Also state the
number of orders to be placed in a year.
Consumption of materials per annum : 10,000 kg.
Order placing cost per order : ₹ 50
Cost per kg. of raw materials : ₹2
Storage costs : 8% on average inventory
Hints: 2,500 kg, 4 orders

Study Material - ILLUSTRATION 5

(i) COMPUTE E.O.Q. and the total variable cost for the following:
Annual Demand = 5,000 units
Unit price = ₹ 20.00
Order cost = ₹ 16.00
Storage rate = 2% per annum
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
(ii) DETERMINE the total cost that would result for the items if an incorrect price of ₹ 12.80
is used.
Hints:
(i) EOQ = 200 units, Variable Cost = ₹1,00,800
(ii) EOQ = 250 units, Variable Cost = ₹64,640
Study Material - ILLUSTRATION 6
Two components, A and B are used as follows:
Normal usage 50 per week each
Maximum usage 75 per week each
Minimum usage 25 per week each
Re-order quantity A: 300; B: 500
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
CALCULATE for each component (a) Re-ordering level, (b) Minimum level, (c) Maximum
level, (d) Average stock level.

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MATERIAL COST By: CA PRAKASH PATEL

Hints:
A B
a 450 300
b 200 150
c 650 750
d 425 450

Study Material - ILLUSTRATION 7

From the details given below, CALCULATE:
(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level.
Re-ordering quantity is to be calculated on the basis of following information: Cost of
placing a purchase order is ₹ 20
Number of units to be purchased during the year is 5,000 Purchase
price per unit inclusive of transportation cost is ₹ 50 Annual cost of
storage per units is ₹ 5.
Details of lead time : Average- 10 days, Maximum- 15 days, Minimum- 5 days.
For emergency purchases- 4 days
Rate of consumption : Average: 15 units per day,
Maximum: 20 units per day.
Hints: (i) 300 units, (ii) 450 units, (iii) 150 units, (iv) 60 units

Study Material - ILLUSTRATION 8

M/s Tyrotubes trades in four wheeler tyres and tubes. It stocks sufficient quantity of tyres of
almost every vehicle. In year-end 20X8-X9, the report of sales manager revealed that M/s
Tyrotubes experienced stock-out of tyres.
The stock-out data is as follows:

Stock-out of Tyres No. of times

100 2
80 5
50 10
20 20
10 30
0 33

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MATERIAL COST By: CA PRAKASH PATEL

M/s Tyrotubes loses ₹ 150 per unit due to stock-out and spends ₹ 50 per unit on carrying of
inventory.
DETERMINE optimum safest stock level.
Hints: Safety stock = 20 units, Total Cost = ₹2,140

TEST YOUR KNOWLEDGE

1. Anil & Company buys its annual requirement of 36,000 units in 6 instalments.
Each unit costs ₹ 1 and the ordering cost is ₹ 25. The inventory carrying cost is
estimated at 20% of unit value. FIND the total annual cost of the existing
inventory policy. Calculate, How much money can be saved by Economic
Order Quantity?
Hints: EOQ = 3000 units, Cost saving = ₹150

2. A Company manufactures a special product which requires a component

‘Alpha’. The following particulars are collected for the year 20X1:
(i) Annual demand of Alpha 8,000 units
(ii) Cost of placing an order ₹ 200 per order
(iii) Cost per unit of Alpha ₹ 400
(iv) Carrying cost P.A. 20%
The company has been offered a quantity discount of 4% on the purchase of
‘Alpha’ provided the order size is 4,000 components at a time.
Required:
(i) COMPUTE the economic order quantity
(ii) STATE whether the quantity discount offer can be accepted.
Hints:

(i) EOQ = 200 units

(ii)
EOQ Discount Accepted
Total Cost ₹32,16,000 ₹32,26,000

3. The complete Gardener is deciding on the economic order quantity for two
brands of lawn fertilizer. Super Grow and Nature’s Own. The following
information is collected:

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MATERIAL COST By: CA PRAKASH PATEL

FERTILIZER
Particulars Super Grow Nature’s
Own
Annual demand 2,000 bags 1,280 bags
Relevant ordering cost per purchase ₹ 1,200 ₹ 1,400
order
Annual relevant carrying cost per bag ₹ 480 ₹ 560
Required:
(i) COMPUTE EOQ for Super Grow and Nature’s own.
(ii) For the EOQ, WHAT is the sum of the total annual relevant ordering costs
and total annual relevant carrying costs for Super Grow and Nature’s
own?
(iii) For the EOQ, COMPUTE the number of deliveries per year for Super
Grow and Nature’s own.
Hints:
(i) EOQ = 100, 80
(ii) Total Cost = ₹48,000, ₹44,800
(iii) 20 orders, 16 orders

4. A Company uses three raw materials A, B and C for a particular product for
which the following data apply:
Raw Usage per Re-order Price Delivery period (in Re- Minimu
Material unit of quantity per weeks) order m level
Product (Kgs.) Kg. level (Kgs.)
(Kgs.) (Kgs)
Minimum Average Maximum
A 10 10,000 10 1 2 3 8,000 ?
B 4 5,000 30 3 4 5 4,750 ?
C 6 10,000 15 2 3 4 ? 2,000

Weekly production varies from 175 to 225 units, averaging 200 units of the
said product. COMPUTE the following quantities:

(i) Minimum Stock of A

(ii) Maximum stock of B
(iii) Re-order level of C
(iv) Average stock level of A
Hints: (i) 4,000 kg, (ii) 7,650 kg, (iii) 5,400 or 5,600 kg, (iv) 9,000 or 10,125 kg

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MATERIAL COST By: CA PRAKASH PATEL

5. (a) EXE Limited has received an offer of quantity discounts on its order of
materials as under:

Price per ton Ton

(₹) (Nos.)
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above.

The annual requirement for the material is 5,000 tons. The ordering cost
per order is ₹ 1,200 and the stock holding cost is estimated at 20% of
material cost per annum. You are required to COMPUTE the most
economical purchase level.
(b) WHAT will be your answer to the above question if there are no discounts
offered and the price per ton is ₹ 1,500?
Hints:

(a) 1,000 units, Cost = ₹59,22,000

(b) 200 units

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MATERIAL COST By: CA PRAKASH PATEL

6. Same as Illustration No. 6 of Study Material

Hints: (i) 300 units, (ii) 450 units, (iii) 150 units, (iv) 60 units

7. G. Ltd. produces a product which has a monthly demand of 4,000 units. The product
requires a component X which is purchased at ₹ 20. For every finished product, one unit of
component is required. The ordering cost is ₹ 120 per order and the holding cost is 10%
p.a. You are required to CALCULATE:
(i) Economic order quantity.
(ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the
company has to incur?
(iii) What is the minimum carrying cost, the company has to incur?
Hints: (i) 2,400 units, (ii) ₹640, (iii) ₹2,400

B. PAST YEAR QUESTION

Nov.22 Q1(c)
MM Ltd. uses 7500 valves per month which is purchased at a price of ₹ 1.50 per unit. The
carrying cost is estimated to be 20% of average inventory investment on an annual basis. The
cost to place an order and getting the delivery is ₹ 15. It takes a period of 1.5 months to receive
a delivery from the date of placing an order and a safety stock of 3200 valves is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequency of orders.
(ii) The re-order point.
(iii) The Economic Order Quantity (EOQ) if the valve cost ₹ 4.50 each instead of 1.50 each.
(Assume a year consists of 360 days)
Solution:
(i) Calculation of Economic Order Quantity
Annual requirement (A) = 7500×12= 90,000 Valves Cost per order (O) =₹
15
Inventory carrying cost (i) = 20% Cost per unit of spare (c) = ₹ 1.5
Carrying cost per unit (i × c) = ₹ 1.5 × 20% = ₹ 0.30
Economic Order Quantity (EOQ) = 2 × A ×O
c ×i

= 2 ×(90,000 ×15)
0.3

= 3,000 Valves
Frequency of order or Number of Orders = 90,000/3,000 = 30 orders.
So Order can be placed in every 12 (360days/30) days

(ii) Re-order Quantity = {Maximum Consumption X Maximum lead time} + safety Stock
= {7500X1.5} + 3200 = 14,450 Valves

(iii) Calculation of Economic Order Quantity if valve costs ₹ 4.50

Carrying cost is 20% of ₹ 4.50 = ₹ 0.90
Economic Order Quantity (EOQ) = 2 × A ×O
c ×i

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MATERIAL COST By: CA PRAKASH PATEL

= 2 ×(90,000 ×15)
0.9

= 1732.0508 units or 1733 Valves

Nov.20 Q3(b)
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per
order is ₹ 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs
₹ 50.
At present, the order size is 3,000 spare parts. (Assume that number of days in a year = 360 days)
Find out:
(i) How much the company's cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?.

Solution:
Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ₹ 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ₹ 50
Carrying cost per unit (i × c) = ₹ 50 × 12.5% = ₹ 6.25

EOQ = 2 × A ×O
c ×i

= 2 ×(27,000 ×240)
6.25

= 1440 units

(i) Calculation of saving by opting EOQ:

Existing Order policy EOQ Model

No. of orders 9 18.75 or 19
27,000 27,000
3,000 1, 440

A. Ordering Cost (₹) 2,160 4,500

(₹ 240 × 9) 27,000
₹ 240 ×
1,440

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MATERIAL COST By: CA PRAKASH PATEL
B. Carrying cost (₹) 9,375 4,500
3,000 × ₹ 6.25 1,440 × ₹ 6.25
2 2

Total cost (A+B) (₹) 11,535 9,000

Savings of Cost by opting EOQ Model = ₹ 11,535 – ₹ 9,000 = ₹ 2,535

(ii) Re-order point under EOQ:

Re-order point/ Re-order level = Maximum consumption × Maximum lead time

Consumption per day = 27,000 units

360 days
= 75 units

Re-order point/ Re-order level = 75 units × 12 days = 900 units

(iii) Frequency of Orders (in days):

360 days = 360 days = 18.95 days or 19 days

No. of orders a year 19

Nov.19 Q1(a)
Surekha Limited Produces 4000 liters of paints on a quarterly basis. Each litre requires 2 kg of
raw material. The cost of placing one order for raw material is ₹ 40 and the purchasing price of
raw material is ₹ 50 per kg. The storage cost and interest cost is 2% and 6% per annum
respectively. The lead time for procurement of raw material is 15 days. Calculate EOQ and Total
Annual Inventory Cost in respect of above raw material.

Solution:

a) EOQ = 2 × A ×O
c ×i
= 2 ×(4,000 ×4×2)×40
8% × 50
= 800 units

b) Annual inventory cost

Purchase price (32000 × 50) = 16,00,000

Add: Ordering cost (32,000 × 40)= 1,600
800
Add: Carrying cost (800×1/2 × 4 ) = 1,600
= 16,03,200

Nov.18 Q1(a)
M/s. SJ Private Limited manufactures 20000 units of a product per month. The cost of placing an
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MATERIAL COST By: CA PRAKASH PATEL
order is ₹ 1,500. The purchase price of the raw material is ₹ 100 per kg. The re-order period is 5
to 7 weeks. The consumption of raw materials varies from 200 kg to 300 kg per week, the average
consumption being 250 kg. The carrying cost of inventory is 9.75% per annum.
You are required to calculate:
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level

Solution:
(a) Annual consumption 250 kg × 52 weeks = 13,000 kg.

(i) Re-order Quantity or EOQ = 2 × A ×O

c ×i
A = Annual Consumption = 13,000 kg
O = Ordering Cost = ₹. 1,500
C = Cost per kg = ₹. 100
i = carrying cost rate = 9.75%
Carrying cost per kg per annum (c× i) = 100 × 9.75% = ₹. 9.75
2 ×13,000 ×1,500
EOQ =
9.75

39000000
= = 2000 kg.
9.75
(ii) Re-order level = Max. re-order period × Max, Consumption
= 7 weeks × 300 kg = 2,100 kg

(iii) Maximum level = Re-order level + Re-order Qty – (Min re-order Period ×
Min. Consumption)
= 2100 kg + 2000 kg – (5 × 200) kg = 3100 kg.

(iv) Minimum level = Re-order level – (Avg. re-order period × Avg. Consumption)
= 2,100 kg – (6 × 250) kg = 600 kg.

(v) Avg. stock level = 1/2 (Max. Level + Min. Level)

= ½ (3100+600) =1,850kg
OR
= Min. Level + ½ ROQ
= 600kg + ½ * 2000kg = 1600 kg

May.18 Q1(a)
M/s. X Private Limited is manufacturing a special product which requires a component "SKY
BLUE". The following particulars are available for the year ended 31 st March, 2018:
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MATERIAL COST By: CA PRAKASH PATEL

Annual demand of "SKY BLUE" 12000 Units

Cost of placing an order ₹ 1,800
Cost per unit of "SKY BLUE ₹ 640
Carrying cost per annum 18.75%

The company has been offered a quantity discount of 5 on the purchases of "SKY BLUE"
provided the order size is 3000 components at a time.
You are required to:
1. Compute the Economic Order Quantity.
2. Advise whether the quantity discount offer can be accepted.

Solution:
(a) (i) Calculation of Economic Order Quantity

2AO
EOQ = = = 600 units

(ii) Evaluation of Profitability of Different Options of Order Quantity

When EOQ is ordered
(₹)
Purchase Cost (12,000 units × ₹ 640) 76,80,000
Ordering Cost A × O - 36,000
(12,000 units/ 600 units) ×₹ 1,800]
Q
Carrying Cost ( Q × C×i - 36,000
600 units ×₹ 640 × ½ × 18.75/100)
2
Total Cost 77,52,000

(b) When Quantity Discount is accepted

(₹)
Purchase Cost (12,000 units × ₹ 608) 72,96,000
A 7,200
Ordering Cost [ ×O (12,000 units/3,000 units) × ₹ 1,800]
Q
Carrying Cost [ Q × C ×i (3,000 units × ₹ 608 ×½ × 18.75/100)] 1,71,000
2
Total Cost 74,74,200

Advise – The total cost of inventory is higher if EOQ is adopted. If M/s. X Private Limited gets
a discount of 5% on the purchases of “SKY BLUE” (if order size is 3,000 components at a time), there will
be financial benefit of ₹ 2,77,800 (77,52,000 - 74,74,200). However, order size of big quantity
will increase volume of average inventory to 5 times. There may be risk of shrinkage, pilferage
and obsolescence etc., of inventory due to increase in the average volume of inventory holding.
This aspect also has to be taken into consideration before opting the discount offer and taking final
decision.

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C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A company has the option to procure a particular material from two sources:

Source I assures that defectives will not be more than 2% of supplied quantity.

Source II does not give any assurance, but on the basis of past experience of supplies received
from it, it is observed that defective percentage is 2.8%.

The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is
lower by ₹ 100 as compared to Source I. The defective units of material can be rectified for
use at a cost of ₹ 5 per unit.

You are required to find out which of the two sources is more economical.
Solution:

Comparative Statement of procuring material from two sources

Material source Material source

I II
Defective (in %) 2 2.8
(Future estimate) (Past experience)
Units supplied (in one lot) 1,000 1,000
Total defective units in a lot 20 28
(1,000 units × 2%) (1,000 units
×2.8%)
Additional price paid per lot (₹) (A) 100 –
Rectification cost of defect (₹) (B) 100 140
(20 units × ₹ 5) (28 units × ₹ 5)
Total additional cost per lot (₹): [(A) + 200 140
(B)]
On comparing the total additional cost incurred per lot of 1,000 units, we observe
that it is more economical, if the required material units are procured from material
source II.

Question-2
IPL Limited uses a small casting in one of its finished products. The castings are purchased
from a foundry. IPL Limited purchases 54,000 castings per year at a cost of ₹ 800 per casting.
The castings are used evenly throughout the year in the production process on a 360-days-
per-year basis. The company estimates that it costs ₹9,000 to place a single purchase order
and about ₹300 to carry one casting in inventory for a year. The high carrying costs result
from the need to keep the castings in carefully controlled temperature and humidity
conditions, and from the high cost of insurance.

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MATERIAL COST By: CA PRAKASH PATEL
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The
days of delivery time and percentage of their occurrence are shown in the following
tabulation:

Delivery time (days) : 6 7 8 9 10

Percentage of occurrence : 75 10 5 5 5

Required:
(i) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What
would be the safety stock? The re-order pointAssume the company is willing to
assume a 5% risk of being out of stock. What would be the safety stock? The re-
order point?
(iii) Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
(iv) Refer to the original data. Assume that using process re-engineering the company
reduces its cost of placing a purchase order to only ₹ 600. In addition company
estimates that when the waste and inefficiency caused by inventories are considered,
the true cost of carrying a unit in stock is ₹ 720 per year.

(a) Compute the new EOQ.

(b) How frequently would the company be placing an order, as compared to the old
purchasing policy?
Solution:
(i) Computation of economic order quantity (EOQ)
Annual requirement (A) = 54,000 castings
Cost per casting (C) = ₹ 800
Ordering cost (O) = ₹ 9,000 per order
Carrying cost per casting p.a. (C × i) = ₹ 300
2AO 2 × 54,000units ×₹9,000
EOQ = = = 1,800 castings
C×i ₹300

(ii) Safety stock (Assuming a 15% risk of being out of stock)

From the probability table given in the question, we can see that 85% certainty in
delivery time is achieved when delivery period is 7days i.e. at 15% risk level of being
out of stock, the maximum delivery period should not exceed 7 days.

Annualdemand
Safety stock = ×(Max.lead time - Avg.lead time) 360
days
54,000units
= ×(7days - 6days)
360 days

= 150 castings
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MATERIAL COST By: CA PRAKASH PATEL
Re-order point (level) = Safety Stock + Average lead time consumption
= 150 units + (6 days × 150 units) = 1,050 casting

(iii) Safety stocks (Assuming a 5% risk of being out of stock)

From the probability table given in the question, we can see that 95% certainty in
delivery time is achieved when delivery period is 9 days i.e. at 5% risk level of being
out of stock, the maximum delivery period should not exceed 9 days.
Annualdemand
Safety stock = ×(Max.lead time - Avg.lead time) 360
days
54,000units
= ×(9days - 6days) = 450 castings
360 days

Re-order point (level) = Safety Stock + Average lead time consumption

= 450 units + (6 days × 150 units) = 1,350 castings.

(iv) At 5% stock-out risk the total cost of ordering and carrying cost is as follows:
Annualdemand
Total cost of ordering = ×Cost per order
EOQ
54,000units
= ×₹ 9,000 = ₹ 2,70,000
1,800units

Total cost of carrying = (Safety Stock + ½ EOQ) × Carrying cost per unit p.a.
= (450 units + ½ × 1,800 units) ₹ 300 = ₹ 4,05,000

(v) (a) Computation of new EOQ:

2 × 54,000units ×₹600
EOQ = = 300 castings
₹720

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MATERIAL COST By: CA PRAKASH PATEL
54,000units
(b) Total number of orders to be placed in a year are = 180 times
300units
Under new purchasing policy IPL Ltd. has to place order in every 2nd day, however under
the old purchasing policy it was every 12th day.

Question-3 (May’22)
A company manufactures a product from a raw material, which is purchased at ₹60 per
kg. The company incurs a handling cost of ₹ 360 plus freight of ₹ 390 per order. The
incremental carrying cost of inventory of raw material is ₹ 0.50 per kg. per month. In
addition, the cost of working capital finance on the investment in inventory of raw material
is ₹ 9 per kg. per annum. The annual production of the product is 1,00,000 units and 2.5
units are obtained from one kg of raw material.
Required
(i) Calculate the economic order quantity of raw materials.
(ii) Advise, how frequently should orders for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis,
what percentage of discount in the price of raw materials should be negotiated?
Solution:
1,00,000units
Annual requirement of raw material in kg. (A) = = 40,000kg.
2.5units per kg.
Ordering Cost (Handling & freight cost) (O) = ₹ 360 + ₹ 390 = ₹ 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost (c × i)
= (₹ 0.5 × 12 months) + ₹ 9
= ₹ 15 per kg.
2 40,000kgs.  ₹ 750
(i) E.O.Q. = = 2,000 kg.
₹ 15
(ii) Frequency of orders for procurement:
Annual consumption (A) = 40,000 kg.
Quantity per order (EOQ) = 2,000 kg.
A 40,000kg.
No. of orders per annum ( ) = = 20 times
EOQ 2,000kg.

12months
Frequency of placing orders (in months) = = 0.6 months
20 orders
365 days
Or, (in days) = = 18 days (approx)
20 orders

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

Quarterly order EOQ
Size of the order 10,000 kg. 2,000 kg.
No. of orders 4 20
Cost of placing orders ₹3,000 ₹15,000
(4 order × ₹ 750) (20 orders × ₹ 750)
Inventory carrying cost ₹75,000 ₹15,000
(10,000 kg. × ½ × ₹ (2,000 kg. × ½ × ₹ 15)
15)
Total Cost ₹78,000 ₹30,000
When order is placed on quarterly basis the ordering cost and carrying cost increased by
₹ 48,000 (₹78,000 - ₹30,000). This increase in total cost should be compensated by reduction in
purchase price per kg. to make quarterly order placement rational.

Increase in total cost

Reduction per kg. in the purchase price of raw material =
Annual requirement
₹48,000
= = ₹ 1.2 per kg.
40,000units

₹1.20
Discount in the price of raw material to be negotiated = ₹ 60 =2%

Question-4
The quarterly production of a company's product which has a steady market is 20,000 units.
Each unit of a product requires 0.5 kg. of raw material. The cost of placing one order for
raw material is ₹ 100 and the inventory carrying cost is ₹ 2 per annum. The lead time for
procurement of raw material is 36 days and a safety stock of 1,000 kg. of raw materials is
maintained by the company. The company has been able to negotiate the following discount
structure with the raw material supplier.
Order quantity (kg.) Discount (₹)
Upto 6,000 NIL
6,001 – 8,000 400
8,001 – 16,000 2,000
16,001 – 30,000 3,200
30,001 – 45,000 4,000
You are required to
(i) Calculate the re-order point taking 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw
material after considering the discount of the company elects to place one, two, four
or six orders in the year.

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(iii) State the number of orders which the company should place to minimize the costs
after taking EOQ also into consideration.
Solution:
Working notes
1. Annual production (20,000 units per quarter × 4 quarters) = 80,000 units
2. Raw material required for 80,000 units (80,000 units × 0.5 kg.) = 40,000 kg.
2 40,000 kgs.  ₹ 100
3. EOQ = = 2,000 kgs.
₹2
4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg.
No. of orders (40,000 kg. ÷ 2,000 kg.) = 20 times
Ordering cost (20 orders × ₹100) = ₹ 2,000
Carrying cost (₹)(½ × 2,000 kg. × ₹ 2) = ₹ 2,000
Total cost ₹ 4,000
(i) Re-order point = Safety stock + Lead time consumption
40,000kg.
= 1,000 kg. + ×36 days
360 days
= 1,000 kg. + 4,000 kg. = 5,000 kg.
(ii) Statement showing the total cost of procurement and storage of raw
materials
(after considering the discount)
Order No. of Total cost of Average Total cost of Discount Total cost
size orders procurement stock storage of raw
materials
Kg. (₹) Kg. (₹) (₹) (₹)
(1) (2) (3)=(2)×₹100 (4)=½×(1) (5)=(4)×₹2 (6) (7)=[(3)+(5)– (6)
40,000 1 100 20,000 40,000 4,000 36,100
20,000 2 200 10,000 20,000 3,200 17,000
10,000 4 400 5,000 10,000 2,000 8,400
6666.66 6 600 3,333 6,666 400 6,866
(iii) Number of orders which the company should place to minimize the costs after taking
EOQ also into consideration is 20 orders each of size 2,000 kg. The total cost of
procurement and storage in this case comes to ₹ 4,000, which is minimum.
(Refer to working notes 3 and 4)

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Question-5
ZED Company supplies plastic crockery to fast food restaurants in metropolitan
city. One of its products is a special bowl, disposable after initial use, for serving
soups to its custome₹ Bowls are sold in pack 10 pieces at a price of ₹ 50 per pack.
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000
packs every year. The company purchases the bowl direct from manufacturer at ₹
40 per pack within a three days lead time. The ordering and related cost is ₹ 8
per order. The storage cost is 10% per annum of average inventory investment.
Required:
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order to be placed. (Assuming that the
company does maintain a safety stock and that the present inventory level is
333 packs with a year of 360 working days.
Solution:
(i) Economic Order Quantity
2AO 2 40,000packs ₹8
EOQ = = = 400 packs.
Ci ₹4010%
(ii) Number of orders per year
Annual requirements
E.O.Q
40,000 packs
=100 orders a year
400 packs
(iii) Ordering and storage costs
(₹)
Ordering costs :– 100 orders  ₹ 8.00 800
Storage cost :– ½ (400 packs  10% of ₹40) 800
Total cost of ordering & storage 1,600

(iv) Timing of next order

(a) Day’s requirement served by each order.
No. of working days 360
Number of days requirements = = = 3.6 days supply
No. of order in a year 100

This implies that each order of 400 packs supplies for requirements of 3.6 days
only.
(b) Days requirement covered by inventory
Units in inventory
=  (Day's requirement served by an order)
Economic order quantity

333 packs
  3.6 days = 3 days requirement
400 packs

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(c) Time interval for placing next order

Inventory left for day’s requirement – Lead time of delivery
3 days – 3 days = 0 days
This means that next order for the replenishment of supplies has to be placed immediately.

Question-6
Re-order quantity of material ‘X’ is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage
50 kg. per hour; minimum re-order period 4 days; daily working hours in the factory is 8
hou₹ You are required to calculate the re-order level of material ‘X’.
Solution:
Maximum Level = Re-order level + Re-order Quantity- (Min. usage × Min. Re-order Period) Re-
order Level = Maximum Level – [Re-order Quantity – (Min. usage × Min. Re-order Period)
= 8,000 kg. – [5,000 kg. – (400 kg* × 4 days)] = 8,000 kg. – 3,400 kg. = 4,600 kg.
Hence, Re-order level is 4,600 kg.
*Minimum usage per day = 50 kg. × 8 hours = 400 kg.

Question-7
Assume that the following quantity discount schedule for a particular bearing is available to
a retail store:
Order size (unit) Discount
0 - 49 0%
50 - 99 5%
100 - 199 10%
200 and above 12%
The cost of a single bearing with no discount is ₹ 30. The annual demand is 250 units.
Ordering cost is ₹ 20 per order and annual inventory carrying cost is ₹ 4 per unit. Determine
the optimal order quantity and the associated minimal total cost of inventory and
purchasing costs, if shortages are not allowed.
Solution:
Working Notes
1. EOQ without discount
2AO 2 250units ₹20
EOQ = =
Ci ₹4

= 2,500 = 50 units
2. Prices with discount for different order size
5% Discount = 30 – 5% = ₹ 28.50
10% Discount = 30 – 10% = ₹ 27.00
12% Discount = 30 – 12%= ₹ 26.40

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Statement of Computing Total cost at various order sizes

Orders size No. of Orders Ordering Cost Carrying cost Purchase Total cost (₹)
(units) in a year (₹) of average cost (₹)
inventory (₹)
(1) (2) (3) (4) (5) (3+4+5)= (6)
50 5 100 100 7,125 7,325
250 units (5 orders×₹20) 50 units (250 ×₹28.50)
( ) ( ₹4)
50 units 2
100 2.5* 50 200 6,750 7,000
250 units (2.5 oders×₹20) 100 units (250 ×₹27)
( ) ( ₹4)
100 units 2
125 2 40 250 6,750 7,040
250 units (2 oders×₹20) 125 units (250 ×₹27)
( ) ( ₹4)
125 units 2
200 1.25* 25 400 6,600 7,025
250 units (1.25 oders×₹20) 200 units (250 ×₹26.4)
( ) ( ₹4)
200 units 2
250 1 20 500 6,600 7,120
250 units (1oder×₹20) 250 units (250 ×₹26.4)
( ) ( ₹4)
250 units 2

Optimal order quantity = 100 units

Minimum total cost of inventory and purchasing cost = ₹ 7,000.
Note: Theoretically it may be 2.5 orders, (250÷100), however practically 3 orders are required.
Therefore ordering cost would be ₹ 60 (3 × 20) and total cost ₹ 7,010 (60 + 200 + 6750).

Question-8
Aditya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe,
2 kg of Dee is required. As per the sales forecast conducted by the company, it will able
to sale 10,000 units of Exe in the coming year. The following is the information regarding
the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per
day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ₹125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ₹ 720 on paper and documentation work. From the
above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level

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(d) Calculate the impact on the profitability of the company by not ordering
the EOQ. [Take 364 days for a year]

Solution:
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.
(ii) Computation of Economic Order Quantity (EOQ):
2Annualdemand of 'Dee ' Ordering cost
EOQ =
Carrying cost per unit per annum

217,200kg. ₹720 217,200kg. ₹720

= = = 1,200 kg.
₹12513.76% ₹17.2

(iii) Re- Order level:

= (Maximum consumption per day × Maximum lead time)

= {(Annual Consumption of Dee’ + 20kg. ) * 8 days }

364 days
Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption +Max.consumption
Average Consumption =
2
Min.consumption + 70kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg.= 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.

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MATERIAL COST By: CA PRAKASH PATEL

(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order 1,000 kg. 1,200 kg.
quantity
II No. of orders 17,200kg. 17,200kg.
=17.2 or 18 orders =14.33 or15 orders
a year 1,000kg. 1,200kg.

III Ordering Cost 18 orders × ₹ 720 = ₹12,960 15 orders × ₹ 720 = ₹10,800

IV Average 1,000kg. 1,200kg.
= 500kg. = 600kg.
Inventory 2 2
V Carrying Cost 500 kg. × ₹ 17.2 = ₹ 8,600 600 kg. × ₹ 17.2 = ₹ 10,320
VI Total Cost ₹ 21,560 ₹ 21,120

Extra Cost incurred due to not ordering EOQ = ₹ 21,560 - ₹ 21,120 = ₹440

Question-9
Following details are related to a manufacturing concern:
Re-order Level 16,000 units
Economic Order Quality 90,000
Minimum Stock Level 100000 units
Maximum Stock Level 190000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead time 4 days
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day
Solution:
Difference between Minimum lead time Maximum lead time = 4 days
Max. lead time – Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days.............................................. (i)
Average lead time is given as 6 days i.e.
Max.leadtime +Min.leadtime
= 6 days ....................................................... (ii)
2
Putting the value of (i) in (ii),
Min. lead time + 4 days +Min.lead time
= 6 days
2

Or, Min. lead time + 4 days + Min. lead time = 12 days

Or, 2 Min. lead time = 8 days
8days
Or, Minimum lead time = = 4 days
2

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Putting this Minimum lead time value in (i), we get

Maximum lead time = 4 days + 4 days = 8 days
(i) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption per day
1,60,000 units = 8 days × Maximum Consumption per day
1,60,000units
Or, Maximum Consumption per day = = 20,000 units
8 days

(ii) Minimum Consumption per day:

Maximum Stock Level =
Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day)
Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day) Or,
4 days × Min. Consumption per day = 2,50,000 units – 1,90,000 units
60,000 units
Or, Minimum Consumption per day = = 15,000 units
4 days

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Question-10 (Jan 2021 Old Course Q3(a)(i) )

The following information is furnished by ABC Ltd.:
Re-order quantity 6,750 units
Minimum stock level to allow for emergencies 5 weeks
Average Delivery time from suppliers 4 weeks
Maximum stock level allowed by Management 20 weeks
Average rate of consumption per week 625 units
Minimum consumption in 4 weeks 1,250 units
Calculate:
(a) Re-order Level
(b) Maximum Stock Level
(c) Minimum Stock Level
Solution:
(a) Re-order level
= Minimum stock + (Average consumption × Average delivery time)
= 1,250 units + [625 units × 4 weeks] = 3,750 units
(b) Maximum Stock Level
= Re-order level + Re-order quantity – (Min. consumption × Min. re order period)
= 3,750 units + 6,750 units – 1250 units
= 9,250 units
(c) Minimum Stock Level
= Re-order level – (Average consumption × Average delivery time)
= 3,750 units – (625 units × 4 weeks) = 1,250 units
(Note: It has been assumed that average delivery time and minimum delivery time is same i.e. 4 weeks)

Question-11 (May 2019 Old Course Q2(a) )

ACE Ltd. produces a product EMM using a material 'REX'. To produce one unit of EMM
0.80 kg of 'REX' is required. As per the sales forecast conducted by the company it will be
able to sell 45,600 units of product EMM in the coming year. There is an opening stock of
3,150 units of product EMM and company desires to maintain closing stock equal to one
month's forecasted sale. Following is the information regarding material 'REX':
(i) Purchase price per kg ₹ 25
(ii) Cost of placing order ₹ 240 per order
(iii) Storage cost 2% per annum
(iv) Interest rate 10% per annum
(v) Average lead time 8 days
(vi) Difference between minimum and maximum lead time 6 days
(vii) Maximum usage 150 kg
(viii) Minimum usage 90 kg
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Opening stock of material 'REX' is 2,100 kg and closing stock will be 10% more than
opening stock.
Required:
(i) Compute the EOQ and total cost as per EOQ.
(ii) Compute the reorder level and maximum level.
(iii) If the company places an order of 7,500 kg of REX at a time, it gets 2% discount,
should the offer be accepted?

Solution:
Computation of Economic Order Quantity (EOQ):
EOQ =

= 2,440 kgs
No. Of orders = 37,210 = 15.25 or 16 Orders
2,440
Total cost as per EOQ:
Amount (₹)
Material purchase cost (₹ 25 × 37,210 kgs) 9,30,250
Add: Ordering costs (₹ 240 × 16 orders) 3,840
Add: Carrying cost 2,440 x ₹3 3,660
2

Total Cost 9,37,750

OR
Amount (₹)
Material purchase cost (₹ 25 × 37,210 kgs) 9,30,250
Add: Ordering costs (₹ 240 × 15.25 orders) 3,660
Add: Carrying cost 2,440 x ₹ 3 3,660
2
Total Cost 9,37,570
(ii) Computation of Re-order level & Maximum level:
Re-order level = Maximum usage × Maximum lead time
= 150 kg × 11 days = 1,650 kg
Maximum level = Re-order level + Re-order Quantity (EOQ) – (Min. usage × Min.
lead time)
= 1,650 kg + 2,440 kg – (90 kg × 5 days)
= 4,090 – 450 = 3,640 kg

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(iii) Analysis of Offer at order level of 7,500 kgs:

If the company places 7,500 kg REX at a time, number of order and carrying cost
per unit would be:
No. of orders = 37,210 = 4.96 or 5 orders
7,500
Carrying cost per unit per annum = ₹ 25 × 98% × 12% = ₹ 2.94
Total cost at 7,500 order level:
Amount (₹)
Material purchase cost {(₹ 25×98%) × 37,210 kgs)} 9,11,645
Add: Ordering costs (₹ 240× 5 orders) 1,200
Add: Carrying cost 7 ,5 0 0 x ₹ 2 .9 4 11,025
2
Total Cost 9,23,870
Since, ordering 7,500 kg at a time, the company saves ₹ 13,880 (₹ 9,37,750 - ₹
9,23,870) [or, ₹ 13,700 (₹ 9,37,570 – ₹ 9,23,870)]. Hence, the company should
accept the offer of 2% discount and 7,500 order size.
OR
Amount (₹)
Material purchase cost {(₹ 25×98%) × 37,210 kgs)} 9,11,645
Add: Ordering costs (₹ 240× 4.96 orders) 1,191
Add: Carrying cost 7,500 x₹ 2.94 11,025
2
Total Cost 9,23,861
Since, ordering 7,500 kg. at a time, the company saves ₹ 13,709 (₹ 9,37,570 -
₹ 9,23,861) [or, ₹ 13,889 (₹ 9,37,750 – ₹ 9,23,861)]. Hence, the company should
accept the offer of 2% discount and 7,500 order size.
Working Notes:
1. No. of production units of product EMM:
= Forecasted sales + Closing stock – Opening stock
= 45,600 + 45,600 - 3,150
12
= 45,600 + 3,800 – 3,150 = 46,250 units of EMM
2. Quantity of REX to be purchased:
In Kgs.
No. of units of EMM to be produced 46,250
Quantity of REX required to produce one unit of EMM 0.8 kg
Quantity of REX for 46,250 units 37,000 kg
Less: Opening stock of REX (2,100)
Add: Closing Stock of REX 2,310
Quantity of REX to be purchased 37,210 kgs

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3. Computation of Lead times

Average Lead time = Max. lead time + Min. lead time = 8 days
2
Or, Max. + Min. lead time = 16 days (i)
And Max – Min. lead time = 6 days (given) (ii)
Solving both the equations
Max. + Min. lead time = 16
Max – Min. lead time = 6
2 Min lead time = 10
Thus,
Minimum lead time = 5 days and
Maximum lead time = 5 + 6 = 11 days

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3. Inventory Ratio

A. QUESTIONS FROM STUDY MATERIAL

Study Material - ILLUSTRATION 9 (Dec 2021 Q1(a))

The following data are available in respect of material X for the year ended 31st March,
20X9.
(₹ )
Opening stock 90,000
Purchases during the year 2,70,000
Closing stock 1,10,000
CALCULATE:
(i) Inventory turnover ratio, and
(ii) The number of days for which the average inventory is held.
Hints: 2.5 times, 146 days
Study Material - ILLUSTRATION 10
From the following data for the year ended 31st December, 20X9, CALCULATE the
inventory turnover ratio of the two items and put forward your comments on them.
Particulars Material A (₹) Material B (₹)
Opening stock 1.1.20X9 10,000 9,000
Purchase during the year 52,000 27,000
Closing stock 31.12.20X9 6,000 11,000
Hints:
A = 7 times, 52 days
B = 2.5 times, 146 days

B. PAST YEAR QUESTION

May.18 Q. 5(a)(1)
The following details are provided by M/s. SKU Enterprises for the year ended 31st March, 2018:
Particulars Material-M (₹) Material-N (₹)
Stock as on 01-04-2017 6,00,000 10,00,000
Stock as on 31-03-2018 4,50,000 7,25,000
Purchases during the year 9,50,000 18,40,000
You are required to:
1. Calculate Turnover Ratio of both the materials.
2. Advise which of the two materials is fast moving. (Assume 360 days in a year).

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MATERIAL COST By: CA PRAKASH PATEL

Solution:
Material M Material N
Turnover ratio Turnover ratio
Cost of stock of raw material consumed Cost of stock of raw material consumed Average
= =
Average stock of raw material stock of raw material

= ₹6,00,000 + ₹9,50,000 -₹4,50,000 =2.09 = ₹10,00,000 + ₹18,40,000 -₹7,25,000.

(6,00,000+ 4,50,000) / 2 (10,00,000+ 7,25,000) / 2
Average number of days for which the average =2.45
inventory is held Average number of days for which the average inventory
= 360 . is held
Inventory turnover ratio = 360 .
360 days Inventory turnover ratio
=
2.09 360 days
=
= 172.25 days 2.45
= 146.94 days

(ii) Advice
Comparatively Material M is slower than Material N since Inventory holding period of
‘M’ is 172.25 days in Comparison to ‘N’ i.e. 146.94 days. Infact, both materials have slow inventory
turnover. Though, different business has their own expected rates for inventory turnover
like food shops have fast inventory turnover, shop selling furniture etc. will have slower
inventory turnover while manufacturers of large items of plant will have very long
inventory turnover.
If it is not as per the Industry Standard, then a slow turnover may indicate that excessive
inventory is held and risk of obsolete or spoiled inventory will increase. Large quantity of
slow moving material means that capital is locked up in business and not earning revenue.
It is advisable to make proper investigations into slow moving materials and take steps to
minimize the loss arises therefrom as it may impact overall financial health of the
organisation.

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4. Material Pricing & Store Ledger

A. QUESTIONS FROM STUDY MATERIAL

Study Material - ILLUSTRATION 11
The following transactions in respect of material Y occurred during the six months
ended 30th June, 20X8:

Month Purchase Price per unit Issued

(units) (₹) Units
January 200 25 Nil
February 300 24 250
March 425 26 300
April 475 23 550
May 500 25 800
June 600 20 400
Required:
(a) The Chief Accountant argues that the value of closing stock remains the same
no matter which method of pricing of material issues is used. Do you agree?
Why or why not? EXPLAIN. Detailed stores ledgers are not required.
(b) STATE when and why would you recommend the LIFO method of pricing
material issues?

Hints: Chief Accountant is correct in his argument.

Study Material - ILLUSTRATION 12

The following information is provided by Sunrise Industries for the fortnight of April,
20X9:
Material Exe:
Stock on 1-4-20X9 100 units at ₹ 5 per unit.
Purchases
5-4-20X9, 300 units at ₹ 6
8-4-20X9, 500 units at ₹ 7
12-4-20X9, 600 units at ₹ 8
Issues
6-4-20X9, 250 units
10-4-20X9,400 units
14-4-20X9,500 units
Required:
(A) CALCULATE using FIFO and LIFO methods of pricing issues:
(a) the value of materials consumed during the period
(b) the value of stock of materials on 15-4-20X9.
EXPLAIN why the figures in (a) and (b) in part A of this question are different under the
two methods of pricing of material issues used. You need not draw up the Stores Ledge
Hints: FIFO = ₹2,800, LIFO = ₹2,300

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MATERIAL COST By: CA PRAKASH PATEL

Study Material - ILLUSTRATION 13 (Old Course RTP May 2019)

Arnav Electronics manufactures electronic home appliances. It follows weighted average
Cost method for inventory valuation. Following are the data of component X:
Date Particulars Units Rate per unit (₹)

15-12-19 Purchase Order- 008 10,000 9,930

30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the 10,000 -
Purchase Order- 008)
05-01-20 MRN**-003 (against the 500 -
Purchase Order- 008)
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the 10,000 -
Purchase Order- 009)
13-01-20 MRN-004 (against the 400 -
Purchase Order- 009)
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the 10,000 -
Purchase Order- 010)
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -
*GRN- Goods Received Note; **MRN- Material Returned Note Based on the above data,
you are required to CALCULATE:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of
stock as on 31-01-2020.
(v) Value of components used during the month of January, 2020.
(vi) Inventory turnover ratio.

Study Material - ILLUSTRATION 14

Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is
engaged in creating Embedded products and Internet of Things (IoT) solutions for the
Industrial market. It is focused on innovation, design, research and development of products
and services. One of its embedded products is LogMax, a system on module (SoM) Carrier
board for industrial use. It is a small, flexible and embedded computer designed as per
industry specifications. In the beginning of the month of September 2021, company entered
into a job agreement of providing 4800 LogMax to NIT, Mandi. Following details w.r.t.
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MATERIAL COST By: CA PRAKASH PATEL

issues, receipts, returns of Store Department handling Micro-controller, a component used

in the designated assembling process have been extracted for the month of September, 2021:
Sep. 1 Opening stock of 6,000 units @ ₹ 285 per unit
Issued 4875 units to mechanical division vide material requisition no.
Sep. 8
Mech 009/20
Received 17,500 units @ ₹ 276 per unit vide purchase order no.159/2020
Sep. 9

Issued 12,000 units to technical division vide material requisition no.

Sep. 10
Tech 012/20
Returned to stores 2375 units by technical division against material
Sep. 12
requisition no. Tech 012/20.
Received 9,000 units @ ₹ 288 per units vide purchase order no. 160/
Sep. 15
2020
Returned to supplier 700 units out of quantity received vide purchase
Sep. 17
order no. 160/2020.
Issued 9,500 units to technical division vide material requisition no.
Sep. 20
Tech 165/20
On 25th September, 2021, the stock manager of the company expressed his need to leave
for his hometown due to certain contingency and immediately left the job same day. Later,
he also switched his phone off.
As the company has the tendency of stock-taking every end of the month to check and report
for the loss due to rusting of the components, the new stock manager, on 30th September,
2021, found that 900 units of Micro-controllers were missing which was apparently
misappropriated by the former stock manager. He, further, reported loss of 300 units due to
rusting of the components.
From the above information you are REQUIRED to prepare the Stock Ledger account using
‘Weighted Average’ method of valuing the issues.
Hints: Balance of Stock = 19,46,112

TEST YOUR KNOWLEDGE

8. ‘AT’ Ltd. furnishes the following store transactions for September, 20X8:

1-9-X8 Opening balance 25 units value ₹ 162.50

4-9- X8 Issues Req. No. 85 8 units
6-9- X8 Receipts from B & Co. GRN No. 26 50 units @ ₹ 5.75 per unit
7-9- X8 Issues Req. No. 97 12 units
10-9- X8 Return to B & Co. 10 units
12-9- X8 Issues Req. No. 108 15 units
13-9- X8 Issues Req. No. 110 20 units
15-9- X8 Receipts from M & Co. GRN. No. 33 25 units @ ₹ 6.10 per unit 17-
9- X8 17-9-X8 Issues Req. No. 121 10 units
19-9- X8 Received replacement from B & Co.

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MATERIAL COST By: CA PRAKASH PATEL

GRN No. 38 10 Units

20-9- X8 Returned from department, material of
M & Co. MRR No. 4 5 Units
22-9- X8 Transfer fromJob 182 to 187 in the
Dept. MTR 6 5 Units
26-9-X8 Issues Req. No. 146 10 Units
29-9- X8 Transfer from Dept. “A”
to Dept “B” MTR taking 5 Units
30-9- X8 Shortage in stock taking 2 Units
PREPARE the priced stores ledger on FIFO method and state how would you treat the shortage in
stock taking.
Hints: ₹167.30

9. The following information is extracted from the Stores Ledger:

Material X
Opening Stock Nil
Purchases:
Jan. 1 100 @ ₹ 1 per unit
Jan. 20 100 @ ₹ 2 per unit
Issues:
Jan. 22 60 for Job W 16
Jan. 23 60 for Job W 17
Complete the receipts and issues valuation by adopting the First-In-First- Out, Last-In-First-Out
and the Weighted Average Method. TABULATE the values allocated to Job W 16, Job W 17
and the closing stock under the methods aforesaid and discuss from different points of view
which method you would prefer.
Hints: FIFO = ₹160, LIFO = ₹80, Weighted Average = ₹120

B. PAST YEAR QUESTION

May’19 Q4 (b)
The following are the details of receipt and issue of material 'CXE' in a manufacturing Co.
during the month of April 2019:

Quantity Rate
Date Particulars
(kg) per kg
April 4 Purchase 3,000 ₹ 16

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MATERIAL COST By: CA PRAKASH PATEL

April8 Issue 1,000

April15 Purchase 1,500 ₹ 18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 ₹ 17
Opening stock as on 01-04-2019 is 1,000 kg @ ₹ 15 per kg.
On 30th April, 2019 it was found that 50 kg of material 'CXE' was fraudulently
misappropriated by the store assistant and never recovered by the Company.
Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
(a) Weighted Average Method
(b) LIFO
What would be the value of material consumed and value of closing stock as on 30-04-2019 as
per these two methods?
Solution:
(i) (a) Stores Ledger Account for the month of April, 2019 (Weighted Average Method)

Receipt Issue Balance

Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (₹) (₹) Units (₹) (₹) Units (₹) (₹)
1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000
4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000
8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250
15-4-19 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250
20-4-19 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450
25-4-19 _ _ _ 300 18.00 5,400 3,000 16.35 49,050
26-4-19 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700
28-4-19 500 17.00 8,500 _ _ _ 2,500 16.48 41,200
30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376
(b) Stores Ledger Account for the month of April, 2019 (LIFO)
Receipt Issue Balance
Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (₹) (₹) Units (₹) (₹) Units (₹) (₹)
1-4-19 _ _ _ _ _ _ 1,000 15 15,000
4-4-19 1,000 15 15,000
3,000 16 48,000 _ _ _
3,000 16 48,000
8-4-19 1,000 15 15,000
_ _ _ 1,000 16 16,000
2,000 16 32,000
15-4-19 1,000 15 15,000
1,500 18 27,000 _ _ _ 2,000 16 32,000
1,500 18 27,000

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MATERIAL COST By: CA PRAKASH PATEL

20-4-19 1,000 15 15,000

_ _ _ 1,200 18 21,600 2,000 16 32,000
300 18 5,400
25-4-19 1,000 15 15,000
_ _ _ 300 18 5,400
2,000 16 32,000
26-4-19 1,000 15 15,000
_ _ _ 1,000 16 16,000
1,000 16 16,000
28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000
1,000 16 16,000
500 17 8,500
30-4-19 _ _ _ 50 17 850 1,000 15 15,000

1,000 16 16,000

450 17 7,650

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
Prepare a Store Ledger Account from the following transactions of XY Company Ltd.
April, 2014
1 Opening balance 200 units @ ₹ 10 per unit.
5 Receipt 250 units costing ₹ 2,000
8 Receipt 150 units costing ₹ 1,275
10 Issue 100 units
15 Receipt 50 units costing ₹ 500
20 Shortage 10 units
21 Receipt 60 units costing ₹ 540
22 Issue 400 units
The issues upto 10-4-14 will be priced at LIFO and from 11-4-14 issues will be priced at FIFO.
Shortage will be charged as overhead.

Solution:
Name - Max. Stock Level - Bin No.-
Code No. - Min. Stock Level - Location Code-
Description- Re-order level – Re-order quantity-
Date Receipts Issues Balance
Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
Units (₹) (₹) Units (₹) (₹) Units (₹) (₹)
April 1 200 10 2,000
”5 250 8 2,000 200 10
250 8 4,000
”8 150 8.50 1,275 200 10
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MATERIAL COST By: CA PRAKASH PATEL

250 8
150 8.50 5,275
” 10 100 8.50 850 200 10
250 8 4,425
50 8.50
” 15 50 10 500 200 10
250 8 4,925
50 8.50
50 10
” 20 10 10 100 190 10
(shortage
)
250 8 4,825
50 8.50
50 10
” 21 60 9 540 190 10
250 8 5,365
50 8.50
50 10
60 9
” 22 190 10 3,580 40 8 (Closing
210 8 50 8.50 Stock)1,7
50 10 85
60 9

Question-2 (Old Practice Manual Q20)

The following are the details of receipts and issues of a material of stores in a
manufacturing company for the period of three months ending 30th June, 2014:
Receipts:
Date Quantity (kg.) Rate per kg. (₹)
April 10 1,600 5.00
April 20 2,400 4.90
May 5 1,000 5.10
May 17 1,100 5.20
May 25 800 5.25
June 11 900 5.40
June 24 1,400 5.50
There was 1,500 kg. in stock at April 1, 2014 which was valued at ₹ 4.80 per kg.

Issues:
Date Quantity
(kg.)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200

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MATERIAL COST By: CA PRAKASH PATEL

Issues are to be priced on the basis of weighted average method.

The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2014 and 60
kgs. on 30th June, 2014. The shortage is treated as inflating the price of remaining material
on account of shortage.
You are required to prepare a Stores Ledger Account.
Solution:
(a) Stores Ledger Account
for the three months ending 30th June, 2014
(Weighted Average Method)
Receipts Issues Balance
GRN Rate for further
Date Qty. Rates Qty. Rates Amount Qty. Amount
No. PR Amounts MR No. Issue (₹)
No.
(Kg.) (₹) (Kg.) (₹) (₹) (Kg.) (₹)
2014
April 1 1,500 7,200 4.80
April 4 1,100 4.80 5,280 400 1,920 4.80
April 10 1,600 5.00 8,000 2,000 9,920 9,920
= 4.96
2,000
April 20 2,400 4.90 11,760 4,400 21,680 21,680
= 4.93
4,400
April 24 1,600 4.93 7,888 2,800 13,792 13,792
= 4.93
2,800
May 5 1,000 5.10 5,100 3,800 18,892 18,892
= 4.97
3,800
May 10 1,500 4.97 7,455 2,300 11,437 11,437
= 4.97
2,300
May 17 1,100 5.20 5,720 3,400 17,157 17,157
= 5.05
3,400
May 25 800 5.25 4,200 4,200 21,357 21,357 = 5.09
4,200
May 26 1,700 5.09 8,653 2,500 12,704 12,704
= 5.09
2,500
May 31 Shortage 80 2,420 12,704 12,704
= 5.25
2,420
June 11 900 5.40 4,860 3,320 17,564 17,564
= 5.29
3,320
June 15 1,500 5.29 7,935 1,820 9,629 9,629
= 5.29
1,820
June 21 1,200 5.29 6,348 620 3,281 3,281
= 5.29
620
June 24 1,400 5.50 7,700 2,020 10,981 10,981
= 5.44
2,020
June 30 Shortage 60 1,960 10,981 10,981
= 5.60
1,960

Question-3 (Old Practice Manual Q23)

After the annual stock taking you come to know of some significant discrepancies between
book stock and physical stock. You gather the following information:-

Item Stock card Stores Ledger Physical Check Cost/unit

Units Units Units (₹)
A 600 600 560 60
B 380 380 385 40
C 750 780 720 10
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MATERIAL COST By: CA PRAKASH PATEL

(a) What action should be taken to record the information shown.

(b) Suggest reasons for the shortage and discrepancies disclosed above and
recommended a possible course of action by management to prevent future losses.

Solution:
(a) Item A: The shortage of 40 units may be entered in the Stock Card and Stores
Ledger. That means, stock card should reflect the physical quantity only. The value
is ₹ 2,400 (i.e. 40 units at ₹ 60 per unit).

Accounting treatment

1. If the shortage is normal:-

Production Overhead control A/c Dr. 2,400
To Stores Ledger control A/c 2,400
2. If the shortage is abnormal:-
Costing P&L A/c Dr. 2,400
To Stores Ledger control A/c 2,400

3. If the shortage is due to non-recording or short-recording of direct material

issued to production:
WIP Control A/c Dr. 2,400
To Stores Ledger control A/c 2,400
4. If the shortage is due to non-recording or short-recording of indirect
material issued:-
Production Overhead control A/c Dr. 2,400
To Stores Ledger control A/c 2,400
5. Clerical errors, if any, should be rectified.
Item B: Excess physical units is 5 units valuing 5 unit × ₹40 = ₹ 200.
Accounting treatment

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MATERIAL COST By: CA PRAKASH PATEL

1. If the excess is due to normal causes:

Stores Ledger control A/c Dr. 200
To Production Overhead control A/c 200
2. If the excess is due to abnormal causes:
Stores Ledger control A/c Dr. 200
To Costing P&L A/c 200
3. If the excess is due to wrong recording of direct material:
Stores Ledger control A/c Dr. 200
To WIP Control A/c 200
4. If the excess is due to wrong recording of indirect material:
Stores Ledger control A/c Dr. 200
To Production Overhead control A/c 200
Item C: Units
Physical stock 720
Stock Card 750
Shortage 30
Value 30 units at ₹ 10 = ₹ 300.
Accounting treatment is the same as given in case of Item A.
Stock Card 750
Stores Ledger 780
Difference 30

Reasons for difference of 30 units between stock card and stores Ledger:
1. One issue voucher of 30 units might not have been posted in Stores Ledger
2. There may be clerical errors in balancing, posting etc. After ascertaining, these may
be rectified.
3. One receipt of 30 units might not have been posted in Stock Card. After posting of
this stock card balance will be 780 units. Then the shortage will be 60 units as
compared to physical quantity of 720 units.
(b) Reasons for shortage and discrepancies:
1. Wastage of material due to spoilage, breakages, evaporation etc. it may be normal
or abnormal.
2. Theft or pilferage.
3. Issued but not entered in stock card.
4. Over issues.
5. Entering the issue in the wrong stock card.
6. Clerical errors in balancing or posting etc.
7. Incorrect entries in stock card.
8. Goods received and deposited in the wrong bins.
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MATERIAL COST By: CA PRAKASH PATEL

9. Small defective units - nails, screws etc.

10. Purchase in kg. but issues to production in numbers i.e. bolts, nuts etc.
Recommended course of action to prevent future losses
1. The entries should be correctly entered in stock cards.
2. Internal check system should be introduced by double checking on the entries.
3. Entry in the stores should be restricted to authorized persons only.
4. To avoid pilferage, the store room should be well guarded and protected. (Just like
cash room).
5. Proper accounting should be done for all stock movements.
6. FIFO system should be followed while issuing materials (pricing of issue of
materials may be a different method). This will avoid losses due to deterioration or
obsolescence.
7. All issues of stock should be made on the basis of stores requisition duly signed by
authorised person.
8. To minimise losses due to breakage in case of heavy and bulky materials, materials
handling equipment like forklift trucks and cranes should be provided.
9. Wrong issues should be avoided by accurate measuring and weighing equipment
should be inspected / checked periodically.
10. Proper storage conditions should be provided, particularly in the case of perishable
items and items of lesser shelf life.
11. No movement of materials from one place to another place without proper
authorisation and documentation.
Question-4 (Nov. 2019 Old Course Q3(a) )
M/s XYZ Traders is a distributor of an electronic calculator. A periodic inventory of
electronic calculator on hand is taken when books are closed at the end of each quarter.
The following summary of information is available for the quarter ended on 30th
September, 2019:
Sales ₹ 1,46,20,000
Opening Stock 25,000 calculator @ ₹ 200 per calculator
Administrative Expenses ₹ 3,75,000
Purchases (including freight inward):
- July 1, 2019 50,000 calculator @ ₹ 191 per calculator
- September 30, 2019 25,000 calculator @ ₹ 210 per calculator
Closing stock- September 30, 2019 32,000 calculator
You are required to compute the following by WAM (Weighted Average Method), FIFO
method and LIFO method.

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MATERIAL COST By: CA PRAKASH PATEL

(i) Value of Inventory on 30th September, 2019.

(ii) Profit or loss for the quarter ended 30th September, 2019.
Solution:
(i) Computation of Value of Inventory as on 30th September 2019:

Date Particulars Units WAM (₹) FIFO (₹) LIFO (₹)

01-07-19 OpeningStock 25,000 50,00,000 50,00,000 50,00,000
(₹200×25,000) (₹200×25,000) (₹200×25,000)
01-07-19 Purchases 50,000 95,50,000 95,50,000 95,50,000
(₹191×50,000) (₹191×50,000) (₹191×50,000)
30-09-19 Purchases 25,000 52,50,000 52,50,000 52,50,000
(₹210×25,000) (₹210×25,000) (₹210×25,000)
01-07-19 Issues/ 68,000 1,34,64,000* 1,32,13,000** 1,34,63,000***
to Consumption
30-09-19 (Balancing figure)
30-09-19 Closing Stock 32,000 63,36,000 65,87,000 63,37,000

Weighted average rate = ₹ 50,00,000+₹ 95,50,000+₹ 52,50,000 = ₹ 198

(25,000 + 50,000 + 25,000) units
* ₹ 198 x 68,000
** ₹ 200×25,000 + ₹ 191×43,000 = ₹ 50,00,000 + ₹ 82,13,000
*** ₹ 210×25,000 + ₹ 191×43,000 = ₹ 52,50,000 + ₹ 82,13,000

(ii) Computation of Profit or Loss for the Quarter ended 30th September 2019
Particulars WAM (₹) FIFO (₹) LIFO (₹)
Sales 1,46,20,000 1,46,20,000 1,46,20,000
Less: Consumption 1,34,64,000 1,32,13,000 1,34,63,000
Less: Administrative Exp. 3,75,000 3,75,000 3,75,000
Profit or Loss 7,81,000 10,32,000 7,82,000
[Assumption: Issue/ consumption pattern was even throughout the quarter]

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MATERIAL COST By: CA PRAKASH PATEL

5. ABC Analysis

A. QUESTIONS FROM STUDY MATERIAL

Study Material - ILLUSTRATION 15
From the following details, DRAW a plan of ABC selective control:
Item Units Unit cost (₹)
1 7,000 5.00
2 24,000 3.00
3 1,500 10.00
4 600 22.00
5 38,000 1.50
6 40,000 0.50
7 60,000 0.20
8 3,000 3.50
9 300 8.00
10 29,000 0.40
11 11,500 7.10
12 4,100 6.20

Hints: Refer ABC analysis concept in material cost control techniques.

Study Material - ILLUSTRATION 16

A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory
usage, the following information is compiled:

No. of varieties of % % value of % of inventory

inventory inventory holding usage (in end-
(average) product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100
Classify the items of inventory as per ABC analysis with reasons.
Hints: Refer ABC analysis concept in material cost control techniques.

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MATERIAL COST By: CA PRAKASH PATEL

B. PAST YEAR QUESTION

July’21 Q1 (a)
MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (₹)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12

MM Ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory
Cost as 'A' category, items constituting 6% or less of Total Inventory Cost as 'C' category and the
remaining items as 'B' category.
You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC Analysis of Inventory Control
adopted by MM Ltd.

Solution:
(i) Statement of Total Inventory Cost and Ranking of items

Item Units % of Total Unit Total Inventory % of Total Ranking

code no. units cost cost(₹) Inventory cost
(₹)
101 25 3.33 50 1,250 16.67 2
102 300 40.00 1 300 4.00 6
103 50 6.67 80 4,000 53.33 1
104 75 10.00 8 600 8.00 4
105 225 30.00 2 450 6.00 5
106 75 10.00 12 900 12.00 3
750 100 153 7,500 100

(ii) Classifying items as per ABC Analysis of Inventory Control

Basis for ABC Classification as % of Total Inventory Cost

15% & above -- ‘A’ items

7% to 14% -- ‘B’ items
6% & Less -- ‘C’ items

Ranking Item code % of Total Total Inventory % of Total Category

No. units cost (₹) Inventory Cost
1 103 6.67 4,000 53.33
2 101 3.33 1,250 16.67
Total 2 10.00 5,250 70.00 A

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MATERIAL COST By: CA PRAKASH PATEL

3 106 10.00 900 12.00

4 104 10.00 600 8.00
Total 2 20.00 1,500 20.00 B
5 105 30.00 450 6.00
6 102 40.00 300 4.00
Total 2 70.00 750 10.00 C
Grand Total 6 100 7,500 100

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Chapter 2 – Employees Cost and Direct Expenses

1. LABOUR COST AND ITS ALLOCATION

A. QUESTION FROM STUDY MATERIAL

Study Material - ILLUSTRATION 1
‘X’ an employee of ABC Co. gets the following emoluments and benefits:
(a) Basic pay ₹ 10,000 p.m.
(b) Dearness allowance ₹ 2,000 p.m.
(c) Bonus 20% of salary and D.A.
(d) Other allowances ₹ 2,500 p.m.
(e) Employer’s contribution to P.F. 10% of salary and D.A.
‘X’ works for 2,400 hours per annum, out of which 400 hours are non-
productive and treated as normal idle time. You are required to COMPUTE
the effective hourly cost of employee ‘X’.

Hints: ₹108.06
Study Material - ILLUSTRATION 2
In a factory working six days in a week and eight hours each day, a worker
is paid at the rate of ₹ 100 per day basic plus D.A. @ 120% of basic. He
is allowed to take 30 minutes off during his hours shift for meals-break
and a 10 minutes recess for rest. During a week, his card showed that his
time was chargeable to:
Job X 15 hrs.
Job Y 12 hrs.
Job Z 13 hrs.
The time not booked was wasted while waiting for a job. In Cost
Accounting, STATE how would you allocate the wages of the workers for
the week?

Hints: Effective hours = 44 hours, Abnormal hours = 4 hours, Cost = ₹120

Study Material - ILLUSTRATION 3

CALCULATE the earnings of A and B from the following particulars for
a month and allocate the employee cost to each job X, Y and Z:
A B
(i) Basic Wages (₹) 10,000 16,000
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(ii) Dearness Allowance 50% 50%

(iii) Contribution to provident Fund (on basic wages) 8% 8%
(iv) Contribution to Employee’s State Insurance (on basic wages) 2% 2%
(v) Overtime (Hours) 10 --
The normal working hours for the month are 200. Overtime is paid at
double the total of normal wages and dearness allowance. Employer’s
contribution to state Insurance and Provident Fund are at equal rates with
employees’ contributions. The two workers were employed on jobs X, Y
and Z in the following proportions:

Jobs X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%
Overtime was done on job Y.
Hints:
Earning = ₹15,500, ₹22,400
Wages Allocation : X = ₹19,200, Y = ₹11,420, Z = ₹12,480
Study Material - ILLUSTRATION 4
It is seen from the job card for repair of the customer’s equipment that a
total of 154 labour hours have been put in as detailed below:
Worker ‘A’ paid Worker ‘B’ Worker ‘C’ paid
at ₹ 200 per day paid at ₹ at ₹ 300 per day
of 8 hours 100 per of 8 hours
day of 8 hours
Monday (hours) 10.5 8.0 10.5
Tuesday (hours) 8.0 8.0 8.0
Wednesday (hours) 10.5 8.0 10.5
Thursday (hours) 9.5 8.0 9.5
Friday (hours) 10.5 8.0 10.5
Saturday (hours) -- 8.0 8.0
Total (hours) 49.0 48.0 57.0
In terms of an award in an employee conciliation, the workers are to be paid
dearness allowance on the basis of cost of living index figures relating to each
month which works out @ ₹ 968 for the relevant month. The dearness allowance
is payable to all workers irrespective of wages rate if they are present or are on
leave with wages on all working days.
Sunday is a weekly holiday and each worker has to work for 8 hours on all week
days and 4 hours on Saturdays; the workers are however paid full wages for
Saturday (8 hours for 4 hours worked).

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Workers are paid overtime according to the Factories Act, 1948. Excluding
holidays, the total number of hours works out to 176 in the relevant month. The
company’s contribution to Provident Fund and Employees State Insurance
Premium are absorbed into overheads.
Calculate the wages payable to each worker.
Hints: Wages Payable: A = ₹1,647, B = ₹864, C = ₹2,838

Study Material - ILLUSTRATION 5 (Treatment of Overtime)

In a factory, the basic wage rate is ₹ 100 per hour and overtime rates are as follows:

Before and after normal working hours 175% of basic wage rate
Sundays and holidays 225% of basic wage rate
During the previous year, the following hours were worked
- Normal time 1,00,000 hours
- Overtime before and after working hours 20,000 hours
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours
The following hours have been worked on job ‘Z’
Normal 1,000 hours
Overtime before and after working hrs. 100 hours.
Sundays and holidays 25 hours.
Total 1,125 hours
You are required to CALCULATE the labour cost chargeable to job ‘Z’
and overhead in each of the following instances:

(a) Where overtime is worked regularly throughout the year as a policy

due to the workers’ shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
Hints: Inflated Wages Rate = ₹117
(a) Charge to Job Z = ₹1,31,625
(b) Charge to factory overhead= ₹10,625
(c) Charge to Job Z total cost = ₹1,23,125

Study Material - ILLUSTRATION 12

A worker is paid ₹10,000 per month and a dearness allowance of ₹ 2,000
p.m. Worker contribution to provident fund is @ 10% and employer also
contributes the same amount as the employee. The Employees State
Insurance Corporation premium is 6.5% of wages of which 1.75% is paid
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 Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

by the employees. It is the firm’s practice to pay 2 months’ wages as bonus

each year.
The number of working days in a year are 300 of 8 hours each. Out of these the
worker is entitled to 15 days leave on full pay. CALCULATE the wage rate
per hour for costing purposes.

Hints: Wage Rate = ₹83 (i.e. 189240/2280)

Study Material - ILLUSTRATION 13
CALCULATE the Employee hour rate of a worker X from the following data:
Basic pay ₹ 10,000 p.m.
D.A. ₹ 3,000 p.m.
Fringe benefits ₹ 1,000 p.m.
Number of working days in a year 300. 20 days are availed off as holidays
on full pay in a year. Assume a day of 8 hours.
Hints: (i) 2240 hours, (ii) 1,68,000, (iii) ₹75
B. PAST YEAR QUESTION

Nov 20 Q4(b)
Following are the particulars of two workers 'R' and 'S' for a month:
Particulars R S
(i) Basic Wages (₹) 15,000 30,000
(ii) Dearness Allowance 50% 50%
(iii) Contribution to EPF (on basic wages) 7% 7.5%
(iv) Contribution to ESI (on basic wages) 2% 2%
(v) Overtime (hours) 20 -

The normal working hours for the month are 200 hrs. Overtime is paid at double the total of normal
wages and dearness allowance. Employer's contribution to State Insurance and Provident Fund are at
equal rates with employees' contributions.
Both workers were employed on jobs A, B and C in the following proportions :

Jobs A B C
R 75% 10% 15%
S 40% 20% 40%

Overtime was done on job 'A'. You are required to :

(i) Calculate ordinary wage rate per hour of 'R' and ‘S’.
(ii) Allocate the worker's cost to each job 'A', 'B' and 'C'.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Solution:
(i) Calculation of Net Wages paid to Worker ‘R’ and ‘S’

Particulars R (₹) S (₹)

Basic Wages 15,000.00 30,000.00
Dearness Allowance (DA) (50% of Basic Wages) 7,500.00 15,000.00
Overtime Wages (Refer to Working Note 1) 4,500.00 ----
Gross Wages earned 27,000.00 45,000.00
Less: Provident Fund (7% × ₹ 15,000); (7.5% × ₹ (1,050.00) (2,250.00)
30,000)
Less: ESI (2% × ₹ 15,000); (2% × ₹ 30,000) (300.00) (600.00)
Net Wages paid 25,650.00 42,150.00

Calculation of ordinary wage rate per hour of Worker ‘R’ and ‘S’

R (₹) S (₹)
Gross Wages (Basic Wages + DA) 22,500.00 45,000.00
(excluding overtime)
Employer’s contribution to P.F. and E.S.I. 1,350.00 2,850.00
23,850.00 47,850.00
Ordinary wages Labour Rate per hour 119.25 239.25
(₹ 23,850 ÷ 200 hours); (₹ 47,850 ÷ 200 hours)

(ii) Statement Showing Allocation of workers cost to each Job

Total Jobs
Wages A B C
Worker R
Ordinary Wages (15:2:3) 23,850.00 17,887.50 2,385.00 3577.50
Overtime 4500.00 4500.00 - --
Worker S
Ordinary Wages (2:1:2) 47,850.00 19,140.00 9,570.00 19,140.00
76,200.00 41,527.50 11,955.00 22,717.50

Working Note:

Normal Wages are considered as basic wages.

Over time = 2 x (Basic wage + D.A.) x 20 hours
200 hours
= 2 x ₹22,500 x 20hours
200

= ₹ 4,500

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Nov 18 Q5(b)(i)
Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) ₹ 30,000
(ii) Bonus 25% of salary
(iii) Employer's contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees' welfare activities ₹ 6,61,500 per annum
(v) Total leave permitted during the year 30 days
(v) No. of employees 175
(vii) Normal idle time 70 hours per annum
(viii) Abnormal idle time (due to failure of power 50 hours
supply)
(ix) Working days per annum 310 days of 8 hours
You are required to calculate:
1. Annual cost of each employee
2. Employee cost per hour
Cost of abnormal idle time, per employee

Solution 1 .

Annual cost of each employee ₹.

1. Salary (30,000×12) 3,60,000
2. Bonus (25% of Salary) 90,000
3. Employees Contribution to PF (15% of Salary) 54,000
4. Employers welfare (661500/175) 3,780
Total Annual Cost 5,07,780
2.
Effective Working hours (310 days × 8 hours) 2480 hours
Less: Leave days (30 days × 8 hours) 240 hours*
Available Working hours 2240 hours
Less: Normal Loss @ 70 hours
2170 hours
Employee cost per hour 507780 = ₹ 234
2170
*It is assumed 310 working days are without taking leave permitted into consideration
3. Cost of abnormal idle time per employee = ₹ 234× 50 hours= ₹ 11700 Alternative
solution for Part (2) and (3)

(2) Calculation of Employee cost per hour:

Working hours per annum 2,480 *
Less: Normal Idle time hours 70
Effective hours 2,410
Employee cost 5,07,780
Employee cost per hour 210.70
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 Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

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

(3) Cost of Abnormal idle time per employee:

Abnormal Idle time hours 50

Employee cost per hour 210.70
Cost of Abnormal idle time (210.70 ×50) 10,534.85

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (Practice Manual Old Cource Q25)

An article passes through five hand operations as follows:
Operation Time per article Grade of Wage rate per hour
No. worker (₹)
1 15 minutes A 0.65
2 25 minutes B 0.50
3 10 minutes C 0.40
4 30 minutes D 0.35
5 20 minutes E 0.30
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a
statement showing for each operation and in total the number of operations required, the labour
cost per dozen and the total labour cost per week to produce the total targeted output.
Solution:
Statement of number of operators required and labour cost per dozen and per week. Production
target is 600 dozen or 7,200 article per week.
Operation No.
Particulars Total
1 2 3 4 5
Time per article(minutes) 15 25 10 30 20

Total time in hours for

1,800 3,000 1,200 3,600 2,400
production. of 600 (120 × (120 × (120 × (120 × (120 ×
dozen 600doz. x 12 = 120 15min.) 25 min.) 10 min.) 30 min.) 20 min.)
60 min.
No. of operators 45 75 30 90 60 300
Total time
40hours
Labour cost per dozen (₹) 8.55
Total time x Rate per hour 1.95 2.50 0.80 2.10 1.20
600dozen
Labour cost per week (₹) (Cost
per doz. × 600 doz.) 1,170 1,500 480 1,260 720 5,130

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Question-2 (Practice Manual Old Cource Q26)

Arnav Limited manufactures and sales plastic chairs. It pays wages under the differential piece rate
system by following F.W. Taylor’s System with a standard piece rate of ₹ 12.50 per unit of chair
produced by the workers. Standard production per hour is 4 chairs. Each worker is supposed to work
8 hours a day from Monday to Friday and 5 hours on Saturday. Presently, there are 118 workers who
are entitled for this plan.
The plant and machinery used to manufacture the chairs was purchased long back and does not match
with the efficiency of the workers. Workers appraised their concerns to the management and
demanded wages on the time rate basis i.e. ₹ 50 per hour and the incentive under the Halsey Premium
plan.
The following production estimates has been made for the month of November, 2015 under the three
scenarios:
Scenario Worst case Optimal case Best case
Production (in units) 42,400 84,960 1,27,400
Required:
(a) Calculate total wages and average wages per worker per month, under the each scenario, when
(i) Current system of wages and incentive payment system is followed
(ii) Workers’ demand for time rate wages and Halsey premium plan is accepted.

(b) Mr. K, during the month of October 2015, has produced 1,050 units. What will be impact on his
earning if he will be able to produce the same number of units in next month also. Should he
support the workers’ demand?
(Take 4 working weeks in a month)
Solution:
(a) Calculation of Total wages and average wages per worker per month.
(i) When Current system of wages and incentive payment system is followed:

Worst case Optimal case Best case

I Standard Production (in units) 84,960 84,960 84,960
(45 hours × 4 units × 4 weeks × 118
workers)
II No. of units to be produced 42,400 84,960 1,27,400
III Efficiency {(II ÷ I) × 100} 49.91% 100% 149.95%
IV Differential piece rate* ₹10 ₹15 ₹15
(₹12.5× 0.8) (₹12.5 × 1.2) (₹12.5 × 1.2)
V Total Wages (II × IV) ₹4,24,000 ₹12,74,400 ₹19,11,000
VI Average wages per worker(V ÷ ₹3,593.22 ₹10,800 ₹16,194.92
118)
*For efficiency less than 100%, 83% of piece rate and for efficiency more than or equals to
100%, 125% of piece rate may also be taken.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(ii) When workers’ demand for time rate wages and Halsey premium plan is accepted:

Worst case Optimal case Best case

I No. of units expected to be produced 42,400 84,960 1,27,400
(units)
II Standard no. units in an hour (units) 4 4 4
III Standard Hours (I ÷ II) 10,600 21,240 31,850
IV Expected working hours 21,240 21,240 21,240
(45 hours × 4 weeks × 118 workers)
V Hours to be saved (III – IV) -- -- 10,610
VI Time wages (IV × ₹50) ₹10,62,000 ₹10,62,000 ₹10,62,000
VII Incentive under Halsey Premium Plan -- -- ₹2,65,250
1 x Time saved x ₹ 50
2
VIII Total Wages (VI +VII) ₹10,62,000 ₹10,62,000 ₹13,27,250
IX Average wages per worker (VIII ÷ ₹9,000 ₹9,000 ₹11,247.88
118)

(b) Calculation of gain or loss in the current monthly income of Mr. K:

Wages earned in October 2015:

Standard production unit (45 hours × 4 weeks × 4 units) 720 units
No. of units produced 1,050 units
Efficiency 145.83%
Differential piece rate (refer the above part) ₹15
I Total wages (1,050 units × ₹15) ₹15,750
Expected wages under the new scheme
Standard hours (1,050 units ÷ 4 units) 262.50 hours
Expected hours to be taken 180 hours
(45 hours × 4 weeks)
Time saved 82.50 hours
Time wages (180 hours × ₹50) ₹9,000
Incentive 1 x Time saved x ₹ 50 ₹2,062.50
2
II Total expected wages ₹11,062.50
Loss from the proposed scheme (II – I) ₹4,687.50

Supporting the demand of colleague workers will cost ₹4,687.50 in the next month
to Mr. K.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Question-3 (RTP Nov 20 Old Cource)

GZ Ld. pays the following to a skilled worker engaged in production works. The following are the
employee benefits paid to the employee:
(a) Basic salary per day ₹1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance ₹50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA),
only if works more than 9 hours a day otherwise noovertime
allowance. If works for more than 9 hours a day then
overtime is considered after 8th hours.
(f) Work of holiday and Sunday Double of per day basic rate provided works atleast 4 hours.
The holiday and Sunday basic is eligible for all allowances
and statutory deductions.
(h) Earned leave & Casual leave These are paid leave.

(h) Employer’s contribution 12% of basic and DA

to Provident fund

(i) Employer’s contribution 7% of basic and DA

to Pension fund

The company normally works 8-hour a day and 26-day in a month. The company provides 30
minutes lunch break in between.
During the month of August 2020, Mr.Z works for 23 days including 15th August and a Sunday
and applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours
respectively without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively.
During the month Mr. Z worked for 100 hours on Job no.HT200.
You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr.Z.
(iii) Wages to be charged to Job no.HT200.

Solution:
Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours

2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(i) Calculation of earnings per day

Particulars Amount (₹)
Basic salary (₹1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House rent allowance (16% of basic salary) 4,160
Employer’s contribution to Provident fund (12% × ₹31,200) 3,744
Employer’s contribution to Pension fund (7% × ₹31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638

(ii) Calculation of effective wage rate per hour of Mr. Z:

Particulars Amount (₹)
Basic salary (₹1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (₹1,000 × 2 days) 2,000
Dearness allowance (20% of basic salary) 5,600
33,600
House rent allowance (16% of basic salary) 4,480
Transport allowance (₹50 × 23 days) 1,150
Overtime allowance (₹160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × ₹33,600) 4,032
Employer’s contribution to Pension fund (7% × ₹33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248

*(Daily Basic + DA) ÷ 7.5 hours

= (1,000+200) ÷ 7.5 = ₹ 160 per hour

(iii) Calculation of wages to be charged to Job no. HT200

= ₹248 × 100 hours = ₹ 24,800

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 Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

2. INCENTIVE SCHEME
A. QUESTION FROM STUDY MATERIAL
Study Material - ILLUSTRATION 7
CALCULATE the earnings of a worker under Rowan System and Halsey
System. The relevant data is given as below:

Time rate (per Hour) ₹ 60

Time allowed 8 hours.

Time taken 6 hours.

Time saved 2 hours.
Hints: ₹420, ₹450

Study Material - ILLUSTRATION 8

Two workmen, ‘A’ and ‘B’, produce the same product using the same
material. Their normal wage rate is also the same. ‘A’ is paid bonus
according to the Rowan system, while ‘B’ is paid bonus according to the
Halsey system. The time allowed to make the product is 50 hours. ‘A’ takes
30 hours while ‘B’ takes 40 hours to complete the product. The factory
overhead rate is ₹ 5 per man-hour actually worked. The factory cost for the
product for ‘A’ is ₹ 3,490 and for ‘B’ it is ₹ 3,600.
Required:
(a) Compute the normal rate of wages;
(b) Compute the cost of materials cost;
(c) Prepare a statement comparing the factory cost of the products as
made by the two workmen.
Hints: Wage rate = ₹20, Factory cost: A = ₹3,490, B = ₹3,600

Study Material - ILLUSTRATION 9

(a) Bonus paid under the Halsey Plan with bonus at 50% for the time saved
equals the bonus paid under the Rowan System. When will this statement
hold good? (Your answer should contain the proof).

(b) The time allowed for a job is 8 hours. The hourly rate is ₹ 8. Prepare a statement
showing:
i. The bonus earned
ii. The total earnings of employee and
iii. Hourly earnings.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Under the Halsey System with 50% bonus for time saved and Rowan
System for each hour saved progressively.
Hints: When Actual Hour is 50% of standard hours

Study Material - ILLUSTRATION 10

A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ₹ 30 per hour.
The standard time per unit for a particular product is 4 hours. Mr. P, a machine
man, has been paid wages under the Rowan Incentive Plan and he had earned
an effective hourly rate of ₹ 37.50 on the manufacture of that particular
product.
State what could have been his total earnings and effective hourly rate, had he
been put on Halsey Incentive Scheme (50%)?
Hints: Effective hours rate = ₹35

Study Material - ILLUSTRATION 11

A factory having the latest sophisticated machines wants to introduce an
incentive scheme for its workers, keeping in view the following:
(i) The entire gains of improved production should not go to the workers.
(ii) In the name of speed, quality should not suffer.
(iii) The rate setting department being newly established are liable to commit mistakes.
You are required to PREPARE a suitable incentive scheme and
DEMONSTRATE by an illustrative numerical example how your scheme
answers to all the requirements of the management.

TEST YOUR KNOWLEDGE

Question 1
Mr. A. is working by employing 10 skilled workers. He is considering the
introduction of some incentive scheme - either Halsey Scheme (with 50% bonus) or
Rowan Scheme - of wage payment for increasing the Employee productivity to cope
with the increased demand for the product by 25%. He feels that if the proposed incentive
scheme could bring about an average 20% increase over the present earnings of the
workers, it could act as sufficient incentive for them to produce more and he has
accordingly given this assurance to the workers.
As a result of the assurance, the increase in productivity has been observed as
revealed by the following figures for the current month:

Hourly rate of wages (guaranteed) ₹40

Average time for producing 1 piece by one worker at the previous 2 hours
performance (This may be taken as time allowed)
No. of working days in the month 25
No. of working hours per day for each worker 8
Actual production during the month 1,250 units
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 Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Required:
(i) Calculate effective rate of earnings per hour under Halsey Scheme
and Rowan Scheme.
(ii) Calculate the savings to Mr. A in terms of direct labour cost per
piece under the schemes.
Hints:
(i) Halsey = ₹45, Rowan = ₹48
(ii) Halsey = ₹80, Rowan = ₹8
Question 2
Wage negotiations are going on with the recognised employees’ union, and the management wants you as an
executive of the company to formulate an incentive scheme with a view to increase productivity.
The case of three typical workers A, B and C who produce respectively 180, 120 and 100 units of the company’s
product in a normal day of 8 hours is taken up for study.
Assuming that day wages would be guaranteed at ₹ 75 per hour and the piece rate would be based on a standard
hourly output of 10 units, Calculate the earnings of each of the three workers and the employee cost per 100
pieces under (i) Day Wages, (ii) Piece rate, (iii) Halsey scheme, (iv) Rowan Scheme.
Also calculate under the above schemes the average cost of labour for the company to produce 100 pieces.
Hints:
Plan Average Labour Cost (100 Pieces)
Day Wages ₹450
Piece Rate ₹750
Halsey ₹600
Rowan ₹613.25

B. PAST YEAR QUESTION

May 23 Q1(b)
SMC Company Limited is producing a particular design of toys under the following
existing incentive system:
Normal working hours in the week 48 hours
Late shift hours in the week 12 hours
Rate of payment Normal working: ₹ 150 per hour
Late shift: ₹ 300 per hour
Average output per operator for 60 hours per week (including late shift hours): 80 toys.
The company's management has now decided to implement a system of labour cost
payment with either the Rowan Premium Plan or the Halsey Premium Plan in order to
increase output, eliminate late shift overtime, and reduce the labour cost.
The following information is obtained:
The standard time allotted for ten toys is seven and half hours.
Time rate: ₹ 150 per hour (as usual).
Assuming that the operator works for 48-hours in a week and produces 100 toys, you are
required to calculate the weekly earnings for one operator under-
(i) The existing Time Rate,

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(ii) Rowan Premium Plan and,

(iii) Halsey Premium Plan (50%).
Solution:
Working Notes:
(1) Effective rate per hour:
Incentive for 60 hours = (₹ 150 × 48 hours + ₹ 300 × 12 hours)
= 7,200 + 3,600 = ₹ 10,800
= ₹ 10,800 ÷ 60 hours = ₹ 180 per hour

(2) Time taken/ Allowed to produce 100 toys:

= (60 hours ÷ 80 toys) × 100 toys = 75 hours

(3) Time saved = Time Allowed – Time Taken

= 75 hours – 48 hours = 27 hours

(i) Calculation of weekly earnings for one operator under the existing time
rate:
= (48 hours x ₹ 150) + (12 hours x ₹ 300) = ₹ 10,800 Alternative solution
= Effective rate per hour (WN-1) × Time required for 100 toys (WN-2)
= ₹ 180 × 75 hours = ₹ 13,500
(ii) Calculation of weekly earnings for one operator under Rowan Premium
plan:
(Time taken × Rate per hour) + (Time Saved/ Time Allowed × Time taken
× Rate per hour)
= (48 hours × ₹ 150) + [(27 ÷ 75) × 48 × ₹ 150]
= 7,200 + 2,592 = ₹ 9,792
(iii) Calculation of weekly earnings for one operator under Halsey Premium
plan:
(Time taken × Rate per hour) + (50% of Time Saved × Rate per hour)
= (48 hours × ₹ 150) + (50% of 27 hours × ₹ 150)
= ₹ 7,200 + ₹ 2,025 = ₹ 9,225
Nov 22 Q2(b)
A skilled worker, in PK Ltd., is paid a guaranteed wage rate of ₹ 15.00 per hour in a 48- hour week. The
standard time to produce a unit is 18 minutes. During a week, a skilled worker -Mr. ‘A’ has produced 200
units of the product. The Company has taken a drive for cost reduction and wants to reduce its labour cost.
You are required to:
(i) Calculate wages of Mr. ‘A’ under each of the following methods:
(A) Time rate,
(B) Piece -rete with a guaranteed weekly wage,
(C) Halsey Premium Plan
(D) Rowan Premium Plan
(ii) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium Plan, the company should
follow.

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Solution:
(i) Calculation of wages of Mr. ‘A’ under different wage schemes:
A. Time rate
Wages = Time Worked × Rate for the time
= 48 hours x ₹ 15
= ₹ 720
B. Piece rate with a guaranteed weekly wage
Wages = Number of units produced × Rate per unit
= 200 units x ₹ 4.50*
= ₹ 900
*(₹ 15 / 60 minutes) x 18 minutes = ₹ 4.50
C. Halsey Premium Plan
Wages = Time taken × Time rate + 50% of time saved × Time rate
Wages = Time taken × Time rate + 50% (Standard time – Actual time) ×
Time
rate
= (48 hours x ₹ 15) + 50% of (60 hours# – 48 hours) x ₹ 15
= ₹ 720 + ₹ 90
= ₹ 810
#(200 units x 18 minutes) / 60 minutes = 60 hours
D. Rowan Premium Plan
Wages = Time taken × Rate per hour + Time Saved x time taken x Rate per hour
Time Allowed
= (48 hours x ₹ 15) + (60 – 48 hours x 48 hours x ₹15)
60 hours
= ₹ 720 + ₹ 144
= ₹ 864
(ii) The company may follow Halsey Premium Plan over Rowan Premium Bonus Plan as
the total wages paid is lower than that of Rowan Premium Bonus Plan.

Dec 21 Q1(c)
A skilled worker is paid a guaranteed wage rate of ₹ 150 per hour. The standard time allowed for a job is
10 hours. He took 8 hours to complete the job. He has been paid the wages under Rowan Incentive Plan.
You are required to:
(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under Halsey
Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings.

Solution:
(i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Time taken = 8 hours; Time saved = 2 hours
Standard time allowed = 10 hours

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Particulars Amount (₹)

A Basic guaranteed wages (₹150×8 hours) 1,200

B Add: Bonus for time saved (2 × 8 × ₹ 150) 240
10
C Total earnings (A+B) 1,440
D Hours worked 8 hours
E Effective hourly rate (C÷D) 180

(ii) Let the time taken to complete the job is “T” and the time saved is 10-T

Effective hourly rate under the Halsey Incentive scheme

= (Rate × Hours Worked) + (Rate × 50% of Time Saved) = ₹180

Hours Worked
= (₹150 × T) + ₹150 × 50% (10 - T) = ₹ 180
T
150T + 750 -75T = 180T
180T-75T = 750
T = 750 = 7.14 hours
105

Jan 21 Q2(a)
Z Ltd is working by employing 50 skilled workers. It is considering the introduction of an incentive scheme
- either Halsey Scheme (with 50% Bonus) or Rowan Scheme - of wage payment for increasing the labour
productivity to adjust with the increasing demand for its products by 40%. The company feels that if the
proposed incentive scheme could bring about an average 20% increase over the present earnings of the
workers, it could act as sufficient incentive for them to produce more and the company has accordingly
given assurance to the workers.
Because of this assurance, an increase in productivity has been observed as revealed by the figures for the
month of April, 2020:
Hourly rate of wages (guaranteed) ₹ 50
Average time for producing one unit by one worker at the previous 1.975 hours
performance (this may be taken as time allowed)
Number of working days in a month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective increase in earnings of workers in percentage terms under Halsey and Rowan
scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its assurance of incentivising
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workers and also to adjust with the increase in demand.

Solution:
Working Notes:
1. Total time wages of 50 workers per month:
= No. of working days in the month × No. of working hours per day of each worker
× Hourly rate of wages × No. of workers
= 24 days × 8 hrs. × ₹ 50 × 50 workers = ₹ 4,80,000
2. Time saved per month:
Time allowed per unit to a worker 1.975 hours
No. of units produced during the month by 50 workers 6,120 units
Total time allowed to produce 6,120 units (6,120 × 1.975 hrs) 12,087 hours
Actual time taken to produce 6,120 units (24 days × 8 hrs. × 50 workers) 9,600
hours
Time saved (12,087 hours – 9,600 hours) 2,487 hours
3. Bonus under Halsey scheme to be paid to 50 workers:
Bonus = (50% of time saved) × hourly rate of wages
= 50/100 × 2,487 hours × ₹ 50 = ₹ 62,175
Total wages to be paid to 50 workers are (₹ 4,80,000 + ₹ 62,175) ₹ 5,42,175, if Z Ltd.
considers the introduction of Halsey Incentive Scheme to increase the worker productivity.
4. Bonus under Rowan Scheme to be paid to 50 workers:
Bonus = Time Taken × Time saved × hourly rate
Time allowed
= 9,600 hours × 2,487 hours × ₹ 50 = ₹ 98,764
12,087 hours
Total wages to be paid to 50 workers are (₹ 4,80,000 + ₹ 98,764) ₹ 5,78,764, if Z Ltd.
considers the introduction of Rowan Incentive Scheme to increase the worker productivity.
(i) (a) Effective hourly rate of earnings under Halsey scheme:
(Refer to Working Notes 1, 2 and 3)

Total time wages of 50 workers + Total bonus under Halsey scheme

=
Total hours worked
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₹ 4,80,000 + ₹ 62,175
= = ₹ 56.48
9,600 hours

Effective increase in earnings of worker (in %) = ₹ 56.48 - ₹ 50 x 100 = 2.96%

₹ 50

(b) Effective hourly rate of earnings under Rowan scheme:

(Refer to Working Notes 1, 2 and 4)
Total time wages of 50 workers + Total bonus under Rowan scheme
=
Total hours worked
₹ 4,80,000 + ₹ 96,875
= = ₹ 60.29
9,600 hours

Effective increase in earnings of worker (in %) = ₹ 60.29 - ₹ 50 x 100 = 20.58%

₹ 50

(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme:
(Refer to Working Note 3)

Labour cost per unit (under time wage scheme)

= 1.975 hours × ₹ 50 = ₹ 98.75

Labour cost per unit (under Halsey scheme)

Total wages paid under the scheme = ₹ 5,42,175 = ₹88.60

Total number of units produced 6,120

(b) Saving in terms of direct worker cost per unit under Rowan Scheme:
(Refer to Working Note 4)

Labour cost per unit under Rowan scheme = ₹ 5,78,764/6,120 units = ₹ 94.57
Saving per unit = ₹ 98.75 – ₹ 94.57 = ₹ 4.18

(iii) Calculation of Productivity:

Normal Production Hours worked/Unit per Hour (9,600/1.975) 4,861

Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal production 25.9%

Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings
of workers. This would increase productivity by 25.9% only. It will not adjust with the increase
in demand by 40%.
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Nov 19 Q4(a)
Zico Ltd. Has its factory at two location viz Nasik and Satara. Rowan plan is used at Nasik factory and
Hasley Plan is used at Satara factory. Standard time and basic rate of wages are same for a job which is
similar and is carried out on similar machinery. Normal working hours is 8 hours per day for 5 day week.
Job in Nasik factory is completed in 32 hours while at Satara factory it has taken 30 hours. Conversion
costs at Nasik and Satara are ₹ 5408 and ₹ 4950. Overheads account for ₹ 25 per hours
Required :
(i) To find out normal wage rate; and
(ii) To compare the respective conversion cost
Solution:
(i) Let, normal wage rate be ₹x/hr
Nasik Satara
S.H. 40 40
A.H. 32 30
8 10

Total wages :
1. At Nasik = (32.x + 8.x.32/40)
= 38.4x
Labour + overhead = conversion cost
38.4x + 800 = 5408 ………………………………….(1)

2. At Satara = (30.x + 10.x . 50%)

= 35x
35x + 750 = 4950 ……………………………………(2)

Solving Equation (1) and (2)

We get,
X = ₹120
(ii) Comparision of conversion cost
Nasik Satara
Wages 38.4 x 120 35 x 120
₹4608 ₹4200
Overheads ₹800 ₹750
₹5408 ₹4950

May 19 Q1(b)
M/s Zeba Private Limited allotted a standard time of 40 hours for a job and the rate per hour is ₹ 75.
The actual time taken by a worker is 30 hours.
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You are required to calculate the total earnings under the following plans:
(i) Halsey Premium Plan (Rate 50%)
(ii) Rowan Plan
(iii) Time Wage System
(iv) Piece Rate System
(v) Emerson Plan
Solution
1. Halsey Premium plan
= ( time taken × Rate per hour ) + ( ½ × Time saved × Rate per hour )
= (30 hours × ₹75 ) + (½ × 10 hours × ₹ 75 ) = ₹2,250 + ₹375 = ₹2,625
2. Rowan Premium plan:
= ( time taken × Rate per hour ) + ( Time saved × Time taken × Rate per hour )
Time allowed
= (30 hours × ₹75) +(10 ×30×₹75)
40
= ₹2,250 + ₹562.5 = ₹2,812.5 or ₹2,813

3. Time wage system:

= Time taken × Rate per hour
= 30 × ₹ 75 = ₹ 2,250
4. Piece Rate System:
= Std. Time × Rate per hour
= 40 × ₹ 75 = ₹ 3,000
5. Emerson plan:
Efficiency level = 40/30 = 133.33%
Time taken × (120% + 33.33%) of Rate
= 30 hours × 153.33% of ₹ 75
= ₹ 3,450

May 18 Q1(b)
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours.
His wage rate is ₹ 5 per hour. Following additional information are also available:
Material cost of work ₹ 50
Factory overheads 100% of wages
Calculate the factory cost of work under the following methods of wage payments:
(i) Rowan Plan
(ii) Halsey Plan
Solution
₹
(i) Rowan Plan : Normal time wage = 15 hours @ ₹ 5= 75
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Bonus = Time saved /Time allowed × (Time taken × Time rate)

5
= × (15× 5) =
20 18.75
93.75
(ii) Halsey Plan: Normal time wage = 15 hours @ ₹ 5 =
75
Bonus = 50% of (Time saved x Time rate) = 50% of (5x5) = 12.5
87.5
Statement of Comparative Factory cost of work

Rowan Plan Halsey Plan

₹ ₹
Materials 50 50
Direct Wages 93.75 87.5
Prime Cost 143.75 137.5
Factory Overhead (100% of Direct 93.75 87.5
wages)
Factory Cost 237.5 225

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A Company is undecided as to what kind of wage scheme should be introduced.
The following particulars have been compiled in respect of three systems, which
are under consideration of the management.
Workers
A B C
Actual hours worked in a week 38 40 34
Hourly rate of wages ₹6 ₹5 ₹ 7.20
Production in units
Product- P 21 - 60
Product- Q 36 - 135
Product -R 46 25 -
Standard time allowed per unit of each product is:
P Q R
Minutes
12 18 30

For the purpose of piece rate, each minute is valued at ₹ 0.10 You are required to
calculate the wages of each worker under:
1) Guaranteed hourly rates basis
2) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed
hourly rate) if his earnings are less than 50% of basic pay.

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3) Premium bonus basis where the worker receives bonus based on Rowan
scheme.
Solution:
(1) Computation of wages of each worker under guaranteed hourly rate basis:
Workers Actual hours worked in a Hourly rate of Wages
week wages (₹) (₹)
(a) (b) (c) (d) = (b) × (c)
A 38 6.00 228.00
B 40 5.00 200.00
C 34 7.20 244.80

(2) Computation of wages of each worker under piece work earnings basis:
Worker A Worker B Worker C
Product Rate Units Wages Units Wages Units Wages
per unit (₹) (₹) (₹)
(a) (b) (c)(d= b*c) (e) (f = b*e) (g) (h=b*g)
P 1.20 21 25.20 - - 60 72
Q 1.80 36 64.80 - - 135 243
R 3.00 46 138.00 25 75 - -
228.00 75.00 315.00
Since each worker has been guaranteed at 75% of basic pay, if his earnings are less than
50% of basic pay (guaranteed hourly rate), therefore, earning of the workers will be as
follows Workers A and C will be paid the wages as computed viz., ₹ 228 and ₹ 315
respectively. The computed earnings under piece rate basis for worker B is ₹ 75 which is
less than 50% of basic pay i.e., ₹ 100 (₹ 200 × 50) therefore he would be paid ₹ 150 i.e. 75%
× ₹ 200 .
Working Notes:
1. Piece rate / per unit
Product Standard time per Piece rate each Piece rate per
unit in minutes minute (₹) unit
(₹)
(a) (b) (c) (d) = (b) × (c)
P 12 0.10 1.20
Q 18 0.10 1.80
R 30 0.10 3.00
2. Time allowed to each worker
Worker A = (21 units × 12 minutes) + (36 units × 18 minutes) + (46 units × 30 minutes)
= 2,280 minutes or 38 hours
Worker B = 25 units × 30 minutes
= 750 minutes or 12.5 hours
Worker C = (60 units × 12 minutes) + (135 units × 18 minutes)
= 3,150 minutes or 52.5 hours
3. Computation of wages of each worker under Premium bonus basis (where each
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worker receives bonus based on Rowan Scheme)

Workers Time Time Time Wage Earnings Bonus Total of

allowed taken saved rate/hour earning &
hours hours hours bonus
(₹) (₹) (₹) (₹)
A 38.00 38.00 - 6.00 228.00 - 228.00
B 12.50 40.00 - 5.00 200.00 - 200.00
C 52.50 34.00 18.50 7.20 244.80 86.26* 331.06

Time saved
*Bonus under Rowan scheme = [ × Time taken × Rate per hour
Time Allowed

= 18.5 hours × 34 hours × ₹ 7.20

52.5 hours
= ₹ 86.26

Question-2
The standard hours of job X is 100 hours. The job has been completed by Amar in 60 hours,
Akbar in 70 hours and Anthony in 95 hours.
The bonus system applicable to the job is as follows:-
Percentage of time saved to time allowed (Slab rate)

Bonus Saving
Upto 10% 10% of time saved
From 11% to 20% 15% of time saved
From 21% to 40% 20% of time saved
From 41% to 100% 25% of time saved
The rate of pay is ₹ 1 per hour, Calculate the total earnings of each worker and also the rate of
earnings per hour.
Solution:
Statement of total earnings and rate of earning per hour

Workers
Amar Akbar Anthony
Standard hours of Job 100 hours 100 hours 100
hours
Time taken on the Jobs (i) 60 hours 70 hours 95 hours
Time saved 40 hours 30 hours 5 hours
Percentage of time saved to time 40 30 5%
allowed % %
Bonus hours (ii) (See Working Note 6.5 hours 4.5 hours 0.5 hours
1)

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Total hours to be paid [(i) + (ii)] 66.5 hours 74.5 hours 95.5 hours
Total earning @ ₹ 1 per hour ₹ 66.5 ₹ 74.5 ₹ 95.5
Rate of earning per hour (See ₹ 1.1083 ₹ 1.0642 ₹ 1.005
Working Note 2)
Note:
1. Bonus hours as percentage of time saved:
Amar : (10 hours × 10%) + (10 hours × 15%) + (20 hours × 20%) = 6.5 hours
Akbar : (10 hours × 10%) + (10 hours × 15%) + (10 hours × = 4.5 hours
20%)
Anthony : 5 hours × 10% = 0.5 hours

2. Rate of Earning per hour = Total earning

Total time taken on job

Amar = ₹ 65.5 = ₹1.1083

60 hours
Akbar = ₹ 74.5 = ₹1.0642
70 hours
Anthony = ₹95.50 = ₹1.005
95 hours
Question-3
The existing Incentive system of Alpha Limited is as under:
Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each
Rate of Payment Day work: ₹ 160 per hour Late shift: ₹ 225 per hour
Average output per operator for 49 hours week i.e. including 3 late shifts – 120 articles
In order to increase output and eliminate overtime, it was decided to switch on to a system of
payment by results. The following information is obtained:
Time-rate (as usual) : ₹ 160 per hour
Basic time allowed for 15 articles : 5 hours
Piece-work rate : Add 20% to basic piece-rate
Premium Bonus : Add 50% to time.
Required:
(i) Prepare a Statement showing hours worked, weekly earnings, number of articles produced
and labour cost per article for one operator under the following systems:
(a) Existing time-rate
(b) Straight piece-work
(c) Rowan system
(d) Halsey premium system
(ii) Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan
Premium system, and Halsey premium system above and worker earns half the time saved
under Halsey premium system.

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Solution:
Table showing Labour Cost per Article

Method of Payment Hours Weekly Number Labour cost

worked earnings of articles per article
(₹) produced (₹)
Existing time rate (WN-1) 49 8,425.00 120 70.21
Straight piece rate system (WN-2) 40 8,640.00 135 64.00
Rowan Premium System (WN-3) 40 9,007.41 135 66.72
Halsey Premium System (WN-4) 40 8,600.00 135 63.70
Working Notes:
1. Existing time rate
Weekly wages:
Normal shift (40 hours × ₹ 160) ₹ 6,400
Late shift (9 hours × ₹ 225) ₹ 2,025
₹ 8,425
2. Piece Rate System
15 articles are produced in 5 hours
Therefore, to produce 135 articles, hours required is 5 hours × 135 articles = 45 hours
15 articles
Cost of producing 135 articles:
At basic time rate (45 hours × ₹160) = ₹7,200
Add: Bonus @ 20% on basic Piece rate
₹ 7,200 × 20%× 135 articles = ₹1,440
135 articles
Earning for the week = ₹8,640

3. Rowan Premium system

(i) Time allowed for producing 135 articles 5 hours × 135 articles × 150% = 67.5 hours
15 articles

(ii) Time taken to produce 135 articles = 40.0 hours

(iii) Time saved = 27.5 hours

Earnings under Rowan Premium system:
= (time taken × Rate per hour) + Time saved × Time taken × Rate per hour
Time allowed
= (40 × ₹160) + 27.5 hours × 40 hours × ₹160 = ₹ 9,007.41
67.5 hours

4. Halsey Premium System

= (time taken × Rate per hour) + (½ × Time saved × Rate per hour)
= (40 hours × ₹160) + ( ½ × 27.5 hours × ₹160) = ₹6,400 + ₹2,200 = ₹8,600
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Question-4
Two workmen, Andrew and Baker, produce the same product using the same material.
Andrew is paid bonus according to Halsey plan, while Baker is paid bonus according to
Rowan plan. The time allowed to manufacture the product is 100 hours. Andrew has taken
60 hours and Baker has taken 80 hours to complete the product. The normal hourly rate of
wages of workman Andrew is ₹ 24 per hour. The total earnings of both the workers are same.
Calculate normal hourly rate of wages of workman Baker.
Solution:
Andrew Baker
Time allowed (Hours) 100 100
Time taken (Hours) 60 80
Time saved (Hours) 40 20
Let the rate of wages of the worker Baker is ‘L’
per hour
Normal Wages ₹ 1,440 ₹ 80 L
(60 hours× (80
₹24) hours× L)
Bonus ₹ 480* ₹ 16 L**
Total earnings ₹ 1,920 ₹ 96 L
* Bonus under Halsey system = ½ x Time saved x Rate per Hour
= ½ x 40 hours x ₹24 = ₹480
**Bonus under Rowan system = Time Saved x Time worked x Rate per hour
Time allowed
= 20 hours x 80 hours x L = 16L
100 hours
According to the problem,
Total earnings of Andrew = Total earnings of Baker
₹ 1,920 = ₹ 96 L
L = ₹ 20
Therefore, Hourly rate of wages of Baker is ₹ 20 per hour.
Question-5
Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is ₹ 50. Because of
the saving in time a worker A gets an effective hourly rate of wages of ₹ 60 under Rowan
premium bonus system. For the same saving in time, calculate the hourly rate of wages a
worker B will get under Halsey premium bonus system assuring 40% to worker.
Solution:
Increase in hourly rate of wages under Rowan Plan is ₹ 10 i.e.(₹ 60 – ₹ 50)
This is equal to Time Saved x Rate per hour (Please refer Working Notes)
Time Allowed
Or, Time Saved x ₹50 = ₹10
Time Allowed
Or, Time Saved x ₹50 = ₹10
90 hours
Therefore, Time Saved = 18 hours and Time Taken is 72 hours i.e. (90 hours – 18 hours)

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Effective Hourly Rate under Halsey System:

Time saved = 18 hours
Bonus @ 40% = 18 hours × 40% × ₹ 50 = ₹ 360
Total Wages = (₹50 × 72 hours + ₹360) = ₹ 3,960
Effective Hourly Rate = ₹ 3,960 ÷ 72 hours = ₹ 55
Working Note:
Time Taken
(Time Taken x Rate per hour) + x Time Saved x Rate per hour
Effective hourly rate = Time Allowed
Time Taken
Time Taken
×Time Saved × Rate per hour
Time Taken × Rate per hour Time Allowed
Or, ₹ 60 = +
Time Taken Time Taken
Time Taken×Rate per hour Time Taken 1
Or, ₹ 60 - = x Time Saved x Rate per hour x
Time Taken Time Allowed Time Taken
Time Saved
Or, ₹ 60 - ₹ 50 = ×₹ 50
Time Allowed

Question-6
You are given the following information of a worker:
(i) Name of worker : Mr. Roger
(ii) Ticket No. : 002
(iii) Work started : 1-4-14 at 8 a.m.
(iv) Work finished : 5-4-14 at 12 noon
(v) Work allotted : Production of 2,160 units
(vi) Work done and approved : 2,000 units
(vii) Time and units allowed : 40 units per hour
(viii) Wage rate : ₹ 25 per hour
(ix) Mr. Roger worked 9 hours a day.
You are required to calculate the remuneration of Mr. Roger on the following basis:
(i) Halsey plan and
(ii) Rowan plan

Solution:
No. of units produced and approved = 2,000 units
Standard time = 40 units per hour
Hourly Wage Rate = ₹ 25
Time Allowed = 2000 units = 50 hours
40 units
Time Taken = (4 days × 9 hours) + 4 hours = 40 hours
Calculation of Remuneration under Halsey Plan:
Standard time allowed for 2,000 units : 50 hours
Actual time taken for 2,000 units: 40 hours
Time saved 10 hours
Basic wages for time taken 40 hours @ ₹ 25 ₹ 1,000
Bonus: 50% of time saved (50 x 10 hours x ₹25) ₹125
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

100
Total remuneration ₹1125

(ii) Calculation of Remuneration under Rowan Plan:

Wages for time taken 40 hours @ ₹ 25 ₹ 1,000
Bonus = Time saved x Time taken x hourly rate
Time allowed
= 10 hours x 40 hours x ₹25 = ₹200
50 hours
Total remuneration = ₹1,200

Question-7
Mr. Michael executes a piece of work in 120 hours as against 150 hours allowed to him. His
hourly rate is ₹ 10 and he gets a dearness allowance @ ₹ 30 per day of 8 hours worked in
addition to his wages. You are required to calculate total wages received by Mr. Michael under
the following incentive schemes:
1. Rowan Premium Plan, and
2. Emerson's Efficiency Plan
Solution:
Time Allowed = 150 hours
Time Taken = 120 hours
Time Saved = 30 hours
(i) Rowan Premium Plan (₹)
Normal wages (₹ 10 x 120 hours) 1,200
D.A. for 15 days i.e. 120 hours (₹30 x 15 days) 450
8 hours
Bonus = Time saved x Time taken x Hourly rate
Time Allowed
= 30 hours x 120 hours x ₹10 240
150 hours
Total Wages 1,890

(ii) Emersion₹s Efficiency Plan

Normal wages (120 hours × ₹ 10) 1,200

D.A. (15 days x ₹ 30) 450
Bonus * = 45% × ₹1,200 540
Total Wages 2,190
*Efficiency = Time Allowed x 100 = 150 x 100 = 125%
Time Taken 120
Rate of Bonus up to 100% = 20%
From 101% to 125% = 25%
45%

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Question-8
The management of a company wants to formulate an incentive plan for the workers with a
view to increase productivity. The following particulars have been extracted from the books of
company:
Piece Wage rate ₹ 10
Weekly working hours 40
Hourly wages rate ₹ 40 (guaranteed)
Standard/normal time per unit 15 minutes. Actual output for a week:
Worker A: 176 pieces
Worker B: 140 pieces
Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate
when output above normal.
Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.

Calculate:
Earning of workers under Halsey’s and Rowan’s premium scheme.

Solution:
Calculation of earnings for workers under different incentive plans:
Halsey’s Premium Plan Worker A Worker B
Actual time taken 40 hours 40 hours

Standard time for actual 44 hours 35 hours

Production (176 pcs x 15 min.) (140 pcs x 15 min.)
60 min 60 min
Minimum Wages ₹1,600 (40 hours x ₹40) ₹1,600 (40 hours x ₹40)
Bonus ₹80 {50% (44-40) x ₹40} No Bonus
Earning ₹1,680 ₹1,600
Rowan’s Premium Plan:
Minimum Wages (as above) ₹1,600 ₹1,600
Bonus 145:45 ₹145.45 No Bonus
(4 hours x 40 hours x ₹40)
44 hours
Earning ₹1,745.45 ₹1,600

Question-9
A skilled worker is paid a guaranteed wage rate of ₹ 120 per hour. The standard time allowed
for a job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan
Incentive Plan.
(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain
the same effective hourly rate of earnings, calculate the time in which he should
complete the job.
Solution:

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(i) Effective hourly rate of earnings under Rowan Incentive Plan Earnings under Rowan
Incentive plan =
(Actual time taken × wage rate) + Time Saved x Time taken × Wage rate
Time Allowed
= (5 hours × ₹120) + (1 hour x 5 hours x ₹120)
6 hours
= ₹ 600 + ₹100 = ₹700
Effective hourly rate = ₹700/5 hours = ₹ 140 /hour

(ii) Let time taken = X

Effective hourly rate = Earnings under Halsay Scheme
Time Taken
Or, Effective hourly rate under Rowan Incentive plan =
(Time taken x Rate) + 50% Rate x (Time allowed - Time taken)
Time Taken
Or, ₹140 (X x ₹120) + 50% ₹120 x (6 - X)
X
Or, 140X = 120X + 360 – 60X
Or, 80X = 360
Or, X = 360/80 = 4.5 hours
Therefore, to earn effective hourly rate of ₹140 under Halsey Incentive Scheme worker
has to complete the work in 4.5 hours.
Question-10 (Practice Manual Old Cource Q8)
The finishing shop of a company employs 60 direct workers. Each worker is paid ₹ 400 as wages
per week of 40 hours. When necessary, overtime is worked up to a maximum of 15 hours per
week per worker at time rate plus one-half as premium. The current output on an average is 6
units per man hour which may be regarded as standard output. If bonus scheme is introduced, it
is expected that the output will increase to 8 units per man hour. The workers will, if necessary,
continue to work overtime up to the specified limit although no premium on incentives will be
paid.
The company is considering introduction of either Halsey Scheme or Rowan Scheme of wages
incentive system. The budgeted weekly output is 19,200 units. The selling price is ₹ 11 per unit
and the direct material cost is ₹ 8 per unit. The variable overheads amount to ₹ 0.50 per direct
labour hour and the fixed overhead is ₹ 9,000 per week.
Prepare a statement to show the effect on the company’s weekly profit of the proposal to
introduce (a) Halsey Scheme, and (b) Rowan Scheme.
Solution:
Working notes:

1. Total available hours per week 2,400

(60 workers × 40 hours)

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

2. Total standard hours required to produce 19,200 units 3,200

(19,200 units ÷ 6 units per hour)

3. Total labour hours required after the 2,400

introduction of bonus scheme to produce 19,200 units
(19,200 units ÷ 8 units per man hour)

4. Time saved in hours 800

(3,200 hours – 2,400 hours)

5. Wage rate per hour (₹ ) 10

(₹ 400 ÷ 40 hours)

6. Bonus:
(i) Halsey Scheme = 1 x Time saved x Wage rate per hour
2
= 1 x 800 hours × ₹ 10 = ₹ 4,000
2
(ii) Rowan Scheme = Time saved x Time taken × Wage rate per hour
Time allowed
= 800 hours × 2,400 hours × ₹ 10 = ₹ 6,000
3,200 hours

Statement showing the effect on the company’s weekly

present profit by the introduction of Halsey & Rowan schemes

Present (₹) Halsey (₹) Rowan (₹)

Sales revenue: (A) 2,11,200 2,11,200 2,11,200
(19,200 units × ₹11)
Direct material cost (19,200 units × ₹ 1,53,600 1,53,600 1,53,600
8)
Direct wages 32,000 24,000 24,000
(Refer to working notes 2 & 3) (3,200 hrs. × ₹10) (2,400 hrs. × ₹10) (2,400 hrs. × ₹10)
Overtime premium 4,000 - -
(800 hrs.× ₹ 5)
Bonus - 4,000 6,000
(Refer to working notes 6 (i) & (ii))
Variable overheads 1,600 1,200 1,200
(3,200 hr.×₹0.50) (2,400 hr.×₹0.50) (2,400 hr.×₹0.50)
Fixed overheads 9,000 9,000 9,000

Total cost : (B) 2,00,200 1,91,800 1,93,800

Profit: {(A)- (B)} 11,000 19,400 17,400

Question-11 (Practice Manual Old Cource Q11)

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

‘Under the Rowan Premium Bonus system, a less efficient worker can obtain same bonus as a
highly efficient worker.’ Discuss with suitable examples.
Solution:
Bonus under Rowan system = Time taken x Time saved × Rate per hour
Time allowed
The statement that under Rowan Premium bonus system, a less efficient worker and a highly
efficient worker can obtain same amount of bonus, can be proved with the help of an example.
Let time allowed for a job is 4 hours and Labour rate per hour is ₹ 5.

Case I : Less efficient worker, If time taken = 3 hours.

Bonus = 3 hours x 1hour x ₹ 5 = ₹ 3.75
4 hours

Case II : Highly efficient worker, If time taken = 1 hour

Bonus = 1 hour x 3 hours x ₹ 5 = ₹ 3.75
4 hours

So, it can be concluded that under Rowan System, the less efficient worker and highly efficient
worker can get the same bonus.

Question-12 (Practice Manual Old Cource Q22)

Jigyasa Boutiques LLP. (JBL) takes contract on job works basis. It works for various fashion
houses and retail stores. It has employed 26 workers and pays them on time rate basis. On an
average an employee is allowed 2 hours for boutique work on a piece of garment. In the month
of March 2014, two workers Margaret and Jennifer were given 30 pieces and 42 pieces of
garments respectively for boutique work. The following are the details of their work:
Margaret Jennifer
Work assigned 30 pcs. 42 pcs.
Time taken 28 hours 40 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is ₹ 50 per hour. As
per the new wages agreement the workers will be paid ₹ 55 per hour w.e.f. 1st April 2014. At
the end of the month March 2014, the accountant of the company has calculated wages to these
two workers taking ₹ 55 per hour.
(i) From the above information calculate the amount of loss that the company has incurred
due to incorrect rate selection.
(ii) What would be the loss incurred by the JBL due to incorrect rate selection if it had
followed Rowan scheme of bonus payment.
(iii) Amount that could have been saved if Rowan scheme of bonus payment was followed.
(iv) Do you think Rowan scheme of bonus payment is suitable for JBL?
Solution:
Margaret Jennifer
No. of garments assigned (Pieces.) 30 42
Hour allowed per piece (Hours) 2 2
Total hours allowed (Hours) 60 84
Hours Taken (Hours) 28 40
Hours Saved (Hours) 32 44

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

i. Calculation of loss incurred due to incorrect rate selection.

(While calculating loss only excess rate per hour has been taken)

Margaret Jennifer Total

(₹) (₹) (₹)
Basic Wages 140 200 340
(28 Hrs. × ₹ 5) (40 Hrs. × ₹ 5)
Bonus (as per Halsey Scheme) 80 110 190
(50% of Time Saved × Excess Rate) (50% of 32 Hrs. × ₹ 5) (50% of 44 Hrs. × ₹ 5)
Excess Wages Paid 220 310 530

ii. Amount of loss if Rowan scheme of bonus payment were followed

Margaret (₹) Jennifer (₹) Total (₹)
Basic Wages 140.00 200.00 340.00
(28 Hrs. × ₹ 5) (40 Hrs. × ₹ 5)
Bonus (as per Rowan Scheme) 74.67 104.76 179.43
Time taken x Time saved × Excess Rate (28 x 32 x (40 x 44 x ₹5)
Time allowed ₹5) 84
60
Excess Wages Paid 214.67 304.76 519.43
iii. Calculation of amount that could have been saved if Rowan Scheme were followed
Margaret Jennifer (₹) Total (₹)
(₹)
Wages paid under Halsey Scheme 220.00 310.00 530.00
Wages paid under Rowan Scheme 214.67 304.76 519.43
Difference (Savings) 5.33 5.24 10.57

iv. Rowan Scheme of incentive payment has the following benefits, which is suitable with the
nature of business in which Jigyasa Boutique LLP operates:
a. Under Rowan Scheme of bonus payment, workers cannot increase their earnings or bonus
by merely increasing its work speed. Bonus under Rowan Scheme is maximum when the
time taken by a worker on a job is half of the time allowed. As this fact is known to the
workers, therefore, they work at such a speed which helps them to maintain the quality of
output too.
b. If the rate setting department commits any mistake in setting standards for time to be taken
to complete the works, the loss incurred will be relatively low.

Question-13 (Jan 21 Old Course Q6 (a))

The standard time allowed for a certain piece of work is 300 hours. Normal wages is ₹ 60 per
hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab rate) Bonus

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

(i) Up to the first 20% of time allowed 25% of the corresponding

saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding
saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding
saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding
saving in time.
Calculate the total earnings of a worker over the piece of work and his earnings per hour when
he takes.
(a) 320 hours,
(b) 150 hours, and
(c) 30 hours respectively.
Solution:
Calculation of total earnings and earnings per hour:
Particulars (a) Time (b) Time (c) Time
taken is 320 taken is 150 taken is 30
hours hours hours
A. Time Allowed 300 hours 300 hours 300 hours
B. Time taken 320 hours 150 hours 30 hours
C. Time Saved (A-B) Nil 150 hours 270 hours
D. Bonus hours Nil 51 hours 81 hours
(Refer the workings)
E. Hours to be paid (B+D) 320 hours 201 hours 111 hours
F. Wages rate per hour ₹ 60 ₹ 60 ₹ 60
G. Total earnings (E×F) ₹ 19,200 ₹ 12,060 ₹ 6,660
H. Earnings per hour (G÷B) ₹ 60 ₹ 80.40 ₹ 222

Workings:

Calculation of bonus hours:

Time saved 150 Time saved 270
hours hours
For first 20% of time allowed i.e. 60 hours 15 15
(25% of 60 hours) (25% of 60 hours)
For next 30% of time allowed i..e. 90 hours 36 36
(40% of 90 hours) (40% of 90 hours)
For next 30% of time allowed i..e. 90 hours - 27
(30% of 90 hours)
For next 20% of time allowed i..e. 60 hours - 3
(10% of 30 hours)
Bonus hours 51 81

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Question-14 (May 21 Old Course RTP)

JBL Sisters operates a boutique which works for various fashion houses and retail stores. It has
employed 26 workers and pays them on time rate basis. On an average an employee is allowed
8 hours for boutique work on a piece of garment. In the month of December 2020, two workers
M and J were given 15 pieces and 21 pieces of garments respectively for boutique work. The
following are the details of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is ₹ 60 per hour. As
per the new wages agreement, the workers will be paid ₹ 72 per hour w.e.f. 1st January 2021.
At the end of the month December 2020, the accountant of the company has wrongly calculated
wages of these two workers taking ₹ 72 per hour.
Required:
(i) Calculate the loss incurred due to incorrect rate selection.
(ii) Calculate the loss incurred due to incorrect rate selection, had Rowan scheme of bonus
payment followed.
(iii) Calculate the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) Discuss the suitability of Rowan scheme of bonus payment for JBL Sisters?
Solution:
Workings Notes:
Calculation of Total hours saved:

M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28

1. Calculation of loss incurred due to incorrect rate selection:

(While calculating loss, only excess rate per hour has been taken)

M J Total
(₹) (₹) (₹)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × ₹12) (140 Hrs. × ₹12)
Bonus (as per Halsey Scheme) 120 168 288
(50% of Time Saved × Excess (50% of 20 Hrs. × (50% of 28 Hrs. ×
Rate) ₹12) ₹12)

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Excess Wages Paid 1,320 1,848 3,168

2. Calculation of loss incurred due to incorrect rate selection had Rowan scheme of bonus
payment followed:

M J Total
(₹) (₹) (₹)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × ₹12) (140 Hrs. × ₹12)
Bonus (as per Rowan Scheme) 200 280 480
Time taken x Time saved ×Excess Rate (100 x 20 x ₹12) (140 x 28 x ₹12)
Time allowed 120 168

Excess Wages Paid 1,400 1,960 3,360

3. Calculation of amount that could have been saved if Rowan Scheme were followed:

M J Total
(₹) (₹) (₹)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)

(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with
the nature of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their earnings or
bonus by merely increasing its work speed. Bonus under Rowan Scheme is maximum when the
time taken by a worker on a job is half of the time allowed. As this fact is known to the workers,
therefore, they work at such a speed which helps them to maintain the quality of output too.
(b) If the rate setting department commits any mistake in setting standards for time to be
taken to complete the works, the loss incurred will be relatively low.
Question-15 (Nov 19 Old Course RTP)
ADV Pvt. Ltd. manufactures a product which requires skill and precision in work to get quality
products. The company has been experiencing high labour cost due to slow speed of work. The
management of the company wants to reduce the labour cost but without compromising with the
quality of work. It wants to introduce a bonus scheme but is indifferent between the Halsey and
Rowan scheme of bonus.
For the month of November 2019, the company budgeted for 24,960 hours of work. The
workers are paid ₹80 per hour.
Required:
Calculate and suggest the bonus scheme where the time taken (in %) to time allowed to
complete the works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted hours.
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Solution:
The Cost of labour under the bonus schemes are tabulated as below:

Time Time Wages (₹) Bonus (₹) Total Wages (₹) Earning per hour
Allowed taken (₹)
Halsey* Rowan** Halsey Rowan Halsey Rowan
(1) (2) (3) (4) (5) (6) (7) (8) (9)
= (2) ×₹80 = (3) + (4) = (3) + (5) = (6)/(2) = (7)/(2)
24,960 24,960 19,96,800 - - 19,96,800 19,96,800 80.00 80.00
24,960 18,720 14,97,600 2,49,600 3,74,400 17,47,200 18,72,000 93.33 100.00
24,960 12,480 9,98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00
24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00

* Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour
** Bonus under Rowan Plan = Time taken x Time saved x Rate per hour
Time allowed
Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases only
upto 50% of time taken to time allowed but the rate decreases as the time taken to time allowed
comes below 50%. It provides incentives for efficient workers for saving in time but also puts
check on careless speed. On implementation of Rowan scheme, the management of ADV Pvt.
Ltd. would resolve issue of the slow speed work while maintaining the skill and precision
required maintaining the quality of product.

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 Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

3. LABOUR TURNOVER

A. QUESTION FROM STUDY MATERIAL

Study Material - ILLUSTRATION 14
The Accountant of Y Ltd. has computed employee turnover rates for the quarter ended 31st
March, 20X1 as 10%, 5% and 3% respectively under ‘Flux method’, ‘Replacement method’
and ‘Separation method’ respectively. If the number of workers replaced during that
quarter is 30, FIND OUT the number of workers for the quarter

(i) recruited and joined and

(ii) left and discharged and
(iii) Equivalent employee turnover rates for the year.

Hints: (i) 42, (ii) 18, (iii) 40%, 20%, 12%

Study Material - ILLUSTRATION 15
The management of B.R Ltd. is worried about their increasing employee turnover in the
factory and before analyzing the causes and taking remedial steps, it wants to have an idea
of the profit foregone as a result of employee turnover in the last year.
Last year sales amounted to ₹ 83,03,300 and P/V ratio was 20 per cent. The total number of
actual hours worked by the direct employee force was 4.45 lakhs. As a result of the delays by
the Personnel Department in filling vacancies due to employee turnover, 1,00,000 potentially
productive hours were lost. The actual direct employee hours included 30,000 hours attributable
to training new recruits, out of which half of the hours were unproductive.
The costs incurred consequent on employee turnover revealed, on analysis, the following:

Settlement cost due to leaving ₹ 43,820

Recruitment costs ₹ 26,740
Selection costs ₹ 12,750
Training costs ₹ 30,490
Assuming that the potential production lost as a consequence of employee turnover could
have been sold at prevailing prices, FIND the profit foregone last year on account of
employee turnover.
Hints: Profit Foregone: ₹5,00,000

B. PAST YEAR QUESTION

May 19 Q-3(a)
The information regarding number of employees on roll in a shopping mall for the month of
December 2017 are given below:
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

Number of employees as on 01-12-2017 900

Number of employees as on 31-12-2017 1100
During December, 2017, 40 employees resigned and 60 employees were discharged. 300 employees
were recruited during the month. Out of these 300 employees, 225 employees were recruited for an
expansion project of the mall and rest were recruited due to exit of employees.
Assuming 365 days in a year, calculate Employee Turnover Rate and Equivalent Annual' Employee
Turnover Rate by applying the following:
(i) Replacement Method
(ii) Separation Method
(iii) Flux Method
Solution:
(a) Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
Replacement Method
Labour turnover rate = No. of workers replaced x 100
Average number of workers

= 75 x 100 = 7.5%
1,000

Equivalent Annual Turnover Rate = 7.5 x 365 = 88.31%

31
(b) Separation Method

Labour turnover rate = No. of workers left + No. of workers discharged × 100
Average no. of worker
= (40+60) × 100 = 100 × 100
(900+1,100) /2 1,000
= 10%

Equivalent Annual Turnover Rate = 10 × 365 = 117.74%

31
(c) Flux Method:
Labour turnover rate = No. of Separation + No. of accessions × 100
Average number of workers
= (100+300) × 100 = 400 × 100 = 40%
(900+1,100)/2 1,000

Equivalent Annual Turnover Rate = 40 × 365 = 470.97%

31
OR

Labour turnover rate = No. of Separation + No. of replaced × 100

Average number of workers
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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

= (100+75) × 100 = 17.5%

1000

Equivalent Annual Turnover Rate = 17.5 × 365 = 206.05%

31

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question 1
From the following information, calculate Labour turnover rate and Labour flux rate:
No. of workers as on 01.01.2013 = 7,600

No. of workers as on 31.12.2013 = 8,400

During the year, 80 workers left while 320 workers were discharged 1,500 workers were
recruited during the year of these, 300 workers were recruited because of exits and the rest were
recruited in accordance with expansion plans.
Solution:
Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Separation Method:

No. of workers left + No. of workers discharged

= × 100
Average number of workers

(80 + 320)
= x 100 = 400 × 100 = 5%
(7,600 + 8,400) / 2 8,000

(ii) Replacement Method

= No. of workers replaced x 100
Average no. of workers
= 300 x 100 = 3.75%
8,000

(iii) New Recruitment

= No. of workers newly recruited x 100
Average number of worker
= No. Recruitments - No. of Replacements x 100
Average number of worker

= 1500-300 x 100 = 1200 x 100 = 15%

8,000 8,000
(iv) Flux Method:
No. of separations + No. of accessions x 100
=
Average number of worker

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

= (400 + 1,500) x 100 = 1,900 x 100 = 23.75%

(7,600 + 8,400) 8,000

Question-2
Human Resources Department of A Ltd. computed labour turnover by replacement method at
3% for the quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was
made. The number of workers at the beginning and end of the quarter was 990 and 1,010
respectively.
You are required to calculate the labour turnover rate by Separation Method and Flux Method.
Solution:
No. of workers replaced during the quarter
Labour Turnover by Replacement Method =
Average no. of workers on roll during the quarter

No. of workers replaced during the quarter (990 + 1,010) /2

Or, 0.03 =
Or, No. of workers replaced during the quarter = 0.03 × 1,000 = 30 workers

(i) Labour Turnover by Separation Method

= No. of workers separated during the × 100

quarter Average no. of workers onrollduring the quarter

= Worker at begining + Fresh recruitment + Replacements – Workers at closing × 100

Average no. of workers on roll during the quarter
= (990 +40+30-1,010) × 100 = 50 workers × 100 = 5%
(990+1,010)/2 1,000 workers

(ii) Labour Turnover by Flux Method

= No. of workers (Separated+ Replaced+ Fresh Recruitment) during the quarter × 100
Average no. of workers on roll during the quarter

= 50+30+40 ×100 = 120 wokrers × 100 =12%

(990+1,010)/2 1,000 worker

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Employees Cost and Direct Expenses By: CA PRAKSAH PATEL

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 Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Chapter. 3: Overhead- Absorption Costing Method

Part-I: Primary and Secondary Distribution

A. QUESTION FROM STUDY MATERIAL

ILLUSTRATION 1: (Direct Re-distribution Method)

XL Ltd., has three production departments and four service departments. The expenses
for these departments as per Primary Distribution Summary are as follows:

Production Departments: (₹) (₹)

A 30,00,000
B 26,00,000
C 24,00,000 80,00,000
Service Departments: (₹) (₹)
Stores 4,00,000
Time-keeping and Accounts 3,00,000
Power 1,60,000
Canteen 1,00,000 9,60,000
The following information is also available in respect of the production departments:

Dept. A Dept. B Dept. C

Horse power of Machine 300 300 200
Number of workers 20 15 15
Value of stores requisition in (₹) 2,50,000 1,50,000 1,00,000
PREPARE a statement apportioning the costs of service departments over the
production departments.
Hints: ₹34,20,000, ₹29,00,000, ₹26,40,000

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

ILLUSTRATION: 2 (Step Method)

Suppose the expenses of two production departments A and B and two service
departments X and Y are as under:

Amount (₹) Apportionment Basis

Y A B
X 2,00,000 25% 40% 35%
Y 1,50,000 — 40% 60%
A 3,00,000
B 3,20,000
Hints: ₹ 46,000, ₹ 5,10,000

ILLUSTRATION: 3 (Reciprocal- Simultaneous Equation)

Service departments’ expenses
(₹)

Boiler House 3,00,000

Pump Room 60,000
3,60,000
The allocation is
:
Production Departments Boiler House Pump Room
A B
Boiler House 60% 35% – 5%
Pump Room 10% 40% 50% –

Hints: A = ₹2,10,769, B = ₹1,49,231

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

ILLUSTRATION: 4 (Reciprocal- Trial and Error Method / Repeated Distribution Method)

Sanz Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and
‘C’ and two service departments ‘X’ and ‘Y’. The following is the budget for December
20X3:

Total (₹) A (₹) B (₹) C (₹) X (₹) Y (₹)

Direct material 1,00,000 2,00,000 4,00,000 2,00,000 1,00,000
Direct wages 5,00,000 2,00,000 8,00,000 1,00,000 2,00,000
Factory rent 4,00,000
Power 2,50,000
Depreciation 1,00,000
Other overheads 9,00,000
Additional information:
Area (Sq. ft.) 500 250 500 250 500
Capital value of assets 20 40 20 10 10
(₹ lakhs)
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25
A technical assessment of the apportionment of expenses of service departments is as under:

A B C X Y
Service Dept. ‘X’ (%) 45 15 30 – 10
Service Dept. ‘Y’ (%) 60 35 – 5 –
Required:
(i) PREPARE a statement showing distribution of overheads to various departments.
(ii) PREPARE a statement showing re-distribution of service departments expenses to
production departments using Trial and error method.

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Hints:
A B C
Trial & Error ₹8,48,200 ₹6,50,500 ₹7,51,300
Repeated ₹8,48,177 ₹6,50,541 ₹7,51,282
Distribution

ILLUSTRATION: 5
A Ltd., manufactures two products A and B. The manufacturing division consists of
two production departments P1 and P2 and two service departments S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory
overheads to the products. The rate of Department P1 is based on direct machine hours,
while the rate of Department P2 is based on direct labour hours. In applying overheads,
the pre-determined rates are multiplied by actual hours.
For allocating the service department costs to production departments, the basis
adopted is as follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.

The following budgeted and actual data are available:

Annual profit plan data:
Factory overheads budgeted for the year:

Departments P1 25,50,000 S1 6,00,000

P2 21,75,000 S2 4,50,000
Budgeted output in units:
Product A 50,000; B 30,000.

Budgeted raw-material cost per unit:

Product A ₹ 120; Product B ₹ 150.

Budgeted time required for production per unit:

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Department P1 : Product A : 1.5 machine hours

Product B : 1.0 machine hour
Department P2 : Product A : 2 Direct labour hours
Product B : 2.5 Direct labour hours
Average wage rates budgeted in Department P2 are:
Product A - ₹ 72 per hour and Product B – ₹ 75 per hour.

All materials are used in Department P1 only.

Actual data: (for the month of July, 20X8)
Units actually produced: Product A : 4,000 units
Product B : 3,000 units
Actual direct machine hours worked in Department P1:
On product A 6,100 hours, Product B 4,150 hours.

Actual direct labour hours worked in Department P2:

on product A 8,200 hours, Product B 7,400 hours.
Costs actually incurred:
Product A Product B

₹ ₹
Raw materials 4,89,000 4,56,000
Wages 5,91,900 5,52,000
₹ ₹
Overheads: Department P1 S1
2,31,000 60,000
P2 2,04,000 S2 48,000
You are required to :

(i) COMPUTE the pre-determined overhead rate for each production department.
(ii) PREPARE a performance report for July, 20X8 that will reflect the budgeted costs and
actual costs.
Hints:
(i) P1 = ₹30, P2 = ₹15
(ii) Budgeted Cost = ₹25,71,000, Actual Cost = ₹26,31,861
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

ILLUSTRATION: 6 (Overhead & Cost Sheet)

In an engineering company, the factory overheads are recovered on a fixed percentage
basis on direct wages and the administrative overheads are absorbed on a fixed
percentage basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in
a period:
Job 101 Job 102
(₹) (₹)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Selling price 1,66,650 1,28,250
Profit percentage on Total Cost 10% 20%
Required:
(i) COMPUTATION of percentage recovery rates of factory overheads and
administrative overheads.
(ii) CALCULATION of the amount of factory overheads, administrative overheads
and profit for each of the two jobs.
(iii) Using the above recovery rates FIX the selling price of job 103. The additional
data being:
Direct materials ₹ 24,000
Direct wages ₹ 20,000
Profit percentage on selling price 12-½%
Hints:
(i) Factory overhead = 60%, Administrative overhead = 25%
(ii)

Job 101 (₹) Job 102 (₹)

SP ₹1,66,650 ₹1,28,250
Profit ₹15,150 ₹21,375
(iii) SP for Job 103 = ₹80,000
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

ILLUSTRATION: 7 (Overhead & Cost Sheet)

A company which sells four products, some of them unprofitable, proposes
discontinuing the sale of one of them. The following information is available regarding
income, costs and activity for the year ended 31st March, 20X9.

Products
A B C D
Sales (₹) 30,00,000 50,00,000 25,00,000 45,00,000
Cost of sales (₹) 20,00,000 45,00,000 21,00,000 22,50,000
Area of storage (Sq.ft.) 50,000 40,000 80,000 30,000
Number of parcels sent 1,00,000 1,50,000 75,000 1,75,000
Number of invoices sent 80,000 1,40,000 60,000 1,20,000
Selling and Distribution overheads and the basis of allocation are:

(₹) Basis of allocation to

products
Fixed Costs
Rent & Insurance 3,00,000 Square feet
Depreciation 1,00,000 Parcel
Salesmen’s salaries & expenses 6,00,000 Sales Volume
Administrative wages and salaries 5,00,000 No. of invoices
Variable Costs:
Packing wages & materials ₹ 2 per parcel
Commission 4% of sales
Stationery ₹ 1 per invoice
You are required to PREPARE Costing Profit & Loss Statement, showing the percentage
of profit or loss to sales for each product.
Hints:
Product A B C D
% of Profit 9.5 (12.10) (8.80) 26.4
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

TEST YOUR KNOWLEDGE

Question-1
The ABC Company has the following account balances and distribution of direct
Charges on 31st March, 20X1.

Total Production Depts. Service Depts.

Machine Packing Gen. Store

shop Plant &
Maintenance
(₹) (₹) (₹) (₹) (₹)
Allocated Overheads :
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance material 5,020 1,800 700 1,020 1,500

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

Superintendent’s salary 4,000 – – 4,000 –

Cost & payroll salary 10,000 – – 10,000 –

Overheads to be apportioned:
Power 8,000
Rent 12,000
Fuel and heat 6,000
Insurance 1,000
Taxes 2,000
Depreciation 1,00,000
1,64,420 6,200 4,700 17,170 7,350
The following data were compiled by means of the factory survey made in the previous
year:

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Floor Radiator
Space ₹
2,000 Sq. ft. 45 20
800 ” ” 90 10
400 ” ” 30 3 10,000
Store & Maint. 1,600 ” ” 60 5
4,800 ” ” 225

Expenses charged to the stores and maintenance departments are to be distributed to the
other departments by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is
distributed on the basis of number of employees:
(a) PREPARE an overhead distribution statement with supporting schedules to show
computations and basis of distribution including distribution of the service
department expenses to producing department.
(b) DETERMINE the service department distribution by the method of continued
distribution. Carry through 3 cycles. Show all calculations to the nearest rupees.
Hints:
Machine Packing General Stock
Primary 83,920 30,500 20,000 30,000
Distribution
Secondary 1,18,396 46,024 - -
Distribution

Question-2
Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service
Departments S1and S2 details pertaining to which are as under:
P1 P2 P3 S1 S2
Direct wages (₹ ) 3,000 2,000 3,000 1,500 195
Working hours 3,070 4,475 2,419 - -
Value of machines (₹) 60,000 80,000 1,00,000 5,000 5,000
H.P. of machines 60 30 50 10 -

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500

The following figures extracted from the Accounting records are relevant:
(₹)
Rent and Rates 5,000
General Lighting 600
Indirect Wages 1,939
Power 1,500
Depreciation on Machines 10,000
Sundries 9,695
The expenses of the Service Departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
Find out the total cost of product X which is processed for manufacture in the depts. P1,
P2 and P3 for 4,5 and 3 hours respectively, given that its direct material cost is ₹50 and
Direct Labour cost is ₹30.
Hints:
P1 P2 P3 S1 S2
Primary 7,700 7,300 9,800 4,700 929
Distribution
Secondary 9,233.52 9,035.02 12,160.46 - -
Distribution

Question-3
Deccan manufacturing Ltd. Have three dept. which are regarded as production dept. Service
departments’ cost are distribution to these production departments using the “Step Ladder
Method” of distribution. Estimates of factory overheads costs to be incurred by each
department on the forthcoming year are as follow.
Data required for the distribution is also shown against each department.

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Department Factory overhead Direct labour No. of Area in

(₹) hours employees sq.m.
Production:
X 1,93,000 4,000 100 3,000
Y 64,000 3,000 125 1,500
Z 83,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000
The overhead costs of the four service departments are distributed in the same order,
viz., P, Q, R and S respectively on the following basis.
Department Basis
P Number of employees
Q Direct labour hours
R Area in square metres
S Direct labour hours
You are required to:
1. Prepare a schedule showing the distribution of overhead costs of the four service
departments to the three production departments; and
2. Calculate the overhead recovery rate per direct labour hour for each of the three
production departments.
Hints:
X = 3,00,000, 75
Y = 1,35,000, 45
Z = 1,60,000, 40

Question-4
The ABC Company has the following account balances and distribution of direct charges
on 31st March.

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Total Production Depts. Service Depts.

Machine Packing Gen. Store &
shop Plant Maintenance
(₹) (₹) (₹) (₹) (₹)
Allocated Overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance material 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s 4,000 – – 4,000 –
salary
Cost & payroll salary 10,000 – – 10,000 –
Overheads to be apportioned:
Power 8,000
Rent 12,000
Fuel and heat 6,000
Insurance 1,000
Trade License fees 2,000
Depreciation 1,00,000
1,64,420 6,200 4,700 17,170 7,350
The following data were compiled by means of the factory survey made in the previous
year:

Floor Radiator No. of Investment H.P

Space Sections Employees (₹) hours
(Sqft)
Machine 2,000 45 20 6,40,000 3,500
Shop
Packing 800 90 10 2,00,000 500
General Plant 400 30 3 10,000 -
Store 1,600 60 5 1,50,000 1,000

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

&
Maintenance
4,800 225 38 10,00,000 5,000
Expenses charged to the stores and maintenance departments are to be distributed to the
other departments by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is
distributed on the basis of number of employees:
(a) PREPARE an overhead distribution statement with supporting schedules to show
computations and basis of distribution including distribution of the service
departments’ expense to production departments.
(b) DETERMINE the service department distribution by the method of continued
distribution (repeated distribution) through 3 cycles. Show all calculations to the
nearest rupees.
Hints:
(a) Overhead Distribution Statement

Particulars Production Service

Department Department
Machine Packing General Stores &
Plant Maint.
Total overheads 83,920 30,500 20,000 30,000

Schedule of Apportioned Expenses

Item Basis Total Production Depts. Service Depts.

Amount Machine Packing Gen. Store
shop Plant &
Maint.
(₹) (₹) (₹) (₹) (₹)
Total 1,29,000 77,720 25,800 2,830 22,650

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

(b) Distribution of Service Department Expenses

Production Depts. Service Depts.

Machineshop Packing Gen. Store &
Plant Maint.
(₹) (₹) (₹) (₹)
Total 1,18,397 46,023

Question-5
A Ltd., manufactures two products A and B. The manufacturing division consists of two
production departments P1 and P2 and two service departments S1 and S2. Budgeted
overhead rates are used in the production departments to absorb factory overheads to the
products. The rate of Department P1 is based on direct machine hours, while the rate of
Department P2 is based on direct labour hours.
For allocating the service department costs to production departments, the basis adopted is
as follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.
The following data relating to factory overheads budgeted for the year is available:
Production Departments Service Departments
P1 P2 S1 S2
₹ ₹ ₹ ₹
25,50,000 21,75,000 6,00,000 4,50,000
Budgeted output in units:
Product A 50,000; B 30,000.
Budgeted time required for production per unit:
Department P1 : Product A : 1.5 machine hours
Product B : 1.0 machine hour
Department P2 : Product A : 2 Direct labour hours
Product B : 2.5 Direct labour hours
You are required to COMPUTE the pre-determined overhead rate for both the production
departments.
Hints: P1 P2
Budgeted machine/ labour hour rate (₹) 30.00 15.00
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

B. PAST YEAR EXAM QUESTIONS

Nov.-20 Q2(b) 10 Marks

TEE Ltd. is a manufacturing company having three production departments 'P', 'Q' and 'R'
and two service departments 'X' and 'Y' details pertaining to which are as under :
P Q R X Y
Direct wages (₹) 5,000 1,500 4,500 2,000 800
Working hours 13,191 7,598 14,995 - -
Value of machine (₹) 1,00,000 80,000 1,00,000 20,000 50,000
H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000

The expenses are as follows:

(₹)
Rent and Rates 10,000
General Lighting 600
Indirect Wages 3,450
Power 3,500
Depreciation on Machines 70,000
Sundries (apportionment on the basis of direct wages) 13,800

The expenses of Service Departments are allocated as under :

P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -

Product 'A' is processed for manufacture in Departments P, Q and R for 6, 5 and 2 hours
respectively.
Direct Costs of Product A are:
Direct material cost is ₹ 65 per unit and Direct labour cost is ₹ 40 per unit.

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

You are Required to:

(i) Prepare a statement showing distribution of overheads among the production and
service departments.
(ii) Calculate recovery rate per hour of each production department after redistributing
the service departments costs.
(iii) Find out the Total Cost of a 'Product A'.

Solution:

(i) Statement showing distribution of Overheads

Primary Distribution Summary

Item of cost Basis of Total P Q R X Y

apportionment (₹) (₹) (₹) (₹) (₹) (₹)
Direct wages Actual 2,800 -- -- -- 2,000 800
Rent and Rates Floor area 10,000 2,000 2,500 3,500 1,000 1,000
(4:5:7:2:2)
General Light points 600 200 100 150 50 100
lighting (4:2:3:1:2)
Indirect wages Direct wages 3,450 1,250 375 1,125 500 200
(50:15:45:20:8)
Power Horse Power of machines 3,500 1,000 800 1,000 200 500
used(10:8:10:2:5)

Depreciation Value of machinery 70,000 20,000 16,000 20,000 4,000 10,000

of machinery (10:8:10:2:5)

Sundries Direct wages 13,800 5,000 1,500 4,500 2,000 800

(50:15:45:20:8)
Total 1,04,150 29,450 21,275 30,275 9,750 13,400

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Secondary Distribution using simultaneous equation method:

Overheads of service cost centres
Let, X be the overhead of service cost centre X
Y be the overhead of service cost centre Y

X = 9,750 + 0.10 Y
Y = 13,400 + 0.10 X
Substituting the value of Y in X we get X = 9,750 + 0.10 (13,400 + 0.10 X)
X = 9,750 + 1,340 + 0.01 X
0.99 X = 11,090
X = ₹ 11,202
Y = 13,400 + 0.10 x 11,202
= ₹ 14,520.20

Secondary Distribution Summary

Particulars Total (₹) P (₹) Q (₹) R (₹)

Allocated and Apportioned 29,450.00 21,275.00 30,275.00
over-heads as per primary
distribution
X 11,202.00 5,040.90 1,680.30 3,360.60
Y 14,520.20 5,082.07 3,630.05 4,356.06
Total 39,572.97 26,585.35 37,991.66

(ii) Calculation of Overhead recovery rate per hour

P (₹) Q (₹) R (₹)

Total overheads cost 39,572.97 26,585.35 37,991.66
Working hours 13,191 7,598 14,995
Rate per hour (₹) 3 3.50 2.53

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

(iii) Cost of Product A

(₹)
Direct material 65.00
Direct labour 40.00
Prime cost 105.00
Production on overheads
P 6 hours x ₹ 3 = ₹ 18
Q 5 hours x ₹ 3.50 = ₹ 17.50
R 2 hours x ₹ 2.53 = ₹ 5.06 40.56
Total cost 145.56
Note: Secondary Distribution can also be done using repeated distribution Method

Nov-18 Q5(b)(ii) 5Marks

M/s. NOP Limited has its own power plant and generates its own power. Information
regarding power requirements and power used are as follows:
Production Dept. Service Dept.
A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the quarter ended 16,000 20,000 12,000 8,000
September 2018

During the quarter ended September 2018, costs for generating power amounted to
₹ 12.60 lakhs out of which ₹ 4.20 lakhs was considered as fixed cost.
Service department X renders services to departments A, B, and Y in the ratio of 6:4:2
whereas department Y renders services to department A and B in the ratio of 4: 1. The
direct labour hours of department A and B are 67500 hours and 48750 hours
respectively.
Required:
1. Prepare overheads distribution sheet.
2. Calculate factory overhead per labour hour for the dept. A and dept. B.
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Solution:
1. Overheads distribution Sheet

Item Basis Total Production Service

Amount Departments Departments
(₹) A (₹) B (₹) X (₹) Y (₹)
Variable Horse Power 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
overheads (₹ hours used
12.60 lakhs -
₹ 4.20 lakhs)
Fixed Overheads Horse 4,20,000 1,20,000 1,50,000 90,000 60,000
power for
Capacity
production
Total Overheads 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000

Service dept X As per the (2,70,000) 1,35,000 90,000 45,000

allocated to A, B ratio given
&Y 6:4:2
Service dept Y As per the (1,80,000+ 1,80,000 45,000
allocated to A & ratio of 4:1 4
B 5000 =
2,25,000)
Total Overheads 6,75,000 5,85,000
of Production
departments

2. Calculation of Factory overhead per labour hour

Item Production Departments

A (₹) B (₹)
Total overheads 6,75,000 5, 85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

July-21 Q1(b)
SNS Trading Company has three Main Departments and two Service Departments. The
data for each department is given below:
Departments Expenses (in ₹) Area in (Sq. Mtr) Number of
Main Department: Employees
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis
of ‘Area in Square Metres’ and 'Number of Employees' respectively.
You are required to:
(i) Prepare a Statement showing the distribution of expenses of Service Departments to
the Main Departments using the "Step Ladder method" of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase
Department, Packing Department and Distribution Department works for 12 hours a
day, 24 hours a day and 8 hours a day respectively. Assume that there are 365 days
in a year and there are no holidays.

Solution:
(i) Schedule Showing the Distribution of Expenses of Service Departments
using Step ladder method.

Main Department Service Department

Purchase Packing(₹) Distribution Maintenance Personnel
(₹) (₹) (₹) (₹)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance
Department
1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

(12:15:7:-:6)

Distribution of
Personnel
Department
(800:1700:700:-:-) 1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -

(ii) Calculation of Expenses rate per hour of Main Department

Purchase Packing Distribution
Total apportioned expenses (₹) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (₹) 181.74 143.95 189.38

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM)

Question-1 (Old Course Practice Manual Q12)
E-books is an online book retailer. The Company has four departments. The two sales
departments are Corporate Sales and Consumer Sales. The two support – departments are
Administrative (Human Resources Accounting) and Information Systems each of the sales
departments conducts merchandising and marketing operations independently.
The following data are available for October, 2013:

Departments Revenues Number of Processing time used

Employees (in minutes)
Corporate Sales ₹ 16,67,750 42 2,400
Consumer Sales ₹ 8,33,875 28 2,000
Administrative -- 14 400
Information system -- 21 1,400
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Cost incurred in each of four departments for October, 2013 are as follow:

Corporate Sales ₹ 12,97,751

Consumer Sales ₹ 6,36,818
Administrative ₹ 94,510
Information systems ₹ 3,04,720

The company uses number of employees as a basis to allocate Administrative costs and
processing time as a basis to allocate Information systems costs.
Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other
support departments. Use this ranking to allocate support costs based on the step-down
allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal
allocation method.
Solution:
(i) Statement showing the allocation of support department costs to the sales
departments (using the Direct Method)

Sales department Support department

Particulars Basis of Corporate Consumer Administrative Informatio
allocation sales sales (₹) nsystems
(₹) (₹) (₹)
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of Number of 56,706 37,804 (94,510) ---
cost of employees
administrative (6:4:–:–)
department
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Re-allocation of Processing 1,66,211 1,38,509 --- (3,04,720)

costs of information time (6:5:–
systems :–)
department
Total 15,20,668 8,13,131

(ii) Ranking of support departments based on percentage of their services rendered

to other support departments
➢ Administration support department provides 23.077% ( 21×100 ) of its services to
42 + 28+ 21
Information systems support department. Thus 23.077% of ₹94,510 = ₹ 21,810.

➢ Information system support department provides 8.33% ( 400 ×100 ) of

2,400+ 2,000+ 400
its services to Administration support department. Thus 8.33% of ₹3,04,720 = ₹
25,383.

Statement showing allocation of support costs

(By using step-down allocation method)

Sales department Support department

Particulars Basis of Corporate Consumer Administrative Information
allocation sales sales systems.
(₹) (₹) (₹) (₹)
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of cost Number of 43,620 29,080 (94,510) 21,810
of administrative employees 3,26,530
department (6:4:–:3)
Re-allocation of Processing 1,78,107 1,48,423 (3,26,530)
costs of information time (6:5:–
systems department :–
)
Total 15,19,478 8,14,321
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

(iii) An alternative ranking is based on the rupee amount of services rendered to other
service departments, using the rupee figures obtained under requirement (ii) This
approach would use the following sequence of ranking.

➢ Allocation of information systems overheads as first (₹25,383 provided to

administrative).
➢ Allocated administrative overheads as second (₹21,810 provided to information
systems).

(iv) Working notes:

1. Percentage of services provided by each service department to other service
department and sales departments.

Service departments Sale departments

Particulars Administrative Information Corporate Consumer
system Sales Sales
Administrative – 23.08% 46.15% 30.77%
Information systems 8.33% – 50% 41.67%

2. Total cost of the support department: (By using simultaneous equation method).
Let AD and IS be the total costs of support departments Administrative and
Information systems respectively. These costs can be determined by using the
following simultaneous equations:

AD = 94,510 + 0.0833 IS
IS = 3,04,720 + 0.2308 AD
Or, AD = 94,510 + 0.0833 {3,04,720 + 0.2308 AD}
Or, AD = 94,510 + 25,383 + 0.01922 AD
Or, 0.98077AD = 1,19,893
Or, AD = ₹1,22,243
and IS = ₹3,32,934

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Statement showing the allocation of support department costs to the sales

departments (Using reciprocal allocation method)

Sales department
Particulars Corporate sales Consumer sales
(₹) (₹)
Costs incurred 12,97,751 6,36,818
Re-allocation of cost administrative department 56,427 37,614
(46.16% and 30.77% of ₹1,22,243)
Re-allocation of costs of information systems 1,66,467 1,38,734
department (50% and 41.67% of ₹3,32,934)
Total 15,20,645 8,13,166

Question-2 (Old Course Practice Manual Q13)

ABC Ltd. has three production departments P1, P2 and P3 and two service departments S1
and S2. The following data are extracted from the records of the Company for the month
of October, 2013:
(₹)

Rent and rates 62,500

General lighting 7,500
Indirect Wages 18,750
Power 25,000
Depreciation on machinery 50,000
Insurance of machinery 20,000
Other Information:

P1 P2 P3 S1 S2
Direct wages (₹) 37,500 25,000 37,500 18,750 6,250
Horse Power of Machines used 60 30 50 10
Cost of machinery (₹) 3,00,000 4,00,000 5,00,000 25,000 25,000

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500

Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100

Expenses of the service departments S1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2
S1 20% 30% 40% 10%
S2 40% 20% 30% 10%

Required:
(i) Compute overhead absorption rate per production hour of each production
department.
(ii) Determine the total cost of product X which is processed for manufacture in
department P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that
its direct material cost is ₹ 625 and direct labour cost is ₹ 375.
Solution:
Primary Distribution Summary

Item of cost Basis of Total P1 P2 P3 S1 S2

apportionment (₹) (₹) (₹) (₹) (₹) (₹)
Direct wages Actual 25,000 -- -- -- 18,750 6,250
Rent and Floor area 62,500 12,500 15,625 18,750 12,500 3,125
Rates (4 : 5 : 6 : 4 : 1)
General Light points 7,500 1,250 1,875 2,500 1,250 625
lighting (2 : 3 : 4 : 2 : 1)
Indirect wages Direct wages (6 18,750 5,625 3,750 5,625 2813 938
: 4 : 6 : 3 : 1)
Power Horse Power of 25,000 10,000 5,000 8,333 1,667
machines used
(6 : 3 : 5 : 1)

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Depreciation of Value of machinery 50,000 12,000 16,000 20,000 1,000 1,000

machinery (12 : 16 : 20 : 1 : 1)
Insurance of Value of machinery 20,000 4,800 6,400 8,000 400 400
machinery (12 : 16 : 20 : 1 : 1)
2,08,750 46,175 48,650 63,208 38,380 12,338

Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2
be the overhead of service cost centre S2.
S1 = 38,380 + 0.10 S2
S2 = 12,338 + 0.10 S1
Substituting the value of S2 in S1 we get S1 = 38,380 + 0.10 (12,338 + 0.10 S1)
S1 = 38,380 + 1,233.80 + 0.01 S1
0.99 S1 = 39,613.80
S1 = ₹40,014.
S2 = 12,338 + 0.10 x 40,014.
= ₹16,339

Secondary Distribution Summary

Particulars Total (₹) P1 (₹) P2 (₹) P3 (₹)

Allocated and Apportioned over- 1,58,033 46,175 48,650 63,208

heads as per primary distribution
S1 40,014 8,003 12,004 16,006
S2 16,339 6,536 3,268 4,902
60,714 63,922 84,116

(i) Overhead rate per hour

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P1 P2 P3
Total overheads cost ₹60,714 ₹63,922 ₹84,116
Production hours worked 6,225 4,050 4,100
Rate per hour (₹) ₹9.75 ₹15.78 ₹20.52

(ii) Cost of Product X

(₹
)
Direct material 625.00
Direct labour 375.00
Prime cost 1,000.00
Production on overheads
P1 5 hours x ₹9.75 = 48.75
P2 3 hours x ₹15.78 = 47.34
P3 4 hours x ₹20.52 = 82.08 Factory cost 178.17
Factory cost 1,178.17

Question-3 (Old Course Practice Manual Q14)

A company has three production departments (M1, M2 and A1) and three service
department, one of which Engineering service department, servicing the M1 and M2 only.
The relevant information are as follows:

Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct Labour hours 18 Direct Labour hours

The annual budgeted overhead cost for the year are

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Indirect Wages (₹) Consumable

Supplies(₹)
M1 46,520 12,600
M2 41,340 18,200
A1 16,220 4,200
Stores 8,200 2,800
Engineering Service 5,340 4,200
General Service 7,520 3,200

(₹)
- Depreciation on Machinery 39,600
- Insurance of Machinery 7,200
- Insurance of Building 3,240
(Total building insurance cost for M1 is one third of annual premium)
- Power 6,480
- Light 5,400
- Rent 12,675
(The general service deptt. is located in a building owned by the company. It is valued at
₹6,000 and is charged into cost at notional value of 8% per annum. This cost is additional
to the rent shown above)
The value of issues of materials to the production departments are in the same proportion
as shown above for the Consumable supplies.
The following data are also available:

Department Book value Area Effective Production Capacity

Machinery (Sq. ft.) H.P. hours % Direct Labour Machine
(₹) hour hour
M1 1,20,000 5,000 50 2,00,000 40,000
M2 90,000 6,000 35 1,50,000 50,000

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A1 30,000 8,000 05 3,00,000 -

Stores 12,000 2,000 - - -
Engg. Service 36,000 2,500 10 - -
General Service 12,000 1,500 - - -
Required:
(i) Prepare a overhead analysis sheet, showing the bases of apportionment of
overhead to departments.
(ii) Allocate service department overheads to production department ignoring the
apportionment of service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products, X and Y.
Solution:
(i) Summary of Apportionment of Overheads
(₹)
Basis of Total Production Deptt. Service Deptt.
Items Apportionment Amount M1 M2 A1 Store Engineering General
Service Service Service
Indirect Allocation given 1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
wages
Consumable Allocation given 45,200 12,600 18,200 4,200 2,800 4,200 3,200
stores
Depreciation Capital value of 39,600 15,840 11,880 3,960 1,584 4,752 1,584
machine
(20:15:5:2:6:2)
Insurance of Capital value of 7,200 2,880 2,160 720 288 864 288
Machine machine
(20:15:5:2:6:2)

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Insurance 1/3rd to M1 3,240 1,080 648 864 216 270 162

on Building Balance area

basis

(-:12:16:4:5:3)

Power HP Hr% 6,480 3,240 2,268 324 - 648 -

(10:7:1:-:2:-)

Light Area 5,400 1,080 1,296 1,728 432 540 324

(10:12:16:4:5:3)

Rent* Area 12,675 2,697 3,236 4,315 1,079 1,348 --

(10:12:16:4:5:-)

Total 2,44,935 85,937 81,028 32,331 14,599 17,962 13,078

*Rent to be apportioned among the departments which actually use the rented building.
The notional rent is imputed cost and is not included in the calculation.
(ii) Allocation of service departments overheads
Production Deptt. Service Deptt.
Service Basis of M1 M2 A1 Store Engineering General
Deptt. Apportionment Service Service Service
Store Ratio of
consumable 5,256 7,591 1,752 (14,599) - -
value (126 :182 :
42)

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Engineering In Machine
service hours Ratio of 7,983 9,979 - - (17,962) -
M1 and M2 (4 :
5)
General Labour hour
service Basis 4,024 3,018 6,036 - - (13,078)
(20 : 15 : 30)
Production 85,937 81,028 32,331
Department
allocated in
(i)
Total 1,03,200 1,01,616 40,119

(iii) Overhead Absorption rate

M1 M2 A1
Total overhead allocated 1,03,200 1,01,616 40,119
Machine hours 40,000 50,000 -
Labour hours - - 3,00,000
Rate per machine hour 2.58 2.032 -
Rate per Direct labour -₹ - 0.134

(iv) Statement showing overhead absorption for Product X and Y

Machine Deptt. Absorption Rate Product X Product Y
Hours (₹) Hours (₹)
M1 2.58 10 25.80 6 15.48
M2 2.032 4 8.13 14 28.45
A1
0.134 14 1.88 18 2.41
35.81 46.34

Question-4 (Old Course Practice Manual Q15)

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The following account balances and distribution of indirect charges are taken from the
accounts of a manufacturing concern for the year ending on 31st March, 2014:

Total Production Departments Service Departments

Item Amount
(₹) X (₹) Y (₹) Z (₹) A (₹) B (₹)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent's Salary 96,000 - - 96,000 - -

Fuel & Heat 15,000

Power 1,80,000

Rent & Rates 1,50,000

Insurance 18,000

Meal Charges 60,000

Depreciation 2,70,000

The following departmental data are also available:

Production Departments Service Departments

X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of
Assets (₹) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000

Kilowatt Hours 3,500 4,000 3,000 1,500 -

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Radiator Sections 20 40 60 50 30

No. of Employees 60 70 120 30 20

Expenses charged to the service departments are to be distributed to other departments by

the following percentages:

X Y Z A B
Department A (%) 30 30 20 - 20
Department B (%) 25 40 25 10 -
Prepare an overhead distribution statement to show the total overheads of production
departments after re-apportioning service departments' overhead by using simultaneous
equation method. Show all the calculations to the nearest rupee.
Solution:
Primary Distribution of Overheads

Item Basis Total Production Departments Service

Amount Departments
(₹) X (₹) Y (₹) Z (₹) A (₹) B (₹)

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Indirect Material Actual 1,25,000 20,000 30,000 45,000 25,000 5,000

Indirect Labour Actual 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent’s Actual 96,000 - - 96,000 - -
Salary
Fuel & Heat Radiator 15,000 1,500 3,000 4,500 3,750 2,250
Sections
{2:4:6:5:3}
Power Kilowatt Hours 1,80,000 52,500 60,000 22,500 -
45,000
{7:8:6:3:-}
Rent & Rates Area (Sq. ft.) 1,50,000 44,000 40,000 30,000 24,000 12,000
{22:20:15:12:6
Insurance } 18,000 5,000 1,000
4,000 6,000 2,000
Capital Value
of Assets
{4:6:5:1:2} 60,000 12,000 24,000 6,000 4,000
Meal Charges 14,000
No. of
Employees
{6:7:12:3:2}
Depreciation Capital Value 2,70,000 60,000 90,000 75,000 15,000 30,000
of Assets
{4:6:5:1:2}
Total overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250

Re-distribution of Overheads of Service Department A and B

Total overheads of Service Departments may be distributed using simultaneous equation
method
Let, the total overheads of A = a and the total overheads of B= b
a = 1,57,250 + 0.10 b (i)
or, 10a - b = 15,72,500 [(i) x10]
b = 90,250 + 0.20 a (ii)
or, -0.20a + b = 90,250

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Solving equation (i) & (ii)

10a - b = 15,72,500
-0.20a + b = 90,250
9.8a = 16,62,750
a = 1,69,668
Putting the value of a in equation (ii), we get b = 90,250 + 0.20 x 1,69,668
b = 1,24,184
Secondary Distribution of Overheads

Production Departments
X Y (₹) Z
(₹) (₹)
Total overhead as per primary distribution 2,39,000 2,93,000 3,94,500
Service Department A (80% of 1,69,668) 50,900 50,900 33,934
Service Department B (90% of 1,24,184) 31,046 49,674 31,046
3,20,946 3,93,574 4,59,480
Total

Question-5 (Old Course Practice Manual Q16)

Arnav Ltd. has three production departments M, N and O and two service departments P
and Q. The following particulars are available for the month of September, 2013:

(₹)
Lease rental 35,000
Power & Fuel 4,20,000
Wages to factory supervisor 6,400
Electricity 5,600
Depreciation on machinery 16,100
Depreciation on building 18,000
Payroll expenses 21,000
Canteen expenses 28,000
ESI and Provident Fund Contribution 58,000

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Followings are the further details available:

Particulars M N O P Q
Floor space (square meter) 1,200 1,000 1,600 400 800
Light points (nos.) 42 52 32 18 16
Cost of machines (₹) 12,00,000 10,00,000 14,00,000 4,00,000 6,00,000
No. of employees (nos.) 48 52 45 15 25
Direct Wages (₹) 1,72,800 1,66,400 1,53,000 36,000 53,000
HP of Machines 150 180 120 - -
Working hours (hours) 1,240 1,600 1,200 1,440 1,440

The expenses of service department are to be allocated in the following manner:

M N O P Q
P 30% 35% 25% - 10%
Q 40% 25% 20% 15% -
You are required to calculate the overhead absorption rate per hour in respect of the three
production departments.
Solution:
Primary Distribution Summary

Total Production Dept. Service Dept.

Item of cost Basis of apportionment M N O P Q
(₹) (₹) (₹) (₹) (₹) (₹)
Lease rental Floor space 35,000 8,400 7,000 11,200 2,800 5,600
(6 : 5 : 8 : 2 : 4)
HP of Machines ×
Power & Fuel 4,20,000 1,26,408 1,95,728 97,864 - -
Working hours
(93: 144 : 72)
Supervisor’s Working hours 6,400 1,964 2,535 1,901 - -
wages* (31 : 40 : 30)
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Light points
Electricity (21: 26: 16 : 9 : 8)
5,600 1,470 1,820 1,120 630 560
Depreciation Value of machinery
on machinery (6 : 5 : 7 : 2 : 3)
Depreciation Floor space 16,100 4,200 3,500 4,900 1,400 2,100
on building (6 : 5 : 8 : 2 : 4)

Payroll No. of employees 18,000 4,320 3,600 5,760 1,440 2,880

expenses (48: 52: 45: 15: 25)
Canteen No. of employees
21,000 5,448 5,903 5,108 1,703 2,838
expenses (48: 52: 45: 15: 25)
Direct wages
ESI and PF 7,265
(864: 832: 765: 180: 28,000 7,870 6,811 2,270 3,784
contribution 265)

58,000 17,244 16,606 15,268 3,593 5,289

6,08,100 1,76,719 2,44,562 1,49,932 13,836 23,051

* Wages to supervisor is to be distributed to production departments only.

Let ‘P’ be the overhead of service department P and ‘Q’ be the overhead of service
department Q.
P = 13,836 + 0.15 Q
Q = 23,051 + 0.10 P
Substituting the value of Q in P we get P = 13,836 + 0.15 (23,051 + 0.10 P)
P = 13,836 + 3,457.65 + 0.015 P
0.985 P = 17,293.65
P = ₹ 17,557
Q = 23,051 + 0.10 x 17,557
= ₹ 24,806.70 or ₹ 24,807
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Secondary Distribution Summary

Total M N O
Particulars (₹) (₹) (₹ (₹)
)
Allocated and Apportioned
over-heads as per primary 5,71,213 1,76,719 2,44,562 1,49,932
distribution
P (90% of ₹17,557) 15,801 5,267 6,145 4,389
Q (85% of ₹24,807) 21,086 9,923 6,202 4,961
1,91,909 2,56,909 1,59,282

Overhead rate per hour

M N O
Total overheads cost (₹) 1,91,909 2,56,909 1,59,282
Working hours 1,240 1,600 1,200
Rate per hour (₹) 154.77 160.57 132.74

Question-6 (Old Course Practice Manual Q18)

PQR Ltd has its own power plant, which has two users, Cutting Department and Welding
Department. When the plans were prepared for the power plant, top management decided
that its practical capacity should be 1,50,000 machine hours. Annual budgeted practical
capacity fixed costs are ₹ 9,00,000 and budgeted variable costs are ₹ 4 per machine-hour.
The following data are available:

Cutting Welding Total

Department Department
Actual Usage in 2012-13 (Machine hours) 60,000 40,000 1,00,000
Practical capacity for each department (Machine 90,000 60,000 1,50,000
hours)

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Required
(i) Allocate the power plant's cost to the cutting and the welding department using a
single rate method in which the budgeted rate is calculated using practical capacity
and costs are allocated based on actual usage.
(ii) Allocate the power plant's cost to the cutting and welding departments, using the
dual - rate method in which fixed costs are allocated based on practical capacity and
variable costs are allocated based on actual usage.
(iii) Allocate the power plant's cost to the cutting and welding departments using the
dual- rate method in which the fixed-cost rate is calculated using practical capacity,
but fixed costs are allocated to the cutting and welding department based on actual
usage. Variable costs are allocated based on actual usage.
(iv) Comment on your results in requirements (i), (ii) and (iii).
Solution:
Working Notes:
1. Fixed practical capacity cost per machine hour:
Practical capacity (machine hours) 1,50,000
Practical capacity fixed costs (₹) 9,00,000
Fixed practical capacity cost per machine hour ₹6
(₹ 9,00,000 ÷ 1,50,000 hours)

2. Budgeted rate per machine hour (using practical capacity):

= Fixed practical capacity cost per machine hour + Budgeted variable cost per
machine hour
= ₹ 6 + ₹ 4 = ₹10

(i) Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using single rate method on actual usage of machine hours.
Cutting Welding Total
Department Department
(₹) (₹) (₹)

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Power plants cost allocation byusing 6,00,000 4,00,000 10,00,000

actual usage (machine hours) (Refer to (60,000 hours (40,000 hours
Working Note 2) × ₹10) × ₹10)

(ii) Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using dual rate method.
Cutting Department Welding Total
(₹) Department
(₹) (₹)
Fixed Cost 5,40,000 3,60,000 9,00,000
(Allocated on practical capacityfor (₹ 9,00,000×3) (₹ 9,00,000× 2 )
each department i.e.): (90,000 hours : 5 5
60,000 hours)
Variable cost 2,40,000 1,60,000 4,00,000
(Based on actual usage of (60,000 hours × ₹ 4) (40,000 hours × ₹4)
machine hours)
Total cost 7,80,000 5,20,000 13,00,000

(iii) Statement showing Power Plant's cost allocation to the Cutting & Welding
Departments using dual rate method
Cutting Department Welding Total
(₹) Department
(₹) (₹)
Fixed Cost 3,60,000 2,40,000 6,00,000
Allocation of fixed cost on actual (60,000 hours × ₹ 6) (40,000 hours × ₹ 6)
usage basis
(Refer to Working Note 1)
Variable cost 2,40,000 1,60,000 4,00,000
(Based on actual usage) (60,000 hours × ₹ 4) (40,000 hours × ₹ 4)
Total cost 6,00,000 4,00,000 10,00,000

(iv) Comments:
Under dual rate method, under (iii) and single rate method under (i), the allocation of

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fixed cost of practical capacity of plant over each department are based on single rate.
The major advantage of this approach is that the user departments are allocated fixed
capacity costs only for the capacity used. The unused capacity cost ₹ 3,00,000 (₹
9,00,000 – ₹ 6,00,000) will not be allocated to the user departments. This highlights
the cost of unused capacity.
Under (ii) fixed cost of capacity are allocated to operating departments on the basis of
practical capacity, so all fixed costs are allocated and there is no unused capacity
identified with the power plant.
Question-7 (Old Course Practice Manual Q19) (Overhead & Cost-Sheet)
In a manufacturing company factory overheads are charged as fixed percentage basis on
direct labour and office overheads are charged on the basis of percentage of factory cost.
The following information are available related to the year ending 31st March, 2014 :
Product A Product B
Direct Materials ₹ 19,000 ₹ 15,000
Direct Labour ₹ 15,000 ₹ 25,000
Sales ₹ 60,000 ₹ 80,000
Profit 25% on cost 25% on sales price

You are required to find out:

(i) The percentage of factory overheads on direct labour.
(ii) The percentage of office overheads on factory cost.
Solution:
Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office
overheads on factory cost is ‘y’, then the total cost of product A and product B will be as
follows:
Product A (₹) Product B (₹)
Direct Materials 19,000 15,000
Direct labour 15,000 25,000

Prime Cost 34,000 40,000

Factory overheads (Direct labour x) 150 x 250 x

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Factory cost (i) 34,000 + 150 x 40,000 + 250 x

Office overheads (Factory cost y) (ii) 340 y + 1.5 x y 400 y + 2.5 x y

Total Cost [(i) + (ii)] 34,000 + 150 x 40,000 + 250 x

+ 340 y + 1.5 x y +400 y + 2.5 x y

Total cost on the basis of sales is:

Product A Product B
(₹) (₹)
Sales Less: 60,000 80,000
Profit
Product A – 25% on cost or 20% on Sales 12,000
Product B – 25% on sales
20,000
Total Cost 48,000 60,000

Thus,
Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000
Or, 150x + 340y + 1.5 xy = 14,000… ............................... (i)
Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000
Or, 250x + 400y + 2.5 xy = 20,000… ..............................(ii)

Equation (ii) multiplied by 0.6 and after deducting from equation (i),
we get
150x + 340y + 1.5xy = 14,000 … (i)
_150x  240y  1.5xy = _ 12,000 … (ii)
100y = 2,000
Or, y = 20
Putting value of y in equation (i), we get
150x + 340 x 20 + 1.5x x 20 = 14,000
Or, 150x + 30x = 14,000 – 6,800
Or, 180x = 7,200
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Or, x = 40
Hence, (i) the factory overheads on direct labour = 40% and
(ii) the office overheads on factory cost = 20%.
Question-8 (Old Course Practice Manual Q20) (Overhead & Budget)
Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated
cost of production are as follows:
➢ Direct material ₹ 15 per unit.
➢ Direct wages ₹ 9 per unit (subject to a minimum of ₹ 2,50,000 per month).
➢ Fixed overheads ₹ 9,60,000 per annum.
➢ Variable overheads ₹ 8 per unit.
➢ Semi-variable overheads are ₹ 5,60,000 per annum up to 50 per cent capacity and
additional ₹1,50,000 per annum for every 25 per cent increase in capacity or a part
of it.
JK Ltd. worked at 60 per cent capacity for the first three months during the year 2013-14,
but it is expected to work at 90 per cent capacity for the remaining nine months.
The selling price per unit was ₹ 44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine months
to yield a total profit of ₹15,62,500 for the whole year.
Solution:
Statement of Cost and Sales for the year 2013-14
(Maximum production capacity = 5,20,000 units per annum)
Particulars First 3 months Next 9 months Total
Capacity utilized 60% 90%
Production 5,20,000 x 3 x 60% 5,20,000 x 9 x 90%
12 12
= 78,000 units = 3,51,000 units 4,29,000 units
(₹) (₹) (₹)
Direct materials @ ₹15 per unit 11,70,000 52,65,000 64,35,000
Direct wages @ ₹ 9 per unit or 7,50,000 31,59,000 39,09,000
₹2,50,000 per month whichever ishigher.

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Prime cost (A) 19,20,000 84,24,000 1,03,44,000

Overheads
Fixed 2,40,000 7,20,000 9,60,000
Variable @ ₹8 per unit 6,24,000 28,08,000 34,32,000
Semi Variable (Refer to WorkingNote- 1,77,500 6,45,000 8,22,500
1)
Total overheads (B) 10,41,500 41,73,000 52,14,500
Total Cost (C) [(A + B)] 29,61,500 1,25,97,000 1,55,58,500
Profit during first 3 months(Bal. 4,70,500
figure)
Sales @ ₹44 per unit (78,000 x ₹ 44) 34,32,000
Desired profit during next 9 months
(₹15,62,500 – ₹4,70,500) (D) 10,92,000
Sales required for next 9 months
………………………… (E) [(C + D)] 1,36,89,000
Total profit
15,62,500
Total Sales 1,71,21,000

Required selling price per unit for last 9 months = Total sales required for last 9 months
Units produced during last 9 months

= ₹1,36,89,000 = ₹39 per unit

3,51,000 units
Workings:
(1) Semi-variable overheads:
(a) For first 3 months at 60% capacity = ₹(5,60,000 + ₹1,50,000) x 3/12
= ₹7,10,000 x 3/12
= ₹1,77,500.
(b) For remaining 9 months at 90% capacity = ₹(5,60,000 + ₹3,00,000) x 9/12
= ₹8,60,000 x 9/12
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= ₹ 6,45,000

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

Part-II: Machine Hour Rate

A. QUESTION FROM STUDY MATERIAL
ILLUSTRATION: 8
A machine costing ₹ 1,00,00,000 is expected to run for 10 years. At the end of this period
its scrap value is likely to be ₹ 9,00,000. Repairs during the whole life of the machine are
expected to be ₹ 18,00,000 and the machine is expected to run 4,380 hours per year on the
average. Its electricity consumption is 15 units per hour, the rate per unit being ₹ 5. The
machine occupies one-fourth of the area of the department and has two points out of a total
of ten for lighting. The foreman has to devote about one sixth of his time to the machine.
The monthly rent of the department is ₹ 30,000 and the lighting charges amount to ₹ 8,000
per month. The foreman is paid a monthly salary of ₹ 19,200. FIND OUT the machine hour
rate, assuming insurance is @ 1% p.a. and the expenses on oil, etc., are ₹ 900 per month.
Hints: MHR = ₹362.10

TEST YOUR KNOWLEDGE

Question-6
Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use
of a special machine and also the use of a computer. The computer is hired hired and the
hire charges work out to ₹ 4,20,000 per annum. The expenses regarding the machine are
estimated as follows:
(₹)
Rent for the quarter 17,500
Depreciation per annum 2,00,000
Indirect charges per annum 1,50,000
During the first month of operation the following details were taken from the job register:
Job
A B C
Number of hours the machine was used :
(a) Without the use of the computer 600 900 —
(b) With the use of the computer 400 600 1,000
You are required to COMPUTE the machine hour rate:
(a) For the firm as a whole for the month when the computer was used and
when the computer was not used.
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(b) For the individual jobs A, B and C.

Hints: MHR = ₹27.5, ₹10
MHR for Job: A = ₹17, B = ₹17, C = ₹27.5
Question-7
A machine shop has 8 identical Drilling machines manned by 6 operators. The machine
cannot be worked without an operator wholly engaged on it. The original cost of all these
machines works out to ₹ 8 lakhs. These particulars are furnished for a 6 months period:

Normal available hours per month 208

Absenteeism (without pay) hours 18
Leave (with pay) hours 20
Normal idle time unavoidable-hours 10
Average rate of wages per worker for 8 hours a day. ₹ 20
Production bonus estimated 15% on wages
Value of power consumed ₹ 8,050
Supervision and indirect labour ₹ 3,300
Lighting and electricity ₹1,200
These particulars are for a year Repairs and maintenance including consumables 3% of
value of machine, Insurance ₹4,000, Depreciation 10% of original cost, other sundry
works expenses ₹12,000, General management expenses ₹54,530.
You are required to WORK OUT a comprehensive machine hour rate for the machine
shop.
Hints: MRH = ₹1,37,480 = ₹23.87
5760
Question-8
Job No. 198 was commenced on October 10, 20X8 and completed on November 1, 20X8.
Materials used were ₹ 600 and labour charged directly to the job was ₹ 400. Other
information is as follows:
Machine No. 215 used for 40 hours, the machine hour rate being ₹ 3.50.
Machine No. 160 used for 30 hours, the machine hour rate being ₹ 4.00. 6 welders worked
on the job for five days of 8 hours each : the Direct labour hour per welder is ₹ 0.20.
Expenses not included for CALCULATING the machine hour or direct labour hour rate
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total led ₹ 2,000, total direct wages for the period being ₹ 20,000. Ascertain the works
costs of job No. 198.
Hints: Work Cost = ₹1,348

B. PAST YEAR EXAM QUESTIONS

Nov-22. 2(a)- 5 marks

USP Ltd. is the manufacturer of ‘double grip motorcycle tyres’. In the manufacturing
process, it undertakes three different jobs namely, Vulcanising, Brushing and Striping. All
of these jobs require the use of a special machine and also the aid of a robot when
necessary. The robot is hired from outside and the hire charges paid for every six months
is₹ 2,70,000. An estimate of overhead expenses relating to the special machine is given
below:
• Rent for a quarter is ₹ 18,000.
• The cost of the special machine is ₹ 19,20,000 and depreciation is charged @10%
per annum on straight line basis.
• Other indirect expenses are recovered at 20% of direct wages.
The factory manager has informed that in the coming year, the total direct wages will be
₹ 12,00,000 which will be incurred evenly throughout the year.
During the first month of operation, the following details are available from the job book:

Number of hours the special machine was used

Jobs Without the aid of the robot With the of the robot
Vulcanising 500 400
Brushing 1000 400
Striping - 1200

You are required to :

(i) Compute the Machine Hour Rate for the company as a whole for a month (A)
when the robot is used and (B) when the robot is not used.
(ii) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising, Brushing
and Striping.
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Solution:
Working notes:
(I) Total machine hours use 3,500
(500 + 1,000 + 400 + 400 + 1,200)
(II) Total machine hours without the use of robot 1,500
(500 + 1,000)
(III) Total machine hours with the use of robot 2,000
(400 + 400 + 1,200)
(IV) Total overheads of the machine per month
Rent (₹ 18,000 ÷ 3 months) 6,000
Depreciation [(₹ 19,20,000 x 10%) ÷ 12 months] 16,000
Indirect expenses [(₹ 12,00,000 x 20%) ÷ 12 months] 20,000
Total 42,000
(V) Robot hire charges for a month ₹ 45,000
(₹ 2,70,000 ÷ 6 months)
(VI) Overheads for using machines without robot

= ₹42,000 x 1,500 hrs = 18,000

3,500 hrs.
(VII) Overheads for using machines with robot
= ₹42,000 x 2,000 hrs + 45,000 = 69,000
3,500 hrs.

(i) Computation of Machine hour rate for the firm as a whole for a month.
a. When the robot was used: ₹69,000 = ₹34.50 per hours
2,000 hrs
b. When the robot was not used: ₹18,000 = ₹12 per hours
1,500 hrs

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(ii) Computation of Machine hour rate for the individual job

Rate per Job
hour Vulcanising Brushing Striping
(₹) Hrs. (₹) Hrs. (₹) Hrs. (₹)
Overheads
Without robot 12.00 500 6,000 1,000 12,000 - -
With robot 34.50 400 13,800 400 13,800 1,200 41,400
Total 900 19,800 1,400 25,800 1,200 41,400
Machine hour rate 22 18.43 34.50
=
Jan-21. 1(b)- 5 marks
A machine shop has 8 identical machines manned by 6 operators. The machine cannot
work without an operator wholly engaged on it. The original cost of all the 8 machines
works out to ₹ 32,00,000. The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per operator ₹ 100
Production bonus estimated 10% on wages
Power consumed ₹ 40,250
Supervision and Indirect Labour ₹ 16,500
Lighting and Electricity ₹ 6,000

The following particulars are given for a year:

Insurance ₹ 3,60,000
Sundry work Expenses ₹ 50,000
Management Expenses allocated ₹ 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine shop.

Solution:
Workings:
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Particulars Six months 6

operators (Hours)
Normal available hours per month (208 x 6 months x 6 7,488
operators)
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200

Computation of Comprehensive Machine Hour Rate

Particulars Amount for six
months (₹)
Operators' wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ₹ 32,00,000)/2} 80,000
Insurance (₹ 3,60,000/2) 1,80,000
Depreciation {(₹ 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (₹ 50,000/2) 25,000
Management expenses (₹ 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = ₹ 8,59,225/7,200 ₹ 119.33
hours

(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures
may also be done on monthly or annual basis.)
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May-19. 5(b)- 5 marks

M/s Zaina Private Limited has purchased a machine costing ₹ 29,14,800 and it is
expected to have a salvage value of ₹ 1,50,000 at the end of its effective life of 15 years.
Ordinarily the machine is expected to run for 4,500 hours per annum but it is estimated
that 300 hours per annum will be lost for normal repair & maintenance. The other
details in respect of the machine are as follows :
(i) Repair & Maintenance during the whole life of the machine are expected to be
₹ 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ₹ 87,384.
(iv) Power consumptions: 10 units per hour @ ₹ 7 per unit. No power consumption
during repair and maintenance. •
(v) Salary to operator per month ₹ 24,000. The operator devotes one third of his time
to the machine.
You are required to calculate comprehensive machine hour rate.
Solution:
Effective machine hour = 4,500 – 300 = 4,200 hours
Calculation of Comprehensive machine hour rate
Elements of Cost and Revenue Amount (₹) Per Annum
Repair and Maintenance 36,000
(₹5,40,000 ÷15 years)
Power (4,200 hours × 10 units × ₹7) 2,94,000
Depreciation (₹29,14,800 - ₹1,50,000) 1,84,320
15 years
Insurance (₹29,14,800 × 2%) 58,296
Oil and Lubricant 87,384
Salary to Operator {(₹24,000×12)/3} 96,000
Total Cost 7,56,000
Effective machine hour 4,200
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Total Machine Rate Per Hour 180

C. ADDITIONAL QUESTIONS FOR PRACTICE(PAST YEAR EXAM)

Question-1
A manufacturing unit has purchased and installed a new machine of ₹ 12,70,000 to its fleet
of 7 existing machines. The new machine has an estimated life of 12 years and is expected
to realise ₹ 70,000 as scrap at the end of its working life. Other relevant data are as follows:
1. Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300
hours for plant maintenance and 92 hours for setting up of plant.
2. Estimated cost of maintenance of the machine is ₹25,000 p.a.
3. The machine requires a special chemical solution, which is replaced at the end of each week
(6 days in a week) at a cost of ₹400 each time.
4. Four operators control operation of 8 machines and the average wages per person amounts to
₹420 per week plus 15% fringe benefits.
5. Electricity used by the machine during the production is 16 units per hour at a cost of ₹ 3 per
unit. No electricity is consumed during unproductive maintenance and setting up time.
6. Departmental and general works overhead allocated to the operation during last year was ₹
50,000. During the current year it is estimated to increase by 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is
productive.
Solution :
Working Note:
1. Effective machine hour when set-up time is unproductive:
= Budgeted working hours – (Maintenance time + Setting-up time)
= [2,592 – (300 + 92)] hours. = 2,200 hours.

2. Effective machine hour when set-up time is productive:

= Budgeted working hours – maintenance time
= (2,592 - 300) hours. = 2,292 hours.

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3. Operators’ wages per annum

Basic wages (4 operators × ₹420 × 54 weeks) = ₹ 90,720

Add: Fringe benefits (15% of ₹90,720) = ₹ 13,608

₹1,04,328
4. Depreciation per annum
₹12,70,000 - ₹70,000 = ₹1,00,000
12 years

5. Cost of special chemical solution

324 days ÷ 6 days × ₹ 400 = ₹ 21,600

Computation of Machine hour Rate

Amount Amount per hour Amount per
p.a. (₹) (₹) (when set-up hour (₹) (when
time is set-up time is
unproductive) productive)
Standing charges
B
6

Operators wages 1,04,328

₹1,04,328 x 1
8machines 2,200hours 5.93

₹ x 1 .
 machines 2,292 hours
5.69

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Departmental and general overhead

(50,000 × 110%) 55,000

₹55,000 × 1
8 machines 2,200 hours 3.13

₹55,000 x 1
8machines 2,292hours 3.00
(A) 1,59,328 9.06 8.69
Machine Expenses
Depreciation 1,00,000
₹1,00,000 ₹1,00,000 45.45 43.63
2,200 hours 2,292 hours

Electricity (16 units x ₹3) 48.00 48.00

Special chemical solution 21,600
9.82 9.42
₹21,600 ₹21,600
2,200 hours 2,292 hours
Maintenance 25,000
₹25,000 ₹25,000 11.36 10.91
2,200 hours 2,292 hours

(B) 114.63 111.96

Machine Hour Rate (A + B) 123.69 120.65
Question-2
From the details furnished below you are required to compute a comprehensive machine-
hour rate:
Original purchase price of the machine ₹ 3,24,000
(subject to depreciation at 10% per annum on original cost)
Normal working hours for the month 200 hours
(The machine works for only 75% of normal capacity)
Wages to Machine-man ₹ 125 per day (of 8 hours)
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Wages to Helper (machine attendant) ₹ 75 per day (of 8 hours) Power

cost Power cost for the month for the time worked ₹15,000
Supervision charges apportioned for the machine centre
For the month ₹3,000
Electricity & Lighting for the month ₹ 7,500
Repairs & maintenance (machine) including Consumable stores per month ₹17,500
Insurance of Plant & Building (apportioned) for the year ₹ 16,250
Other general expense per annum ₹ 27,500

The workers are paid a fixed Dearness allowance of ₹1,575 per month. Production bonus
payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
allowance. Add 10% of the basic wage and dearness allowance against leave wages and
holidays with pay to arrive at a comprehensive labour-wage for debit to production.
Solution:
Effective machine hours = 200 hours × 75% = 150 hours
Computation of Comprehensive Machine Hour Rate
Per month(₹) Per hour (₹ )
Fixed cost
Supervision charges 3,000.00
Electricity and lighting 7,500.00
Insurance of Plant and building (₹16,250 ÷12) 1,354.17
Other General Expenses (₹27,500÷12) 2,291.67
Depreciation (₹32,400÷12) 2,700.00

16,845.84 112.31

Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 15,000.00 100.00
Wages of machine man 44.91
Wages of Helper 32.97
Machine Hour rate (Comprehensive) 406.86

Wages per machine hour

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Machine man Helper

Wages for 200 hours Machine-
man (₹125× 25) ₹3,125.00 ---
Helper (₹75× 25) --- ₹1,875.00
₹1,575.00 ₹1,575.00
Dearness Allowance (DA)
₹4,700.00 ₹3,450.00

Production bonus (1/3 of Basic and DA) 1,567.00 1,150.00

Leave wages (10% of Basic and DA) 470.00 345.00
6,737.00 4,945.00
Effective wage rate per machine hour ₹44.91 ₹32.97
Question-3
A machine shop cost centre contains three machines of equal capacities. To operate these
three machines nine operators are required i.e. three operators on each machine. Operators
are paid ₹20 per hour. The factory works for fourtyeight hours in a week which includes 4
hours set up time. The work is jointly done by operators. The operators are paid fully for the
forty eight hours. In additions they are paid a bonus of 10 per cent of productive time. Costs
are reported for this company on the basis of thirteen four-weekly period.
The company for the purpose of computing machine hour rate includes the direct wages
of the operator and also recoups the factory overheads allocated to the machines. The
following details of factory overheads applicable to the cost centre are available:
• Depreciation 10% per annum on original cost of the machine. Original cost of the each
machine is ₹52,000.
• Maintenance and repairs per week per machine is ₹60.
• Consumable stores per week per machine are ₹75.
• Power : 20 units per hour per machine at the rate of 80 paise per unit.
• Apportionment to the cost centre : Rent per annum ₹5,400, Heat and Light per annum
₹9,720, foreman’s salary per annum ₹12,960 and other miscellaneous expenditure per
annum ₹ 18,000.
Required:
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate.

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Solution:
Effective Machine hour for four-week period
= Total working hours – unproductive set-up time
= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)}
= (192 – 16) hours ) =176 hours.

1. Computation of cost of running one machine for a four week period

(₹) (₹)
(A) Standing charges (per annum)
Rent 5,400.00
Heat and light Forman’s 9,720.00
salary 12,960.00
Other miscellaneous expenditure 18,000.00
46,080.00
Standing charges (per annum)
Total expenses for one machine for four week period
₹46,080 1,181.54
3machines x 13 four - week period

Wages (48 hours × 4 weeks × ₹ 20 × 3 operators)

Bonus {(176 hours × ₹ 20 × 3 operators) x 10%} 11,520.00
1,056.00
Total standing charges 13,757.54
(B) Machine Expenses 400.00
Depreciation = (₹52,000 x 10% x 1 / 13 four-week period)
Repairs and maintenance (₹60 x 4 weeks) 240.00
Consumable stores (₹ 75 x 4 weeks) 300.00
Power (176 hours x 20 units x₹ 0 .80) 2,816.00
Total machine expenses 3,756.00
(C) Total expenses (A) + (B) 17,513.54

2. Machine hour rate = ₹ 17,513.54 = ₹ 99.51

176 hours

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Question-4 (Old Course Practice Manual Q1)

In a factory, a machine is considered to work for 208 hours in a month. It includes
maintenance time of 8 hours and set up time of 20 hours.
The expense data relating to the machine are as under:
➢ Cost of the machine is ₹ 5,00,000. Life 10 years. Estimated scrap value at the end of
life is ₹ 20,000.
(₹)
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum (The machine under reference 72,000
occupies 1/6 of the area)
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000
– Power 25 units per hour at ₹ 2 per unit

Power is required for productive purposes only. Set up time, though productive, does not
require power. The Supervisor and Operator are permanent. Repairs and maintenance and
consumable stores vary with the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time
Solution:
Working Notes:

1. (i) Effective hours for standing charges (208 hours – 8 hours) = 200 hours
(ii) Effective hours for variable costs (208 hours – 28 hours) = 180 hours

2. Standing Charges per hour

Cost per month (₹) Cost per hour (₹)
(Cost per month ÷
200 hours)
Supervisor’s salary ₹6,000 2,000 10.00
3 machines

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Rent of building 1 x 7 2 , 0 0 0 1,000 5.00

6 12 months

General lighting 1,000 5.00

Total Standing Charges 4,000 20.00

Machine running expenses per hour

Cost per month (₹) Cost per hour (₹)
Depreciation 4,000 20.00
₹(5,00,000 - 20,000) x 1 ( ₹4,000)
10 years 12months
200 hours
Wages 2,500 12.50
₹2,500
200hours

Repairs & Maintenance 5,040 28.00

₹ 60,480 ₹5,040
12 months 180 hours
Consumable stores 22.00
3,960
₹ 47,520 ₹3,960
12 months 180 hours
Power (25 units × ₹2 × 180 hours) 9,000 50.00

Total Machine Expenses 24,500 132.50

Computation of Two – tier machine hour rate

Set up time Running time
rate per machine rate per machine
hour hour
(₹) (₹)
Standing Charges 20.00 20.00
Machine expenses :
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Depreciation 20.00 20.00

Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00

Machine hour rate of overheads 40.00 140.00

Wages 12.50 12.50
52.50 152.50
Comprehensive machine hour rate

Question-5 (Old Course Practice Manual Q6)

You are given the following information of the three machines of a manufacturing
department of X Ltd.:
Preliminary estimates of expenses (per annum)
Machines
Total (₹) A B (₹) C (₹)
(₹)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000

(The foreman and the attendant control all the three machines and spend equal time on
them.) The following additional information is also available:
Machines
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A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The
manufacturing department works 8 hours in a day but Saturdays are half days. All
machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.

You are required to :

Calculate predetermined machine hour rates for the above machines after taking into
consideration the following factors:
•An increase of 15% in the price of spare parts.
•An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
•20% general increase in wages rates.
Solution:
(a) Computation of Machine Hour Rate
Basis of Machines
apportionment Total (₹) A (₹) B (₹) C (₹)
(A) Standing Charges
Insurance Depreciation 8,000 3,000 3,000 2,000
Basis (3:3:2)
Indirect Labour Direct Labour 24,000 6,000 9,000 9,000
(2:3:3)
Building maintenance Floor Space 20,000 8,000 8,000 4,000
expenses (2:2:1)
Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000
(2:2:1)
Salary of foreman Equal 2,40,000 80,000 80,000 80,000
Salary of attendant Equal 60,000 20,000 20,000 20,000
Total standing charges 4,72,000 1,65,000 1,68,000 1,39,000
Hourly rate for standing charges 84.70 86.24 71.36
(B) Machine
Expenses:
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Depreciation Direct 20,000 7,500 7,500 5,000

Spare parts Final estimates 13,225 4,600 5,750 2,875
Power K.W. rating 40,000 15,000 10,000 15,000
(3:2:3)
Consumable Stores Direct 8,000 3,000 2,500 2,500
Total Machine expenses 81,225 30,100 25,750 25,375
Hourly Rate for Machine expenses 15.45 13.22 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.15 99.46 84.38

Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days Total
working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for break-down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.
(ii) Amount of spare parts is calculated as under:
A (₹) B (₹) C (₹)
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% - 1,150 575
Estimated cost 4,600 5,750 2,875

(iii) Amount of Indirect Labour is calculated as under:

(₹)
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
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24,000

(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the
cost accounts.
Question-6 ( Nov 20 Old Course Q2(a))
PQR Ltd. has provided the following information for Departments A and B of its factory:
Preliminary Estimates of expenses (Per Annum)
Total (₹) Dept A (₹) Dept B (₹)
Power 15,000 - -
Spare parts 8,000 3,000 5,000
Consumable stores 5,000 2,000 3,000
Depreciation on machinery 30,000 10,000 20,000
Insurance on machinery 3,000 1,000 2,000
Indirect labour 40,000 - -
Building maintenance 7,000 - -

The final estimates of expenses are to be prepared on the basis of above figures after
taking into consideration the following factors:
(a) An increase of 10 per cent in the price of spare parts.
(b) An increase of 20 per cent in the consumption of spare parts for Department B
only.
(c) Increase in the straight line method of depreciation from 10 per cent on the original
value of machinery to 12 per cent.
(d) 15 per cent increase in wage rates of Indirect Labour.

The following information is also available:

Dept. A Dept. B
Estimated Direct Labour hours 80,000 1,20,000
Ratio of K.W. Rating 3 2
Floor space (sq. ft.) 15,000 20,000

There are 12 holidays besides Sundays in the year. The manufacturing department works 8
hours in a day. All machines work at 90% capacity throughout the year. (Assume 365 days
in a year).
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You are required to work out the Machine Hour rates for Departments A and B.

Solution:
(a) Computation of Machine Hour Rate
Basis of Total Department
apportionment (₹) A (₹) B (₹)
(A) Standing Charges
Insurance Direct 3,000 1,000 2,000
Indirect Labour Direct Labour 46,000 18,400 27,600
(2:3)
Building maintenance Floor Space 7,000 3,000 4,000
expenses (3:4)
Total standing charges (A) 56,000 22,400 33,600
Hourly rate for standing charges (H1) 10.33 15.50
(B) Machine Expenses:
Power K.W. rating (3:2) 15,000 9,000 6,000
Spare parts Final estimates 9,900 3,300 6,600
Consumable Stores Direct 5,000 2,000 3,000
Depreciation on machinery Final estimates 36,000 12,000 24,000
Total Machine expenses (B) 65,900 26,300 39,600
Hourly Rate for Machine expenses (H2) 12.13 18.27
Total Cost (A + B) 1,21,90 48,700 73,200
0
Machine Hour rate* (H1+H2) 22.46 33.76

*Alternatively, Machine Hour rate can be calculated as total Cost  total effective hours.

Working Notes:
i. Calculation of effective working hours:
No. of off-days = No. of Sundays + No. of holidays
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= 52 + 12 = 64 days
No. of working days = 365 days – 64 days = 301 days
Total working Hours = 301 days × 8 hours
= 2,408 hours
Total effective hours = Total working hours × 90%
= 2,408 hours × 90%
= 2,167.2 or Rounded up to 2,168 hours
ii. Amount of Indirect Labour is calculated as under:
Particulars (₹)
Preliminary estimates 40,000
Add: Increase in wages @ 15% 6,000
Estimated total cost of Indirect labour 46,000

iii. Amount of spare parts is calculated as under:

Particulars A (₹) B (₹)
Preliminary estimates 3,000 5,000
Add: Increase in price @ 10% 300 500
3,300 5,500
Add: Increase in consumption @ 20% - 1,100
Estimated cost of spare parts 3,300 6,600

iv. Amount of Depreciation of machinery is calculated as under:

Particulars A (₹) B (₹)
Preliminary estimates 10,000 20,000
Add: Increase in depreciation 2000 4000
{₹ 10,000 x 2 (12-10) /10}
Estimated Depreciation 12,000 24,000
(Current depreciation x 12/10)

Question-7 ( RTP May 21 Old Course)

A manufacturing unit has purchased and installed a new machine at a cost of ₹ 24,90,000
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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

to its fleet of 5 existing machines. The new machine has an estimated life of 12 years and
is expected to realise ₹ 90,000 as scrap value at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant
maintenance work is carried out on weekends when production is totally halted.
The estimated maintenance hours are 416. During the production hours machine
set -up and change over works are carried out. During the set-up hours no
production is done. A total 312 hours are required for machine set-ups and change
overs.
(ii) An estimated cost of maintenance of the machine is ₹ 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of ₹ 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each
operator is paid ₹ 30,000 per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine
consumes 60 units per hour. During the maintenance the machine consumes only
10 units per hour. Rate of electricity per unit of consumption is ₹ 6.
(vi) Departmental and general works overhead allocated to the operation during last
year was ₹ 5,00,000. During the current year it is estimated to increase by 10%.
Required:
Compute the machine hour rate.

Solution:
Working Note:

1. Effective machine hour:

= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.

2. Operators’ salary per annum:

Salary (3 operators × ₹ 30,000 × 12months) ₹ 10,80,000
Add: Fringe benefits (20% of ₹ 10,80,000) ₹ 2,16,000
₹ 12,96,000

3. Depreciation per annum

= ₹24,90,000 - ₹90,000 = ₹ 2,00,000
12 Years

Computation of Machine hour Rate

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Amount Amount
p.a. (₹) per hour
(₹)
Standing charges
₹12,96,000 1 12,96,000 98.90
Operators’ Salary ×
6 machines 2,184 hours
Departmental and general overheads:
(₹ 5,00,000 × 110%) 5,50,000 41.97
₹5,50,000 x 1
6 machines 2,184 hours
(A) 18,46,000 140.87
Machine Expenses
Depreciation ₹ 2 , 0 0 , 0 0 0 2,00,000 91.58
2,184 hours
Electricity:
During working hours (2,496 hours × 60 units x ₹ 6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units x ₹ 6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47
Machine Hour Rate (A + B) 822.34

Question-8 ( RTP Jan 21 Old Course)

You are given the following information of the three machines of a manufacturing
department of X Ltd.:
Preliminary estimates of expenses (per annum)
Machines
Total (₹) A (₹) B (₹) C (₹)
Depreciation 2,00,000 75,000 75,000 50,000
Spare parts 1,00,000 40,000 40,000 20,000
Power 4,00,000
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Consumable stores 80,000 30,000 25,000 25,000

Insurance of machinery 80,000
Indirect labour 2,00,000
Building maintenance expenses 2,00,000
Annual interest on capital outlay 1,00,000 40,000 40,000 20,000
Monthly charge for rent and rates 20,000
Salary of foreman (per month) 42,000
Salary of Attendant (per month) 12,000

(The foreman and the attendant control all the three machines and spend equal time on
them.)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The
manufacturing department works 8 hours in a day but Saturdays are half days. All
machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.

You are required to:

CALCULATE predetermined machine hour rates for the above machines after taking into
consideration the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates.
Solution:
Computation of Machine Hour Rate
Basis of Machines
apportionment Total (₹) A (₹) B (₹) C (₹)
(A) Standing
Charges
Insurance Depreciation 80,000 30,000 30,000 20,000
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Basis (3:3:2)
Indirect Labour Direct Labour 2,40,000 60,000 90,000 90,000
(2:3:3)
Building Floor Space 2,00,000 80,000 80,000 40,000
maintenance expenses (2:2:1)

Rent and Rates Floor Space 2,40,000 96,000 96,000 48,000

(2:2:1)
Salary of Equal 5,04,000 1,68,000 1,68,000 1,68,000
foreman
Salary of Equal 1,44,000 48,000 48,000 48,000
attendant
Total standing charges 14,08,000 4,82,000 5,12,000 4,14,000
Hourly rate for standing charges 247.43 262.83 212.53
(B) Machine
Expenses:
2,00,000 75,000 75,000 50,000
Depreciation Direct
1,32,250 46,000 57,500 28,750
Spare parts Final estimates 4,00,000 1,50,000 1,00,000 1,50,000
Power K.W. rating(3:2:3)
Consumable Direct 80,000 30,000 25,000 25,000
Store
Total Machine expenses

Hourly Rate for Machine expenses

Total (A + B)
Machine Hour rate

Stores

Total Machine expenses 8,12,250 3,01,000 2,57,500 2,53,750

Hourly Rate for Machine expenses 154.52 132.19 130.26

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Total (A + B) 22,20,250 7,83,000 7,69,500 6,67,750

Machine Hour rate 401.95 395.02 342.79
Working Notes:

(i) Calculation of effective working hours:

No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days Total
working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for break- down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.

(ii) Amount of spare parts is calculated as under:

A (₹) B (₹) C (₹)

Preliminary estimates 40,000 40,000 20,000
Add: Increase in price @ 15% 6,000 6,000 3,000
46,000 46,000 23,000
Add: Increase in consumption @ 25% - 11,500 5,750
Estimated cost 46,000 57,500 28,750

(iii) Amount of Indirect Labour is calculated as under:

(₹)
Preliminary estimates 2,00,000
Add: Increase in wages @ 20% 40,000
2,40,000

(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the
cost accounts.
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Part-III: Treatment of under and over absorption of overhead

A. QUESTIONS FROM STUDY MATERIAL

TEST YOUR KNOWLEDGE

Question-9
In a factory, overheads of a particular department are recovered on the basis of ₹ 5 per
machine hour. The total expenses incurred and the actual machine hours for the department
for the month of August were ₹ 80,000 and 10,000 hours respectively. Of the amount of ₹
80,000, ₹ 15,000 became payable due to an award of the Labour Court and ₹ 5,000 was in
respect of expenses of the previous year booked in the current month (August). Actual
production was 40,000 units, of which 30,000 units were sold. On analysing the reasons, it
was found that 60% of the under-absorbed overhead was due to defective planning and the
rest was attributed to normal cost increase. EXPLAIN how would you treat the under-
absorbed overhead in the cost accounts?

Hints: Under absorption = 10,000, SR = ₹0.10 P.U.

Question-10 (Dec 21 Q5(b))

In a manufacturing unit, factory overhead was recovered at a pre-determined rate of ₹ 25

per man-day. The total factory overhead expenses incurred and the man-days actually
worked were ₹ 41.50 lakhs and 1.5 lakh man-days respectively. Out of the 40,000 units
produced during a period, 30,000 were sold.
On analysing the reasons, it was found that 60% of the unabsorbed overheads Were due to
defective planning and the rest were attributable to increase in overhead costs.
EXPLAIN how would unabsorbed overheads be treated in Cost Accounts?
Hints: Under absorption = 4,00,000, SR = ₹4 P.U.

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Question-11

A factory has three production departments. The policy of the factory is to recover the
production overheads of the entire factory by adopting a single blanket rate based on the
percentage of total factory overheads to total factory wages. The relevant data for a month
are given below:
Direct Factory
Department Direct Direct Machine
Materials Wages Overheads Labour hours hours
(₹) (₹) (₹)
Budget:
Machining 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 -
Actual:
Machining 7,80,000 96,000 3,90,000 24,000 96,000
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 -
The details of one of the representative jobs produced during the month are as under:
Job No. CW 7083 :
Department Direct Direct Direct Machine
Materials Wages Labour hours hours
(₹) (₹)
Machining 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 -
The factory adds 30% on the factory cost to cover administration and selling
overheads and profit.
Required :
1. Calculate the overhead absorption rate as per the current policy of the company and
determine the selling price of the Job No. CW 7083.
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2. Suggest any suitable alternative method(s) of absorption of the factory overheads and
Calculate the overhead recovery rates based on the method(s) so recommended by
you.
3. Determine the selling price of Job CW 7083 based on the overhead application rates
calculated in (ii) above.
4. Calculate the department wise and total under or over recovery of overheads based
on the company’s current policy and the method(s) recommended by you.
Hints:
(i) Over absorption rate = 125% of Direct Wages.
Selling price = ₹4,660.50
(ii)
Department Recovery Rate
Machine 4.50 per machine hour
Assembly 1.40 per labour hour
Packing 2.50 per labour hour
(iii) Selling price = ₹4,989.40
(iv)
Machine Assembly Packing
Current Policy (2,70,000) 2,53,500 (22,500)
Proposed Policy 42,000 42,000 15,000

Question-12
The total overhead expenses of a factory are ₹4,46,380. Taking into account the normal
working of the factory overhead war recovered in production at ₹ 1.25 per hour. The actual
hours worked were 2,93,104. STATE how would you proceed to close the books of
accounts, assuming that besides 7,800 units produced of which 7,000 were sold, there were
200 equivalent units in work-in- progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of
increase in the cost of indirect materials and indirect labour and the remaining 50% was due
to factory inefficiency. Also give the profit implication of the method suggested.
Hints: Under recovery = 80,000, SR = 5 P.U.

Question-13
ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-
determined rate of ₹ 10 per machine hour.

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At the end of financial year 20X8-X9, it has been found that actual production overheads
incurred were ₹ 6,00,000. It included ₹ 45,000 on account of ‘written off’ obsolete stores
and ₹ 30,000 being the wages paid for the strike period under an award.
The production and sales data for the year 20X8-X9 is as under:
Production:
Finished goods 20,000 units
Work-in-progess 8,000 units
(50% complete in all respects)
Sales:
Finished goods 18,000 units

The actual machine hours worked during the period were 48,000. It has been found that one-
third of the under-absorption of production overheads was due to lack of production
planning and the rest was attributable to normal increase in costs.
1. Calculate the amount of under-absorption of production overheads during the year 20x8-
x9; and
2. Show the accounting treatment of under-absorption of production overheads.
Hints: Under recovery = 45,000, SR = ₹1.25 P.U.

Question-14
A light engineering factory fabricates machine parts to customers. The factory commenced
fabrication of 12 Nos. machine parts to customers’ specifications and the expenditure
incurred on the job for the week ending 21st August, 20X8 is given below:

(₹) (₹)
Direct materials (all items) 780.00
Direct labour (manual) 20 hours @₹ 15 per hour 300.00
Machine facilities :
Machine No. I : 4 hours @ ₹ 45 180.00
Machine No. II : 6 hours @ ₹ 65 390.00 570.00
Total 1,650.00
Overheads @ ₹ 8 per hour on 20 manual hours 160.00
Total cost 1,810.00
The overhead rate of ₹ 8 per hour is based on 3,000 man hours per week; similarly, the
machine hour rates are based on the normal working of Machine Nos. I and II for 40 hours
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out of 45 hours per week.

After the close of each week, the factory levies a supplementary rate for the recovery of
full overhead expenses on the basis of actual hours worked during the week. During the
week ending 21st August, 20X8, the total labour hours worked was 2,400 and Machine
Nos. I and II had worked for 30 hours and 32.5 hours respectively.

PREPARE a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly
levying the supplementary rates.

Hints: Total amount = ₹2,000, Supplementary rate = ₹2,

Machine facilities (Supplementary rate): M1 = 15, M2 = 15

B. PAST YEAR EXAM QUESTIONS

Nov’19 Q2(b) 10 Marks

ABS enterprises produces a product and adopts the policy to recover factory overheads
applying blanket rate based on mchine hours. The cost records of the concern reveal
following information :
Budgeted production overheads ₹10,35,000
Budgeted machine hour rate 90,000
Actual machine hour worked 45,000
Actual production overheads ₹8,80,000
Production overheads (actual) include:-
Paid to worker as per count’s award ₹50,000
Wages paid for strike period ₹38,000
Stores written off ₹22,000
Expenses of previous year booked in C.Y. ₹18,500
Production-
Finished goods 30,000 units
Sale of finished goods 27,000 units
The analysis of cost information reveals that 1/3 of the under absorption of overheads was
due to defective production planning and balance was attributable to increase in costs.
You are required :
1. To find out the amount of under absorption of overheads.
2. To give the ways of treating it in cost accounts.
3. To apportion the under absorbed overheads over the items.

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C. ADDITIONAL QUESTIONS FOR PRACTICE( PAST YEAR EXAM)

Question-1
PQR manufacturers – a small scale enterprise produces a single product and has
adopted a policy to recover the production overheads of the factory by adopting a single
blanket rate based on machine hours. The budgeted production overheads of the factory
are ₹ 10,08,000 and budgeted machine hours are 96,000.
For a period of first six months of the financial year 2013-2014, following information
were extracted from the books:
Actual production overheads ₹6,79,000
Amount included in the production overheads:
Paid as per court’s order ₹ 45,000
Expenses of previous year booked in current year ₹ 10,000
Paid to workers for strike period under an award ₹ 42,000
Obsolete stores written off ₹ 18,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 22,000 units
Works-in-progress
(50% complete in every respect) 16,000 units

Sale:
Finished goods 18,000 units

The actual machine hours worked during the period were 48,000 hours. It is revealed from
the analysis of information that ¼ of the under-absorption was due to defective production
policies and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
(ii) to show the accounting treatment of under-absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.

Solution:
Amount of under absorption of production overheads during the period of first six
months of the year 2013-2014:
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Amount Amount
(₹) (₹)
Total production overheads actually incurred during the period 6,79,000
Less: Amount paid to worker as per court order
45,000
Expenses of previous year booked in the current year
Wages paid for the strike period under an award 10,000
Obsolete stores written off
42,000
Less: Production overheads absorbed as per machine hour
rate (48,000 hours × ₹10.50*) 18,000 1,15,000
5,64,000
Amount of under absorbed production overheads
5,04,000
60,000

Budgeted Machine hour rate (Blanket rate) = ₹ 10,08,000 = ₹ 10.50 per hour
96,000 hours

(ii) Accounting treatment of under absorbed production overheads: As, one fourth of
the under absorbed overheads were due to defective production policies, this being
abnormal, hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account = (60,000 * ¼) ₹
15,000.
Balance of under absorbed production overheads should be distributed over Works
in progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (60,000 * ¾) ₹45,000.

Supplementary rate = ₹ 45,000 = ₹ 1.50 per unit

30,000 units

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(iii) Apportionment of under absorbed production overheads over WIP, Finished goods
and Cost of sales:
Equivalent Amount (₹)
completed units
Work-in-Progress (16,000 units × 50% ×1.50) 8,000 12,000
Finished goods (4,000 units × 1.50) 4,000 6,000
18,000 27,000
Cost of sales (18,000 units × 1.50)
Total 30,000 45,000

Question-2 (Old Course Practice Manual Q9)

Your company uses a historical cost system and applies overheads on the basis of “pre
determined” rates. The following are the figure from the Trial Balance as at 30 th
September, 2013:-
Manufacturing overheads ₹ 4,26,544 Dr.
Manufacturing overheads applied ₹ 3,65,904 Cr.
Work-in-progress ₹ 1,41,480 Dr.
Finished goods stocks ₹ 2,30,732 Dr.
Cost of goods sold ₹ 8,40,588 Dr.
Give two methods for the disposal of the unabsorbed overheads and show the profit
implications of each method.
Solution:
Calculation of manufacturing overhead under absorbed (₹)
Actual overheads 4,26,544
Overhead recovered (applied) 3,65,904
Under absorption (recovery) of overhead 60,640

The two methods for the disposal of the under-absorbed overheads in this problem may be:-
(1) Write off the under – absorbed overhead to Costing Profit & Loss Account.
(2) Use supplementary rate, to recover the under-absorbed overhead.

According to first method, the total unabsorbed overhead amount of ₹60,640 will be written
off to Costing Profit & Loss Account. The use of this method will reduce the profits of the
concern by ₹ 60,640 for the period.
According to second method, a supplementary rate may be used to adjust the overhead cost
of each cost unit. The under-absorbed amount in total may, at the end of the accounting
period, be apportioned on ratio basis to the three control accounts, viz, Work-in-progress,
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Finished goods stock and Cost of goods sold account. Apportioning of under-absorbed
overhead can be carried out by using direct labour hours/ machine hours/ the value of the
balances in each of these accounts, as the basis. Prorated figures of under-absorbed overhead
over Work-in-progress, Finished goods stock and Cost of goods sold in this question on the
basis of values, of the balances in each of these accounts are as follows:-
Additional Overhead (Under-absorbed) Total
(₹) (₹) (₹)
Work-in-progress 1,41,480 7,074* 1,48,554
Finished Goods Stock 2,30,732 11,537@ 2,42,269
Cost of Goods Sold 8,40,588 8,82,617
42,029#
12,12,800 60,640 12,73,440

By using this method, the profit for the period will be reduced by ₹42,029 and the value of
stock will increase by ₹18,611. The latter will affect the profit of the subsequent period.
Working Notes
The apportionment of under-absorbed overhead over Work-in-progress, Finished goods
stock and Cost of goods sold on the basis of their value in the respective account is as
follows:-

*Overhead to be absorbed by work-in-progress = ₹60,640 x 1,41,480 = ₹7,074

12,12,800
@Overhead to be absorbed by finished goods = ₹60,640 x 2,30,732 = ₹11,537
12,12,800
#Overhead to be absorbed by cost of goods sold = ₹60,640 x 8,40,588 = ₹42,029
12,12,800

MISCELLANEOUS
Question-1
A machine was purchased from a manufacturer who claimed that his machine could
produce 36.5 tonnes in a year consisting of 365 days. Holidays, break-down, etc., were
normally allowed in the factory for 65 days. Sales were expected to be 25 tonnes during
the year and the plant actually produced 25.2 tonnes during the year. You are required to
state the following figures:

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• Rated Capacity.
• Practical Capacity.
• Normal Capacity.
• Actual Capacity.
Solution:
(a) Rated capacity 36.5 tonnes
(Refers to the capacity of a machine or a plant as indicated by its manufacturer)
(b) Practical capacity 30.0 tonnes
[Defined as actually utilised capacity of a plant i.e. 36.5 tonnes × (365 - 65) days]
365 days
(c) Normal capacity 25.0 tonnes
(It is the capacity of a plant utilized based on sales expectancy)
(d) Actual capacity 25.2 tonnes
(Refers to the capacity actually achieved)
Question-2
Following information is available for the first and second quarter of the year 2013-14
of ABC Limited:
Production (in units) Semi-variable cost (₹)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
You are required to segregate the semi-variable cost and calculate:
(a) Variable cost per unit; and
(b) Total fixed cost.
Solution:
Change in Semi - variable cost under two production level
(a) Variable Cost per Unit =
Change in production quantity in two levels
₹3,10,000 -₹ 2,80,000
=
42,000units - 36,000units
= ₹ 5 per units

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Overhead- Absorption Costing Method By: CA. PRAKASH PATEL

(b) Total Fixed Cost = Semi Variable Cost for 36,000 units – Variable cost for 36,000 units
= ₹ 2,80,000 – (36,000 units × ₹ 5)
= ₹ 1,00,000

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Page | 384
Activity Based Costing By: CA. PRAKASH PATEL

Chapter. 4: Activity Based Costing

A. QUESTION FROM STUDY MATERIAL
Question-1
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C. The
budgeted costs and production for the year ending 31st March, 20X8 are as follows:
A B C
Production quantity (Units) 4,000 3,000 1,600
Resources per Unit:
- Direct Materials (Kg.) 4 6 3
- Direct Labour (Minutes) 30 45 60
The budgeted direct labour rate was ₹10 per hour, and the budgeted material cost was ₹
2 per kg. Production overheads were budgeted at ₹ 99,450 and were absorbed to products
using the direct labour hour rate. ABC Ltd. followed an Absorption Costing System.
ABC Ltd. is now considering to adopt an Activity Based Costing system. The following
additional information is made available for this purpose.
1. Budgeted overheads were analysed into the following:
(₹)
Material handling 29,100
Storage costs 31,200
Electricity 39,150
2. The cost drivers identified were as follows:
Material handling Weight of material handled
Storage costs Number of batches of material
Electricity Number of Machine operations
3. Data on Cost Drivers was as follows:

A B C
For complete production:
Batches of material 10 5 15
Per unit of production:
Number of Machine operators 6 3 2

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Activity Based Costing By: CA. PRAKASH PATEL

You are requested to:

1. PREPARE a statement for management showing the unit costs and total costs of
each product using the absorption costing method.
2. PREPARE a statement for management showing the product costs of each product
using the ABC approach.

STATE what are the reasons for the different product costs under the two approaches?

Hints:
Product Cost Absorption Costing (₹) ABC (₹)
A 86,000 1,00,360
B 96,750 86,940
C 52,800 48,256

Question-2
MST Limited has collected the following data for its two activities. It calculates activity
cost rates based on cost driver capacity.

Activity Cost Driver Capacity Cost

Power Kilowatt hours 50,000 kilowatt hours ₹2,00,000
Quality Inspections Number of 10,000 Inspections ₹ 3,00,000
Inspections

The company makes three products M, S and T. For the year ended March 31, 20X9,
the following consumption of cost drivers was reported:

Product Kilowatt hours Quality Inspections

M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) COMPUTE the costs allocated to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) DISCUSS the factors the management considers in choosing a capacity level to
compute the budgeted fixed overhead cost rate.
Hints: (i)
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Activity Based Costing By: CA. PRAKASH PATEL

Product M S T
Power 40,000 80,000 60,000
Quality Inspection 1,05,000 75,000 90,000

(ii) Cost of unused capacity = ₹50,000

Question-3
ABC Ltd. Manufactures two types of machinery equipment Y and Z and applies/absorbs
overheads on the basis of direct-labour hours. The budgeted overheads and direct-labour
hours for the month of December, 20X8 are ₹ 12,42,500 and 20,000 hours respectively.
The information about Company’s products is as follows:

Equipment Equipment
Y Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ₹ 300 per unit ₹ 450 per unit
Direct labour cost
Y : 3 hours @ ₹ 150 per hour
X : 4 hours @ ₹ 150 per hour ₹ 450 ₹ 600
ABC Ltd.’s overheads of ₹ 12,42,500 can be identified with three major activities:
Order Processing (₹ 2,10,000), machine processing (₹ 8,75,000), and product inspection
(₹ 1,57,500). These activities are driven by number of orders processed, machine hours
worked, and inspection hours, respectively. The data relevant to these activities is as
follows:

Orders processed Machine hours Inspection

worked hours
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000
Required:
(i) Assuming use of direct-labour hours to absorb/apply overheads to production,
COMPUTE the unit manufacturing cost of the equipment Y and Z, if the budgeted
manufacturing volume is attained.
(ii) Assuming use of activity-based costing, COMPUTE the unit manufacturing costs
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Activity Based Costing By: CA. PRAKASH PATEL

of the equipment Y and Z, if the budgeted manufacturing volume is achieved.

(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hours
as an application base, CALCULATE the amount of cost distortion (under-costed
or over-costed) for each equipment.

Hints:
Unit Manufacturing Cost Y Z
Direct Labour Hours 936.38 1,298.50
ABC 976.80 1,266.16

Question-4
‘Humara - Apna’ bank offers three products, viz., deposits, Loans and Credit Cards. The
bank has selected 4 activities for a detailed budgeting exercise, following activity based
costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, so
that prices may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Estimation for the budget period
Cost (₹)
ATM Services:
(a) Machine 4,00,000 All fixed, no change.
Maintenance 2,00,000 Fully fixed, no change.
(b) Rents 1,00,000 Expected to double during budget period.
(c) Currency
Replenishment Cost 7,00,000 (This activity is driven by no. of ATM
transactions)
Computer Processing 5,00,000 Half this amount is fixed and no change is
expected.
The variable portion is expected to
increase to three times the current level.
(This activity is driven by the number of
computer transactions)
Issuing Statements 18,00,000 Presently, 3 lac statements are made. In
the budget period, 5 lac statements are
expected. For every increase of one lac
statement, one
lac rupees is the budgeted increase.

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Activity Based Costing By: CA. PRAKASH PATEL

(This activity is driven by the number of

statements)

Computer Inquiries 2,00,000 Estimated to increase by 80% during the

budget period.
(This activity is driven by telephone minutes)
The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM Transactions 1,50,000 --- 50,000
No. of Computer Processing 15,00,000 2,00,000 3,00,000
Transactions
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000
Credit Card Accounts.
Required
(i) Calculate the budgeted rate for each activity.
(ii) Prepare the budgeted cost statement activity wise.
(iii) Find the budgeted product cost per account for each product using (i) and (ii) above.

Solution:
Statement Showing “Budgeted Cost per unit of the Product”
Activity Activity Activity No. of Activity Deposits Loans Credit
Cost Driver Units of Rate (₹) Cards
(Budgeted) Activity
(₹) Driver
(Budget)
ATM 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 --- 2,00,000
Services Transaction
Computer 10,00,000 No. of 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing Computer
Transaction
Issuing 20,00,000 No. of 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements Statements
Customer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000
Inquiries Minutes
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Activity Based Costing By: CA. PRAKASH PATEL

Budgeted 41,60,000 29,30,000 3,90,000 8,40,000

Cost
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60

TEST YOUR KNOWLEDGE

Question-1
Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating
to a period are as under:
Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit @ ₹ 20 4 12 8
Direct Material per unit (₹) 90 80 120
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production
overheads on the basis of machine hours. The machine hour rate of overheads is ₹ 6 per
hour.
The company proposes to use activity based costing system and the activity analysis is as
under:

Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs……………………………………… 20%
Machine operation costs……………………………………. 30%
Inspection costs……………………………………………… 40%
Material procurement related costs……………………….. 10%
Required
(i) Calculate the cost per unit of each product using traditional method of absorbing
all production overheads on the basis of machine hours.
(ii) Calculate the cost per unit of each product using activity based costing principles.

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Activity Based Costing By: CA. PRAKASH PATEL

Solution:
(i) Statement Showing “Cost per unit - Traditional Method”
Particulars of Costs P Q R
(₹) (₹) (₹)
Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours) x ₹20] 80 240 160
Production Overheads [(10, 18, 14 hours) x ₹6] 60 108 84
Cost per unit 230 428 364

(ii) Statement Showing “Cost per unit - Activity Based Costing”

Products P Q R
Production (units) 3,000 5,000 20,000
(₹) (₹) (₹)
Direct Materials (90, 80, 120) 2,70,000 4,00,000 24,00,000
Direct Labour (80, 240, 160) 2,40,000 12,00,000 32,00,000
Machine Related Costs @ ₹1.80 per hour
54,000 1,62,000 5,04,000
(30,000, 90,000, 2,80,000)
Setup Costs @ ₹9,600 per setup
1,92,000 96,000 1,92,000
(20, 10, 20)
Inspection Costs @ ₹4,800 per inspection
4,80,000 1,92,000 2,88,000
(100, 40, 60)
Purchase Related Costs @ ₹750 per purchase
45,000 75,000 1,20,000
(60, 100, 160)
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit (Total Cost / Units) 427.00 425.00 335.20

Question-2
RST Limited specializes in the distribution of pharmaceutical products. It buys from the
pharmaceutical companies and resells to each of the three different markets.
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April, 20X9 in respect of RST Limited has been
reported:
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Activity Based Costing By: CA. PRAKASH PATEL

General Drugstore Chemist

Supermarket Chains (₹) Shop (₹)
Chains (₹)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold per delivery 82,500 27,500 4,950
Number of deliveries 330 825 2,750
In the past, RST Limited has used gross margin percentage to evaluate the relative
profitability of its distribution channels.
The company plans to use activity –based costing for analysing the profitability of its
distribution channels.
The Activity analysis of RST Limited is as under:
Activity Area Cost Driver
Customer purchase order processing Purchase orders by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store per
delivery
Shelf-stocking at customer store Hours of shelf-stocking

The April, 20X9 operating costs (other than cost of goods sold) of RST Limited are ₹
8,27,970. These operating costs are assigned to five activity areas. The cost in each area
and the quantity of the cost allocation basis used in that area for April, 20X9 are as
follows:
Activity Area Total costs in Total Units of Cost Allocation
April, 20X9 (₹) Base used in April, 20X9
Customer purchase order processing 2,20,000 5,500 orders
Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries

Cartons dispatched to store 2,09,000 2,09,000 cartons

Shelf-stocking at customer store 28,160 1,760 hours

Other data for April, 20x9 include the following:

General Drugstore Chemist
Supermarket Chains Shop

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Activity Based Costing By: CA. PRAKASH PATEL

Chains
Total numbers of orders 385 990 4,125
Average number of line items per order 14 12 10
Total number of store deliveries 330 825 2,750
Average number of cartons shipped
Per store delivery 300 80 16
Average number of hours of
shelf-stocking per store delivery 3 0.6 0.1
Required:
(i) COMPUTE for April, 20X9 gross-margin percentage for each of its three
distribution channels and compute RST Limited’s operating income.
(ii) COMPUTE the April, 20X9 rate per unit of the cost-allocation base for each of
the five activity areas.
(iii) COMPUTE the operating income of each distribution channel in April, 20X9
using the activity-based costing information. Comment on the results. What new
insights are available with the activity-based cost information?
(iv) DESCRIBE four challenges one would face in assigning the total April, 20X9
operating costs of ₹ 8,27,970 to five activity areas.

Hints: (i)
Particular Super Market Drug Store Chemist
Gross Margin 2.91% 4.76% 9.09%

Operating income = 3.72%

(iii)
Particular Super Market Drug Store Chemist
Operating Income 2.33% 3.96% 5.96%

Question-3
Alpha Limited has decided to analyse the profitability of its five new customers. It buys
bottled water at ₹ 90 per case and sells to retail customers at a list price of ₹ 108 per
case. The data pertaining to five customers are:
Customers
A B C D E
Cases sold 4,680 19,688 1,36,800 71,550 8,775
List Selling Price ₹108 ₹108 ₹108 ₹108 ₹108
Actual Selling Price ₹108 ₹106.20 ₹99 ₹104.40 ₹97.20
Number of Purchase orders 15 25 30 25 30

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Number of Customer visits 2 3 6 2 3

Number of deliveries 10 30 60 40 20
Kilometers travelled per delivery 20 6 5 10 30
Number of expedited deliveries 0 0 0 0 1

Its five activities and their cost drivers are:

Activity Cost Driver Rate
Order taking ₹ 750 per purchase order
Customer visits ₹ 600 per customer visit
Deliveries ₹ 5.75 per delivery Km travelled
Product handling ₹ 3.75 per case sold
Expedited deliveries ₹ 2,250 per expedited delivery
Required:
(i) COMPUTE the customer-level operating income of each of five retail customers
now being examined (A, B, C, D and E). Comment on the results.
(ii) STATE what insights are gained by reporting both the list selling price and the
actual selling price for each customer?

Hints:
Customer A B C D E
Operating Income 53,090 2,23,531 6,90,375 7,39,757 274

Question-4 (Dec 21 Q3(b) )

Family Store wants information about the profitability of individual product lines: Soft
drinks, Fresh produce and Packaged food. Family store provides the following data for
the current year for each product line:
Soft drinks Fresh Packaged
produce food
Revenues ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500
Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase orders 360 840 360
placed
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
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Family store also provides the following information for the current year:
Activity Description of activity Total Cost Cost-allocation
base
Bottles Returning of empty ₹ 60,000 Direct tracing to
returns bottles soft drink line
Ordering Placing of orders for ₹ 7,80,000 1,560 purchase
purchases orders
Delivery Physical delivery and ₹ 12,60,000 3,150 deliveries
receipt of goods
Shelf Stocking of goods onstore ₹ 8,64,000 8,640 hours of
stocking shelves and on- going shelf-stocking time
restocking
Customer Assistance provided to ₹ 15,36,000 15,36,000 items
Support customers including sold
check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods
sold) to product lines on the basis of cost of goods sold of each product line.
CALCULATE the operating income and operating income as a % of revenues
for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold)
to product lines using and activity-based costing system, CALCULATE the
operating income and operating income as a % of revenues for each product line.
Hints:
(i) Operating Income: 10,20,000; Operating income as a percentage of revenues: 4.97%
(ii) Operating Income: 10,20,000; Operating income as a percentage of revenues: 4.97%
Question-5
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures
three ranges of beauty soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and
BABYSOFT- Diamond. The budgeted costs and production for the month of December
are as follows:
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT-
Diamond
Production of 4,000 3,000 2,000
soaps
(Units)
Resources Qty Rate Qty Rate Qty Rate
per Unit:

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Activity Based Costing By: CA. PRAKASH PATEL

- Essential 60 ml ₹ 200 / 100 55 ml ₹ 300 / 100 65 ml ₹ 300 / 100

Oils ml ml ml
- Cocoa 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g
Butter
- Filtered 30 ml ₹ 15 / 100 ml 30 ml ₹ 15 / 100 ml 30 ml ₹ 15 / 100
Water ml
- Chemicals 10 g ₹ 30 / 100 g 12 g ₹ 50 / 100 g 15 g ₹ 60 / 100 g
- Direct 30 ₹ 10 / hour 40 ₹ 10 / hour 60 ₹ 10 / hour
Labour minutes minutes minutes
Bio-organic Ltd. followed an Absorption Costing System and absorbed its production
overheads, to its products using direct labour hour rate, which were budgeted at ₹
1,98,000.

Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For
this, additional information regarding budgeted overheads and their cost drivers is
provided below:
Particulars (₹) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operations per unit of production are 5, 5, and 6 for
BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg
and 1 kg respectively (ii) Mass of output produced is equivalent to the mass of input
materials taken together.)
You are requested to:
(i) PREPARE a statement showing the unit costs and total costs of each product
using the absorption costing method.
(ii) PREPARE a statement showing the product costs of each product using the ABC
approach.
(iii) STATE what are the reasons for the different product costs under the two
approaches?

Hints:
(i)
BABYSOFT- BABYSOFT- BABYSOFT-
Gold (₹) Pearl (₹) Diamond (₹)
Total unit costs 189.00 244.17 291.50
Total costs 7,56,000 7,32,510 5,83,000
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Activity Based Costing By: CA. PRAKASH PATEL

(ii)
BABYSOFT- BABYSOFT- BABYSOFT-
Gold (₹) Pearl (₹) Diamond (₹)
Total unit costs 192.48 243.70 285.72
Total costs 7,69,920 7,31,100 5,71,440

(iii) The difference in the total costs under the two systems is due to the differences
in the overheads borne by each of the products. The Activity Based Costs appear to be
more accurate

B. PAST YEAR EXAM QUESTIONS

May-23. Q4(b) (5 marks)

Beta Limited produces 50,000 Units, 45,000 Units and 62,000 Units of product 'A', 'B'
and 'C' respectively. At present the company follows absorption costing method and
absorbs overhead on the basis of direct labour hours. Now, the company wants to adopt
Activity Based Costing
The information provided by Beta Limited is follows:
Product A Product B Product C
Floor Space Occupied 5,000 Sq.Ft. 4,500 Sq.Ft. 6,200 Sq.Ft.
Direct Labour Hours 7,500 Hours 7,200 Hours 7,800 Hours
Direct Machine Hours 6,000 Hours 4,500 Hours 4,650 Hours
Power consumption 32% 28% 40%
Overhead for year are as follows:
₹

Rent & Taxes 8,63,500

Electricity Expenses 10,66,475
Indirect labour 13,16,250
Repair & Maintenance 1,28,775
33,75,000
Required:
(i) Calculate the overhead rate per labour hour under Absorption Costing.
(ii) Prepare a cost statement showing overhead cost per unit for each product - 'A',
'B' and 'C' as per Activity based Costing.

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Activity Based Costing By: CA. PRAKASH PATEL

Solution:
(i) Calculation of Overhead rate per hour
Total Overheads
Total Hours
33,75,000 = ₹ 150 per hour
22,500

(ii) Statement showing overhead cost per unit as per Activity Based Costing
Product
Overheads Cost Driver Total A B C
₹ ₹ ₹ ₹
Rent & Taxes Floor space 8,63,500 2,75,000 2,47,500 3,41,000
(50:45:62)
Electricity Power Consumption 10,66,475 3,41,272 2,98,613 4,26,590
(32:28:40)
Indirect labour Labour hours 13,16,250 4,38,750 4,21,200 4,56,300
(75:72:78)
Repair & Machine hours 1,28,775 51,000 38,250 39,525
Maintenance (600:450:465)
Total Cost 33,75,000 11,06,022 10,05,563 12,63,415
Units 50,000 45,000 62,000
Cost per Unit 22.12 22.35 20.38

Nov-22. Q2(c) (4 marks)

XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee.
It furnishes the following data for a year:
Product Actual Output Total Machine Total Numberof Total Number
(units) hours Purchaseorders of
set ups
Express Coffee 5,000 20,000 160 20
Instant Coffee 60,000 1,20,000 384 44
The annual overheads are as under:
Particulars ₹
Machine Processing costsSet 7,00,000
up related costs 7,68,000
Purchase related costs 6,80,000
You are required to:

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Activity Based Costing By: CA. PRAKASH PATEL

(i) Compute the costs allocated to each product – Express Coffee and Instant Coffee
from each activity on the basis of Activity- Based Costing (ABC) method.
(ii) Find out the overhead cost per unit of each product – Express coffee and Instant
coffee based on (i) above.
Solution:
(iii) Estimation of Cost-Driver rate
Overhead cost Cost-driver level Cost driver rate
Activity
(₹) (₹)
Machine processing 7,00,000 1,40,000 5
Machine hours
Set up Costs 7,68,000 64 12,000
Number of set up
Purchase related Costs 6,80,000 544 1250
Number of
purchase order

Cost Allocation under Activity based Costing

Express Coffee Instant Coffee

(₹) (₹)
Overhead Cost
Machine processing (Cost 5 × 20,000 = 1,00,000 5 × 1,20,000 = 6,00,000
Driver rate - ₹ 5) (or
20,000:1,20,000)
Set up Costs (Cost Driver rate 12,000 × 20 = 2,40,000 12,000 × 44 = 5,28,000
- ₹ 12,000)) (or 20:44)
Purchase related Costs (Cost 1,250 × 160 = 2,00,000 1,250 × 384 = 4,80,000
Driver rate - ₹ 1250) (or
160:384)
Total overhead cost 5,40,000 16,08,000

(iv) Overhead Cost per unit

Per unit Overhead cost (₹) (₹)
5,40,000 /5,000 108
16,08,000/60,000 26.80

Jan-21. Q4(b) (10 marks)

ABC Ltd. manufactures three products X, Y and Z using the same plant and resources.
It has given the following information for the year ended on 31st March, 2020:
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Activity Based Costing By: CA. PRAKASH PATEL

X Y Z
Production Quantity 1200 1440 1968
(units) Cost per unit:
Direct Material (₹) 90 84 176
Direct Labour (₹) 18 20 30

Budgeted direct labour rate was ₹ 4 per hour and the production overheads, shown in
table below, were absorbed to products using direct labour hour rate. Company followed
Absorption Costing Method. However, the company is now considering adopting
Activity Based Costing Method.

Budgeted Cost Driver Remarks

Overheads (₹)
Material 50,000 No. of orders No. of orders was 25
Procurement units for each product.
Set-up 40,000 No. of production All the three products
Runs are produced in
production runs of 48
units.
Quality Control 28,240 No. of Inspections Done for each
production run.
Maintenance 1,28,000 Maintenance hours Total maintenance
hours were 6,400 and
was allocated in the
ratio of 1:1:2 between
X, Y & Z.
Required:
1. Calculate the total cost per unit of each product using the Absorption Costing
Method.
2. Calculate the total cost per unit of each product using the Activity Based Costing
Method.

Solution:
Traditional Absorption Costing
X Y Z Total

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Activity Based Costing By: CA. PRAKASH PATEL

(a) Quantity (units) 1,200 1,440 1,968 4608

(b) Direct labour per unit (₹) 18 20 30 -
(c) Direct labour hours (a × b)/₹ 4 5,400 7,200 14,760 27,360

Overhead rate per direct labour hour:

= Budgeted overheads /Budgeted labour hours
= (₹ 50,000 + ₹ 40,000 + ₹ 28,240 + ₹ 1,28,000) / 27,360 hours
= ₹ 2,46,240 / 27,360 hours
= ₹ 9 per direct labour hour
Unit Costs:
X Y Z
Direct Costs:
- Direct Labour (₹) 18.00 20.00 30.00
- Direct Material (₹) 90.00 84.00 176.00
Production Overhead: (₹) 40.50 45.00 67.50

Total cost per unit (₹) 148.50 149.00 273.50

2. Calculation of Cost-Driver level under Activity Based Costing

X Y Z Total
Quantity (units) 1,200 1,440 1,968 -

No. of orders (to be 48 58 79 185

rounded off for fraction) (1200 / 25) (1440 / 25) (1968 / 25)
No. of production runs 25 30 41 96
(1200 / 48) (1440 / 48) (1968 / 48)
No. of Inspections (done 25 30 41 96
for each production run)

Maintenance hours
1,600 1,600 3,200 6400

Calculation of Cost-Driver rate

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Activity Budgeted Cost-driver Cost Driver rate

Cost (₹) level (₹)
(a) (b) (c) = (a) / (b)
Material procurement 50,000 185 270.27
Set-up 40,000 96 416.67
Quality control
28,240 96 294.17
Maintenance
1,28,000 6,400 20.00

Calculation of total cost of products using Activity Based Costing

Particulars Product
X (₹) Y (₹) Z (₹)
Direct Labour 18.00 20.00 30.00
Direct Material 90.00 84.00 176.00
Prime Cost per 108.00 104.00 206.00
unit (A)
Material 10.81 10.89 10.85
procurement [(48 x 270.27)/1200] [(58 x 270.27)/1440] [(79 x 270.27)/1968]
Set-up 8.68 8.68 8.68
[(25 x 416.67)/1200] [(30 x 416.67)/ 1440] [(41 x 416.67)/ 1968]
Quality control 6.13 6.13 6.13
[(25 x 294.17)/1200] [(30 x 294.17)/ 1440] [(41 x 294.17)/ 1968]
Maintenance 26.67 22.22 32.52
[(1,600 x 20)/1200] [(1,600 x 20)/ 1440] [(3,200 x 20)/ 1968]
Overhead Cost 52.29 47.92 58.18
per unit (B)
Total Cost per 160.29 151.92 264.18
unit (A + B)
Note: Question may also be solved assuming no. of orders for material procurement to
be 25 for each product.

Nov-20. Q5(b) (6 marks)

ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and
Mixed Fruit.
The following cost data for the month of March 2020 are as under:
Particulars Apple Orange Mixed Fruit

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Activity Based Costing By: CA. PRAKASH PATEL

Units produced and sold 10,000 15,000 20,000

Material per unit (₹) 8 6 5
Direct Labour per unit (₹) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170

Overheads incurred by the company during the month are as under :

(₹)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560

Required:
(i) Calculate cost driver's rate.
(ii) Calculate total cost of each product using Activity Based Costing.
Solution:
(i) Calculation Cost-Driver’s rate
Overhead cost Cost-driver level Cost driver rate
Activity (₹) (₹)
(A) (B) (C) = (A)/(B)
Ordering 64,000 34 + 32 + 14 800
= 80 no. of purchase
orders
Delivery 1,58,200 110 + 64 + 52 700
= 226 no. of deliveries
Shelf 87,560 110 + 160 + 170 199
stocking = 440 shelf stocking hours

(ii) Calculation of total cost of products using Activity Based Costing

Particulars Fruit Juices
Apple (₹) Orange (₹) Mixed Fruit (₹)
Material cost 80,000 90,000 1,00,000
(10,000 x ₹ 8) (15,000 x ₹ 6) (20,000 x ₹ 5)
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Direct labour cost 50,000 60,000 60,000

(10,000 x ₹ 5) (15,000 x ₹ 4) (20,000 x ₹ 3)
Prime Cost (A) 1,30,000 1,50,000 1,60,000
Ordering cost 27,200 25,600 11,200
(800 x 34) (800 x 32) (800 x 14)
Delivery cost 77,000 44,800 36,400
(700 x 110) (700 x 64) (700 x 52)
Shelf stocking cost 21,890 31,840 33,830
(199 x 110) (199 x 160) (199 x 170)
Overhead Cost (B) 1,26,090 1,02,240 81,430
Total Cost (A + B) 2,56,090 2,52,240 2,41,430

Nov-19. Q2(a) (10 marks)

PQR Ltd. has decided to analyze the profitability of it’s five new customers. It buys
soft drink bottles in cases at ₹45 per case and sells them to retail customers at a list
price at ₹ 54 per case. The data pertaining to five customers are given below:
Particulars Customers
A B C D E
Number of cases sold 9,360 14,200 62,000 38,000 9,800
List Selling Price 54 54 54 54 54
Actual Selling Price 54 53.40 49 50.20 48.60
Number of Purchase 30 50 60 50 60
orders
Number of Customer 4 6 12 4 6
visits
Number of deliveries 20 60 120 80 40
Kilometers travelled 40 12 10 20 60
per delivery
Number of expedited 0 0 0 0 2
deliveries

Its five activities and their cost drivers are:

Activity Cost Driver Rate
Order taking ₹ 200 per purchase order
Customer visits ₹ 300 per customer visit
Deliveries ₹ 4.00 per delivery Km travelled
Product handling ₹ 2.00 per case sold
Expedited deliveries ₹ 100 per each such delivery
Required:
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Activity Based Costing By: CA. PRAKASH PATEL

(i) COMPUTE the customer-level operating income of each of five retail customers
by using the Cost Drivers rates
(ii) Examine the results to give your comments on customer ‘D’ in comparison with
customer ‘C’ and on customer ‘E’ in comparison with customer ‘A’.
Solution:
Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level
operating activities costs:
Customers
Particular A B C D E
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price)(₹): 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(b) {(a) × ₹ 54)}
Discount (₹): (c) {(a) × - 8,520 3,10,000 1,44,400 52,920
Discount per case} (14,200 (62,000 (38,000 (9,800
cases × cases × cases × cases ×
₹ 0.6) ₹ 5) ₹ 3.80) ₹ 5.40)
Cost of goods sold (₹): (d) 4,21,200 6,39,000 27,90,000 17,10,000 4,41000
{(a) × ₹ 45}
Customer level operating activities costs
Order taking costs (₹): (No. of 6,000 10,000 12,000 10,000 12,000
purchase × ₹ 200)
Customer visits costs 1,200 1,800 3,600 1,200 1,800
(₹) (No. of customer visits
×
₹ 300)
Delivery vehicles travel costs 3,200 2,880 4,800 6,400 9,600
(₹) (Kms travelled by delivery
vehicles × ₹ 4 per km.)
Product handling costs (₹) 18,720 28,400 1,24,000 76,000 19,600
{(a) ×₹ 2}
Cost of expediting deliveries - - - - 200
(₹)
{No. of expedited deliveries
× ₹ 100}
Total cost of customer level 29,120 43,080 1,44,400 93,600 43,200
operating activities (₹)

(i) Computation of Customer level operating income

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Activity Based Costing By: CA. PRAKASH PATEL

Customers
Particular A B C D E
(₹) (₹) (₹) (₹) (₹)
Revenues (At list 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
price)
(Refer to working note)
Less: Discount - 8,520 3,10,000 1,44,400 52,920
(Refer to working note)
Revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(At actual price)
Less: Cost of goodssold 4,21,200 6,39,000 27,90,000 17,10,000 4,41000
(Refer to working note)
Gross margin 84,240 1,19280 2,48,000 1,97,600 35,280
Less: Customer level 29,120 43,080 1,44,400 93,600 43,200
operating activities costs
(Refer to working note)
Customer level operating 55,120 76,200 1,03,600 1,04,000 (7,920)
income

(ii) Comments

Customer D in comparison with Customer C: Operating income of Customer D is

more than of Customer C, despite having only 61.29% (38,000 units) of the units volume
sold in comparison to Customer C (62,000 units). Customer C receives a higher percent
of discount i.e. 9.26% (₹ 5) while Customer D receive a discount of 7.04% (₹ 3.80).
Though the gross margin of customer C (₹ 2,48,000) is more than Customer D (₹
1,97,600) but total cost of customer level operating activities of C (₹ 1,44,400)
is more in comparison to Customer D (₹ 93,600). As a result, operating income is more
in case of Customer D.

Customer E in comparison with Customer A: Customer E is not profitable while

Customer A is profitable. Customer E receives a discount of 10% ( ₹ 5.4) while Customer
A doesn’t receive any discount. Sales Volume of Customer A and E is almost same.
However, total cost of customer level operating activities of E is far more ( ₹ 43,200) in
comparison to Customer A (₹ 29,120). This has resulted in occurrence of loss in case of
Customer E.

May-19. Q3(b) (10 marks)

MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the
basis of direct labour hours. The budgeted overheads and direct labour hours for the

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month of March 2019 are ₹ 15,00,000 and 25,000 hours respectively. The information
about the company's products is as follows:
Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost ₹ 350 per unit ₹ 400 per unit
Direct Labour Cost
A: 3 hours @ ₹ 120 per hour ₹ 360
B: 4 hours @ ₹ 120 per hour ₹ 480
Overheads of ₹ 15,00,000 can be identified with the following three major activities:
Order Processing: ₹ 3,00,000
Machine Processing: ₹10,00,000
Product Inspection: ₹ 2,00,000
These activities are driven by the number of orders processed, machine hours worked
and inspection hours respectively. The data relevant to these activities is as follows:
Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000
Required:
(i) Prepare a statement showing the manufacturing cost per unit of each product
using the absorption costing method assuming the budgeted manufacturing
volume is attained.
(ii) Determine cost driver rates and prepare a statement showing the manufacturing
cost per unit of each product using activity based costing, assuming the budgeted
manufacturing volume is attained.
(iii) MNO Ltd.'s selling prices are based heavily on cost. By using direct labour
hours as an application base, calculate the amount of cost distortion (under costed
or over costed) for each equipment.

Solution:
(i) Overheads application base: Direct labour hours
Equipment Equipment
A (₹) B (₹)
Direct material cost 350 400
Direct labour cost 360 480
Overheads* 180 240
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Activity Based Costing By: CA. PRAKASH PATEL

890 1120

*Pre-determined rate = Budgeted overheads = ₹15,00,000 = ₹60

Budgeted direct labour hours 25,000 hours

(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver rate
(₹) (₹)
Order processing 600
3,00,000 Orders processed 500
Machine processing 50,000
10,00,000 Machine hours 20
Inspection 15,000
2,00,000 Inspection hours 10
Equipment Equipment
A (₹) B (₹)
Direct material cost 350 400
Direct labour cost 360 480
Prime Cost(A) 710 880
Overhead Cost
Order processing 400: 200 2,00,000 1,00,000
Machine processing 22,500: 27,500 4,50,000 5,50,000
Inspection 5,000: 15,000 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000

(Overheads cost per unit for each overhead can also be calculated)
Per unit cost A (₹) B (₹)
7,00,000 /3,200 (B)-A 218.75
8,00,000/ 3,850 (B)-B 207.79
Unit manufacturing cost (A+B) 928.75 1,087.79

(iii) Calculation of Cost Distortion

Equipment Equipment
A (₹) B (₹)
Unit manufacturing cost–using direct
labour hours as an application base 890.00 1,120.00
Unit manufacturing cost-using activity
based costing 928.75 1,087.79
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Cost distortion -38.75 32.21

Nov-18. Q3(b) (10 marks)

M/s. HMB Limited is producing a product in 10 batches each of 15000 units in a year
and incurring following overheads their on:

Amount (₹)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime costs for the year amounted to ₹ 3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of
prime cost. Now it wants to shift to activity-based costing. Information relevant to
Activity drivers for a year are as under:

Activity Driver Activity Volume

No. of purchase orders 1500
Maintenance hours 9080
No. of set-ups 2250
No. of inspections 2710
The company has produced a batch of 15000 units and has incurred ₹ 26,38,700 and
₹ 3,75,200 on materials and wages respectively.
The usage of activities of the said batch are as follows:

Materials orders 48 orders

Maintenance hours 810 hours
No. of set-ups 40
No. of inspections 25
You are required to:
1. find out cost of product per unit on absorption costing basis for the said batch.
2. determine cost driver rate, total cost and cost per unit of output of the said batch on
the basis of activity based costing.

Solution:
Working Note:
Overhead absorption rate = 51,79,300 x 100 = 17.18%

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Activity Based Costing By: CA. PRAKASH PATEL

3,01,39,000
(i) Cost of Product Under Absorption Costing
Item of Cost Amount (₹)
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
Overheads: 51,79,300 ×30,13,900 5,17,930
3,01,39,000
Total Cost 35,31,830
Units 15,000
Cost per unit 235.46

(ii) Cost driver rate, total cost and cost per unit on the basis of activity-based costing
method Absorption Costing

Calculation of Cost Driver rate:

Activity ₹. Activity Cost Driver
Volume Rate
Material Procurement 22,50,000 1500 1500
Maintenance 17,30,000 9080 190.53
Setup 6,84,500 2250 304.22
Quality Control 5,14,800 2710 189.96

Calculation of total Cost and cost per unit:

Item of Cost Amount (₹)
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
Material Purchase (22,50,000 x 48) /1,500 72,000

Maintenance (17,30,000 x 810) / 9,080 1,54,328

Setup (6,84,500 x 40) / 2,250 12,169

Quality Control (5,14,800 x 25) / 2,710 4,749

Total Cost 32,57,146

Unit 15,000
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Activity Based Costing By: CA. PRAKASH PATEL

Cost per unit 217.14

May-18. Q4(a) (10 marks)

PQR Pens Ltd. manufactures two products - 'Gel Pen' and 'Ball Pen'. It furnishes the
following data for the year 2017:

Product Annual Total Machine Total number of Total number

Output (Units) Hours Purchase orders of set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56

The annual overheads are as under:

Particulars ₹
Volume related activity costs 4,75,020
Set up related costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each Product - Gel Pen and Ball Pen on the basis of:
(i) Traditional method of charging overheads
(ii) Activity based costing method and
(iii) Find out the difference in cost per unit between both the methods.

Solution:
(i) Statement Showing Overhead Cost per unit “Traditional Method”
Gel Pen (₹) Ball Pen (₹)

Units 5,500 24,000

Overheads (₹) (Refer to 4,80,000 10,80,000
W.N.) (20 x 24,000 hrs.) (20 x 54,000 hrs.)
Overhead Rate per unit 87.27 45
(₹) (₹ 4,80,000 / 5,500 units) (₹ 10,80,000 /24,000 units)
Working Notes:
Overhead Rate per Machine Hour
= Total overhead incurred by a company
Total machine hours
= ₹4,75,020 + 5,79,988 + 5,04,992 = ₹15,60,000

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24,000 hours + 54,000 hours 78,000 hours

= ₹20 per machine hour
(ii) Statement Showing “Activity Based Overhead Cost”
Activity Cost Cost Driver Ratio Total Gel Pen (₹) Ball Pen (₹)
Pool Amount
(₹)
Volume Related Machine hours 24:54 4,75,020 1,46,160 3,28,860
Activity Costs

Setup Related No. of Setups 30:56 5,79,988 2,02,321 3,77,667

Costs
Purchase No. of 240:448 5,04,992 1,76,160 3,28,832
Related Costs Purchase
Orders
Total Cost 5,24,641 10,35,359
Output (units) 5,500 24,000
Unit Cost (Overheads) 95.39 43.13
(iii)
Gel Pen (₹) Ball Pen (₹)

Overheads Cost per unit (₹) (Traditional Method) 87.27 45

Overheads Cost per unit (₹) (ABC) 95.39 43.13
Difference per unit -8.12 +1.87
(Volume related activity cost, set up related costs and purchase related cost can also be
calculated under Activity Base Costing using Cost driver rate. However, there will be
no changes in the final answer.)

July-21. Q3(b) (10 marks)

PQR Ltd. is engaged in the production of three products P, Q and R. The company
calculates Activity Cost Rates on the basis of Cost Driver capacity which is provided as
below:
Activity Cost Driver Cost Driver Capacity Cost (₹)
Direct Labour hours Labour hours 30,000 Labour hours 3,00,000
Production runs No. of Production runs 600 Production runs 1,80,000
Quality Inspections No. of Inspection 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity / Products P Q R

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Direct Labour hours 10,000 8,000 6,000

Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
You are required to:
(i) Compute the costs allocated to each Product from each Activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iv) A potential customer has approached the company for supply of 12,000 units of a
new product. 'S' to be delivered in lots of 1500 units per quarter. This will involve
an initial design cost of ₹ 30,000 and per quarter production will involve the
following:
Direct Material ₹ 18,000
Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating Direct and Indirect costs and compute the Sales
value per quarter of product 'S' using ABC system considering a markup of 20%
on cost.

Solution:
(i) Statement of cost allocation to each product from each activity
Product
P (₹) Q (₹) R (₹) Total (₹)
Direct Labour 1,00,000 80,000 60,000 2,40,000
hours (Refer to (10,000 Labour (8,000 Labour (6,000 Labour
working note) hours × ₹10) hours × ₹10) hours × ₹10)
Production runs 60,000 54,000 48,000 1,62,000
(Refer toworking (200 Productionruns (180 Productionruns (160 Productionruns
note) × ₹ 300) × ₹ 300) × ₹ 300)

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Quality 90,000 75,000 45,000 2,10,000

Inspections (3,000 (2,500 (1,500
(Refer to Inspections × Inspections × Inspections ×
working note) ₹30) ₹ 30) ₹ 30)

Working note:
Rate per unit of cost driver
Direct Labour hours (₹ 3,00,000/30,000 Labour ₹ 10 per Labour hour
hours)
Production runs (₹ 1,80,000/600 Production runs) ₹ 300 per Production run

Quality Inspection (₹ 2,40,000/8,000 Inspections) ₹ 30 per Inspection

(ii) Computation of cost of unused capacity for each activity

Particulars (₹)
Direct Labour hours [(₹ 3,00,000 – ₹ 2,40,000) or (6,000 x ₹ 10)] 60,000
Production runs [(₹ 1,80,000 – ₹ 1,62,000) or (60 x ₹ 300)] 18,000
Quality Inspection [(₹ 2,40,000 – ₹ 2,10,000) or (1,000 x ₹ 30)] 30,000
Total cost of unused capacity 1,08,000

(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using
ABC System
Particulars (₹)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (₹ 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ₹ 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ₹ 300) 4,500
Inspection Cost (250 Inspections × ₹ 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (₹ 58,500/1500 units) 39

May-22. Q5(a) (10 marks)

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Activity Based Costing By: CA. PRAKASH PATEL

Star Limited manufacture three products using the same production methods. A
conventional product costing system is being used currently. Details of the three products
for a typical period are:
Product Labour Hrs.per unit Machine Hrs. per Materials perUnit1 Volume inUnits
unit
AX 1.00 2.00 35 7,500
BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 25,000
1
Material cost per unit
Direct Labour costs ₹ 20 per hour and production overheads are absorbed on a machine
hour basis. The overhead absorption rate for the period is ₹ 30 per machine hour.
Management is considering using Activity Based Costing system to ascertain the cost of
the products. Further analysis shows that the total production overheads can be divided
as follows:
Particulars %
Cost relating to set-ups 40
Cost relating to machinery 10
Cost relating to material handling 30
Costs relating to inspection 20
Total production overhead 100
The following activity volumes are associated with the product line for the period as a
whole. Total activities for the period:
Product No. of set-ups No. of movements of Materials No. of inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500
Required:
(i) Calculate the cost per unit for each product using the conventional method.
(ii) Calculate the cost per unit for each product using activity based costing method.
Solution:
(i) Statement showing “Cost per unit” using “conventional method”
Particulars of Costs AX BX CX
(₹) (₹) (₹)
Direct Materials 35 25 45
Direct Labour 20 18 30
Production Overheads 60 45 75
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Activity Based Costing By: CA. PRAKASH PATEL

Cost per unit 115 88 150

(ii) Statement Showing “Cost per unit using “Activity Based Costing”
Products AX BX CX
Production (units) 7,500 12,500 25,000
(₹) (₹) (₹)
Direct Materials 2,62,500 3,12,500 11,25,000
Direct Labour 1,50,000 2,25,000 7,50,000
Machine Related Costs 45,000 56,250 1,87,500

Products AX BX CX
Setup Costs 2,62,500 3,37,500 5,55,000
Material handling Cost 1,50,000 2,10,000 5,06,250
Inspection Costs 77,000 1,54,000 3,46,500
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost Units) 126.267 103.62 138.81

Working Notes:
Calculation of Total Machine hours
Particulars AX BX CX
(A) Machine hours per unit 2 1.5 2.5
(B) Production (units) 7,500 12,500 25,000
(C) Total Machine hours (A× B) 15,000 18,750 62,500

Total Machine hours = 96,250

Total Production overheads = 96,250 × 30 = ₹ 28,87,500
Calculation of Cost Driver Rate
Cost Pool % Overheads (₹) Cost Driver Cost Driver Cost DriverRate
(Basis) (Units) (₹)
Set up 40 11,55,000 No of set ups 1,540 750 per set up
Machine 10 2,88,750 Machine hours 96,250 3 per machine
Operation hour
Material 30 8,66,250 No of material 1,155 750 per material
Handling movement movement

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Inspection 20 5,77,500 No of 1,500 385 per

inspection inspection

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A company manufactures three products namely A, B and C in a factory. The following
cost data for the month of March, 20X8 are as under:
Activity A B C
Unit produced 10,000 15,000 20,000

Direct labour hour per unit 3 4.5 4

Machine hour per unit 6 4 5

Set-up of machines 20 25 30

Number of orders 15 12 10

Machine operating cost (₹) 34,50,000

Machine set-up cost (₹) 4,36,000
Order processing cost (₹) 2,56,000
Required:
(i) IDENTIFY Cost pool, Cost drivers.
(ii) CALCULATE cost driver rate.
(iii) CALCULATE overheads rate per unit using activity- based costing method.
Solution:
(i) Identification of Cost pools and cost drivers:
Cost Pools Cost Drivers
Machine operating cost No. of machine hours
Machine set-up cost No. of machine set-
Order processing cost ups No. of orders

(ii) Calculation of cost driver rate:

Cost Pools Cost (₹) Cost Drivers Rate per cost
driver (₹)
Machine operating 34,50,000 2,20,000 machine hours 15.68
cost {(10,000×6)+(15,000×4)+(20,000
×5)}
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Machine set-up 4,36,000 75 set-ups 5,813.33

cost (20+25+30)

Order processing 2,56,000 37 orders 6,918.92

cost (15+12+10)
(iii) Calculation of overhead rate per unit using ABC:
Activity Cost Products
driver A B C
rate (₹) Total Cost Rate Rate Rate
per per per
unit unit unit
(i) (ii) = (i)×Cost (iii) ÷ (ii) = (i)×Cost (iii) (ii) = (i)×Cost (iii)
driver units driver ÷ driver ÷
unit unit
s s
Machine 15.68 9,40,800 94.08 9,40,800 62.72 15,68,000 78.40
operating
(15.68×60000) (15.68×60000) (15.68×1,00000)
cost
1,16,267 11.63 1,45,333 9.69 1,74,400 8.72
Machine 5,813.33
set-up cost (5,813.33×20) (5,813.33×25) (5,813.33×30)

1,03,784 10.38 83,027 5.54 69,189 3.46

Order 6,918.92 (6,918.92×15) (6,918.92×12) (6,918.92×10)

processing
cost
Question-2
CDE Ltd. is following Activity based costing. Budgeted overheads, cost drivers and
volume are as follows:
Cost pool Budgeted Cost driver Budgeted volume
overheads (₹)
Material 18,42,000 No. or orders 1,200
Procurement
Material handling 8,50,000 No. of movement 1,240

Maintenance 24,56,000 Maintenance hours 17,550

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Activity Based Costing By: CA. PRAKASH PATEL

Set-up 9,12,000 No. of set-ups 1,450

Quality control 4,42,000 No. of inspection 1,820

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

Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.
Solution:
(i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver rate
overheads (₹) (₹)
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86

(ii) Calculation of cost for the batch:

Particulars Amount (₹) Amount (₹)

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Material cost 24,62,000.00

Wages 4,68,500.00
Overheads:
- Material procurement (₹1,535×56 orders) 85,960.00
- Material handling (₹685.48×84 movements) 57,580.32
- Maintenance (₹139.94×1,420 hours) 1,98,714.80
- Set-up (₹628.97×60 set-ups) 37,738.20
- Quality control (₹242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17

Question-3
MST Limited has collected the following data for its two activities. It calculates activity
cost rates based on cost driver capacity.
Activity Cost Driver Capacity Cost (₹)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000

Quality Inspections Number of 10,000 Inspections 60,00,000

Inspections
The company makes three products M, S and T. For the year ended March 31, 20X7, the
following consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to
compute the budgeted fixed overhead cost rate.

Solution:

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Activity Based Costing By: CA. PRAKASH PATEL

(i) Statement of cost allocation to each product from each activity

Product
M (₹) S (₹) T (₹) Total (₹)
Power 8,00,000 16,00,000 12,00,000 36,00,000
(Refer to (10,000 kWh ×₹80) (20,000 kWh ×₹80) (15,000 kWh ×₹80)
working
note)
Quality 21,00,000 15,00,000 18,00,000 54,00,000
Inspections (3,500 inspections (2,500 inspections (3,000 inspections
(Refer to ×₹600) ×₹600) ×₹600)
working note)
Working Note:
Rate per unit of cost driver:
Power :(₹40,00,000 ÷ 50,000 kWh) = ₹80/kWh
Quality Inspection :(₹60,00,000 ÷ 10,000 inspections) = ₹600 per inspection

(i) Calculation of cost of unused capacity for each activity:

(₹)
Power (₹40,00,000 – ₹36,00,000) 4,00,000
Quality Inspections (₹60,00,000 – ₹54,00,000) 6,00,000

Total cost of unused capacity 10,00,000

(ii) Factors management consider in choosing a capacity level to compute the budgeted
fixed overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting for any capacity level.
Question-4
Linex Limited manufactures three products P, Q and R which are similar in nature
and are usually produced in production runs of 100 units. Product P and R require
both machine hours and assembly hours, whereas product Q requires only
machine hours. The overheads incurred by the company during the first quarter
are as under:

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Machine Department expenses…………………........................ 18,48,000

Assembly Department expenses…………………………………. 6,72,000
Setup costs…………………………………………………………. 90,000
Stores receiving cost………………………………………………. 1,20,000
Order processing and dispatch…………………………………… 1,80,000
Inspect and Quality control cost………………………………… 36,000
The date related to the three products during the period are as under:

P Q R
Units produced and sold 15,000 12,000 18,000
Machine hours worked 30,000 hrs.
48,000 54,000
hrs. hrs.
Assembly hours worked (direct labour hours) 15,000 hrs. - 27,000
hrs.
Customers orders executed (in numbers) 1,250 1,000 1,500
Number of requisitions raised on the stores 40 30 50
Required
Prepare a statement showing details of overhead costs allocated to each product type
using activity based costing.
Solution:
Calculation of “Activity Rate”

Cost Pool Cost (₹) Cost Cost Driver

Driver Rate (₹)
[A]
[B] [C] = [A]÷[B]
Machine Department 18,48,000 Machine Hours 14.00
Expenses (1,32,000 hrs.)

Assembly Department 6,72,000 Assembly Hours 16.00

Expenses (42,000 hrs.)

Setup Cost 90,000 No. of Production Runs 200.00

(450*)
Stores Receiving Cost 1,20,000 No. of Requisitions 1,000.00
Raised on the Stores
(120)
Order Processing and 1,80,000 No. of Customers 48.00
Dispatch Orders Executed
(3,750)
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Inspection and Quality 36,000 No. of Production Runs 80.00

Control Cost (450*)
Total (₹) 29,46,000
*Number of Production Run is 450 (150 + 120 + 180)
Statement Showing “Overheads Allocation”
Particulars of Cost P Q R Total
Cost Driver
Machine Machine Hours 4,20,000 6,72,000 7,56,000 18,48,000
Department
Expenses (30,000 (48,000 × (54,000 ×
× ₹14) ₹14) ₹14)
Assembly Assembly Hours 2,40,000 --- 4,32,000 6,72,000
Department (15,0 (27,000
Expenses 00 × ₹16)
×
₹16)
Setup Cost No. of Production 30,000 24,000 36,000 90,000
Runs (150 × (120 × (180 ×
₹200) ₹200) ₹200)
Stores Receiving No. of 40,000 30,000 50,000 1,20,000
Requisitions
Cost Raised on the (40 (30 (50
Stores × ₹1,000) ×₹1,000) × ₹1,000)
Order Processing No. of Customers 60,000 48,000 72,000 1,80,000
and Dispatch Orders Executed (1,250 (1,000 (1,500
× ₹48) × ₹48) × ₹48)
Inspection and No. of Production 12,000 9,600 14,400 36,000
Quality Control Runs (150 × (120 × ₹80) (180 × ₹80)
Cost
₹80)
Overhead (₹) 8,02,000 7,83,600 13,60,400 29,46,000

Question-5
G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different
products is as follows:
Product Product Product
Particulars
A B C
Direct Materials 50 40 40 ₹/u
Direct Labour @ ₹ 10/ hour 30 40 50 ₹/u
Production Overheads 30 40 50 ₹/u
Total Cost 110 120 140 ₹/u
Quantity Produced 10,000 20,000 30,000 Units
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Activity Based Costing By: CA. PRAKASH PATEL

G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly
appointed management accountant has suggested that the company should introduce ABC
system and has identified cost drivers and cost pools as follows:

Activity Cost Pool Cost Driver Associated Cost

Stores Receiving Purchase Requisitions 2,96,000
Inspection Number of Production Runs 8,94,000
Dispatch Orders Executed 2,10,000
Machine Setup Number of Setups 12,00,000
The following information is also supplied:

Details Product Product Product

A B C
No. of Setups 360 390 450
No. of Orders Executed 180 270 300
No. of Production Runs 750 1,050 1,200
No. of Purchase Requisitions 300 450 500
Required
Calculate activity based production cost of all the three products.
Solution:
The total production overheads are ₹26,00,000:
Product A: 10,000 × ₹ 30 = ₹ 3,00,000
Product B: 20,000 × ₹ 40 = ₹ 8,00,000
Product C: 30,000 × ₹ 50 = ₹ 15,00,000
On the basis of ABC analysis this amount will be apportioned as follows:

Statement Showing “Activity Based Production Cost”

Activity Cost Driver Ratio Total A B C
Cost Pool Amount (₹) (₹) (₹)
(₹)
Stores Purchase 6:9:10 2,96,000 71,040 1,06,560 1,18,400
Receiving Requisition
Inspection Production 5:7:8 8,94,000 2,23,500 3,12,900 3,57,600
Runs
Dispatch Orders 6:9:10 2,10,000 50,400 75,600 84,000
Executed
Machine Setups 12:13:15 12,00,000 3,60,000 3,90,000 4,50,000
Setups
Total Activity Cost 7,04,940 8,85,060 10,10,000
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Activity Based Costing By: CA. PRAKASH PATEL

Quantity Sold 10,000 20,000 30,000

Unit Cost (Overheads) 70.49 44.25 33.67
Add: Conversion Cost 80 80 90
Total 150.49 124.25 123.67

Question-6
Bank of HK operated for years under the assumption that profitability can be increased by
increasing Rupee volumes. But that has not been the case. Cost analysis has revealed the
following:
Activity Activity Cost Activity Activity
(₹) Driver Capacity
Providing ATM Service 1,00,000 No. of Transactions 2,00,000
Computer Processing 10,00,000 No. of Transactions 25,00,000
Issuing Statements 8,00,000 No. of Statements 5,00,000
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000

The following annual information on three products was also made available:

Activity Driver Checking Personal Gold

Accounts Loans Visa
Units of Product 30,000 5,000 10,000
ATM Transactions 1,80,000 0 20,000
Computer Transactions 20,00,000 2,00,000 3,00,000
Number of Statements 3,00,000 50,000 1,50,000
Telephone Minutes 3,50,000 90,000 1,60,000
Required
(i) Calculate rates for each activity.
(ii) Using the rates computed in requirement (i), calculate the cost of each product.

Solution:
Statement Showing “Activity Rate”
Activity Activity Activity No. of Activity
Cost [a] Driver Units of Rate
(₹) [a] / [b]
Activity
(₹)
Driver [b]
Providing ATM 1,00,00 No. of ATM Transactions 2,00,000 0.50
Service 0
Computer 10,00,00 No. of Computer 25,00,000 0.40
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Activity Based Costing By: CA. PRAKASH PATEL

Processing 0 Transactions
Issuing Statements 8,00,00 No. of Statements 5,00,000 1.60
0
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60

Statement Showing “Cost of Product”

Activity Checking Accounts Personal Loans Gold Visa (₹)
(₹) (₹)
Providing ATM 90,000 --- 10,000
Service (1,80,000 tr.×₹ 0.50) (20,000 tr. × ₹ 0.50)
Computer 8,00,000 80,000 1,20,000
Processing (20,00,000 tr. × ₹ (2,00,000 tr. × ₹ (3,00,000 tr. × ₹ 0.40)
0.40) 0.40)
Issuing Statements 4,80,000 80,000 2,40,000
(3,00,000 st. × ₹ 1.60) (50,000 st. × ₹ 1.60) (1,50,000 st. × ₹
1.60)
Customer Inquiries 2,10,000 54,000 96,000
(3,50,000 min. × ₹ (90,000 min. × ₹ (1,60,000 min. × ₹
0.60) 0.60) 0.60)
Total Cost [a] ₹ 15,80,000 ₹ 2,14,000 ₹ 4,66,000
Units of Product [b] 30,000 5,000 10,000
Cost of each Product 52.67 42.80 46.60
[a] / [b]

Question-7
The following are Product Alpha's data for next year budget:
Activity Cost Driver Cost Driver Cost Pool
Volume / (₹)
Year
Purchasing Purchase orders 1,500 75,000
Setting Batches produced 2,800 1,12,000
Materials handling Materials movements 8,000 96,000
Inspection Batches produced 2,800 70,000
Machining costs Machine hours 50,000 1,50,000
Purchase orders…………………...25
Output ..................................... …..15,000 units
Production batch size ............. …..100 units
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Activity Based Costing By: CA. PRAKASH PATEL

Materials movements per batch…..6

Machine hours per unit… ...... 0.1
Required
(i) Calculate the budgeted overhead costs using activity based costing principles.
(ii) Calculate the budgeted overhead costs using absorption costing (absorb
overhead using machine hours).
(iii) How can the company reduce the ABC for Product Alpha?

Solution:
(i) ‘Budgeted Overhead Costs’ using ‘Activity Based Costing’
Computation of ‘Cost per unit of Cost Driver’
Activity Cost Driver Cost Pool Cost Cost / Unit of Cost
[(a)] Driver Driver [(a) / (b)]
Volume /
Yr
[(b)]
Purchasing Purchase Orders ₹ 75,000 1,500 ₹ 50 per Purchase Order
Setting Batches Produced ₹ 112,000 2,800 ₹ 40 per Batch
Materials Material ₹ 96,000 8,000 ₹ 12 per Movement
Handling Movements
Inspection Batches Produced ₹ 70,000 2,800 ₹ 25 per Batch
Machining Machine Hours ₹ 150,000 50,000 ₹ 3 per Machine Hour
Computation of the ‘Volume of Cost Drivers’ consumed by ‘Product
Alpha’ Purchase Orders (given) = 25
Batches (15,000 / 100) = 150
Materials Movement (150 batches × 6) = 900
Machine Hours (15,000 units × 0.1) = 1,500
Computation of the ‘Overheads Cost’ for ‘Product Alpha’
Activity Cost Driver Costing Rate / Cost Overhead Cost
Driver Unit (₹) (₹)
Purchasing Purchase Orders 50 ₹1,250
(25 Order × ₹50)
Setting Batches Produced 40 ₹6,000
(150 Batches × ₹ 40)
Material Material Movements 12 ₹10,800
Handling (900 Movement × ₹12)
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Activity Based Costing By: CA. PRAKASH PATEL

Inspection Batches Produced 25 ₹ 3,750

(150 Batches × ₹ 25)
Machining Machine Hours 3 ₹ 4,500
(1,500 Hours × ₹ 3)
Total ₹ 26,300
(ii) ‘Budgeted Overheads Costs’ using ‘Absorption Costing’
Budgeted Overheads = ₹ 503,000
(₹ 75,000 + ₹ 96,000 + ₹ 112,000 + ₹ 70,000 + ₹ 150,000)
Budgeted Absorption Cost per Machine Hour = ₹10.06
(₹503,000 / 50,000 Hours)
Budgeted Machining Hours for Product Alpha = 1,500 hrs.
Budgeted Absorbed Overhead (1,500 hrs. × ₹ 10.06) = ₹15,090
(iii) Ways in which the company can reduce the ABC for ‘Product Alpha’
− Reduce the number of batches by increasing the batch size which will then
reduce the setting up overhead, materials handling and inspection costs.
− Reduce the number of purchase orders.
− Innovate ways of speeding up production so that the machining hours are
reduced.

Question-8 (RTP Q4- May 21)

The following budgeted information relates to N Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(₹) (₹) (₹)
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department (machine 3 4 5
hours per unit)
Assembly department (direct labour 6 4 3
hours per unit)
The estimated overhead expenses for the year 2021 will be as below: Machine Department
₹ 73,60,000
Assembly Department ₹ 55,00,000

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Activity Based Costing By: CA. PRAKASH PATEL

Overhead expenses are apportioned to the products on the following basis:

Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost
drivers are found:
Cost Pool Amount (₹) Cost Driver Quantity
Machining services 64,40,000 Machine hours 9,20,000 hours
Assembly services 44,00,000 Direct labour hours 11,00,000 hours
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.

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

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

Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit(₹) 90 180 140

C. Sales Value (₹) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000

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

Working Notes:
1.
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]
D. Rate per hour (₹) 8 8 8

E. Machine Dept. 24,00,000 25,60,000 24,00,000 73,60,000

cost [C×D]
F. Labour hours per unit 6 4 3

G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000

H. Rate per hour (₹) 5 5 5

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I Assembly Dept. cost 30,00,000 16,00,000 9,00,000 55,00,000

[G×H]

Machine hour rate = ₹73,60,000 = ₹8

9,20,000 Hours

Labour hour rate = ₹55,00,000 = ₹5

11,00,000 Hours

2. Calculation of cost driver rate

Cost Pool Amount Cost Driver Quantity Driver rate

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

3. Calculation of activity-wise cost

Products
X Y Z Total
A. Machining hours (Refer 3,00,000 3,20,000 3,00,000 9,20,000
Working note-1)
B. Machine hour rate (₹) 7 7 7
(Refer Working note-2)
C. Machining servicescost 21,00,000 22,40,000 21,00,000 64,40,000
(₹) [A×B]
D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000
Working note-1)
E. Labour hour rate (₹) (Refer 4 4 4
Working note-2)
F. Assembly services 24,00,000 12,80,000 7,20,000 44,00,000
cost (₹) [D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000

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Activity Based Costing By: CA. PRAKASH PATEL

H. Rate per set-up (₹) (Refer 100 100 100

Working note-2)
I. Set-up cost (₹) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000

J. Customer orders 2,200 2,400 2,600 7,200

K. Rate per order (₹) (Refer 100 100 100

Working note-2)
L. Order processing cost (₹) 2,20,000 2,40,000 2,60,000 7,20,000
[J×K]
M. Purchase orders 300 350 150 800

N. Rate per order (₹) (Refer 500 500 500

Working note-2)
O. Purchasing cost (₹) 1,50,000 1,75,000 75,000 4,00,000
[M×N]

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Cost Sheet By: CA PRAKASH PATEL

Chapter 5: Cost Sheet

A. QUESTION FROM STUDY MATERIAL
ILLUSTRATION 1
The following data relates to the manufacture of a standard product during the month of April,
20X8:

Raw materials ₹ 1,80,000

Direct wages ₹ 90,000
Machine hours worked (hours) 10,000
Machine hour rate (per hour) ₹8
Administration overheads 35,000
Selling overheads (per unit) 5
Units produced 4,000
Units sold 3,600
Selling price per unit 125

You are required to PREPARE a cost sheet in respect of the above showing:
(i) Cost per unit
(ii) Profit for the month
Hints: (i) ₹101.25, (ii) ₹82,000

ILLUSTRATION 2
The following information has been obtained from the records of ABC Corporation for the
period from June 1 to June 30, 20X8.
On June On June
1, 20X8 30, 20X8
(₹) (₹)
Cost of raw materials 60,000 50,000
Cost of work-in-process 12,000 15,000
Cost of stock of finished goods 90,000 1,10,000
Purchase of raw materials during June’ 20X8 4,80,000
Wages paid 2,40,000
Factory overheads 1,00,000
Administration overheads (related to production) 50,000
Selling & distribution overheads 25,000
Sales 10,00,000

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Cost Sheet By: CA PRAKASH PATEL

PREPARE a statement giving the following information:

(a) Raw materials consumed;
(b) Prime cost;
(c) Factory cost;
(d) Cost of goods sold; and
(e) Net profit.
Hints: (a) ₹4,90,000, (b) ₹7,30,000, (c) ₹8,27,000, (d) ₹8,57,000, (e) ₹1,18,000

ILLUSTRATION 3
Arnav Inspat Udyog Ltd. has the following expenditures for the year ended 31st March, 2021:
Sl. Amount Amount (₹)
No. (₹)
(i) Raw materials purchased 10,00,00,000
(ii) GST paid on the above purchases @18% 1,80,00,000
(eligible for input tax credit)
(iii) Freight inwards 11,20,600
(iv) Wages paid to factory workers 29,20,000
(v) Contribution made towards employees’ PF
& ESIS 3,60,000
(vi) Production bonus paid to factory workers 2,90,000
(vii) Royalty paid for production 1,72,600
(viii) Amount paid for power & fuel 4,62,000
(ix) Amount paid for purchase of moulds and
patterns (life is equivalent to two years
production) 8,96,000
(x) Job charges paid to job workers 8,12,000
(xi) Stores and spares consumed 1,12,000
(xii) Depreciation on:
Factory building 84,000
Office building 56,000
Plant & Machinery 1,26,000
Delivery vehicles 86,000 3,52,000
(xiii) Salary paid to supervisors 1,26,000
(xiv) Repairs & Maintenance paid for:
Plant & Machinery 48,000
Sales office building 18,000
Vehicles used by directors 19,600 85,600
(xv) Insurance premium paid for:
Plant & Machinery 31,200
Factory building 18,100
Stock of raw materials & WIP 36,000 85,300

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Cost Sheet By: CA PRAKASH PATEL

(xvi) Expenses paid for quality control check

activities 19,600
(xvii) Salary paid to quality control staffs 96,200
(xviii) Research & development cost paid for
improvement in production process 18,200
(xix) Expenses paid for pollution control and
engineering & maintenance 26,600
(xx) Expenses paid for administration of factory
work 1,18,600
(xxi) Salary paid to functional mangers:
Production control 9,60,000
Finance & Accounts 9,18,000
Sales & Marketing 10,12,000 28,90,000
(xxii) Salary paid to General Manager 12,56,000
(xxiii) Packing cost paid for:
Primary packing necessary to maintain
quality 96,000
For re-distribution of finished goods 1,12,000 2,08,000
(xxiv) Wages of employees engaged
indistribution of goods 7,20,000
(xxv) Fee paid to auditors 1,80,000
(xxvi) Fee paid to legal advisors 1,20,000
(xxvii) Fee paid to independent directors 2,20,000
(xxviii) Performance bonus paid to sales staffs 1,80,000
(xxix) Value of stock as on 1st April, 2020:
Raw materials 18,00,000
Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000
(xxx) Value of stock as on 31st March, 2021:
Raw materials 9,60,000
Work-in-process 8,70,000
Finished goods 18,00,000 36,30,000
Amount realized by selling of scrap and waste generated during manufacturing process – ₹
86,000/-
From the above data you are required to PREPARE Statement of cost for Arnav Ispat Udyog Ltd.
for the year ended 31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales.

Hints: (i) ₹10,74,25,200 (ii) ₹10,80,83,100 (iii) ₹ 10,93,05,700 (iv) ₹10,86,05,700

(v) ₹11,35,03,300

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Cost Sheet By: CA PRAKASH PATEL

TEST YOUR KNOWLEDGE

Question-1
The books of Adarsh Manufacturing Company present the following data for the month of
April, 20X9:
Direct labour cost ₹ 17,500 being 175% of works overheads. Cost of goods sold excluding
administrative expenses ₹ 56,000.
Inventory accounts showed the following opening and closing balances:

April 1 (₹) April 30 (₹)

Raw Material 8,000 10,600
Work in progress 10,500 14,500
Finished goods 17,600 19,000
Other data are :
(₹)
Selling expenses 3,500
General and administrative expenses 2,500
Sales for the month 75,000
You are required to:
(i) COMPUTE the value of materials purchased.
(ii) PREPARE a cost statement showing the various elements of cost and also the profit
earned.
Hints: (i) Material Purchased = ₹36,500, (ii) Profit earned = ₹13,000
Question-2
A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at
varying levels of production is as under:
Level Works cost per unit (₹)
10% 400
20% 390
30% 380
40% 370
50% 360

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Cost Sheet By: CA PRAKASH PATEL

60% 350
70% 340
80% 330
90% 320
100% 310
Its fixed administration expenses amount to ₹ 1,50,000 and fixed marketing expenses amount to
₹ 2,50,000 per month respectively. The variable distribution cost amounts to ₹ 30 per unit.
It can sell 100% of its output at ₹5,000 per unit provided it can uncured the following further
expenditures:
1. It give gifts items costing ₹30 per unit of sale.
2. It has lucky draw every month giving the first prize of ₹50,000; 2nd prize of ₹25,000; 3rd
prize of ₹10,000 and three consolation of prizes of ₹5,000 each to customers buying the
product.
3. it spends ₹ 1,00,000 on refreshments serve every month to its customers.
4. it sponsors a television programme every week at a cost of ₹ 20,00,000 per month.
It can market 30% of its output at ₹ 550 per unit without incurring any of the expenses
referred to in (a) to (d) above.
PREPARE a cost sheet for the month showing total cost and profit at 30% and 100%
capacity level.

Hints:
Capacity 30% 100%
Profit (₹) 38,00,000 1,04,00,000
Note: Customer’s prize cost = ₹1,00,000
Question-3
From the following particulars, you are required to PREPARE monthly cost sheet of
Aditya Industries:
Amount (₹)
Opening Inventories:
- Raw materials 12,00,000
- Work-in-process 18,00,000
- Finished goods (10,000 units) 9,60,000
Closing Inventories:
- Raw materials 14,00,000
- Work-in-process 16,04,000
- Finished goods ?
Raw materials purchased 1,44,00,000
GST paid on raw materials purchased (ITC available) 7,20,000
Wages paid to production workers 36,64,000
Expenses paid for utilities 1,45,600

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Cost Sheet By: CA PRAKASH PATEL

Office and administration expenses paid 26,52,000

Travelling allowance paid to office staffs 1,21,000
Selling expenses 6,46,000

Machine hours worked- 21,600 hours

Machine hour rate- ₹ 8.00 per hour
Units sold- 1,60,000
Units produced- 1,94,000
Desired profit- 15% on sales

Hints:
Particulars Amount (₹) Cost per
unit (₹)
Prime Cost 1,80,09,600 92.83
Cost of Production 1,83,78,400 94.73
Cost of Goods Sold 1,51,70,280 94.81
Cost of Sales 1,85,89,280 116.18

Question-4
The following figures are extracted from the Trial Balance of Go-getter Co. on 30th September,
20X8.

Dr. Cr.
(₹) (₹)
Inventories:
Finshed Stock 80,000
Raw Materials 1,40,000
Work-in-Process 2,00,000
Office Appliances 17,400
Plant & Machinery 4,60,500
Building 2,00,000
Sales 7,68,000
Sales Return and Rebates 14,000
Materials Purchased 3,20,000
Freight incurred on Materials 16,000
Purchase Returns 4,800
Direct employee cost 1,60,000
Indirect employee cost 18,000
Factory Supervision 10,000
Repairs and Upkeep Factory 14,000

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Cost Sheet By: CA PRAKASH PATEL

Heat, Light and Power 65,000

Rates and Taxes 6,300
Miscellaneous Factory Expenses 18,700
Sales commission 33,600
Sales Travelling 11,000
Sales promotion 22,500
Distribution Deptt.—Salaries and Expenses 18,000
Office Salary and Expenses 8,600
Interest on Borrowed funds 2,000
Further details are available as follows:
1. Closing inventories
Finished goods 1,15,000
Raw Material 1,80,000
Work-in-progess 1,92,000
2. Accrued Expenses on:
Direct employee cost 8,000
Indirect employee cost 1,200
Interest on Borrowed Funds 2,000
3. Depreciation to be provided on:
Office Appliances 5%
Plant and Machinery 10%
Buildings 4%
4. Distribution of the following costs:
Heat, Light and Power to Factory, Office and Distribution in the ratio 8 : 1 : 1.
Rates and Taxes two-thirds to Factory and one-third to Office.
Depreciation on Buildings to Factory, Office and Selling in the ratio 8 : 1 : 1.
With the help of the above information, you are required to PREPARE a condensed
Profit and Loss Statement of Go-getter Co. for the year ended 30th September, 20X8
along with supporting schedules of:
(i) Cost of Sales.
(ii) Selling and Distribution Expenses.
(iii) Administration Expenses.
Hints: Cost of sales = ₹7,14,020, Net Profit = ₹35,980

B. PAST YEAR QUESTION

May 23 Q3(b) 10 marks

The following information is available from SN Manufacturing Limited's for the month of April
2023.

April 1 April 30
Opening and closing inventories data:
Stock of finished goods 2,500 units ?

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Cost Sheet By: CA PRAKASH PATEL

Stock of raw materials ₹ 42,500 ₹ 38,600

Work-in progress ₹ 42,500 ₹ 42,800
Other data are:
Raw materials Purchased ₹ 6,95,000
Carriage inward ₹ 36,200
Direct wages paid ₹ 3,22,800
Royalty paid for production ₹ 35,800
Purchases of special designs, moulds and patterns ₹ 1,53,600
(estimated life 12 Production cycles)
Power, fuel and haulage (factory) ₹ 70,600
Research and development costs for improving the ₹ 31,680
production process (amortized)
Primary packing cost (necessary to maintain quality) ₹ 6920
Administrative Overhead ₹ 46,765
Salary and wages for supervisor and foremen ₹ 28,000

Other information:
• Opening stock of finished goods is to be valued at ₹ 8.05 per unit.
• During the month of April, 1,52,000 units were produced and 1,52,600 units were sold.
The closing stock of finished goods is to be valued at the relevant month's cost of
production. The company follows the FIFO method.
• Selling and distribution expenses are to be charged at 20 paisa per unit.
• Assume that one production cycle is completed in one month.
Required:
(i) Prepare a cost sheet for the month ended on April 30, 2023 , showing the various elements
of cost (raw material consumed, prime cost, factory cost, cost of production, cost of goods
sold, and cost of sales).
(ii) Calculate the selling price per unit if profit is charged at 20 percent on sales.
Solution:
Cost Sheet for the month of April 2023
Particulars Amount Amount
(₹) (₹)
Raw materials consumed:
Raw materials purchased 6,95,000
Add: Carriage inward 36,200

Add: Value of opening stock of raw materials 42,500

Less: Value of closing stock of raw materials (38,600) 7,35,100

Direct wages paid 3,22,800

Royalty paid for production 35,800

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Cost Sheet By: CA PRAKASH PATEL

Amortised cost of special designs, moulds and patterns (₹153,600 ÷ 12) 12,800

Power, fuel and haulage (factory)* 70,600

Prime Cost* 11,77,100

Salary and wages of supervisor and foremen 28,000

Gross Works Cost 12,05,100

Add: Opening stock of WIP 42,500

Less: Closing stock of WIP (42,800)

Factory/ Works Cost 12,04,800

Research and development cost 31,680

Primary packing cost 6,920 38,600

Cost of Production 12,43,400

Add: Opening stock of finished goods (₹ 8.05 × 2,500 units) 20,125

Less: Value of closing stock [(2,500+152,000 -1,52,600) × (15,542)

(12,43,400÷152000)
Cost of Goods Sold 12,47,983

Add: Administrative overheads 46,765

Add: Selling and distribution expenses (₹ 0.20 × 1,52,600) 30,520

Cost of Sales 13,25,268

Add: Profit (20% on Sales or 25% on cost of sales) 3,31,317

Sales value 16,56,585

Selling price per unit (₹ 16,56,585 ÷ 1,52,600 units) 10.86

*May be taken as part of Factory / Works cost, however Total Factory Cost will remain the
same. If taken as part of factory cost then prime cost will be ₹ 11,06,500.
Alternative Solution (Based on work-in-progress figure of ₹ 45,500 as on 1st April 2023 as per
Hindi part of Question paper)
Particulars Amount Amount
(₹) (₹)
Raw materials consumed:
Raw materials purchased 6,95,000
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Cost Sheet By: CA PRAKASH PATEL

Add: Carriage inward 36,200

Add: Value of opening stock of raw materials 42,500
Less: Value of closing stock of raw materials (38,600) 7,35,100
Direct wages paid 3,22,800
Royalty paid for production 35,800
Amortised cost of special designs, moulds and patterns(₹ 153,600 12,800
÷ 12)
Power, fuel and haulage (factory)* 70,600
Prime Cost 11,77,100
Salary and wages of supervisor and foremen 28,000
Gross Works Cost 12,05,100
Add: Opening stock of WIP 45,500
Less: Closing stock of WIP (42,800)
Factory/ Works Cost 12,07,800
Research and development cost 31,680
Primary packing cost 6,920 38,600
Cost of Production 12,46,400
Add: Opening stock of finished goods (₹ 8.05 × 2,500 units) 20,125
Less: Value of closing stock [(2,500+1,52,000 -1,52,600) × (15,580)
(12,46,400÷1,52,000)
Cost of Goods Sold 12,50,945
Add: Administrative overheads 46,765
Add: Selling and distribution expenses (₹ 0.20 × 1,52,600) 30,520
Cost of Sales 13,28,230
Add: Profit (20% on Sales or 25% on cost of sales) 3,32,058
Sales value 16,60,288
Selling price per unit (₹ 16,60,288 ÷ 1,52,600 units) 10.88
*May be taken as part of Factory / Works cost, however Total Factory Cost will remain the same.
If taken as part of factory cost then prime cost will be ₹ 11,06,500.

Dec. 21 Q2(a) 10 marks

G Ltd. manufactures leather bags for office and school purposes.
The following information is related with the production of leather bags for the month of
September, 2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated requirement per
bag is two metres of leather sheets and one metre of cott on cloth. 2,000 metre of leather
sheets and 1,000 metre of cotton cloths are purchased at ₹ 3,20,000 and ₹ 15,000
respectively. Freight paid on purchases is ₹ 8,500.
(2) Stitching and finishing need 2,000 man hours at ₹ 80 per hour.
(3) Other direct costs of ₹ 10 per labour hour is incurred.
(4) G Ltd. have 4 machines at a total cost of ₹ 22,00,000. Machines have a life of 10 years
with a scrap value of 10% of the original cost. Depreciation is charged on a straight-line
method.
(5) The monthly cost of administration and sales office staffs are ₹ 45,000 and ₹ 72,000
respectively. G Ltd. pays ₹ 1,20,000 per month as rent for a 2,400 sq. feet factory
premises. The administrative and sales office occupies 240 sq. feet and 200 sq. feet
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Cost Sheet By: CA PRAKASH PATEL

respectively of factory space.

(6) Freight paid on delivery of finished bags is ₹ 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ₹ 150 per
kg.
(8) There are no opening and closing stocks of input materials. There is a finished stock of
100 bags in stock at the end of the month.

You are required to prepare a cost sheet in respect of above for the month of September 2021
showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost
(iii) Works/Factory Cost
(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales
Solution:
(a) No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
Particulars Total Cost Cost per unit
(₹) (₹)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (₹80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (₹10 × 2,000 hours) 20,000 20.00
4. (ii) Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines 16,500 16.50
{(₹ 22,00,000 × 90%) ÷ 120 months}
Apportioned cost of factory rent 98,000 98.00
6. (iii) Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (₹150×35 (5,250) (5.25)
kg.)
8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × (63,275)
₹632.75)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 50.00
- Apportioned rent for administrative 12,000 13.33
office
13. Add: Selling and Distribution Overheads
- Staff salary 72,000 80.00
- Apportioned rent for sales office 10,000 11.11
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Cost Sheet By: CA PRAKASH PATEL

- Freight paid on delivery of bags 18,000 20.00

14. (vi) Cost of Sales 7,26,475 807.19

Apportionment of Factory rent:

To factory building {(₹ 1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet} = ₹ 98,000
To administrative office {(₹ 1,20,000 ÷ 2400 sq. feet) × 240 sq. feet} = ₹ 12,000
To sale office {(₹ 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ₹ 10,000

Jan .21 Q2(b) 10 marks

The following data are available from the books and records of Q Ltd. for the month of April
2020:
Direct Labour Cost = ₹ 1,20,000 (120% of Factory Overheads)
Cost of Sales = ₹ 4,00,000
Sales = ₹ 5,00,000
Accounts show the following figures:
1st April, 2020 30th April, 2020
(₹) (₹)
Inventory:
Raw material 20,000 25,000
Work-in-progress 20,000 30,000
Finished goods 50,000 60,000
Other details:
Selling expenses 22,000
General & Admin. expenses 18,000
You are required to prepare a cost sheet for the month of April 2020 showing:
(i) Prime Cost
(ii) Works Cost
(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned.
Solution:
Cost Sheet for the Month of April 2020
Particulars (₹)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
Less: Closing stock of Raw Material (25,000)
Raw material consumed 1,60,000
Add: Direct labour cost 1,20,000
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Cost Sheet By: CA PRAKASH PATEL

Prime cost 2,80,000

Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
Cost of Production 3,70,000
Add: Opening stock of finished goods 50,000
Less: Closing stock of finished goods (60,000)
Cost of goods sold 3,60,000
Add: General and administration expenses* 18,000
Add: Selling expenses 22,000
Cost of sales 4,00,000
Profit {Balancing figure (₹ 5,00,000 – ₹ 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the production
activity.

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Cost Sheet By: CA PRAKASH PATEL

Working Note:
1. Computation of the raw material consumed
Particulars (₹)
Cost of Sales 4,00,000
Less: General and administration expenses (18,000)
Less: Selling expenses (22,000)
Cost of goods sold 3,60,000
Add: Closing stock of finished goods 60,000
Less: Opening stock of finished goods (50,000)
Cost of production/Gross works cost 3,70,000
Add: Closing stock of work-in-progress 30,000
Less: Opening stock of work-in-progress (20,000)
Works cost 3,80,000
₹ 1,20,000
Less: Factory overheads x 100 (1,00,000)
120
2,80,000
Prime cost
Less: Direct labour (1,20,000)
Raw material consumed 1,60,000
2. Computation of the raw material purchased
Particulars (₹)
Closing stock of Raw Material 25,000
Add: Raw Material consumed 1,60,000
Less: Opening stock of Raw Material (20,000)
Raw Material purchased 1,65,000

Nov.20 Q2(a) 10 marks

X Ltd. manufactures two types of pens 'Super Pen' and 'Normal Pen'. The cost data for the year
ended 30th September, 2019 is as follows:
(₹)
Direct Materials 8,00,000
Direct Wages 4,48,000
Production Overhead 1,92,000
Total 14,40,000
It is further ascertained that :
(1) Direct materials cost in Super Pen was twice as much of direct material in Normal Pen.
(2) Direct wages for Normal Pen were 60% of those for Super Pen.
(3) Production overhead per unit was at same rate for both the types.
(4) Administration overhead was 200% of direct labour for each.
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Cost Sheet By: CA PRAKASH PATEL

(5) Selling cost was ₹ 1 per Super pen.

(6) Production and sales during the year were as follow :
Production Sales
No. of units No. of units
Super Pen 40,000 Super Pen 36,000
Normal Pen 1,20,000
(7) Selling price was ₹ 30 per unit for Super Pen.
Prepare a Cost Sheet for 'Super Pen' showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit
Solution:
Preparation of Cost Sheet for Super Pen
No. of units produced = 40,000 units
No. of units sold = 36,000 units

Particulars Per unit (₹) Total (₹)

Direct materials (Working note- (i)) 8.00 3,20,000
Direct wages (Working note- (ii)) 4.00 1,60,000
Prime cost 12.00 4,80,000
Production overhead (Working note- (iii)) 1.20 48,000
Factory Cost 13.20 5,28,000
Administration Overhead* (200% of direct 8.00 3,20,000
wages)
Cost of production 21.20 8,48,000
Less: Closing stock (40,000 units – 36,000 - (84,800)
units)
Cost of goods sold i.e. 36,000 units 21.20 7,63,200
Selling cost 1.00 36,000
Cost of sales/ Total cost 22.20 7,99,200
Profit 7.80 2,80,800
Sales value (₹ 30 × 36,000 units) 30.00 10,80,000

Working Notes:
(i) Direct material cost per unit of Normal pen = M
Direct material cost per unit of Super pen = 2M
Total Direct Material cost = 2M × 40,000 units + M × 1,20,000 units
Or, ₹ 8,00,000 = 80,000 M + 1,20,000 M
Or, M = ₹ 8,00,000 = ₹ 4
2,00,000
Therefore, Direct material Cost per unit of Super pen = 2 × ₹ 4 = ₹ 8

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Cost Sheet By: CA PRAKASH PATEL

(ii) Direct wages per unit for Super pen = W

Direct wages per unit for Normal Pen = 0.6W
So, (W x 40,000) + (0.6W x 1,20,000) = ₹ 4,48,000
W = ₹ 4 per unit

(iii) Production overhead per unit = ₹1,92,000

(40,000 + 1,20,000)
= ₹ 1.20
Production overhead for Super pen = ₹ 1.20 × 40,000 units = ₹ 48,000
* Administration overhead is specific to the product as it is directly related to direct labour as
mentioned in the question and hence to be considered in cost of production only.
Assumption: It is assumed that in point (1) and (2) of the Question, direct materials cost and
direct wages respectively is related to per unit only.
Note: Direct Material and Direct wages can be calculated in alternative ways.

Nov.19 Q3(b) 10 marks

XYZ a manufacturing firm, has revealed following information for Sept, 2019:
1st Sept. 30th Sept.
(₹) (₹)
Raw material 2,42,000 2,92,000
Works in progess 2,00,000 5,00,000
The firm has incurred following expenses for a targeted production of 1,00,000 units during the
month:
(₹)
Consumable stores and spare for factory 3,50,000
Research and development cost for process improvement 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent for production asset 2,00,000
Administrative expenses (General) 2,24,000
Selling and distribution expenses 4,13,000
Finished goods (opening) NIL
Finished goods (closing) 5,000 units

Defective units which is 4% of targeted production, realizes ₹61 per unit.

Closing stock is valued at cost of production (Excluding admin. Exp.).
Cost of goods sold, excluding admin. Exp. Amoutnig to ₹78,26,000.
Direct employees cost is ½ of the cost of material consumed.
Selling price to the output is ₹110 per unit .
You are required to :
1. Calculate the value of material purchase.
2. Prepared cost sheet showing profit earned by the firm.

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Cost Sheet By: CA PRAKASH PATEL

Solution:

Workings:
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000

2. Calculation of Cost of Production

Particular Amount (₹)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000
(₹ 78,26,000 x 5,000 units)
91,000 units
Cost of Production 82,56,000

3. Calculation of Factory Cost

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

4. Calculation of Gross Factory Cost

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

5. Calculation of Prime Cost

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

6. Calculation of Cost of Materials Consumed & Labour cost

Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost
78,00,000 = M + 0.5M
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Cost Sheet By: CA PRAKASH PATEL

M = 52,00,000
Therefore, Cost of Material Consumed = ₹ 52,00,000 and
Labour Cost = ₹ 26,00,000

(i) Calculation of Value of Materials Purchased

Particular Amount (₹)
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000

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

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Cost Sheet By: CA PRAKASH PATEL

May.19 Q2(a) 10 marks

M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys per
annum. The estimated costs of production are as under:
(i) Direct Material ₹ 40 per unit
(ii) Direct Labour ₹ 30 per unit (subject to a minimum of ₹ 48,000 p.m.)
(iii) Factory Overheads:
(a) Fixed ₹ 3,60,000 per annum
(b) Variable ₹ 10 per unit
(c) Semi-variable ₹ 1,08,000 per annum up to 50% capacity and additional
₹ 46,800 for every 20% increase in capacity or any part thereof.
(iv) Administrative Overheads ₹ 5, 18,400 per annum (fixed)
(v) Selling overheads are incurred at ₹ 8 per unit.
(vi) Each unit of raw material yields scrap which is sold at the rate of ₹ 5 per unit.
(vii) In year 2019, the factory worked at 50% capacity for the first three months but it
was expected that it would work at 80% capacity for the remaining nine months.
(viii) During the first three months, the selling price per unit was ₹ 145.
You are Required to:
(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and
Cost of Sales.
(ii) Calculate the selling price per unit for remaining nine months to achieve the
total annual profit of ₹ 8,76,600.
Solution
(i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.
Normal Capacity: 36,000 units p.a.

3 Months 4,500 Units 9 Months 21,600 units

Particulars
Amount Cost per Amount Cost per
(₹) unit (₹) (₹) unit (₹)
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65
Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative overheads 1,29,600 28.80 3,88,800 18
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5

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Cost Sheet By: CA PRAKASH PATEL

Working Notes:
1. Calculation of Costs
Particulars 4,500 units 21,600 units
Amount (₹) Amount (₹)
Material 1,80,000 (₹ 40 × 4,500 units) 8,64,000 (₹40 × 21,600 units)
Wages 1,44,000 (Max. of ₹ 30 × 4,500 6,48,000 (21600 Units×30)
units = ₹1,35,000 and ₹ 48,000
× 3 months = ₹1,44,000)
Variable Cost 45,000 (₹10 × 4,500 units) 2,16,000 (₹10 × 21,600 units)
Semi-variable ₹ 1,08,000 ₹ 1,08,000
27,000 ( ×3 Months ) 1,51,200[( ×9 Months )
Cost 12 Months 12 Months
+46,800(for 20 % increase)
+23,400(for 10% increase)
Selling 36,000 (₹8 × 4,500 units) 1,72,800(₹ 8 × 21,600 units)
Overhead
Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general
overhead. In that case, Works Cost as well as Cost of Production will be same
i.e. ₹ 4,63,500 and Cost of Sales will remain same as ₹ 6,29,100.
(ii) Calculation of Selling price for nine months period
Particulars Amount (₹)
Total Cost of sales ₹ (6,29,100+26,02,800) 32,31,900
Add: Desired profit 8,76,600
Total sales value 41,08,500
Less: Sales value realised in first three months (₹145 × (6,52,500)
4,500 units)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600
Selling price per unit (₹ 34,56,000 ÷ 21,600 units) 160

Nov. 18 Q2(a) 10 Marks

Following details are provided by M/s ZIA Private Limited for the quarter ending 30
September, 2018:
(i) Direct expenses ₹ 1,80,000
(ii) Direct wages being 175% of factory overheads ₹ 2,57,250
(iii) Cost of goods sold ₹ 18,75,000
(iv) Selling & distribution overheads ₹ 60,000
(v) Sales ₹ 22,10,000
(vi) Administration overheads are 10% of factory
overheads
Stock details as per Stock Register:

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Cost Sheet By: CA PRAKASH PATEL

Particulars 30.06.2018 30.09.2018

₹ ₹
Raw material 2,45,600 2,08,000
Work-in-progress 1,70,800 1,90,000
Finished goods 3,10,000 2,75,000
You are required to prepare a cost sheet showing:
(i)Raw material consumed
Prime cost
(ii)
Factory cost
(iii)
Cost of goods sold
(iv)
(v)Cost of sales and profit
Solution:
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (₹)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 16,97,500
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,44,500
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory 14,700
overheads)
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Selling & distribution overheads 60,000
Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000 – (1,47,000 × 10%) + 1,90,000 –1,70,800 – (2,57,250
× 100/175%) - 1,80,000 – 2,57,250 + 2,08,000 – 2,45,600) = 12,22,650
Working notes:
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw
material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock
of finished goods – Administrative overheads
Net Profit = Sales - Cost of sales

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Cost Sheet By: CA PRAKASH PATEL

Alternative solution
Cost Sheet
(for the quarter ending 30 September 2018)

Amount (₹)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Raw Material consumed 12,74,950
Add: Direct wages (1,47,000×175% 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 17,12,,200
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/works cost/cost of production 18,40,000
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory 14,700
overheads)
Add: Selling & distribution overheads 60,000
Cost of sales 19,49,700
(v) Net Profit 2,60,300
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000 + 1,90,000 –1,70,800 – 1,47,500 - 1,80,000 –
2,57,250 + 2,08,000 – 2,45,600) = 12,37,350
Working notes:
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw
material
Raw material consumed = Prime cost - Direct wages - Direct expenses Factory Overheads =
257250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock
of finished goods
Net Profit = Sales - Cost of sales

May.18 Q2(a) 10 Marks

Following information relate to a manufacturing concern for the year ended 31 st March, 2018:
₹
Raw Material (opening) 2,28,000
Raw Material (closing) 3,05,000
Purchases of Raw Material 42,25,000
Freight Inwards 1,00,000

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Cost Sheet By: CA PRAKASH PATEL

Direct wages paid 12,56,000

Direct wages-outstanding at the end of the year 1,50,000
Factory Overheads 20% of prime
cost
Work-in-progress (opening) 1,92,500
Wo9rk-in-progres (closing) 1,40,700
Administrative Overheads (related to production) 1,73,000
Distribution Expenses ₹ 16 per unit
Finished Stock (opening)-1217 Units 6,08,500
Sale of scrap of material 8,000
The firm produced 14000 units of output during the year. The stock of finished
goods at the end of the year is valued at cost of production. The firm sold 14153
units at a price of ₹ 618 per unit during the year.
Prepare cost sheet of the firm.
Solution:
Cost sheet for the year ended 31st March, 2018.
Units produced - 14,000 units
Units sold - 14,153 units
Particulars Amount (₹)
Raw materials purchased 42,25,000
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material 8,000
Materials consumed 42,40,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000
Prime Cost 56,46,000
Factory overheads (20% of ₹ Prime Cost) 11,29,200
Add: Opening value of W-I-P 1,92,500
Less: Closing value of W-I-P (1,40,700)
Factory Cost 68,27,000
Add: Administrative overheads 1,73,000
Cost of Production 70,00,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock
[₹ 500(70,00,000/14,000) × 1,064) (1,217+ 14,000 – 14,153 =
1,064 units) (5,32,000)
Cost of Goods Sold 70,76,500
Distribution expenses (₹ 16 × 14,153 units) 2,26,448
Cost of Sales 73,02,948
Profit (Balancing figure) 14,43,606
Sales (₹ 618 × 14,153 units) 87,46,554

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Cost Sheet By: CA PRAKASH PATEL

Nov.15 Q2(a) 8 Marks

M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year
2014 are given below:
(₹)
(i) Opening Stock of Material 1,50,000
(ii) Closing Stock of Material 2,00,000
(iii)Purchase of Material 18,50,000
(iv)Direct Labour 9,50,000
(v) Factory Overhead 3,80,000
(vi)Administrative Overhead 2,50,400
During 2015, the company has received an order from a car manufacturer where it estimates that
the cost of material and labour will be ₹ 8,00,000 and ₹ 4,50,000 respectively. M.L. Auto Ltd.
charges factory overhead as a percentage of direct labour and administrative overhead as a
percentage of factory cost based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at ₹ 45,000.
You are required to:
(i) Calculate the overhead recovery rates based on actual costs for 2014.
(ii) Prepare a detailed cost statement for the order received in 2015 and the price to be
quoted if the company wants to earn a profit of 10% on sales.
Solution:
(i) Calculation of Overhead Recovery Rate:
Factory Overhead Recovery Rate = Factory Overheadin 2014 x 100
Direct Labour Costs in2014
= ₹ 3,80,000 x 100 = 40% of Direct labour
₹9,50,000
Administrative Overhead Recovery Rate

= Administrative Overheadin 2014 x 100

Factory Costs in2014 (W.N.)
₹ 2,50,400 x 100
= = 8% of Factory Cost
₹ 31,30,000
Working Note:
Calculation of Factory Cost in 2014
Particulars Amount (₹)
Opening Stock of Material 1,50,000
Add: Purchase of Material 18,50,000
Less: Closing Stock of Material (2,00,000)

Material Consumed 18,00,000

Direct Labour 9,50,000

Prime Cost 27,50,000

Factory Overhead 3,80,000

Factory Cost 31,30,000

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Cost Sheet By: CA PRAKASH PATEL

(ii) Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2015

Particulars Amount
(₹)
Material 8,00,000
Labour 4,50,000
Factory Overhead (40% of ₹ 4,50,000) 1,80,000

Factory Cost 14,30,000

Administrative Overhead (8% of ₹ 14,30,000) 1,14,400
Cost of delivery 45,000

Total Cost 15,89,400

Add: Profit @ 10% of Sales or 11.11% of cost or 1/9 of 1,76,600
15,89,400

Sales value (Price to be quoted for the order) (₹ 15,89,400 17,66,000

/0.9)

Hence the price to be quoted is ₹17,66,000 if the company wants to earn a profit of
10% on sales.

July’21 Q2(a) 10 marks

The following data relates to manufacturing of a standard product during the month of March,
2021:
Particulars Amount (in ₹)
Stock of Raw material as on 01-03-2021 80,000
Work in Progress as on 01-03-2021 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Direct Wages 1,20,000
Cost of special drawing 30,000
Hire charges paid for Plant 24,000
Return of Raw Material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000
Depreciation on Delivery van 6,000
Warehousing charges 1,500
Stock of Raw material as on 31-03-2021 30,000
Stock of Work in Progress as on 31-03-2021 24,000
• Store overheads on materials are 10% of material consumed.
• Factory overheads are 20% of the Prime cost.
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Cost Sheet By: CA PRAKASH PATEL

• 10% of the output was rejected and a sum of ₹ 5,000 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were
rectified at an additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8000 units during the month.

You are required to prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.
(ii) Prime Cost
(iii) Work Cost
(iv) Cost of Production
(v) Cost of Sales

Solution:

Statement of Cost for the month of March, 2021

Particulars Amount Amount

(₹) (₹)
(i) Cost of Material Consumed:
Raw materials purchased (₹ 2,00,000 – ₹ 40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000
Direct expenses:
Cost of special drawing 30,000
Hire charges paid for Plant 24,000 54,000
(ii) Prime Cost 4,04,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 80,800
Additional expenditure for rectification of defective
products (refer working note) 2,160 1,11,960
Gross factory cost 5,15,960
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
(iii) Works/ Factory Cost 5,41,960
Less: Realisable value on sale of scrap (5,000)
(iv) Cost of Production 5,36,960
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 5,36,960
Administrative overheads:
Maintenance of office building 2,000
Salary paid to Office staff 25,000
Page |5- 26-
Cost Sheet By: CA PRAKASH PATEL

Legal Charges 2,500 29,500

Selling overheads:
Expenses for participation in Industrial exhibition 8,000 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
(v) Cost of Sales 5,81,960

Alternative Solution
(considering Hire charges paid for Plant as indirect expenses)

Statement of Cost for the month of March, 2021

Particulars Amount Amount

(₹) (₹)
Cost of Material Consumed:
Raw materials purchased (₹ 2,00,000 – ₹ 40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000
Direct expenses:
30,000 30,000
Cost of special drawing
Prime Cost 3,80,000
Hire charges paid for Plant 24,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 76,000
Additional expenditure for rectification of defective products (refer
working note) 2,160 1,31,160
Gross factory cost 5,11,160
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
Works/ Factory Cost 5,37,160
Less: Realisable value on sale of scrap (5,000)
Cost of Production 5,32,160
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 5,32,160
Administrative overheads:
Maintenance of office building 2,000

Page |5- 27-

Cost Sheet By: CA PRAKASH PATEL

Salary paid to Office staff 25,000

Legal Charges 2,500 29,500
Selling overheads:
8,000
Expenses for participation in Industrial exhibition 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
Cost of Sales 5,77,160

Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units
Rectified units (10% of finished product) 720 units

2. Proportionate additional expenditure on 720 units

= 20% of proportionate direct wages
= 0.20 x (₹ 1,20,000/8,000) x 720
= ₹ 2,160

May’22 Q3(b) 10 marks

The following data are available from the books and records of A Ltd. for the month of April
2022:
Particulars Amount (₹)
st
Stock of raw materials on 1 April 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
Stock of raw materials on 30th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300

Stock of finished goods as on 1st April 2022 was 200 units having a total cost of ₹ 28,000. The
entire opening stock of finished goods has been sold during the month.

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Cost Sheet By: CA PRAKASH PATEL

Production during the month of April, 2022 was 3,000 units. Closing stock of finished goods as
on 30th April, 2022 was 400 units.

You are required to:

I. Prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Factory Cost
(iv) Cost of Production
(v) Cost of goods sold
(vi) Cost of Sales
II. Calculate selling price per unit, if sale is made at a profit of 20% on sales.

Solution:
Statement of Cost (for the month of April, 2022)

S. Particulars Amount (₹) Amount (₹)

No.
(i) Opening stock of Raw material 10,000
Add: Purchase of Raw material 2,80,000
Less: Closing stock of raw materials (40,000)
Raw material consumed 2,50,000
Manufacturing wages 70,000
(ii) Prime Cost 3,20,000
Factory/work overheads:
Depreciation on plant 15,000
Lease rent of production Asset 10,000
Expenses paid for pollution control and
engineering & Maintenance 1,000 26,000
(iii) Factory/Work Cost 3,46,000
Expenses paid for quality control checkactivity
4,000
Research and Development Cost 5,000
Administration Overheads (Production) 15,000
Primary Packing Cost 8,000
(iv) Cost of Production 3,78,000
Add: Opening stock of finished goods 28,000
Less: Closing stock of finished goods (50,400)
(v) Cost of Goods Sold 3,55,600
Advertisement expenses 1,300
Packing cost for re-distribution offinished
goods sold 1,500
(vi) Cost of Sales 3,58,400

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Cost Sheet By: CA PRAKASH PATEL

Note: Valuation of Closing stock of finished goods

= 3,78,000 x 400 Units
3000 units
= ₹50,400

II. Cost per unit sold = 3,85,400 x ₹128 per unit

200 + 3,000 -400

 Selling Price = 128 = ₹160 per unit

80%

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Cost Sheet By: CA PRAKASH PATEL

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
ABC Ltd. has furnished the following information from the financial books for the year
ended 31st March, 2014:
Profit & Loss Account
(₹) (₹)
To Opening stock (500 units at 70,000 By Sales (10,250 units) 28,70,000
₹ 140 each)
To Material consumed 10,40,000 By Closing stock
To Wages 6,00,000 (250 units at ₹ 200 each) 50,000
To Gross profit c/d 12,10,000
29,20,000 29,20,000
To Factory overheads 3,79,000 By Gross profit b/d 12,10,000
To Administration overheads 4,24,000 By Interest 1,000
To Selling expenses 2,20,000 By Rent received 40,000

To Bad debts 16,000

To Preliminary expenses 20,000

To Net profit 1,92,000

12,51,000 12,51,000
The cost sheet shows the cost of materials at ₹ 104 per unit and the labour cost at ₹ 60 per unit.
The factory overheads are absorbed at 60% of labour cost and administration overheads at 20%
of factory cost. Selling expenses are charged at ₹ 24 per unit. The opening stock of finished
goods is valued at ₹ 180 per unit.
You are required to prepare:
(i) A statement showing profit as per Cost accounts for the year ended 31st March, 2014; and
(ii) A statement showing the reconciliation of profit as disclosed in Cost accounts with the profit
Shown in Financial accounts.
Solution:
Statement of Profit as per Cost Accounts
Units (₹)
Opening stock @ ₹ 180 per unit 500 90,000
Cost of production @ ₹ 240 per unit
(Refer Working Note 1) 10,000 24,00,000

Total 10,500 24,90,000

Less: Closing stock @ ₹ 240 per unit (250) (60,000)
10,250 24,30,000
2,46,000
Selling expenses @ ₹ 24 per unit

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Cost Sheet By: CA PRAKASH PATEL

26,76,000
Cost of sales
1,94,000
Profit (Balancing figure)
10,250 28,70,000
Sales

Working Notes:
1. Statement of Cost (10,000 units)
Total cost (₹) Cost per unit (₹)
Materials 10,40,000 104.00
Wages 6,00,000 60.00
Factory Overhead 60% of wages 3,60,000 36.00
20,00,000 200.00
Factory cost
Administrative overhead 20% of factory 4,00,000 40.00
cost
Total cost
24,00,000 240.00
2. Statement of Differences between the two set of accounts:

Financial A/c (₹) Cost A/c (₹) Difference (₹) Remarks (₹)
Factory overhead 3,79,000 3,60,000 19,000 Under recovery
Administrative 4,24,000 4,00,000 24,000 Under recovery
overhead

Selling expenses 2,20,000 2,46,000 26,000 Over recovery

Opening stock 70,000 90,000 20,000 Over recovery

Closing stock 50,000 60,000 10,000 Over recovery

Reconciliation Statement
(₹)
Profit as per cost accounts 1,94,000
Add: Over-recovery of selling overhead in Cost A/c 26,000
Add: Over-valuation of opening stock in Cost A/c 20,000
Add: Income excluded from Cost A/c
Interest 1,000
Rent 40,000 41,000
Less: Under recovery of Overhead in Cost A/c
Factory Overhead 19,000
Administrative Overhead 24,000 (43,000)
Less: Over-valuation of closing stock in Cost A/c (10,000)
Less: Expenses excluded from Cost A/c
Bad debts 16,000
Preliminary expenses 20,000 (36,000)
Profit as per financial account 1,92,000

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Cost Sheet By: CA PRAKASH PATEL

Question-2 (RTP May 21 – Q5)

RTA Ltd. has the following expenditures for the year ended 31st December, 2020:
Sl. No. Amount (₹) Amount (₹)
(i) Raw materials purchased 5,00,00,000
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 40,000
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Plant & Machinery 28,200
- Factory building 18,800 47,000
(xi) Expenses paid for quality control checkactivities 18,000

(xii) Research & development cost paid for 20,000

improvement in production process
(xiii) Expenses paid for pollution control andengineering 36,000
& maintenance
(xiv) Salary paid to Sales & Marketing mangers 5,60,000
(xv) Salary paid to General Manager 6,40,000
(xvi) Packing cost paid for:
- Primary packing necessary to maintain quality
- For re-distribution of finished goods 1,26,000
(xvii) Fee paid to independent directors 46,000 1,20,000
(xviii) Performance bonus paid to sales staffs 80,000 1,20,000
(xix) Value of stock as on 1stJanuary, 2020:
- Raw materials 10,00,000
- Work-in-process 8,60,000
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31stDecember, 2020:
- Raw materials 8,40,000
- Work-in-process 6,60,000
- Finished goods 10,50,000 25,50,000

Amount realized by selling of scrap and waste generated during manufacturing process –
₹ 48,000/-
From the above data you are requested to PREPARE Statement of Cost for RTA Ltd. for the year
ended 31st December, 2020, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production,
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Cost Sheet By: CA PRAKASH PATEL

(iv) Cost of goods sold and (v) Cost of sales.

Solution:
Statement of Cost of RTA Ltd. for the year ended 31st December, 2020:
Sl. Particulars Amount (₹) Amount (₹)
No.
(i) Material Consumed:
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
Add: Opening stock of raw materials 10,00,000
Less: Closing stock of raw materials (8,40,000) 5,10,80,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 25,20,000
(iii) Direct expenses:
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job workers 3,10,000 8,40,000
Prime Cost 5,44,40,600
(iv) Works/ Factory overheads:
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid for plant & 40,000
machinery
- Insurance premium paid for plant & machinery 28,200
- Insurance premium paid for factory building 18,800
- Expenses paid for pollution control and
engineering & maintenance 36,000 2,33,000
Gross factory cost 5,46,73,600
Add: Opening value of W-I-P 8,60,000
Less: Closing value of W-I-P (6,60,000)
Factory Cost 5,48,73,600
(v) Quality control cost:
- Expenses paid for quality control check 18,000
activities
(vi) Research & development cost paid for improvement 20,000
in production process
(vii) Less: Realisable value on sale of scrap and waste (48,000)
(viii) Add: Primary packing cost 46,000
Cost of Production 5,49,09,600
Add: Opening stock of finished goods 12,00,000
Less: Closing stock of finished goods (10,50,000)
Cost of Goods Sold 5,50,59,600
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
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Cost Sheet By: CA PRAKASH PATEL

- Fee paid to independent directors 1,20,000 8,10,000

(x) Selling overheads:
- Repairs & Maintenance paid for sales office 20,000
building
(xi) - Salary paid to Manager- Sales 5,60,000
& Marketing
- Performance bonus paid to sales staffs 1,20,000 7,00,000
Distribution overheads:
- Packing cost paid for re-distribution of finished
goods 80,000
Cost of Sales 5,66,49,600

Question-3 (RTP Nov 20 – Q5)

The following details are available from the books of R Ltd. for the year ending 31st March 2020:
Particulars Amount (₹)
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Direct wages 60,00,000
Carriage inward 1,72,600
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production technology 9,60,000

Salary to accountants 7,20,000

Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax for the assessment year 2019-20 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000
Value of sales 2,82,60,000
Position of inventories as on 01-04-2019:
- Raw Material 6,20,000
- W-I-P 7,84,000
- Finished goods 14,40,000
Position of inventories as on 31-03-2020:
- Raw Material 4,60,000
- W-I-P 6,64,000
- Finished goods 9,80,000
From the above information PREPARE a cost sheet for the year ended 31st March 2020.

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Cost Sheet By: CA PRAKASH PATEL

Solution:
Statement of Cost of R Ltd. for the year ended 31st March, 2020:
Sl. Particulars Amount (₹) Amount (₹)
No.
(i) Material Consumed:
- Raw materials purchased 84,00,000
- Carriage inward 1,72,600
Add: Opening stock of raw materials 6,20,000
Less: Closing stock of raw materials (4,60,000) 87,32,600
(ii) Direct employee (labour) cost:
- Direct wages 60,00,000
- Employer’s Contribution towards PF 7,20,000 67,20,000
& ESIS
(iii) Direct expenses:
- Consumable materials 4,80,000
- Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
(iv) Works/ Factory overheads:
- Wages to foreman and store keeper 8,40,000
- Other indirect wages to factorystaffs
1,35,000 9,75,000
Gross factory cost 1,97,07,600
Add: Opening value of W-I-P 7,84,000
Less: Closing value of W-I-P (6,64,000)
Factory Cost 1,98,27,600
(v) Research & development cost paid forimprovement in 9,60,000
production process
(vi) Production planning office expenses 12,60,000
Cost of Production 2,20,47,600
Add: Opening stock of finished goods 14,40,000
Less: Closing stock of finished goods (9,80,000)
Cost of Goods Sold 2,25,07,600
(vii) Administrative overheads:
- Salary to accountants 7,20,000
- Fees to statutory auditor 1,80,000
- Fees to cost auditor 80,000
- Fee paid to independent directors 9,40,000 19,20,000
(viii) Selling overheads& Distribution overheads:
- Salary to delivery staffs 14,30,000
Cost of Sales 2,58,57,600
Profit (balancing figure) 24,02,400
Sales 2,82,60,000

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Cost Sheet By: CA PRAKASH PATEL

Note: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.
Question-4 (RTP May 20 – Q5)
From the following data of Arnav Metallic Ltd., CALCULATE Cost of production:

Amount (₹)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for plant & machinery 96,000
(iii) Raw materials purchased 64,00,000
(iv) Opening stock of raw materials 2,88,000
(v) Closing stock of raw materials 4,46,000
(vi) Wages paid 23,20,000
(vii) Value of opening Work-in-process 4,06,000
(viii) Value of closing Work-in-process 6,02,100
(ix) Quality control cost for the products in manufacturing process 86,000
(x) Research & development cost for improvement in productionprocess 92,600

(xi) Administrative cost for:

- Factory & production 9,00,000
- Others 11,60,000
(xii) Amount realised by selling scrap generated during themanufacturing 9,200
process
(xiii) Packing cost necessary to preserve the goods for furtherprocessing 10,200

(xiv) Salary paid to Director (Technical) 8,90,000

Solution:
Calculation of Cost of Production of Arnav Metallic Ltd. for the period…..
Particulars Amount (₹)
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Prime cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for plant & machinery 96,000
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,17,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,21,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
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Cost Sheet By: CA PRAKASH PATEL

Cost of Production 1,05,22,000

Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.

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Cost Accounting System By: CA PRAKASH PATEL

Chapter 6: Cost Accounting System

Part-I: Non- integral System
A. QUESTION FROM STUDY MATERIAL
Question-1 (Study Material - illustration-1)
As on 31st March, 20X8, the following balances existed in a firm’s Cost Ledger:
Dr. Cr.
(₹) (₹)
Stores Ledger Control A/c 3,01,435
Work-in-Process Control A/c 1,22,365
Finished Stock Ledger Control A/c 2,51,945
Manufacturing Overhead Control A/c 10,525
Cost Ledger Control A/c 6,65,220
6,75,745 6,75,745
During the next three months the following items arose:
(₹)
Finished product (at cost) 2,10,835
Manufacturing overhead incurred 91,510
Raw materials purchased 1,23,000
Factory Wages 50,530
Indirect Labour 21,665
Cost of Sales 1,85,890
Material issued to production 1,27,315
Sales returned at Cost 5,380
Material returned to suppliers 2,900
Manufacturing overhead charged to production 77,200

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Cost Accounting System By: CA PRAKASH PATEL

You are required to PASS the Journal Entries; write up the accounts and schedule the
balances, stating what each balance represents.

Hints: Cost of Sale = ₹1,80,510, CLC = ₹9,49,025

Question-2 (Study Material – illustration-2)
From the following details PREPARE the necessary accounts in the Cost Ledger
Materials (₹) Work-in-Process (₹) Finished Stock (₹)
Opening balance 8,000 5,000 10,000
Closing balance 11,000 9,000 12,000

Transactions during the period: (₹)

Materials purchased 25,000
Wages paid (including ₹ 2,000 indirect) 10,000
Overheads incurred 8,000
Overheads absorbed 9,000
Sales 50,000

Hints: Costing P/L (cr.) = ₹16,000, CLC (c/d) = ₹32,000

Question-3 (Study Material – illustration-3)

On 31st March, 20X8 the following balances were extracted from the books of the
Supreme Manufacturing Company:
Dr. (₹ ) Cr. (₹ )
Stores Ledger Control A/c 35,000
Work-in-Process Control A/c 38,000
Finished Goods Control A/c 25,000
Cost Ledger Control A/c 98,000
98,000 98,000
The following transactions took place in April 20X8:

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Cost Accounting System By: CA PRAKASH PATEL

Dr. (₹ )
Raw Materials:
- Purchased 95,000
- Returned to suppliers 3,000
- Issued to production 98,000
- Returned to stores 3,000
Productive wages 40,000
Indirect wages 25,000
Factory overhead expenses incurred 50,000
Selling and Administrative expenses 40,000
Cost of finished goods transferred to warehouse 2,13,000
Cost of Goods sold 2,10,000
Sales 3,00,000
Factory overheads are applied to production at 150% of direct wages, any under/over
absorbed overhead being carried forward for adjustment in the subsequent months. All
administrative and selling expenses are treated as period costs and charged off to the Profit
and Loss Account of the month in which they are incurred.
PREPARE the following Accounts:
(a) Cost Ledger Control A/c
(b) Stores Ledger Control A/c
(c) Work-in-Process Control A/c
(d) Finished Goods Stock Control A/c
(e) Factory Overhead Control A/c
(f) Costing Profit and Loss A/c
(g) Trial Balance as at 30th April, 20X3.
Hints: Costing P/L (cr.) = ₹50,000, CLC (c/d) = ₹95,000

Question-4 (Study Material – illustration-4)

Acme Manufacturing Co. Ltd. opens the costing records, with the balances as on 1st
July, 20X8 as follows:

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Cost Accounting System By: CA PRAKASH PATEL

(₹ ) (₹ )
Material Control A/c 1,24,000
Work-in-Process Control A/c 62,500
Finished Goods Control A/c 1,24,000
Production Overhead Control A/c 8,400
Administrative Overhead Control A/c 12,000
Selling & Distribution Overhead Control A/c 6,250
Cost Ledger Control A/c 3,13,150
3,25,150 3,25,150
The following are the transactions for the quarter ended 30th September 20X8:

(₹ )
Materials purchased 4,80,100
Materials issued to jobs 4,77,400
Materials to works maintenance 41,200
Materials to administration office 3,400
Materials to selling department 7,200
Wages direct 1,49,300
Wages indirect 65,000
Transportation for indirect materials 8,400
Production overheads 2,42,250
Absorbed production overheads 3,59,100
Administration overheads 74,000
Administration allocation to production 52,900
Administration allocation to sales 14,800
Sales overheads 64,200
Sales overheads absorbed 82,000
Finished goods produced 9,58,400
Finished goods sold 9,77,300
Sales 14,43,000
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Cost Accounting System By: CA PRAKASH PATEL

Make up the various accounts as you envisage in the Cost Ledger and PREPARE a Trial
Balance as at 30th September, 20X8.
Hints: Costing P/L (cr.) = ₹368,900, CLC (c/d) = ₹3,22,300

Question-5 (Study Material – illustration-5)

A fire destroyed some accounting records of a company. You have been able to collect the
following from the spoilt papers/records and as a result of consultation with accounting
staff in respect of January, 20X8:
(i) Incomplete Ledger Entries:

Materials Control A/c

(₹ ) (₹ )
To Balance b/d 32,000

Work-in-Process Control A/c

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

Payables (Creditors) A/c

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

Manufacturing Overheads Control A/c

(₹ ) (₹ )
To Cost Ledger Control 29,600
A/c (Amount spent)

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Cost Accounting System By: CA PRAKASH PATEL

Finished Goods Control A/c

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

(ii) Additional Information:

(1) The cash-book showed that ₹ 89,200 have been paid to creditors for raw-
material.
(2) Ending inventory of work-in-process included material ₹ 5,000 on which
300 direct labour hours have been booked against wages and overheads.
(3) The job card showed that workers have worked for 7,000 hours. The wage
rate is ₹ 10 per labour hour.
(4) Overhead recovery rate was ₹ 4 per direct labour hour.
You are required to COMPLETE the above accounts in the cost ledger of the company:
Hints: Cost of sale = ₹ 1,45,000, under-absorption = ₹30,000, Purchase = ₹92,000

TEST YOUR KNOWLEDGE

Question-1 (Study Material Q-1)
The following incomplete accounts are furnished to you for the month ended 31st October,
20x8.
Stores Ledger Control Account
1.10.20X8 To Balance ₹ 54,000
Work in Process Control Account
1.10. 20X8 To Balance ₹ 6,000
Finished Goods Control Account
1.10. 20X8 To Balance ₹ 75,000
Factory Overheads Control Account
Total debits for October, 20X8₹ 45,000
Factory Overheads Applied Account
Cost of Goods Sold Account
Creditors for Purchases Account
1.10. 20X8 By Balance ₹ 30,000
Additional information:
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Cost Accounting System By: CA PRAKASH PATEL

(i) The factory overheads are applied by using a budgeted rate based on direct labour
hours. The budget for overheads for 20X8 is ₹ 6,75,000 and the budget of direct labour
hours is 4,50,000.
(ii) The balance in the account of creditors for purchases on 31.10.20X8 is ₹ 15,000 and
the payments made to creditors in October, 20X8 amount to ₹ 1,05,000.
(iii) The finished goods inventory as on 31st October, 20X8 is ₹ 66,000.
(iv) The cost of goods sold during the month was ₹ 1,95,000.
(v) On 31st October, 20X8 there was only one unfinished job in the factory. The cost
records show that ₹ 3,000 (1,200 direct labour hours) of direct labour cost and ₹ 6,000
of direct material cost had been charged.
(vi) A total of 28,200 direct labour hours were worked in October, 20X8. All factory
workers earn same rate of pay.
(vii) All actual factory overheads incurred in October, 20x8 have been posted.
You are required to FIND:
(a) Materials purchased during October, 20X8.
(b) Cost of goods completed in October, 20X8.
(c) Overheads applied to production in October, 20X8.
(d) Balance of Work-in-process Control A/c on 31st October, 20X8.
(e) Direct materials consumed during October, 20X8.
(f) Balance of Stores Ledger Control Account on 31st October, 20X8.
(g) Over absorbed or under absorbed overheads for October, 20X8.
Hints: (a) Purchase = ₹90,000, (b) Cost of goods completed = ₹1,86,000
(c) Overhead applied = ₹42,300, (d) WIP (bal) = 10,800,
(e) Material Consumed = ₹78,000, (f) SLC (cr.) = 66,000, (g) Under-absorption = ₹2,700

Question-2 (Study Material Q-2)

A company operates on historic job cost accounting system, which is integrated with the
financial accounts. At the beginning of a month, opening balances in cost ledger were:
₹ (in lakhs)
Stores Ledger Control Account 80
Work-in-Process Control Account 20
Finished Goods Control Account 430
Building Construction Account 10

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Cost Accounting System By: CA PRAKASH PATEL

Cost Ledger Control Account 540

During the month, the following transaction took place:
Materials - Purchased 40
Issued to production 50
Issued to factory maintenance 6
Issued to building construction 4
Wages - Gross wages paid 150
Indirect wages 40
For building construction 10
Works Overheads - Actual amount incurred 160
(excluding items shown above)
Absorbed in building construction 20
Under absorbed 8
Royalty paid (related to production) 5
Selling, distribution and administration overheads 25
Sales 450
At the end of the month, the stock of raw material and work-in-Process was ₹ 55 lakhs and
₹ 25 lakhs respectively. The loss arising in the raw material accounts is treated as factory
overheads. The building under construction was completed during the month. Company’s
gross profit margin is 20% on sales.
PREPARE the relevant control accounts to record the above transactions in the cost ledger
of the company.
Hints: Under-absorption = 8, COS = 385, Costing P/L (cr.) = 57,
Trail Balance (Total) = 483

B. PAST YEAR EXAM QUESTIONS.

Nov-19. Q6(b) (5 marks)

Journalise the following transactions in cost book under Non- Integrated System of
Accounting
(a) Credit purchase of material ₹27,000
(b) Manufacturing overhead charges to production ₹ 6,000
(c) Selling and Distribution overhead recovered from Sales ₹ 4,000
(d) Indirect wages incurred ₹ 8,000
(e) Material return from production to stores ₹ 9,000
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Cost Accounting System By: CA PRAKASH PATEL

Solution:

Nov-18. Q4(a) (10 marks)

The following balances were extracted from a Company's ledger as on 30th June, 2018:
Particulars Debit (₹) Credit (₹)
Raw material control a/c 2,82,450
Work-in-progress control a/c 2,38,300
Finished stock control a/c 3,92,500
General ledger adjustment a/c 9,13,250
Total 9,13,250 9,13,250
The following transactions took place during the quarter ended 30th September, 2018:
₹
(i) Factory overheads - allocated to work-in-progress 1,36,350
(ii) Goods furnished - at cost 13,76,200
(iii) Raw materials purchased 12,43,810
(iv) Direct wages - allocated to work-in-progress 2,56,800
(v) Cost of goods sold 14,56,500
(vi) Raw materials - issued to production 13,60,430
(vii) Raw materials - credited by suppliers 27,200
(viii) Raw materials losses - inventory audit 6,000
(ix) Work-in-progress rejected (with no scrap value) 12,300
(x) Customer's returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c

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Cost Accounting System By: CA PRAKASH PATEL

Solution:
(i) Raw Material Control A/c
(₹) (₹)
To Balance b/d 2,82,450 By General Ledger Adjustment 27,200
A/c
” General Ledger 12,43,810 ” Work-in-progress Control 13,60,430
Adjustment A/c ” A/c Costing P&L A/c 6,000
(Loss) (OR GLA)
” Balance c/d 1,32,630
15,26,260 15,26,260

(ii) Work-in-Progress Control A/c

(₹) (₹)
To Balance b/d 2,38,300
” Raw Material Control 13,60,430 ” Finished Goods Control 13,76,200
A/c A/c
” Wages Control A/c 2,56,800 Costing P&L A/c (OR 12,300
GLA)
” Factory OH Control A/c 1,36,350 ” Balance c/d 6,03,380
19,91,880 19,91,880
(iii) Finished Goods Control A/c
(₹) (₹)
To Balance b/d 3,92,500 By Cost of goods sold 14,56,500
A/c (OR GLA)
General Ledger 45,900
Adjustment A/c
” Work-in-process 13,76,200 ” Balance c/d 3,58,100
Control A/c
18,14,600 18,14,600

(iv) General Ledger Adjustment A/c

(₹) (₹)
To Costing P&L A/c (sales) 25,68,910 By Balance b/d 9,13,250
(Balancing figure)

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Cost Accounting System By: CA PRAKASH PATEL

” Raw Material Control 27,200 ” Raw Material Control 12,43,810

A/c A/c
” Wages Control A/c 2,56,800
” Factory OH Control 1,36,350
A/c
” Finished Goods 45,900
Control A/c
25,96,110 25,96,110
OR
General ledger adjustment account
(₹) (₹)
To Raw Material Control 27,200 By Balance b/d 9,13,250
A/c
” Raw Material 6,000 ” Raw Material Control 12,43,810
control ccount(loss) A/c
‘’ WIP control 12,300 ” Wages Control A/c 2,56,800
Account (rejection)
“ Finished stock 14,56,500 ” Factory OH Control A/c 1,36,350
Control Account
“” Balance c/d 10,94,110 ” Finished Goods 45,900
Control A/c
25,96,110 25,96,110
Working:
Factory Overhead Control A/c
(₹) (₹)
To General Ledger 1,36,350 By Work-in-progress 1,36,350
Adjustment A/c A/c
1,36,350 1,36,350

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
Pass journal entries in the cost books, maintained on non-integrated system, for the
following:

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Cost Accounting System By: CA PRAKASH PATEL

(i) Issue of materials: Direct ₹ 5,50,000; Indirect ₹ 1,50,000

(ii) Allocation of wages: Direct ₹ 2,00,000; Indirect ₹ 40,000
(iii) Under/Over absorbed overheads: Factory (over) ₹ 20,000;
Administration (under) ₹ 10,000

Solution:
Journal Entries in Cost Books
Maintained on non-integrated system
(₹) (₹)
(i) Work-in-Progress Ledger Dr. 5,50,000
Control A/c Factory Overhead Dr. 1,50,000
Control A/c 7,00,000
To Stores Ledger Control A/c
(Being issue of materials)
(ii) Work-in Progress Ledger Dr. 2,00,000
Control A/c Factory Overhead Dr. 40,000
control A/c 2,40,000
To Wages Control A/c
(Being allocation of wages and salaries)
(i) Factory Overhead Control A/c Dr. 20,000
To Costing Profit & Loss A/c 20,000
(Being transfer of over absorption of
overhead) Dr. 10,000
Costing Profit & Loss A/c 10,000
To Administration Overhead
Control A/c
(Being transfer of under absorption of
overhead)

Question-2
A Company operates separate cost accounting and financial accounting systems. The
following is the list of opening balances as on 1.04.2013 in the Cost Ledger.
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Cost Accounting System By: CA PRAKASH PATEL

Debit(₹) Credit(₹)
Stores Ledger Control Account 53,375 --
WIP Control Account 1,04,595 --
Finished Goods Control Account 30,780 --
General Ledger Adjustment Account -- 1,88,750
Transactions for the quarter ended 30.06.2013 are as under:
(₹)
Materials purchased 26,700
Materials issued to production 40,000
Materials issued to factory for repairs 900

Factory wages paid (including indirect wages ₹ 23,000) 77,500

Production overheads incurred 95,200

Production overheads under-absorbed and written-off 3,200

Sales 2,56,000

The Company’s gross profit is 25% on Cost of Sales. At the end of the quarter, WIP stocks
increased by ₹ 7,500.
Prepare the relevant Control Accounts, Costing Profit & Loss Account and General Ledger
Adjustment Account to record the above transactions for the quarter ended 30.06.2013.
Solution:
General Ledger Adj. A/c
Dr. Cr.
Particulars (₹) Particulars (₹)
To Sales 2,56,000 By Balance b/d 1,88,750
To Balance c/d 1,80,150 By Stores ledger control A/c 26,700
(Materials purchased)
By Wages control A/c 77,500
(Factory wages paid)
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Cost Accounting System By: CA PRAKASH PATEL

By Factory Overheads control 95,200

A/c
(Production overhead incurred)
By Costing Profit & Loss A/c 48,000
4,36,150 4,36,150

Stores Ledger Control A/c

Dr. Cr.
Particulars (₹) Particulars (₹)
To Balance b/d 53,375 By WIP control A/c 40,000
(Materials issued to production)
To General ledger adj. A/c 26,700 By Factory overhead control 900
(Materials purchased) A/c
(Materials issued for repairing)
39,175
By Balance c/d
80,075 80,075

WIP Control A/c

Dr. Cr.
Particulars (₹) Particulars (₹)
To Balance b/d 1,04,595 By Finished goods control A/c 2,02,900
(Balancing figure)
To Stores ledger control A/c 40,000 By Balance c/d 1,12,095
To Wages control A/c 54,500
To Factory Overhead control A/c 1,15,900
3,14,995 3,14,995
Finished Goods Control A/c
Dr. Cr.
Particulars (₹) Particulars (₹)
To Balance b/d 30,780 By Cost of sales A/c 2,04,800
(Refer to note)
To WIP control A/c 2,02,900 By Balance c/d 28,880
2,33,680 2,33,680
Note: Gross profit is 25% of Cost of Sales or 20% on sales.

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Cost Accounting System By: CA PRAKASH PATEL

Hence cost of sales = ₹ 2,56,000 – 20% of ₹ 2,56,000 = ₹ 2,04,800

Factory Overhead Control A/c
Dr. Cr.
Particulars (₹) Particulars (₹)
To Stores ledger control A/c 900 By Costing Profit & Loss 3,200
A/c (Under-absorption of
To Wages control A/c 23,000 overhead) By WIP control 1,15,900
To General ledger adj. A/c 95,200 A/c
1,19,100 1,19,100
Cost of Sales A/c
Dr. Cr.
Particulars (₹) Particulars (₹)
To Finished goods control 2,04,800 By Costing Profit & Loss A/c 2,04,800
A/c
Sales A/c
Dr. Cr.
Particulars (₹) Particulars (₹)
To Costing Profit & Loss 2,56,000 By GLA A/c 2,56,000
A/c

Wages Control A/c

Dr. Cr.
Particulars (₹) Particulars (₹)
To General ledger adj. A/c 77,500 By Factory overhead control A/c 23,000
(Wages paid for direct labour)
By WIP control A/c 54,500
(Wages paid for indirect labour)
77,500 77,500

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Cost Accounting System By: CA PRAKASH PATEL

Costing Profit & Loss A/c

Dr. Cr.
Particulars (₹) Particulars (₹)
To Factory O/H Control A/c 3,200 By Sales A/c 2,56,000
To Cost of sales A/c 2,04,800
To General ledger adj. A/c 48,000
(Profit)

2,56,000 2,56,000

Trial Balance (as on 30.06.2013)

Dr. Cr.
(₹) (₹)
Stores ledger control A/c 39,175
WIP control A/c 1,12,095
Finished goods control A/c 28,880
To General ledger adjustment A/c 1,80,150
1,80,150 1,80,150

Question-3
Following information have been extracted from the cost records of XYZ Pvt. Ltd Stores:

(₹)
Opening balance 54,000
Purchases 2,88,000
Transfer from WIP 1,44,000
Issue to WIP 2,88,000
Issue for repairs 36,000
Deficiency found in stock 10,800
Work-in-progress: (₹)
Opening balance Direct 1,08,000
wages applied Overheads 1,08,000
charged 4,32,000
Closing balance 72,000
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Cost Accounting System By: CA PRAKASH PATEL

Finished Production: (₹)

Entire production is sold at a profit of 15% on cost of WIP
Wages paid 1,26,000
Overheads incurred 4,50,000
Draw the Stores Ledger Control Account, Work-in-Progress Control Account,
Overheads Control Account and Costing Profit and Loss Account.
Solution:
Stores Ledger Control A/c
Particulars (₹) Particulars (₹)
To Balance b/d 54,000 By Work in Process 2,88,000
To General Ledger 2,88,000 A/c By Overhead 36,000
Adjustment A/c Control A/c

To Work in Process A/c 1,44,000 By Overhead Control A/c 10,800*

(Deficiency)
By Balance c/d 1,51,200
4,86,000 4,86,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)

Work in Progress Control A/c

Particulars (₹) Particulars (₹)
To Balance b/d 1,08,000 By Stores Ledger Control a/c 1,44,000

To Stores Ledger Control A/c 2,88,000 By Costing P/L A/c 7,20,000

(Balancing figures being
Cost of finished goods)

To Wages Control A/c 1,08,000 By Balance c/d 72,000

To Overheads Control a/c 4,32,000

9,36,000 9,36,000

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Cost Accounting System By: CA PRAKASH PATEL

Overheads Control A/c

Particulars (₹) Particulars (₹)
To Stores Ledger Control A/c 36,000 By Work in Process A/c 4,32,000
To Stores Ledger Control A/c 10,800 By Balance c/d 82,800
(Under absorption)
To Wages Control A/c 18,000
(₹1,26,000- ₹1,08,000)
To Gen. Ledger Adjust. A/c 4,50,000
5,14,800 5,14,800
Costing Profit & Loss A/c

Particulars (₹) Particulars (₹)

To Work in 7,20,000 By Gen. ledger Adjust. A/c 8,28,000
progress
(Sales) (₹ 7,20,000 × 115%)
To Gen. Ledger Adjust. A/c 1,08,000
(Profit)
8,28,000 8,28,000

Question-4 (RTP May 2020 Q6 New Course)

The following are the balances existed in the books of JPG Ltd. for the year ended, 31st
March, 2019:

Particulars Dr. Cr.

(₹) (₹)
Stores Ledger Control A/c 30,00,000
WIP Control A/c 15,00,000
Finished Goods Control A/c 25,00,000
Manufacturing Overheads Control A/c 1,50,000
Cost Ledger Control A/c 68,50,000

During the year 2019-20, the following transactions took place:

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Cost Accounting System By: CA PRAKASH PATEL

Particulars Amount (₹)

Finished product (at cost) 22,50,000
Manufacturing Overhead incurred 8,50,000
Raw material purchased 12,50,000
Factory wages 4,00,000
Indirect labour 2,00,000
Cost of sales 17,50,000
Materials issued to production 13,50,000
Sales returned (at cost) 90,000
Material returned to suppliers 1,30,000
Manufacturing overhead charged to production 8,50,000
Required:
PREPARE the following control accounts and Trial balance at the end of the year:
Cost Ledger, Stores Ledger, Work-in-process, Finished Stock, Manufacturing
Overhead, Wages and Cost of Sales.
Solution:
Cost Ledger Control Account

Particulars (₹) Particulars (₹)

To Stores Ledger control A/c 1,30,000 By Balance b/d 68,50,000
To Costing Profit & Loss A/c 17,10,000 By Stores Ledger control A/c 12,50,000
By Wages Control A/c 6,00,000
To Balance c/d 77,10,000 By Manufacturing overhead 8,50,000
control A/c
95,50,000 95,50,000

Store Ledger Control Account

Particulars (₹) Particulars (₹)

To Balance b/d 30,00,000 By WIP Control A/c 13,50,000
To Cost Ledger control A/c 12,50,000 By Cost Ledger control A/c 1,30,000
(return)

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Cost Accounting System By: CA PRAKASH PATEL

By Balance c/d 27,70,000

42,50,000 42,50,000

WIP Control Account

Particulars (₹) Particulars (₹)
To Balance b/d 15,00,000 By Finished Stock Control 22,50,000
A/c
To Wages Control A/c 4,00,000
To Stores Ledger control A/c 13,50,000
To Manufacturing overhead 8,50,000 By Balance c/d 18,50,000
control A/c
41,00,000 41,00,000

Finished Stock Control Account

Particulars (₹) Particulars (₹)
To Balance b/d 25,00,000 By Cost of Sales A/c 17,50,000
To WIP Control A/c 22,50,000
To Cost of Sales A/c (sales 90,000 By Balance c/d 30,90,000
return)
48,40,000 48,40,000

Manufacturing Overhead Control Account

Particulars (₹) Particulars (₹)
To Cost Ledger Control A/c 8,50,000 By Balance b/d 1,50,000
To Wages Control A/c 2,00,000 By WIP Control A/c 8,50,000
By Costing P&L A/c 50,000
(underrecovery)
10,50,000 10,50,000

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Cost Accounting System By: CA PRAKASH PATEL

Wages Control Account

Particulars (₹) Particulars (₹)
To Cost Ledger Control A/c 6,00,000 By WIP Control A/c 4,00,000
By Manufacturing overhead 2,00,000
control A/c
6,00,000 6,00,000

Cost of Sales Account

(₹) Particulars (₹)

Particulars
To Finished Stock Control 17,50,000 By Finished Stock Control 90,000
A/c A/c (sales return)
By Costing Profit & Loss A/c 16,60,000
17,50,000 17,50,000

Trial Balance

Particulars Dr. Cr.

(₹) (₹)
Stores Ledger Control A/c 27,70,000
WIP Control A/c 18,50,000
Finished Goods Control A/c 30,90,000
Cost Ledger Control A/c 77,10,000
77,10,000 77,10,000

Working:
Costing P&L Account

Particulars (₹) Particulars (₹)

To Cost of Sales A/c 16,60,000 By Cost Ledger control A/c 17,10,000
To Manufacturing overhead 50,000
control A/c
17,10,000 17,10,000
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Cost Accounting System By: CA PRAKASH PATEL

Part-II: Integral System

A. QUESTION FROM STUDY MATERIAL

Question-6 (Study Material - illustration-6)

JOURNALISE the following transactions assuming that cost and financial
transactions are integrated:
(₹ )
Raw materials purchased 2,00,000
Direct materials issued to production 1,50,000
Wages paid (30% indirect) 1,20,000
Wages charged to production 84,000
Manufacturing expenses incurred 84,000
Manufacturing overhead charged to production 92,000
Selling and distribution costs 20,000
Finished products (at cost) 2,00,000
Sales 2,90,000
Closing stock Nil
Receipts from debtors 69,000
Payments to creditors 1,10,000

Question-7 (Study Material - illustration-7)

Bangalore Petrochemicals Co. keeps books on integrated accounting system. The
following balances appear in the books as on 1st January, 20X8.
DR. (₹) CR. (₹)
Stores Ledger control A/c 18,000
Work-in-Process Control A/c 17,000
Finished Goods Control A/c 13,000
Bank A/c 10,000

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Cost Accounting System By: CA PRAKASH PATEL

Creditors A/c 8,000

Fixed assets A/c 55,000
Debtors A/c 12,000
Share capital A/c 80,000
Provision for depreciation A/c 5,000
Profit and loss A/c 32,000
1,25,000 1,25,000
Transaction for the year ended 31st Dec., 20X8 were as given below:
(₹ ) (₹ )
Wages-direct 87,000
Wages-indirect 5,000 92,000
Purchase of materials (on credit) 1,00,000
Materials issued to production 1,10,000
Materials for repairs 2,000
Goods finished during the year (at cost) 2,15,000
Sales (credit) 3,00,000
Cost of goods sold 2,20,000
Production overhead absorbed 48,000
Production overhead incurred 40,000
Administration overhead incurred (production) 12,000
Selling overhead incurred 14,000
Payments of creditors 1,01,000
Payments of debtors 2,90,000
Depreciation on machinery 1,300
Prepaid rent (included in factory overheads) 300
PREPARE accounts in the integrated ledger.
Hints: Costing P/L (Cr.) = ₹ 66,000, Bank (Dr.) = ₹ 41,000, Purchase = ₹ 1,00,000

Question-8 (Study Material - illustration-8)

In the absence of the Chief Accountant, you have been asked to prepare a month’s cost
accounts for a company which operates a batch costing system fully integrated with the
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Cost Accounting System By: CA PRAKASH PATEL

financial accounts. The following relevant information is provided to you:

(₹) (₹)
Balances at the beginning of the month:
Stores Ledger Control Account 25,000
Work-in-Process Control Account 20,000
Finished Goods Control Account 35,000
Prepaid Production Overheads brought forward from 3,000
previous month
Transactions during the month:
Materials Purchased 75,000
Materials Issued:
To production 30,000
To factory maintenance 4,000 34,000
Materials transferred between batches 5,000
Total wages paid:
To direct workers 25,000
To indirect workers 5,000 30,000
Direct wages charged to batches 20,000
Recorded non-productive time of direct workers 5,000
Selling and Distribution Overheads Incurred 6,000
Other Production Overheads Incurred 12,000
Sales 1,00,000
Cost of Finished Goods Sold 80,000
Cost of Goods completed and transferred into finished 65,000
goods during the month
Physical value of work-in-Process at the end of the month 40,000
The production overhead absorption rate is 150% of direct wages charged to work- in-
Process.
Required:

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Cost Accounting System By: CA PRAKASH PATEL

PREPARE the following accounts for the month:

(a) Stores Ledger Control Account.
(b) Work-in-Process Control Account.
(c) Finished Goods Control Account.
(d) Production Overhead Control Account.
(e) Costing Profit and Loss Account.
Hints: Over-absorption = ₹1,000, Costing P/L (cr.) = 20,000, Purchase = ₹75,000

TEST YOUR KNOWLEDGE

Question-3 (Study Material Q-3)

Dutta Enterprises operates an integral system of accounting. You are required to PASS
the Journal Entries for the following transactions that took place for the year ended 30th
June, 20X8.
(Narrations are not required.)
(₹ )
Raw materials purchased (50% on Credit) 6,00,000
Materials issued to production 4,00,000
Wages paid (50% Direct) 2,00,000
Wages charged to production 1,00,000
Factory overheads incurred 80,000
Factory overheads charged to production 1,00,000
Selling and distribution overheads incurred 40,000
Finished goods at cost 5,00,000
Sales (50% Credit) 7,50,000
Closing stock NIL
Receipts from debtors 2,00,000
Payments to creditors 2,00,000

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Cost Accounting System By: CA PRAKASH PATEL

B. PAST YEAR EXAM QUESTIONS

May-22. Q4 (c) (5 marks)

Journalize the following transactions assuming the cost and financial accounts are integrated:
Particulars Amount (₹)
Direct Materials issued to production ₹ 5,88,000
Allocation of Wages (Indirect) ₹ 7,50,000
Factory Overheads (Over absorbed) ₹ 2,25,000
Administrative Overheads (Under absorbed) ₹ 1,55,000
Deficiency found in stock of Raw material (Normal) ₹ 2,00,000

Solution:

Particulars (₹) (₹)

(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory
overhead)
(iv) Costing Profit & Loss A/c Dr. 1,55,000
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of Administration
overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)
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Cost Accounting System By: CA PRAKASH PATEL

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
Journalise the following transactions assuming cost and financial accounts are integrated :
(₹)
(i) Materials issued :
Direct 3,25,000
Indirect 1,15,000
(ii) Allocation of wages (25% indirect) 6,50,000
(iii) Under/Over absorbed overheads:
Factory (Over) 2,50,000
Administration (Under) 1,75,000
(iv) Payment to Sundry Creditors 1,50,000
(v) Collection from Sundry Debtors 2,00,000

Solution:
Journal Entries under Integrated system of accounting
Particulars (₹) (₹)
(i) Work-in-Progress Ledger Control A/c Dr. 3,25,000
Factory Overhead Control A/c Dr. 1,15,000
To Stores Ledger Control A/c 4,40,000
(Being issue of Direct and Indirect materials)
(ii) Work-in Progress Ledger Control A/c Dr. 4,87,500
Factory Overhead control A/c Dr. 1,62,500
To Wages Control A/c 6,50,000
(Being allocation of Direct and Indirect wages)

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Cost Accounting System By: CA PRAKASH PATEL

(iii) Factory Overhead Control A/c Dr. 2,50,000

To Costing Profit & Loss A/c 2,50,000
(Being transfer of over absorption of Factory overhead)

Costing Profit & Loss A/c Dr. 1,75,000

To Administration Overhead Control A/c 1,75,000
(Being transfer of under absorption of Administration overhead)

(iv) Sundry Creditors A/c Dr. 1,50,000

To Cash/ Bank A/c 1,50,000
(Being payment made to creditors)
(v) Cash/ Bank A/c Dr. 2,00,000
To Sundry Debtors A/c 2,00,000
(Being payment received from debtors)

Question-2
BPR Limited keeps books on integrated accounting system. The following balances appear
in the books as on April 1, 2013.
Dr. (₹) Cr. (₹)
Stores Control A/c 40,950 –
Work-in-progress A/c 38,675 –
Finished Goods A/c 52,325 –
Bank A/c – 22,750
Trade Payables A/c – 18,200
Non-Current Assets A/c 1,47,875 –
Trade Receivables A/c 27,300 –
Share Capital A/c – 1,82,000
Provision for Depreciation A/c – 11,375
Provision for Doubtful Debts A/c – 3,725
Factory Overheads Outstanding A/c – 6,250
Pre-Paid Administration Overheads A/c 9,975 –
Profit & Loss A/c* – 72,800
(*Reserve & Surplus) 3,17,100 3,17,100

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Cost Accounting System By: CA PRAKASH PATEL

The transactions for the year ended March 31, 2014, were as given below:
(₹) (₹)
Direct Wages 1,97,925 –
Indirect Wages 11,375 2,09,300
Purchase of materials (on credit) 2,27,500
Materials issued to production 2,50,250
Material issued for repairs 4,550
Goods finished during the year (at cost) 4,89,125
Credit Sales 6,82,500
Cost of Goods sold 5,00,500
Production overheads absorbed 1,09,200
Production overheads paid during the year 91,000
Production overheads outstanding at the end of year 7,775
Administration overheads paid during the year 27,300
Selling overheads incurred 31,850
Payment to Trade Payables 2,29,775
Payment received from Trade Receivables 6,59,750
Depreciation of Machinery 14,789
Administration overheads outstanding at the end of year 2,225
Provision for doubtful debts at the end of the year 4,590
Required:
Write up accounts in the integrated ledger of BPR Limited and prepare a Trial balance.
Solution:
Stores Control A/c
Dr. Cr.
(₹) (₹)
To Balance b/d 40,950 By WIP A/c 2,50,250
To Trade Payables A/c 2,27,500 By Production overheads 4,550
A/c By Balance c/d 13,650
2,68,450 2,68,450

Wages Control A/c

Dr. Cr.
(₹) (₹)
To Bank (Direct wages) 1,97,925 By Work-in-Progress A/c 1,97,925
To Bank (Indirect wages) 11,375 By Production overheads A/c 11,375
2,09,300 2,09,300
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Cost Accounting System By: CA PRAKASH PATEL

Work-in-Progress A/c
Dr. Cr.
(₹) (₹)
To Balance b/d 38,675 By Finish goods A/c 4,89,125
To Wages control A/c To 1,97,925 By Balance c/d 1,06,925
Stores control A/c 2,50,250
To Production overheads A/c 1,09,200
5,96,050 5,96,050

Production Overheads A/c

Dr. Cr.
(₹) (₹)
To Wages control A/c 11,375 By WIP A/c 1,09,200
To Stores control A/c 4,550 By Profit & Loss A/c 14,039
To Bank (₹ 91,000 – ₹ 6,250) 84,750 (Under-absorbed
overheads Written off)
To Production overheads 7,775
outstanding
To Provision for depreciation 14,789
1,23,239 1,23,239
Production overhead incurred = Payment made + Closing Outstanding + Prov. for Depreciation – Opening
Outstanding
Finished Goods A/c
Dr. Cr.
(₹) (₹)
To Balance b/d 52,325 By Cost of sales A/c 5,00,500
To Work-in-progress A/c 4,89,125 By Balance c/d 80,450
To Admin. overheads A/c 39,500
5,80,950 5,80,950

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Cost Accounting System By: CA PRAKASH PATEL

Administration Overheads A/c

Dr. Cr.
(₹) (₹)
To Pre-paid admin. overheads A/c 9,975 By Finished goods A/c 39,500
To Bank 27,300
To Admin. overheads outstanding 2,225
39,500 39,500
Cost of Sales A/c
Dr. Cr.
(₹) (₹)
To Finished goods A/c 5,00,500 To Sales A/c 5,32,350
To Selling overheads 31,850
5,32,350 5,32,350
Sales A/c
Dr. Cr.
(₹) (₹)
To Cost of sales A/c 5,32,350 By Trade Receivables A/c 6,82,500
To Profit & Loss A/c 1,50,150
6,82,500 6,82,500
Factory Overheads / Production Overheads Outstanding A/c
Dr. Cr.
(₹) (₹)
To Bank 6,250 By Balance b/d 6,250
To Balance c/d 7,775 By Production overheads 7,775
14,025 14,025

Prepaid Administration Overheads A/c

Dr. Cr.
(₹) (₹)
To Balance b/d 9,975 By Admin. overheads A/c 9,975
9,975 9,975

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Cost Accounting System By: CA PRAKASH PATEL

Provision for Depreciation A/c

Dr. Cr.
(₹) (₹)
To Balance c/d 26,164 By Balance b/d 11,375
By Production overheads 14,789
A/c
26,164 26,164
Provision for Doubtful Debts A/c
Dr. Cr.
(₹) (₹)
To Balance c/d 4,590 By Balance b/d 3,725
By Profit & Loss A/c 865
4,590 4,590

Profit & Loss A/c

Dr. Cr.
(₹) (₹)
To Provision for doubtful debts 865 By Balance b/d 72,800
To Production overheads 14,039 By Sales A/c 1,50,150
To Balance c/d* 2,08,046
2,22,950 2,22,950
* Profit is transferred to Reserve & Surplus.
Trade Receivables A/c
Dr. Cr.
(₹) (₹)
To Balance b/d 27,300 By Bank A/c 6,59,750
To Sales A/c 6,82,500 By Balance c/d 50,050
7,09,800 7,09,800
Trade Payables A/c
Dr. Cr.
(₹) (₹)

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Cost Accounting System By: CA PRAKASH PATEL

To Bank 2,29,775 By Balance b/d 18,200

To Balance c/d 15,925 By Stores control/Ac 2,27,500
2,45,700 2,45,700

Non-Current Assets A/c

Dr. Cr.
(₹) (₹)
To Balance b/d 1,47,875 By balance c/d 1,47,875

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Cost Accounting System By: CA PRAKASH PATEL

Bank A/c
Dr. Cr.
(₹) (₹)
To Trade Receivables 6,59,750 By Balance b/d By 22,750
Direct wages By 1,97,925
Indirect wages 11,375
By Production overheads 91,000
(₹ 84,750 + ₹6,250)
By Admn. Overheads A/c 27,300
By Selling overheads A/c 31,850

By Trade Payables A/c 2,29,775

By Balance c/d 47,775
6,59,750 6,59,750

Trial Balance
As on March 31, 2014
Dr. Cr.
(₹) (₹)
Stores control A/c 13,650
Work in Progress A/c 1,06,925
Finished goods A/c 80,450
Bank A/c 47,775
Trade Payables A/c 15,925
Non- current Assets A/c 1,47,875
Trade Receivables A/c 50,050
Share capital A/c 1,82,000
Provision for depreciation A/c 26,164
Reserve & Surplus (Profit & Loss A/c) 2,08,046
Production overheads outstanding A/c 7,775
Outstanding administrative overheads A/c 2,225
Provision for doubtful debt 4,590
4,46,725 4,46,725

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Cost Accounting System By: CA PRAKASH PATEL

Part-III: Reconciliation of Cost and Financial Accounts

A. QUESTION FROM STUDY MATERIAL
Question-9 (Study Material - illustration-9)
The following figures are available from the financial records of ABC Manufacturing Co.
Ltd. for the year ended 31-3-20X8.
(₹ )
Sales (20,000 units) 25,00,000
Materials 10,00,000
Wages 5,00,000
Factory Overheads 4,50,000
Office and administrative Overhead (production related) 2,60,000
Selling and distribution Overheads 1,80,000
Finished goods (1,230 units) 1,50,000

(₹ ) (₹ )
Work-in-Process:
Materials 30,000
Labour 20,000
Factory overheads 20,000 70,000
Goodwill written off 2,00,000
Interest on capital 20,000
In the Costing records, factory overhead is charged at 100% of wages, administration
overhead 10% of factory cost and selling and distribution overhead at the rate of ₹ 10 per
unit sold.
PREPARE a statement reconciling the profit as per cost records with the profit as per
financial records.
Hints:
Particulars Profit (₹)
Financial Accounts 1,10,000
Cost Accounts 3,00,000

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Cost Accounting System By: CA PRAKASH PATEL

Question-10 (Study Material - illustration-10)

Following are the figures extracted from the Cost Ledger of a manufacturing unit.
(₹)
Stores:
Opening balance 15,000
Purchases 80,000
Transfer from WIP 40,000
Issue to WIP 80,000
Issue to repairs and maintenance 10,000
Sold as a special case at cost 5,000
Shortage in the year 3,000
Work-in-Process:
Opening inventory 30,000
Direct labour cost charged 30,000
Overhead cost charged 1,20,000
Closing Balance 20,000
Finished Products:
Entire output is sold at 10% profit on actual cost from work-in-
process.
Others:
Wages for the period 35,000
Overhead Expenses 1,25,000
ASCERTAIN the profit or loss as per financial account and cost accounts and reconcile
them.
Hints:
Particulars Profit (₹)
Financial Accounts (3,000)
Cost Accounts 20,000

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Cost Accounting System By: CA PRAKASH PATEL

Question-11 (Study Material - illustration-11)

The following figures have been extracted from the Financial Accounts of a manufacturing
firm for the first year of its operation:
(₹ )
Direct Material Consumption 50,00,000
Direct Wages 30,00,000
Factory Overhead 16,00,000
Administration Overheads (production related) 7,00,000
Selling and Distribution Overheads 9,60,000
Bad Debts 80,000
Preliminary Expenses written off 40,000
Legal Charges 10,000
Dividends Received 1,00,000
Interest Received on Deposits 20,000
Sales (1,20,000 units) 1,20,00,000
Closing Stock:
Finished Goods (4,000 units) 3,20,000
Work-in-Process 2,40,000
The cost accounts for the same period reveal that the direct material consumption was ₹
56,00,000. Factory overhead is recovered at 20% on prime cost. Administration overhead
is recovered at ₹ 6 per unit of production. Selling and distribution overheads are recovered
at ₹ 8 per unit sold.
Prepare the Profit and Loss Accounts both as per financial records and as per cost records.
Reconcile the profits as per the two records.
Hints:
Particulars Profit (₹)
Financial Accounts 12,90,000
Cost Accounts 5,65,160

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Cost Accounting System By: CA PRAKASH PATEL

TEST YOUR KNOWLEDGE

Question-5 (Study Material Q-5)
The following information is available from the financial books of a company having a
normal production capacity of 60,000 units for the year ended 31st March, 20X8:
i. Sales ₹ 10,00,000 (50,000 units).
ii. There was no opening and closing stock of finished units.
iii. Direct material and direct wages cost were ₹ 5,00,000 and ₹ 2,50,000 respectively.
iv. Actual factory expenses were ₹ 1,50,000 of which 60% are fixed.
v. Actual administrative expenses related with production activities were ₹45,000
which are completely fixed.
vi. Actual Selling and distribution expenses were ₹30,000 of which 40% are fixed.
vii. Interest and dividend received ₹15,000.
You are required to:
1. Find out profit as per financial books for the year ended 31st March, 20x8;
2. PREPARE the cost sheet and ascertain the profit as per cost accounts for the year ended
31st March, 20X8 assuming that the indirect expenses are absorbed on the basis of
normal production capacity; and
3. PREPARE a statement reconciling profits shown by financial and cost books.
Hints:
Particulars Profit (₹)
Financial Records 40,000
Cost Records 49,500

Question-6 (Study Material Q-6)

M/s. H.K. Piano Company showed a net loss of ₹ 4,16,000 as per their financial
accounts for the year ended 31st March, 20X8. The cost accounts, however, disclosed a net
loss of ₹ 3,28,000 for the same period. The following information was revealed as a result
of scrutiny of the figures of both the sets of books:
(₹ )
(i) Factory overheads under-recovered 6,000
(ii) Administration overheads over-recovered 4,000
(iii) Depreciation charged in financial accounts 1,20,000
(iv) Depreciation recovered in costs 1,30,000
(v) Interest on investment not included in costs 20,000
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Cost Accounting System By: CA PRAKASH PATEL

(vi) Income-tax provided 1,20,000

(vii) Transfer fees (credit in financial books) 2,000
(viii) Stores adjustment (credit in financial books) 2,000
PREPARE a Memorandum reconciliation account.

B. PAST YEAR EXAM QUESTIONS

May-23. Q5 (b) (5 marks)

The following information has been obtained from financial accounting and cost accounting
records.
Financial Cost
Accounting Accounting
₹ ₹
(i) Factory Overhead 94,750 90,000
(ii) Administrative Overhead 60,000 57,000
(iii) Selling Overhead 55,000 61,000
(iv) Opening Stock 17,500 22,500
(v) Closing Stock 12,500 15,000
Required:
Indicate under-recovery and over-recovery and their effects on cost accounting profit. [Note:
You are not required to prepare reconciliation statement.]
Solution:
Financial Cost Difference Under/Over- Effect on Net Effect* on
Accounting Accounting recovery Cost Cost
₹ ₹ ₹ Accounting Accounting
Profit Profit
(i) Factory 94,750 90,000 4,750 Under-recovery Increased To be reduced/
Overhead deducted
(ii) Administrative 60,000 57,000 3,000 Under-recovery Increased To be reduced/
Overhead deducted
(iii) Selling 55,000 61,500 -6,500 Over-recovery Decreased To be added
Overhead
(iv) Opening 17,500 22,500 -5,000 Over valuation Decreased To be added
Stock
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Cost Accounting System By: CA PRAKASH PATEL

(v) Closing Stock 12,500 15,000 -2,500 Over valuation Increased To be reduced/
deducted
*Taking Cost Accounting Profit as base
(Under recovery and over recovery with effect are answered by the candidate, or if
under recovery and over recovery with treatment (net effect) are answered, due credit
shall be given in both cases)

Nov-22. Q5 (b) (5 marks)

X Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company show
a Net Profit of ₹ 5,50,000 for the year ended 31st March, 2022. The chief accountant of the
company has provided following information from the Financial Accounts and Cost
Accounts:
Sr. No Particulars (₹)
(i) Legal Chargers Provided in Financial accounts 15,250
(ii) Interim Dividend received credited in financial accounts 4,50,000
(iii) Preliminary Expenses written off in financial accounts 25,750
(iv) Over recovery of selling overheads in cost accounts 11,380
(v) Profit on sale of capital asset credited in financial accounts 30,000
(vi) Under valuation of closing stock in cost accounts 25,000
(vii) Over recovery of production overheads in cost accounts 10,200
(viii) Interest paid on Debentures shown in financial accounts 50,000
Required:
Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement.
Solution:
Reconciliation Statement
(Reconciliation the profit as per financial records with the profit as per costing
records)
Particulars (₹) Total (₹)
Profit as per Financial Accounts 5,50,000
Add: Legal Charges 15,250
Preliminary expenses written off 25,750
Interest paid 50,000 91,000

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Cost Accounting System By: CA PRAKASH PATEL

6,41,000
Less: Under-valuation of closing stock in cost book 25,000
Interim Dividend Received 4,50,000
Over recovery of selling overheads in cost accounts 11,380
Over recovery of production overhead in cost 10,200 5,26,580
accounts
Profit on sale of Assets 30,000
Profit as per Cost Accounts 1,14,420

Dec-21. Q4 (b) (5 marks)

R Ltd. showed a Net Profit of ₹ 3,60,740 as per their cost accounts for the year ended 31st
March, 2021.
The following information was revealed as a result of scrutiny of the figures from the both
sets of accounts:
Sr. No. Particulars (₹)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600
Required:
Prepare a reconciliation statement showing the profit as per financial records.
Solution:
Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(₹) (₹)
Net Profit as per Cost Accounts 3,60,740
Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
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Cost Accounting System By: CA PRAKASH PATEL

Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850
Profit as per Financial Accounts 3,40,590

May-19. Q1 (d) (5 marks)

M/s Abid Private Limited disclosed a net profit of ₹ 48,408 as per cost books for the year
ending 31st March 2019. However, financial accounts disclosed net loss of ₹ 15,000
for the same period. On scrutinizing both the set of books of accounts, the following
information was revealed:
Works Overheads under-recovered in Cost Books 48,600
Office Overheads over-recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000
Prepare a Memorandum Reconciliation Account.
Solution:
Memorandum Reconciliation Account
Dr. Cr.
Particulars (₹) Particulars (₹)
To Works overheads under 48,600 By Net profit as per 48,408
recovered in Cost Accounts Costing books
To Provision for doubtful debts 17,800 By Office overheads over 11,500
recovered in cost
accounts
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Cost Accounting System By: CA PRAKASH PATEL

To Obsolescence loss 17,200 By Dividend received on 17,475

shares
To Store adjustment (Debit) 35,433 By Interest on fixed 21,650
deposit
By Depreciation over- 5,000
charged
By Net loss as per 15,000
financial accounts
1,19,033 1,19,033
[Note: This question may also be solved by taking net loss as per financial accounts as
basis.]

May-18. Q1 (d) (5 marks)

GK Ltd. showed net loss of ₹ 2,43,300 as per their financial accounts for the year ended
31st March, 2018. However, cost accounts disclosed net loss of ₹ 2,48,300 for the same
period. On scrutinizing both the set of books of accounts, the following information
were revealed:

₹
(i) Works overheads over recovered 30,400 30,000
(ii) Selling overheads under recovered 20,300
(iii) Administrative overheads under recovered 27,700
(iv) Depreciation over charged in cost accounts 35,100
(v) Bad debts w/off in financial accounts 15,000
(vi) Preliminary Exp. w/off in financial accounts 5,000
(vii) Interest credited during the year in financial accounts 7,500
Prepare a reconciliation statement reconciling losses shown by financial and cost
accounts by taking costing net loss as base.
Solution:
Reconciliation Statement
Particulars ₹ ₹
Loss as per Cost Accounts (2,48,300)
Add: Works overheads over recovered 30,400
Depreciation over charged in cost accounts 35,100
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Cost Accounting System By: CA PRAKASH PATEL

Interest credited during the year in financial 7,500 73,000

accounts
Less: Selling overheads under recovered 20,300
Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)
Loss as per Financial Accounts (2,43,300)

July-21. Q3 (a) (10 marks)

The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given
below:
Profit and Loss account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
(15000 units)
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000
• Factory overheads are 50% fixed and 50% variable.
• Administrative overheads are 100% fixed.
• Selling overheads are completely variable.
• Normal production capacity of ABC Ltd. is 20,000 units.
• Indirect Expenses are absorbed in the cost accounts on the basis of normal
production capacity.
• Notional rent of own premises charged in Cost Accounts is amounting to ₹
12,000. You are required to:
(i) Prepare a Cost Sheet and ascertain the Profit as per Cost Records for the year
ended 31st March, 2021.
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Cost Accounting System By: CA PRAKASH PATEL

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

(ii) Statement of Reconciliation

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

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Cost Accounting System By: CA PRAKASH PATEL

Profit as per Financial Accounts 57,000

(Note: Solution can be done considering base profit as per Financial Accounts)

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A manufacturing company has disclosed net loss of ₹ 48,700 as per their cost
accounting records for the year ended 31st March, 2014. However their financial
accounting records disclosed net profit of ₹ 35,400 for the same period. A scrutiny of
data of both the sets of books of accounts revealed the following information:

(₹)
(i) Factory overheads under absorbed 30,500
(ii) Administrative overheads over absorbed 65,000
(iii) Depreciation charged in financial accounts 2,25,000
(iv) Depreciation charged in cost accounts 2,70,000
(v) Income-tax provision 52,400
(vi) Transfer fee (credited in financial accounts) 10,200
(vii) Obsolescence loss charged in financial accounts 20,700
(viii) Notional rent of own premises charged in cost 54,000
accounts
(ix) Value of opening stock:
1,38,000
(a) in cost accounts
(b) in financial accounts 1,15,000

(x) Value of closing stock:

(a) in cost accounts 1,22,000
(b) in financial accounts 1,12,500
Prepare a Memorandum Reconciliation Account by taking costing loss as base.
Solution:
Memorandum Reconciliation Accounts
Dr. Cr.
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Cost Accounting System By: CA PRAKASH PATEL

Particulars Amount Particulars Amount

(₹) (₹)
To Net Loss as per Cost Accounts 48,700 By Administration overheads 65,000
over recovered in Cost
To Factory overheads under 30,500 Accounts
absorbed in Cost Accounts
By Depreciation overcharged in
To Provision for Income tax 52,400 Cost Accounts 45,000
(₹ 2,70,000 – ₹ 2,25,000)
To Obsolescence loss 20,700 By Transfer fees in Financial
To Overvaluation of closing stock 9,500 Accounts 10,200
in Cost Account**
By Notional Rent of own premises
54,000
To Net Profit (as per Financial 35,400 By Overvaluation of Opening
Accounts) stock in Cost Accounts* 23,000
1,97,200 1,97,200
* Overvaluation of Opening Stock as per Cost Accounts
= Value in Cost Accounts – Value in Financial Accounts
= ₹ 1,38,000 – ₹ 1,15,000 = ₹ 23,000.
** Overvaluation of Closing Stock as per Cost Accounts
= Value in Cost Accounts – Value in Financial Accounts
= ₹ 1,22,000 – ₹ 1,12,500 = ₹ 9,500.

Question-2
R Limited showed a net loss of ₹ 35,400 as per their cost accounts for the year ended
31st March, 2014. However, the financial accounts disclosed a net profit of ₹ 67,800 for
the same period. The following information were revealed as a result of scrutiny of the
figures of cost accounts and financial accounts:
(₹)

(i) Administrative overhead under recovered 25,500

(ii) Factory overhead over recovered 1,35,000
(iii) Depreciation under charged in Cost Accounts 26,000
(iv) Dividend received 20,000
(v) Loss due to obsolescence charged in Financial Accounts 16,800
(vi) Income tax provided 43,600
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Cost Accounting System By: CA PRAKASH PATEL

(vii) Bank interest credited in Financial Accounts 13,600

(viii) Value of opening stock:
In Cost Accounts 1,65,000
In Financial Accounts 1,45,000
(ix) Value of closing stock:
In Cost Accounts 1,25,500
In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000
(xi) Notional rent of own premises charged in Cost Accounts 60,000
(xii) Provision for doubtful debts in Financial Accounts 15,000
Prepare a reconciliation statement by taking costing net loss as base.
Solution:
Statement of Reconciliation
Sl. Particulars Amount (₹) Amount (₹)
No.
Net loss as per Cost Accounts (35,400)
Additions
1. Factory O/H over recovered 1,35,000
2. Dividend Received 20,000
3. Bank Interest received 13,600
4. Difference in Value of Opening 20,000
Stock (1,65,000 – 1,45,000)
5. Difference in Value of Closing
6,500
Stock (1,32,000 – 1,25,500)
6. Notional Rent of own Premises 60,000 2,55,100
Deductions
1. Administration O/H under recovered 25,500
2. Depreciation under charged 26,000
3. Loss due to obsolescence 16,800
4.
Income tax Provided 43,600
5.
Goodwill written-off 25,000
6.
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Cost Accounting System By: CA PRAKASH PATEL

Provision for doubtful debts 15,000 (1,51,900)

Net Profit as per Financial A/c.

67,800

Question-3
You are given the following information of the cost department of a manufacturing
company:
(₹)
Stores:
Opening Balance 12,60,000
Purchases 67,20,000
Transfer from work-in-progress 33,60,000
Issue to work-in-progress 67,20,000
Issue to repairs and maintenance 8,40,000
Shortage found in stock taking 2,52,000
Work-in-progress:
Opening Balance 25,20,000
Direct wages applied 25,20,000
Overhead applied 90,08,000
Closing Balance 15,20,000
Finished products:
Entire output is sold at a profit of 12% on actual cost from work-in-progress.
Other information:
(₹)
Wages incurred 29,40,000
Overhead incurred 95,50,000
Income from Investment 4,00,000

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Cost Accounting System By: CA PRAKASH PATEL

Loss on sale of fixed assets 8,40,000

Shortage in stock taking is treated as normal loss.

You are require to prepare:
(i) Stores control account;
(ii) Work-in-progress control account;
(iii) Costing Profit and Loss account;
(iv) Profit and Loss account and
(v) Reconciliation statement

Solution:
Stores Leger Control Account
Dr. Cr.
(₹) (₹)
To Balance b/d 12,60,000 By Work-in-progress 67,20,000
control A/c
To General ledger adjustment A/c 67,20,000 By Overhead control A/c 8,40,000

To Work-in progress Control A/c 33,60,000 By Overhead control A/c 2,52,000

(Shortage)
By Balance c/d 35,28,000
1,13,40,000 1,13,40,000

W.I.P Control A/c

Dr. Cr.
(₹) (₹)
To Balance b/d 25,20,000 By Stores ledger control A/c 33,60,000
To Stores ledger control A/c 67,20,000 By Costing P&L A/c (Cost 1,58,88,000
of Sales) (Balancing
figure)
To Direct wages Control A/c 25,20,000
To Overhead control A/c 90,08,000 By Balance c/d 15,20,000
2,07,68,000 2,07,68,000

Costing Profit and Loss A/c

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Cost Accounting System By: CA PRAKASH PATEL

Dr. Cr.
(₹) (₹)
To W.I.P Control A/c 1,58,88,000 By General
To General ledger Adj. 19,06,560 Ledger Adj. A/c
A/c (Profit) Cost of sales 1,58,88,000
Add 12%Profit 19,06,560 1,77,94,560
1,77,94,560 1,77,94,560

Financial Profit and Loss A/c

Dr. Cr.
(₹) (₹) (₹) (₹)
To Opening stock : 12,60,000 By Sales 1,77,94,560
Stores
By Income from
W.I.P 25,20,000 37,80,000 investment 4,00,000
By Closing
stock:
To Purchases 67,20,000
Stores
35,28,000
W.I.P
To Wages 29,40,000 15,20,000 50,48,000
By loss
5,87,440

To Overhead 95,50,000
To Loss on sale of
fixed assets 8,40,000
2,38,30,000 2,38,30,000

Reconciliation Statement
Dr. Cr.
(₹) (₹)
Profit as per Cost Accounts 19,06,560
Add: Income from investments 4,00,000

23,06,560

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Cost Accounting System By: CA PRAKASH PATEL

Less : Loss on sale of fixed assets 8,40,000

Under absorption of overheads (Refer to Working Note) 20,54,000 28,94,000
Loss as per Financial Accounts 5,87,440
Working Notes:
Overhead Control Account
Dr. Cr.
(₹) (₹)
To General Ledger Adj. A/c 95,50,000 By W.I.P control A/c 90,08,000

To Stores Ledger Control A/c 2,52,000 By Balance c/d (under 20,54,000

absorption of
overheads)

To Stores ledger control A/c 8,40,000

To Wages control A/c Indirect

wages (₹ 29,40,000- ₹25,20,000) 4,20,000
1,10,62,000 1,10,62,000

Question-4
The following figures have been extracted from the cost records of a manufacturing unit:
(₹)
Stores: Opening balance 32,000
Purchases of material 1,58,000
80,000
Transfer from work-in-
1,60,000
progress Issues to work-in-
20,000
progress Issues to repair and
6,000
maintenance Deficiencies
60,000
found in stock taking
Work-in-progress: Opening balance
Direct wages applied 65,000
Overheads applied 2,40,000
Closing balance of W.I.P. 45,000
Finished products: Entire output is sold at a profit of 10% on actual cost from work-in-
progress. Wages incurred ₹ 70,000, overhead incurred ₹ 2,50,000.
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Cost Accounting System By: CA PRAKASH PATEL

Items not included in cost records: Income from investment ₹ 10,000, Loss on sale of
capital assets ₹ 20,000.
Draw up Store Control account, Work-in-progress Control account, Costing Profit and
Loss account, Profit and Loss account and Reconciliation statement.

Solution:
(A) Costing books
Stores Control Account

Particulars (₹) Particulars (₹)

To Balance b/d 32,000 By W.I.P. Control A/c 1,60,000
To General ledger adjustment 1,58,000 By Work overhead control 20,000
80,000 A/c By Costing Profit and 6,000
A/c To Work in progress
Loss A/c By Balance c/d 84,000
control A/c
2,70,000 2,70,000

W.I.P. Control Account

Particulars (₹) Particulars (₹)

To Balance b/d 60,000 By Stores control A/c 80,000
To Stores control A/c 1,60,000 By Costing profit and loss A/c 4,00,000
(Cost of sales)
To Direct wages control A/c 65,000
To Works overhead control A/c 2,40,000 By Balance c/d 45,000
5,25,000 5,25,000

Works Overhead Control Account

Particulars (₹) Particulars (₹)

To General ledger adjustment A/c 2,50,000 By W.I.P. Control A/c 2,40,000

To Store ledger control A/c 20,000 By Costing profit & loss 30,000
A/c (under recovery)
2,70,000 2,70,000
Costing Profit & Loss Account

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Particulars (₹) Particulars (₹)

To W.I.P. control A/c (Cost of 4,00,000 By General
ledger
sales) adjustment A/c
To Works overhead control A/c 30,000 Cost of sales 4,00,000
To Stores control A/c (shortage) 6,000 10% profit 40,000 4,40,000
To Profit 4,000
4,40,000 4,40,000

(B) Financial Books

Profit & Loss Account
Particulars (₹) Particulars (₹)
To Opening stock By Sales 4,40,000
By Closing stock:
Stores 32,000
Stores 84,000
W.I.P. 60,000 92,000 W.I.P. 45,000
1,29,000
By Income from
investment 10,000
By Loss 11,000
To Purchases 1,58,000
To Wages incurred 70,000
To Overheads incurred 2,50,000
To Loss on sale of capital assets 20,000
5,90,000 5,90,000

Reconciliation statement
(₹) (₹)
Profit as per Cost Accounts 4,000
Add: Income from investment recorded in Financial accounts 10,000
14,000
Less: Under absorption of wages in Cost accounts 5,000
Loss on sales of capital asset only included in Financial 20,000 25,000
accounts

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Cost Accounting System By: CA PRAKASH PATEL

Loss as per Financial accounts 11,000

Question-5
The following is the Trading and Profit & Loss Account of Omega Limited:
Dr. Cr.
Particulars (₹) Particulars (₹)
To Materials consumed 23,01,000 By Sales (30,000 units) 48,75,000

To Direct wages 12,05,750 By Finished goods Stock 1,30,000

(1,000 units)
To Production Overheads 6,92,250 By Work-in-progress:
To Administration Overheads 3,10,375 Materials 55,250
To Selling and Distribution 3,68,875 Wages 26,000
Overheads
To Preliminary Expenses written off 22,750 Production Overheads 16,250 97,500
To Goodwill written off 45,500
To Fines 3,250 By Dividends received 3,90,000

To Interest on Mortgage 13,000 By Interest on bank deposits 65,000

To Loss on Sale of machine 16,250
To Taxation 1,95,000

To Net Profit for the year 3,83,500

55,57,500 55,57,500
Omega Limited manufactures a standard unit.
The Cost Accounting records of Omega Ltd. show the following:
(i) Production overheads have been charged to work-in-progress at 20% on Prime cost.
(ii) Administration Overheads have been recovered at ₹ 9.75 per finished Unit.
(iii) Selling & distribution Overheads have been recovered at ₹ 13 per Unit sold.
(iv) The Under- or Over-absorption of Overheads has not been transferred to costing
P/L A/c.
Required:

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Cost Accounting System By: CA PRAKASH PATEL

(i) Prepare a proforma Costing Profit & Loss account, indicating net profit.
(ii) Prepare Control accounts for Production overheads, Administration Overheads
and Selling & Distribution Overheads.
(iii) Prepare a statement reconciling the profit disclosed by the Cost records with that
shown in Financial accounts.
Solution:
(i) Costing Profit & Loss A/c
(₹)
Materials 23,01,000
Wages 12,05,750
Prime Cost 35,06,750
Production overheads (20% of Prime Cost) 7,01,350
42,08,100
Less: Work in Progress
97,500
Manufacturing cost incurred during the period 41,10,600
Add: Administration Overheads (₹9.75 x 31,000 units) 3,02,250
Cost of Production 44,12,850
Less: Closing Finished goods stock (₹44,12,850 x 1,000) 1,42,350
31,000
Cost of Goods Sold 42,70,500
Add Selling & Distribution Overheads (₹13 × 30,000 units) 3,90,000
Cost of Sales 46,60,500
Profit (Balancing figure) 2,14,500
Sales 48,75,000

Production OH A/c
(₹) (₹)
To Gen ledger Adj. A/c 6,92,250 By WIP A/c 7,01,350
To Overhead adj. A/c 9,100
(Over-absorption)
7,01,350 7,01,350

(ii) Administration Overheads A/c

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(₹) (₹)
To Gen Ledger Adj. A/c 3,10,375 By Finished goods A/c 3,02,250
By Overhead adj. A/c 8,125
(Under-absorption)
3,10,375 3,10,375

Selling & Distribution Overheads A/c

(₹) (₹)
To Gen. Ledger Adj A/c 3,68,875 By Cost of Sales A/c 3,90,000
To Overhead Adj. A/c 21,125
(Over-absorption)
3,90,000 3,90,000

(iii) Reconciliation Statement

(₹) (₹)
Profits as per cost accounts Production 2,14,500
Add: Overheads- over absorbed 9,100
Selling & Distribution Overheads- over absorbed 21,125
Dividend received 3,90,000
65,000 4,85,225
Interest on bank deposits
6,99,725
Less: Administration Overheads- under-absorbed 8,125
22,750
Preliminary exp. Written off
45,500
Goodwill written off
3,250
Fines
13,000
Interest on Mortgage
16,250
Loss on sale of machinery
1,95,000
Taxation
12,350
Write-down of Finished stock (₹1,42,350 – ₹1,30,000) (3,16,225)
Profit as per Financial Accounts 3,83,500

Question-6

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Cost Accounting System By: CA PRAKASH PATEL

The financial books of a company reveal the following data for the year ended 31st
March, 2014:
(₹)
Opening Stock:
Finished goods 875 units 74,375
Work-in-process 32,000
01.04.2013 to 31.3.2014
Raw materials consumed 7,80,000
Direct Labour 4,50,000
Factory overheads 3,00,000
Goodwill written off 1,00,000
Administration overheads 2,95,000
Dividend paid 85,000
Bad Debts 12,000
Selling and Distribution Overheads 61,000
Interest received 45,000
Rent received 18,000
Sales 14,500 units 20,80,000
Closing Stock: Finished goods 375 units 41,250
Work-in-process 38,667

The cost records provide as under:

➢ Factory overheads are absorbed at 60% of direct wages.
➢ Administration overheads are recovered at 20% of factory cost.
➢ Selling and distribution overheads are charged at ₹ 4 per unit sold.
➢ Opening Stock of finished goods is valued at ₹ 104 per unit.
➢ The company values work-in-process at factory cost for both Financial and Cost
Profit Reporting.
Required:
(i) Prepare statements for the year ended 31st March, 2014 show
➢ the profit as per financial records
➢ the profit as per costing records.
(ii) Present a statement reconciling the profit as per costing records with the profit as
per Financial Records.

Solution:
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Cost Accounting System By: CA PRAKASH PATEL

(i) Statement of Profit as per financial records

OR
Profit & Loss Account of the company
(for the year ended March 31, 2014)
(₹) (₹)
To Opening stock: By Sales 20,80,000
Finished Goods 74,375 By Closing stock:
Work-in-process 32,000 Finished Goods 41250
To Raw materials consumed 7,80,000 Work-in-Process 38,667
To Direct labour 4,50,000 By Rent received 18,000
To Factory overheads 3,00,000 By Interest received 45,000
To Goodwill written off 1,00,000
To Administration overheads 2,95,000

To Selling & distribution overheads 61,000

To Dividend paid 85,000
To Bad debts 12,000
To Profit 33,542

22,22,917 22,22,917

Statement of Profit as per costing records

(for the year ended March 31,2014)
(₹) (₹)
Sales revenue (14,500 units) (A) 20,80,000
Cost of Sales:
Opening stock (875 units x ₹ 104) 91,000
Add: Cost of production of 14,000 units
(Refer to Working Note 1& 2) 17,92,000
Less: Closing stock (₹17,95,000 x 375 units)
14,000 units (48,000)

Production cost of goods sold (14,500 units)

18,35,000
Selling & distribution overheads (14,500 units x ₹ 4)
58,000
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Cost Accounting System By: CA PRAKASH PATEL

Cost of sales: (B)

18,93,000 18,93,000
Profit: {(A) – (B)} 1,87,000

(ii) Statement of Reconciliation

(Reconciling the profit as per costing records with the profit as per financial records)
(₹) (₹)
Profit as per Cost Accounts 1,87,000
Add: Admin. overheads over absorbed 3,667
(₹ 2,98,667 – ₹ 2,95,000)
Opening stock overvalued (₹ 91,000 – ₹ 74,375) 16,625
Interest received 45,000
18,000 83,292
Rent received
2,70,292
Less: Factory overheads under recovery 30,000
(₹ 2,98,667 – ₹ 2,95,000)
Selling & distribution overheads under recovery 3,000
(₹ 61,000 – ₹ 58,000)
Closing stock overvalued (₹ 48,000 – ₹ 41,250) 6,750
Goodwill written off 1,00,000
Dividend 85,000
Bad debts 12,000 2,36,750
Profit as per financial accounts 33,542

Working Notes:

1. Number of units produced Units

Sales 14,500
Add: Closing stock 375
Total 14,875
Less: Opening stock 875
Number of units produced 14,000
2. Cost Sheet

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Cost Accounting System By: CA PRAKASH PATEL

(₹) (₹)
Raw materials consumed 7,80,000
Direct labour 4,50,000
Prime cost 12,30,000
Factory overheads (60% of direct wages) 2,70,000
Factory cost 15,00,000
Add: Opening work-in-process 32,000
Less: Closing work-in-process 38,667
Factory cost of goods produced 14,93,333
2,98,667
Administration overheads (20% of factory cost)
Cost of production of 14,000 units 17,92,000

Cost of production per unit: = Total Cost of Production = ₹ 17,92,000 = ₹128

No. of units produced 14,000units

Question-7 (RTP Nov. 2020 Q6 New Course)

A manufacturing company disclosed a net loss of ₹6,94,000 as per their cost accounts for
the year ended March 31,2020. The financial accounts however disclosed a net loss of
₹10,20,000 for the same period. The following information was revealed as a result of
scrutiny of the figures of both the sets of accounts.
(₹)
(i) Factory Overheads under-absorbed 80,000
(ii) Administration Overheads over-absorbed 1,20,000
(iii) Depreciation charged in Financial Accounts 6,50,000
(iv) Depreciation charged in Cost Accounts 5,50,000
(v) Interest on investments not included in Cost 1,92,000
Accounts
(vi) Income-tax provided 1,08,000
(vii) Interest on loan funds in Financial Accounts 4,90,000
(viii) Transfer fees (credit in financial books) 48,000
(ix) Stores adjustment (credit in financial books) 28,000
(x) Dividend received 64,000

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Cost Accounting System By: CA PRAKASH PATEL

PREPARE a memorandum Reconciliation Account.

Solution:
Memorandum Reconciliation Accounts
Dr. Cr.
(₹) (₹)
To Net Loss as per 6,94,000 By Administration 1,20,000
Costing books overheads
over
recovered in
cost
accounts
To Factory overheads 80,000 By Interest on 1,92,000
under absorbed in investment not
Cost included in Cost
Accounts Accounts
To Depreciation 1,00,000 By Transfer fees 48,000
und in
er charged in Cost Financial books
Accounts
To Income-Tax not 1,08,000 By Stores adjustment 28,000
provided in Cost (Credit in
Accounts financial
books)
To Interest on Loan 4,90,000 By Dividend received 64,000
Funds in Financial in financial books
Accounts
By Net loss as 10,20,00
per Financial 0
books
14,72,00 14,72,00
0 0

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Unit & Batch Costing By: CA. PRAKASH PATEL

Chapter 7: Unit & Batch Costing

PART-A: UNIT COSTING

A. QUESTION FROM STUDY MATERIAL

ILLUSTRATION 1:
The following data relate to the manufacture of a standard product during the 4-
week ended 28th February 20X9:

Raw Materials Consumed ₹ 4,00,000

Direct Wages ₹ 2,40,000
Machine Hours Worked 3,200 hours
Machine Hour Rate ₹ 40
Office Overheads 10% of works cost
Selling Overheads ₹ 20 per unit
Units produced and sold 10,000 at ₹ 120 each
You are required to FIND OUT the cost per unit and profit for the 4- week ended 28th
February 20X9.
Hints: Cost/unit = ₹104.48, Profit= ₹15.52
ILLUSTRATION 2
Atharva Pharmacare Limited produced a uniform type of product and has a
manufacturing capacity of 3,000 units per week of 48 hours. From the records of the
company, the following data are available relating to output and cost of 3 consecutive
weeks

Week Units Direct Direct Factory

Number Manufactured Material (₹) Wages (₹) Overheads (₹)
1 1,200 9,000 3,600 31,000
2 1,600 12,000 4,800 33,000
3 1,800 13,500 5,400 34,000
Assuming that the company charges a profit of 20% on selling price, FIND OUT the
selling price per unit when the weekly output is 2,000 units
Hints: Selling price per unit = ₹35, Factory cost = ₹35,000
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Unit & Batch Costing By: CA. PRAKASH PATEL

TEST YOUR KNOWLEDGE

Question-1
1. Wonder Ltd. has a capacity of 120,000 Units per annum as its optimum capacity. The
production costs are as under
Direct Material – ₹ 90 per unit
Direct Labour- ₹60 per unit
Overheads:

Fixed: ₹ 30,00,000 per annum Variable : ₹100 per unit

Semi Variable: ₹ 20,00,000 per annum upto 50% capacity and an extra amount
of ₹ 4,00,000 for every 25% increase in capacity or part thereof
The production is made to order and not for stocks.
If the production programme of the factory is as indicated below and the management
desires a profit of ₹20,00,000 for the year DETERMINE the average selling price at
which each unit should be quoted.
First 3 months: 50% capacity
Remaining 9 months: 80% capacity
Ignore Administration, Selling and Distribution overheads.
Hints: Average selling price = ₹3,37.356 (i.e. Sales = ₹2,93,50,000, Units = 20,00,000).

B. PAST YEAR EXAM QUESTIONS

Nov-22. Q4(b)-10 marks

PNME Ltd. manufactures two types of masks- 'Disposable Masks' and ‘Cloth Masks'. The
cost data for the year ended 31stMarch, 2022 is as follows:
₹
Direct Materials 12,50,000
Direct Wages 7,00,000
Production Overhead 4,00,000
Total 23,50,000
It is further ascertained that:
• Direct material cost per unit of Cloth Mask was twice as much of Direct material cost per
unit of Disposable Mask.
• Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
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Unit & Batch Costing By: CA. PRAKASH PATEL

• Production overhead per unit was at same rate for both the types of the masks.
• Administration overhead was 50% of Production overhead for each type of mask.
• Selling cost was ₹ 2 per Cloth Mask.
• Selling Price was ₹ 35 per unit of Cloth Mask.
• No. of units of Cloth Masks sold- 45,000
• No. of units of Production of
Cloth Masks: 50,000
Disposable Masks: 1,50,000
You are required to prepare a cost sheet for Cloth Masks showing:
(i) Cost per unit and Total Cost.
(ii) Profit per unit and Total Profit.
Solution:
Preparation of Cost Sheet for Cloth Masks
No. of units produced = 50,000 units
No. of units sold = 45,000 units
Particulars Per unit (₹) Total (₹)
Direct materials (Working note- (i)) 10.00 5,00,000
Direct wages (Working note- (ii)) 5.00 2,50,000
Prime cost 15.00 7,50,000
Production overhead (Working note- (iii)) 2.00 1,00,000
Factory Cost 17.00 8,50,000
Administration Overhead* (50% of Production Overhead) 1.00 50,000
Cost of production 18.00 9,00,000
Less: Closing stock (50,000 units – 45,000 units) - (90,000)
Cost of goods sold i.e. 45,000 units 18.00 8,10,000
Selling cost 2.00 90,000
Cost of sales/ Total cost 20.00 9,00,000
Profit 15.00 6,75,000
Sales value (₹ 35 × 45,000 units) 35.00 15,75,000
Working Notes:
(i) Direct material cost per unit of Disposable Mask = M Direct material cost per
unit of Cloth Mask = 2M
Total Direct Material cost = 2M × 50,000 units + M × 1,50,000 units
Or, ₹ 12,50,000 = 1,00,000 M + 1,50,000 M

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Unit & Batch Costing By: CA. PRAKASH PATEL

Or, M = 12,50,000 = 5
2,50,000
Therefore, Direct material Cost per unit of Cloth Mask = 2 × ₹ 5 = ₹ 10
(ii) Direct wages per unit for Cloth Mask = W
Direct wages per unit for Disposable Mask= 0.6W
So, (W x 50,000) + (0.6W x 1,50,000) = ₹ 7,00,000
W = ₹5 per unit
Therefore, Direct material Cost per unit of Cloth Mask = ₹ 5
(iii) Production overhead per unit = ₹4,00,000 =2
(50,000+1,50,000)
Production overhead for Cloth Mask = ₹ 2 × 50,000 units = ₹ 1,00,000
* Administration overhead is related to production overhead in the question and hence
to be considered in cost of production only.

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Unit & Batch Costing By: CA. PRAKASH PATEL

PART-B: BATCH COSTING

A. QUESTION FROM STUDY MATERIAL

ILLUSTRATION: 3
Arnav Confectioners (AC) owns a bakery which is used to make bakery items like
pastries, cakes and muffins. AC use to bake atleast 50 units of any item at a time. A
customer has given an order for 600 muffins. To process a batch of 50 muffins, the
following cost would be incurred:
Direct materials- ₹ 500
Direct wages- ₹ 50
Oven set- up cost ₹ 150
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added
to the total production cost of each batch to allow for selling, distribution and
administration overheads.
AC requires a profit margin of 25% of sales value.
DETERMINE the selling price for 600 muffins.
Hints: S.P. = ₹1041.33 per batch.

ILLUSTRATION: 4
A jobbing factory has undertaken to supply 200 pieces of a component per month
for the ensuing six months. Every month a batch order is opened against which
materials and labour hours are booked at actual. Overheads are levied at a rate per
labour hour. The selling price contracted for is ₹ 8 per piece. From the following
data CALCULATE the cost and profit per piece of each batch order and overall
position of the order for 1,200 pieces.

Month Batch Output Material cost Direct wages Direct labour

(₹) (₹) hours
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320
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Unit & Batch Costing By: CA. PRAKASH PATEL

The other details are:

Month Chargeable expenses Direct labour

(₹) hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800
Hints:
Particulars Jan Feb Mar April May June July
Profit per unit ₹1.48 ₹0.74 ₹1.17 ₹0.27 ₹(0.15) ₹0.36 ₹0.66

ILLUSTRATION: 5
Monthly demand for a product 500 units
Setting-up cost per batch ₹ 60
Cost of manufacturing per unit ₹ 20
Rate of interest 10% p.a.
DETERMINE economic batch quantity.
Hints: EBQ = 600 units
ILLUSTRATION: 6
M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s.
KMR Fans on a steady daily basis. It is estimated that it costs ₹ 1 as inventory holding
cost per bearing per month and that the set up cost per run of bearing manufacture is
₹ 3,200
(i) DETERMINE the optimum run size of bearing manufacture?
(ii) STATE what would be the interval between two consecutive optimum runs?
(iii)FIND OUT the minimum inventory cost?
Hints: (i) EBQ = 5060 units, (ii) 36.5 days, (iii) ₹30,360
ILLUSTRATION: 7
A Company has an annual demand from a single customer for 50,000 litres of a paint
product. The total demand can be made up of a range of colour to be produced in a
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Unit & Batch Costing By: CA. PRAKASH PATEL

continuous production run after which a set-up of the machinery will be required to
accommodate the colour change. The total output of each colour will be stored and
then delivered to the customer as single load immediately before production of the
next colour commences.
The Set up costs are ₹ 100 per set up. The Service is supplied by an outside company
as required.
The Holding costs are incurred on rented storage space which costs ₹ 50 per sq. meter
per annum. Each square meter can hold 250 Litres suitably stacked.
You are required to:
(i) CALCULATE the total cost per year where batches may range from 4,000 to
10,000 litres in multiples of 1,000 litres and hence choose the production batch
size which will minimize the cost.
(ii) Use the economic batch size formula to CALCULATE the batch size which
will minimise total cost.
Hints: (i) EBQ = 7,000 liters, cost = ₹1,414 (ii) EBQ = ₹7071 liters

TEST YOUR KNOWLEDGE

Question-2
Rio Limited undertakes to supply 1000 units of a component per month for the months
of January, February and March 20X3. Every month a batch order is opened against
which materials and labour cost are booked at actual. Overheads are levied at a rate per
labour hour. The selling price is contracted at ₹15 per unit.
From the following data, CALCULATE the profit per unit of each batch order and the
overall position of the order for the 3,000 units.
Month Batch Output Material Cost Labour Cost
(Numbers) (₹) (₹)
January 20X3 1,250 6,250 2,500
February 20X3 1,500 9,000 3,000
March 20X3 1,000 5,000 2,000
Labour is paid at the rate of ₹ 2 per hour. The other details are:
Month Overheads (₹) Total Labour
Hours
January 20X3 12,000 4,000
February 20X3 9,000 4,500
March 20X3 15,000 5,000
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Unit & Batch Costing By: CA. PRAKASH PATEL

Hints:
Particulars Jan Feb March
Cost p.u. 10 10 10
Profit p.u. 5 5 5

Question-3 (May 2023 Q1(a))

X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on steady basis.
It is estimated that it costs 10 paise as inventory holding cost per bearing per month
and that the set-up cost per run of bearing manufacture is ₹ 324.
(a) COMPUTE what would be the optimum run size for bearing manufacture?
(b) Assuming that the company has a policy of manufacturing 6,000
bearings per run, CALACULATE how much extra costs the company
would be incurring as compared to the optimum run suggested in (a)
above?
(c) CALCULATE the minimum inventory holding cost?
Hints: (a) EBQ = 3,600 bearings
(b)
Size 3,600 6,000
Cost (₹) 4,320 4,896

(c) ₹2,160

Question-4
A customer has been ordering 90,000 special design metal columns at the rate of
18,000 columns per order during the past years. The production cost comprises
₹2,120 for material, ₹60 for labour and ₹20 for fixed overheads. It costs ₹1,500 to
set up for one run of 18,000 column and inventory carrying cost is 5%.
1. FIND the most economic production run.
2. CALCULATE the extra cost that company incur due to processing of 18,000
columns in a batch.
Hints: (i) EBQ = 1567 columns,
(ii)
Size (Columns) 1,567 18,000
Total Cost (₹) 1,73,185 9,97,500

B. PAST YEAR EXAM QUESTIONS

Jan-21. Q1(d)-05 marks

GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the
estimates provided by Pharmaceutical Industry Bureau, there will be a demand of 40
Million 'Stents' in the coming year. GHI Ltd. is expected to have a market share of
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Unit & Batch Costing By: CA. PRAKASH PATEL

2.5% of the total market demand of the Stents in the coming year. It is estimated that it
costs ₹ 1.50 as inventory holding cost per stent per month and that the set-up cost per
run of stent manufacture is ₹ 225.
Required:
(i) What would be the optimum run size for Stent manufacture?
(ii) What is the minimum inventory holding cost?
(iii) Assuming that the company has a policy of manufacturing 4,000 stents per run,
how much extra costs the company would be incurring as compared to the optimum
run suggested in (i) above?

Solution:
(i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity
(EBQ)
Economic Batch Quantity (EBQ) = 2DS
C
Where, D = Annual demand for the Stents
= 4,00,00,000 × 2.5% = 10,00,000 units
S = Set- up cost per run
= ₹ 225
C = Carrying cost per unit per annum
= ₹ 1.50 × 12 = ₹ 18

2 x 10,00,000 x ₹ 225
EBQ = ₹ 18
= 5,000 units of Stents

(ii) Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per
unit per annum
= (5,000 ÷ 2) × ₹ 18
= ₹ 45,000

(iii) Calculation of the extra cost due to manufacturing policy

When run size is 4,000 When run size is 5,000
units units i.e. at EBQ

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Unit & Batch Costing By: CA. PRAKASH PATEL

Total set up cost

= 10,00,000 x ₹ 225 10,00,000 x ₹ 225
4,000 5,000
= ₹ 56,250 = ₹ 45,000
Total Carrying ½ × 4,000 × ₹ 18 ½ × 5,000 × ₹ 18
cost = ₹ 36,000 = ₹ 45,000

Total Cost ₹ 92,250 ₹ 90,000

Extra cost = ₹ 92,250 - ₹ 90,000 = ₹ 2,250

Nov-18. Q3(a)-10 marks

XYZ Ltd. has obtained an order to supply 48000 bearings per year from a concern. On
a steady basis, it is estimated that it costs ₹ 0.20 as inventory holding cost per bearing
per month and the set-up cost per run of bearing manufacture is ₹ 384

You are required to:

• compute the optimum run size and number of runs for bearing manufacture.
• compute the interval between two consecutive runs.
• find out the extra costs to be incurred, if company adopts a policy to
manufacture 8000 bearings per run as compared to optimum run Size.
• give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year.
Solution:
(i) Optimum batch size or Economic Batch Quantity (EBQ):

2 48,000
EBQ = = = 3919.18 or 3,920 units
384
2.4
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run
(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days
Or 365÷12.24=29.82 days
(iii) If 8,000 bearings are manufactures in a run: Total
cost = Set-up cost + Inventory holding cost
= ₹.384×(48,000÷8,000) + (8,000÷2)×₹.2.4
= 2304+9,600 = 11,904
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Unit & Batch Costing By: CA. PRAKASH PATEL

Extra cost = ₹(11,904 – 9,406*) =₹ 2,498/- OR

Extra cost = ₹ (11,904 – 9,696*) = ₹ 2,208/-
* Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum
Average Inventory = 3,920 units ÷ 2 = 1,960 units
Carrying Cost per unit per annum = ₹0.2 × 12 months = ₹2.4
Minimum Inventory Holding Costs = 1,960 units × ₹2.4 = ₹4,704
Total cost = Set-up cost + Inventory holding cost = (12.245×384) + 4704 = ₹ 9,406
(approx.)
OR
Total cost = Set-up cost + Inventory holding cost = (13×384) + 4704 = ₹ 9,696
(approx.)
(iv) To save cost the company should run at optimum
batch size i.e. 3,920 Units. It saves

₹ 2,498 or 2208. Run size should match with the Economic production run of bearing
manufacture. When managers of a manufacturing operation make decisions about the
number of units to produce for each production run, they must consider the costs
related to setting up the production process and the costs of holding inventory

Alternative presentation to part 3(a) (iii)

Statement showing Total Cost at Production Run size of 3,600 and 8,000 bearings

A. Annual requirement 48,000 48,000

B. Run Size 3,920 8,000
C. No. of runs (A/B) 12.245 6
D. Set up cost per run ₹ 384 ₹ 384
E. Total set up cost (CxD) ₹ 4,702 ₹ 2,304
F. Average inventory (B/2) 1,960 4,000
G. Carrying cost per unit p.a. 2.40 2.40
H. Total Carrying cost (FxG) 4,704 9,600
I. Total cost (E+H) 9,406 11,904
Extra cost incurred, if run size is of 8,000= ₹11,904-9,406= ₹ 2,498

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Unit & Batch Costing By: CA. PRAKASH PATEL

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Unit & Batch Costing By: CA. PRAKASH PATEL

Page | 713
Job Costing By: CA. PRAKASH PATEL

Chapter. 8: Job Costing

A. QUESTION FROM STUDY MATERIAL

ILLUSTRATION 1:
The manufacturing cost of a work order is ₹ 1,00,000; 8% of the production
against that order spoiled and the rejection is estimated to have a realizable
value of ₹ 2,000 only. The normal rate of spoilage is 2%. RECORD this in the
costing journal.
Hints: Costing P/L Account = ₹4,500
ILLUSTRATION 2
A shop floor supervisor of a small factory presented the following cost for
Job No. 303, to determine the selling price.

Per unit (₹)

Materials 70
Direct wages 18 hours @ ₹ 2.50 45
(Deptt. X 8 hours; Deptt. Y 6 hours; Deptt. Z 4 hours)
Chargeable expenses 5
120
Add : 33-1/3 % for expenses cost 40
160
Analysis of the Profit/Loss Account (for the year 20X9)
(₹) (₹)
Materials used 1,50,000 Sales less returns 2,50,000
Direct wages:
Deptt. X 10,000
Deptt. Y 12,000
Deptt. Z 8,000 30,000
Special stores items 4,000
Overheads:
Deptt. X 5,000

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Job Costing By: CA. PRAKASH PATEL

Deptt. Y 9,000
Deptt. Z 2,000 16,000
Works cost 2,00,000
Gross profit c/d 50,000 _______
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000 ______
50,000 50,000
It is also noted that average hourly rates for the three Departments X, Y
and Z are similar.
You are required to:
(i) PREPARE a job cost sheet.
(ii) CALCULATE the entire revised cost using 20X9 actual figures as basis.
(iii) Add 20% to total cost to DETERMINE selling price.
Hints: Selling Price = ₹189.76

TEST YOUR KNOWLEDGE

Question-1
In a factory following the Job Costing Method, an abstract from the work- in-progress as on
30th September was prepared as under.

Job No. Material (₹) Direct Labour (₹) Factory

Hrs. Overheads
applied (₹)
115 1325 400 hrs 800 640
118 810 250 hrs. 500 400
120 765 300 hrs. 475 1420
2,900 1,775 1,420

Material used in October were as follows:

Material Requisition No. Job No. Cost (₹)
54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535
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Job Costing By: CA. PRAKASH PATEL

A summary for labour hours deployed during October is as under:

Number of Hours
Job No.
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 --
124 25 10
275 75
Indirect Labour: Waiting of material 20 10
Machine breakdown 10 5
Idle time 5 6
Overtime Premium 6 5
316 101

A shop credit slip was issued in October that material issued under Requisition No. 54
was returned back to stores as bring not suitable. A material transfer note issued in
October indicated that material issued under Requisition No. 55 for job 118 was directed
to job 124.
The hourly rate in shop A per labour hour is ₹3 per hour while at shop B, it is ₹2 per hour. The factory
overhead is applied at the same rate as in September. Job 115, 118 and 120 were completed in
October.
You are asked to COMPUTE the factory cost of the completed job. It is the practice of
the management to put a 10% on factory cost to cover admin. Cost and selling overheads
and invoice the job to the customer on a total cost plus 20% basis. Determine the invoice
price of these three job ?
Hints:

Job 115 118 120

Total Cost ₹3,289 ₹3,100.90 ₹2,998,.60
Invoice Price ₹3,946.80 ₹3,721.08 ₹3,598.32

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B. PAST YEAR EXAM QUESTIONS

Nov-19 Q1(b)
The following data presented by the supervisor of a factory for a job.
₹ per unit
Direct Material 120
Direct Wages @ ₹4 per hour 60
( Department A-4 hrs, B-7 hrs, C-2 hrs & D-2 hrs.)
Chargeable Expenses 20
Total 200

Analysis of Profit and Loss account for the year ended 31 st March, 2019
Particulars ₹ ₹ Particulars ₹ ₹
Material 2,00,000 Sales 4,30,000
Direct Wages
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special Store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross Profit c/d 1,30,000
4,30,000 4,30,000
Selling Expenses 90,000 Gross Profit b/d 1,30,000
Net Profit 40,000
1,30,000 1,30,000

It is also to be noticed that average hourly rate for all the four departments are similar.
Required:
1. Prepare a Job Cost Sheet.
2. Calculate the entire revised cost using the above figures as the base.
3. Add 20% profit on selling price to determine the selling price.

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Solution:
JOB COST SHEET
Particulars Amount in (₹)
Direct Material 120
Direct Labour
A (4 x 4) = 16
B (7 x 4) = 28
C (2 x 4) = 8
D (2 x 4) = 8 60
Chargeable expenses 20
Prime Cost 200
Add: Overheads
Dept. A = (12,000/12,000) x 100 = 100% x 16 16
Dept. B = (6,000/ 8,000) x 28 21
Dept. C = (9,000/10,000) x 8 7.2
Dept. D = (17,000/20,000) x 8 6.8
Work Cost 251
Add: Selling Expenses (90,000/3,00,000) x 251 75.3
Total Cost (80%) 326.3
Add: Profit (20%) 81.575
Selling Price 407.875
Note:
1. Overhead recovered on the basis of Direct Labour.
2. Selling expense recovered on the basis of work cost

May-22 Q2(a) (10 marks)

In a manufacturing company, the overhead is recovered as follows: Factory Overheads: a
fixed percentage basis on direct wages and Administrative overheads: a fixed percentage
basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in a
period.
Job 1 Job 2
(₹) (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Selling price 3,33,312 2,52,000
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Profit percentage on total cost 12% 20%

You are required to:
(i) Compute the percentage recovery rates of factory overheads and administrative
overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and profit
for each of the two jobs.
(iii) Using the above recovery rates, determine the selling price to be quoted for job 3.

Additional data pertaining to Job 3 is as follows:

Direct materials ₹ 68,750
Direct wages ₹ 22,500
Profit percentage on selling price 15%

Solution:
(i) Computation of percentage recovery rates of factory overheads and
administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and
administrative overheads recovery rate as percentage of factory cost be A.

Factory Cost of Jobs:

Direct materials + Direct wages + Factory overhead
For Job 1 = ₹ 1,08,000 +₹ 84,000 + ₹ 84,000F
For Job 2 = ₹ 75,000 +₹ 60,000 + ₹ 60,000F

Total Cost of Jobs:

Factory cost + Administrative overhead
For Job 1 = (₹ 1,92,000 + ₹ 84,000F) + (₹ 1,92,000 + ₹ 84,000F) A = ₹ 2,97,600*
For Job-2 = (₹ 1,35,000 + ₹ 60,000F) + (₹1,35,000+ ₹ 60,000F) A = ₹ 2,10,000**
The value of F & A can be found using following equations
1,92,000 + 84,000F + 1,92,000A + 84,000AF = ₹ 2,97,600 …………eqn (i)
1,35,000 + 60,000F + 1,35,000A + 60,000AF = ₹ 2,10,000 …..……eqn (ii)

Multiply equation (i) by 5 and equation (ii) by 7

9,60,000 + 4,20,000F + 9,60,000A + 4,20,000AF = ₹14,88,000 ...eqn (iii)
9,45,000 + 4,20,000F + 9,45,000A + 4,20,000AF = ₹ 14,70,000 ...eqn (iv)
- - - - -
15,000 + 15,000A = ₹18,000

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15,000 A = 18,000 – 15,000

A = 0.20
Now putting the value of A in equation (i) to find the value of F
1,92,000 + 84,000F + (1,92,000 × 0.20) + (84,000 F × 0.20)= ₹ 2,97,600
Or
1,92,000 + 84,000F+38,400+16,800 F = ₹2,97,600
1,00,800 F = 67,200
F = 0.667
On solving the above relations: F = 0.667 and A = 0.20
Hence, percentage recovery rates of:
Factory overheads = 66.7% or 2/3rd of wages and
Administrative overheads = 20% of factory cost.

Working note:
Total Cost = Selling price
(100% + Percentage of profit)

*For Job 1 = ₹ 3,33,312 = ₹ 2,97,600

(100% + 12%)

*For Job 2 = ₹ 2,52,000 = ₹ 2,10,000

(100% + 20%)

(ii) Statement of jobs, showing amount of factory overheads, administrative

overheads and profit:
Job 1 Job 2
(₹) (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads
2/3rd of direct wages 56,000 40,000
Factory cost 2,48,000 1,75,000
Administrative overheads
20% of factory cost 49,600 35,000
Total cost 2,97,600 2,10,000
Profit (12% & 20% respectively) 35,712 42,000
Selling price 3,33,312 2,52,000
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(iii) Selling price of Job 3

(₹)
Direct materials 68,750
Direct wages 22,500
Prime cost 91,250
Factory overheads (2/3rd of Direct Wages) 15,000
Factory cost 1,06,250
Administrative overheads (20% of factory cost) 21,250
Total cost 1,27,500
Profit margin (balancing figure) 22,500
Selling price Total Cost
85% 1,50,000

C. ADDITIONAL QUESTIONS FOR PRACTICE( PAST YEAR EXAM)

Question-1
A factory incurred the following expenditure during the year 2013:
(₹) (₹)
Direct material consumed 12,00,000
Manufacturing Wages 7,00,000
Manufacturing overhead:
Fixed Variable 3,60,000
2,50,000 6,10,000
25,10,000

In the year 2014, following changes are expected in production and cost of production.
(i) Production will increase due to recruitment of 60% more workers in the factory.
(ii) Overall efficiency will decline by 10% on account of recruitment of new workers.
(iii) There will be an increase of 20% in Fixed overhead and 60% in Variable overhead.
(iv) The cost of direct material will be decreased by 6%.
(v) The company desire to earn a profit of 10% on selling price.
Ascertain the cost of production and selling price.

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Job Costing By: CA. PRAKASH PATEL

Solution:
Budgeted cost sheet for the year 2014
Particulars (Amount ₹)
Direct material consumed 12,00,000
Add: 44% due to increased output 5,28,000
17,28,000
1,03,680
Less: 6% for decline in price 16,24,320
Direct wages (manufacturing) 7,00,000
Add: 60% increase 4,20,000 11,20,000

Prime cost 27,44,320

Manufactured Overhead:
Fixed 3,60,000
Add: 20% increase 72,000

4,32,000
Variable 2,50,000

Add: 60% increase 1,50,000

4,00,000 8,32,000

Cost of production 35,76,320

Add: 1/9 of Cost or 10% on selling price 3,97,369

39,73,689
Selling price

Production will increase by 60% but efficiency will decline by 10%. 160 – 10% of 160 =
144%. So increase by 44%.

Note:
If we consider that variable overhead once will change because of increase in production
(From ₹ 2,50,000 to ₹ 4,00,000) then with efficiency declining by 10% it shall be ₹
3,60,000 and then again as mentioned in point No. (iii) of this question it will increase by
60% then variable overhead shall be ₹3,60,000  160% = ₹ 5,76,000. Hence, total costs
shall be ₹37,52,320 and profit shall be 1/9th of ₹37,52,320 = ₹4,16,924. Thus, selling price
shall be ₹ 41,69,244.
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Question-2
Ares Plumbing and Fitting Ltd. (APFL) deals in plumbing materials and also provides
plumbing services to its customers. On 12th August, 2014, APFL received a job order for
a students’ hostel to supply and fitting of plumbing materials. The work is to be done on
the basis of specification provided by the hostel owner. Hostel will be inaugurated on 5th
September, 2014 and the work is to be completed by 3rd September, 2014. Following
are the details related with the job work:
Direct Materials
APFL uses a weighted average method for the pricing of materials issues. Opening stock
of materials as on 12th August 2014:
- 15mm GI Pipe, 12 units of (15 feet size) @ ₹ 600 each
- 20mm GI Pipe, 10 units of (15 feet size) @ ₹ 660 each
- Other fitting materials, 60 units @ ₹ 26 each
- Stainless Steel Faucet, 6 units @ ₹ 204 each
- Valve, 8 units @ ₹ 404 each Purchases:
On 16th August 2014:
- 20mm GI Pipe, 30 units of (15 feet size) @ ₹ 610 each
- 10 units of Valve @ ₹ 402 each On 18th August 2014:
- Other fitting materials, 150 units @ ₹ 28 each
- Stainless Steel Faucet, 15 units @ ₹ 209 each On 27th August 2014:
- 15mm GI Pipe, 35 units of (15 feet size) @ ₹ 628 each
- 20mm GI Pipe, 20 units of (15 feet size) @ ₹ 660 each
- Valve, 14 units @ ₹ 424 each Issues for the hostel job:
On 12th August 2014:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units On 17th August 2014:
- 15mm GI Pipe, 8 units of (15 feet size)
- Other fitting materials, 30 units On 28th August 2014:
- 20mm GI Pipe, 2 units of (15 feet size)
- 15mm GI Pipe, 10 units of (15 feet size)
- Other fitting materials, 34 units
- Valve, 6 units On 30th August:
- Other fitting materials, 60 units
- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ ₹ 50 per hour (includes 12 hours overtime) Helper: 192 hours @
₹35 per hour (includes 24 hours overtime) Overtimes are paid at 1.5 times of the normal
wage rate.
Overheads:
Overheads are applied @ ₹ 13 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on
sales price.
You are required to
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(a) Calculate the total cost of the job.

(b) Calculate the price to be charged from the customer

Solution:
(a) Calculation of Total Cost for the Hostel Job:

Particulars Amount (₹) Amount (₹)

Direct Material Cost:
- 15mm GI Pipe (Working Note- 1) 11,051.28
- 20mm GI Pipe (Working Note- 2) 2,588.28
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
15 units x 6x ₹204 + 15x ₹209 3,113.57
21 units
- Valve
8x₹ 404 + 10x ₹ 402 + 14x ₹ 424 2,472.75 23,091.95
6 units × 32 units
Direct Labour:
- Plumber [(180 hours × ₹ 50) + (12 hours × ₹ 25)] 9,300.00
- Helper [(192 hours × ₹ 35) + (24 hours × ₹ 17.5)]
7,140.00 16,440.00
- Overheads [₹ 13 × (180 + 192) hours] 4,836.00
Total Cost 44,367.95

(b) Price to be charged for the job work:

Amount (₹)
Total Cost incurred on the job 44,367.95
Add: 25% Profit on Job Price (44,367.95 / 75% x 25%) 14,789.32
59,157.27

Working Note:
1. Cost of 15mm GI Pipe

Date Amount (₹)

17-08-2014 8 units × ₹ 600 4,800.00
28-08-2014 10 units (4 x ₹600 + 35x ₹628)/39 units 6,251.28

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Job Costing By: CA. PRAKASH PATEL

11,051.28

2. Cost of 20mm GI Pipe

Date Amount (₹)

12-08-2014 2 units × ₹ 660 1,320.00
28-08-2014 2 units × ( 8 x ₹660 + 30 x ₹610 + 20 x ₹660 )/ 58 1,268.28
units

2,588.28

3. Cost of Other fitting materials

Date Amount (₹)
12-08-2014 18 units × ₹ 26 468.00

17-08-2014 30 units × ₹ 26 780.00

28-08-2014 34 units × ( 12 x ₹26 + 150 x ₹ 28 )/162 units 946.96

30-08-2014 60 units × ( 12 x ₹26 + 150 x ₹ 28 )/162 units

1,671.11

3,866.07

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Process & Operation Costing By: CA PRAKASH PATEL

Chapter. 9: Process & Operation Costing

(I) Questions without application of valuation norms
A. QUESTION FROM STUDY MATERIAL
Question-1
From the following data, PREPARE process accounts indicating the cost of each
process and the total cost. The total units that pass through each process were 240 for
the period.
Process I (₹) Process II (₹) Process III (₹)
Materials 1,50,000 50,000 20,000
Labour 80,000 2,00,000 60,000
Other expenses 26,000 72,000 25,000

Indirect expenses amounting to ₹ 85,000 may be apportioned on the basis of wages.

There was no opening or closing stock.
Hints:
Transfer from Units ₹
P-I 1,150 2,76,000
P-II 2,700 6,48,000
P-III 3,200 7,68,000

Question-2
A product passes through three processes. The output of each process is treated as the raw
material of the next process to which it is transferred and output of the third process is
transferred to finished stock.

Process-I (₹) Process-II (₹) Process-III (₹)

Materials issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing overhead 10,000 10,000 15,000
10,000 units have been issued to the Process-I and after processing, the output of each
process is as under:
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Process Output Normal Loss

Process-I 9,750 units 2%
Process-II 9,400 units 5%
Process-III 8,000 units 10%
No stock of materials or of work-in-process was left at the end. CALCULATE the cost of
the finished articles.
Hints:
Transfer from Units ₹
P-I 9,750 55,714
P-II 9,400 91,051
P-III 8,000 1,10,687

Question-3 (Nov 22 Q3(b))

RST Limited processes Product Z through two distinct processes – Process- I and Process-
II. On completion, it is transferred to finished stock. From the following information for
the year 20X8-X9, PREPARE Process- I, Process- II and Finished Stock A/c:
Particulars Process- I Process- II
Raw materials used 7,500 units --
Raw materials cost per unit ₹ 60 --
Transfer to next process/finished 7,050 units 6,525 units
stock
Normal loss (on inputs) 5% 10%
Direct wages ₹ 1,35,750 ₹ 1,29,250
Direct Expenses 60% of Direct wages 65% of Direct wages
Manufacturing overheads 20% of Direct wages 15% of Direct wages
Realisable value of scrap per unit ₹ 12.50 ₹ 37.50
6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there
was no opening or closing stock of work-in-process.
Hints:
Transfer from Units ₹
P-I 7,050 6,82,403
P-II 6,525 9,13,824
Finished Stock 6,000 8,40,298
Net Profit = ₹1,38,182
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Process & Operation Costing By: CA PRAKASH PATEL

TEST YOUR KNOWLEDGE

Question-1
A company produces a component, which passes through two processes. During the month
of April, 20X9, materials for 40,000 components were put into Process I of which 30,000
were completed and transferred to Process II. Those not transferred to Process II were
100% complete as to materials cost and 50% complete as to labour and overheads cost.
The Process I costs incurred were as follows:
Direct material ₹15,000
Direct wages ₹18,000
Factory overheads ₹12,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished
goods stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to
materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the end
of the second process, when protective packing is applied to the completed components.
The process and packing costs incurred at the end of the Process II were :
Packing materials ₹4,000
Direct wages ₹3,500
Factory overheads ₹4,500
Required:
1. PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
2. PREPARE Statement of Equivalent Production, Cost per unit and Process II A/c.
Hints:
Process Value of closing WIP Cost/unit
P-I ₹8,035 0.375 + 0.514 + 0.343 = 1.232
P-II ₹2,358 1.240 + 0.123 + 0.158 = 1.521

Question-2
1. An English willow company who manufactures cricket bat buys wood as its direct
material. The Forming department processes the cricket bats and the cricket bats are then
transferred to the Finishing department where stickers are applied. The Forming
department began manufacturing 10,000 initial bats during the month of December for the
first time and their cost is as follows:
Direct material: ₹ 33,000
Conversion costs: ₹ 17,000
Total ₹ 50,000
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Process & Operation Costing By: CA PRAKASH PATEL

A total of 8,000 cricket bats were completed and transferred to the Finishing department,
the rest 2,000 were still in the Forming process at the end of the month. All of the forming
departments direct material were placed, but, on average, only 25% of the conversion costs
was applied to the ending work in progress inventory.
CALCULATE:
(i) Equivalent units of production for each cost.
(ii) The Conversion cost per Equivalent units.
(iii) Cost of closing work in process (WIP) and finished products.
Hints:
(i)
Equivalent Units
Input Output Material Conversion
Details Units Particulars Units
cost
% Units % Units
Unit 10,000 Finished 8,000 100 8,000 100 8,000
Introduced output
Closing W-I-P 2,000 100 2,000 25 500
Total 10,000 Total 10,000 10,000 8,500

(ii)
Direct Material Conversion costs
Cost per equivalent unit (₹) 3.30 2.00

(iii) 7,600 and 42,400

B. PAST YEAR EXAM QUESTIONS

Nov-19. Q4(b) (10 marks)
A product passes through two distinct processes before completion.
Following information are available in this respect:
Process-I Process-II
Raw material used 10000 units -
Raw material cost (per unit) ₹75 -
Transfer to next process/Finished goods 9000 units 8200 units
Normal loss (on inputs) 5% 10%
Direct wages ₹3,00,000 ₹5,60,000
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Direct Expenses 50% of direct wages 65% of direct wages

Manufacturing overheads 25% of direct wages 15% of direct wages
Realizable value of scrap (per unit) ₹13.50 ₹145
8000 units of finished goods were sold at a profit of 15% on cost. There was no opening
and closing stock of work-in-progess.
Prepare:
1. Process-I and Process-II Account
2. Finished goods account
3. Normal loss account
4. Abnormal loss account
5. Abnormal gain account.
Solution:

May-18. Q3(b) (10 marks)

Alpha Ltd. is engaged in the production of a product A which passes through 3 different
process - Process P, Process Q and Process R. The following data relating to cost and
output is obtained from the books of accounts for the month of April 2017:

Particulars Process P Process Q Process R

Direct Material 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000
Production overheads of ₹ 90,000 were recovered as percentage of direct labour.
10,000 kg of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of
materials or work in process. The entire output of each process passes directly to the
next process and finally to warehouse. There is normal wastage, in processing, of 10 %.
The scrap value of wastage is ₹ 1 per kg. The output of each process transferred to next
process and finally to warehouse are as under:
Process P = 9,000 kg
Process Q = 8,200 kg
Process R = 7,300 kg
The company fixes selling price of the end product in such a way so as to yield a profit
of 25% selling price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end
product.

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Solution:
Process- P Account
Kg. Amount Particulars Kg. Amount (₹)
Particulars (₹)
To Input 10,000 50,000 By Normal wastage 1,000 1,000
(1,000 kg. × ₹ 1)
To Direct Material --- 38,000 By Process- Q (9,000 9,000 1,39,500
kg. × ₹ 15.50)
To Direct Labour --- 30,000
To Production OH --- 22,500
(₹ 90,000 × 3/12)
10,000 1,40,500 10,000 1,40,500

Cost per unit = ₹1,40,500 - ₹1,000₹ = ₹15.50

10,000 kg – 1,000 kg
Process- Q Account
Kg. Amount (₹) Particulars Kg. Amount (₹)
Particulars
To Process-P A/c 9,000 1,39,500 By Normal wastage 900 900
(900 kg. × ₹ 1)
To Direct Material --- 42,500 By Process- Q 8,200 2,54,200
(8,200 kg. × ₹ 31)
To Direct Labour --- 40,000
To Production OH --- 30,000
(₹ 90,000 × 4/12)
To Abnormal Gain 100 3,100
(100 kg. × ₹ 31)
9,100 2,55,100 9,100 2,55,100
Cost per unit = ₹2,52,000 - ₹900 = ₹31
9,000 kg – 900 kg

Process- R Account
Particulars Kg. Amount (₹) Particulars Kg. Amount (₹)

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Process & Operation Costing By: CA PRAKASH PATEL

To Process-Q A/c 8,200 2,54,200 By Normal wastage 820 820

(820 kg. × Re.1)
To Direct Material --- 42,880 By Abnormal loss 80 4,160
(80 kg. × ₹ 52)
To Direct Labour --- 50,000 By Finished Goods 7,300 3,79,600
(7,300 kg. × ₹52)
To Production OH --- 37,500
(₹ 90,000 × 5/12)
8,200 3,84,580 8,200 3,84,580
Cost per unit = ₹3,84,580 - ₹820 = ₹52
8,200 kg – 820 kg
Calculation of Selling price per unit of end product:
Cost per unit ₹ 52.00
Add: Profit 25% on selling price i.e. 1/3rd of cost ₹ 17.33
Selling price per unit ₹ 69.33

July-21. Q4(a) (10 marks)

A Manufacturing unit manufactures a product 'XYZ' which passes through three
distinct Processes - X, Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in ₹) 2,600 2,250 2,000
Direct wages (in ₹) 4,000 3,500 3,000
• The total Production Overhead of ₹ 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ₹ 2 each were introduced to Process 'X'.
• The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process 'Z'.
• No stock of materials or work in progress was left at the end. The following
additional information is given:
Process % of wastage to normal Value of Scrap per unit
input (₹)
X 6% 1.10
Y ? 2.00
Z 5% 1.00
You are required to:
(i) Find out the percentage of wastage in process 'Y', given that the output of
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Process 'Y' is transferred to Process 'Z' at ₹ 4 per unit.

(ii) Prepare Process accounts for all the three processes X, Y and Z.

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

*Cost per unit of completed units

= Total Cost - Realisable value from normal loss = ₹ 42,600 - ₹ 990 = 2.951
Inputs units - Normal loss units 15,000 units - 900 units

Dr. Process-Y Account Cr.

Particulars Units (₹) Particulars Units (₹)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of
14,100 units) x
₹ 2]
” Additional material -- 2,250 ” Process-Z A/c(₹ 4 12,205 48,820
× 12,205
units)
” Direct wages -- 3,500
” Production OH -- 5,250
14,100 52,610 14,100 52,610

#Calculation for % of wastage in process ‘Y’:

Let’s consider number of units lost under process ‘Y’ = A

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Process & Operation Costing By: CA PRAKASH PATEL

Now, Total Cost - Realisable value from normal loss = 4

Inputs units - Normal loss units

₹ 52,610 - ₹ 2A =4
14,100 units - A

₹ 52,610 - ₹ 2A = ₹ 56,400 - ₹ 4A
2A = ₹ 3,790 => A = 1,895 units

% of wastage = 1895 units = 13.44%

14,100 units

Dr. Process-Z Account Cr.

Particulars Units (₹) Particulars Units (₹)
To Process-Y A/c 12,205 48,820 By Normal Loss A/c[(5% 610 610
of 12,205
units) x ₹ 1]
” Additional material -- 2,000 ” Finished Stock A/c(₹ 12,000 59,726
4.9771$ ×
12,000 units)
” Direct wages -- 3,000
” Production OH -- 4,500
” Abnormal gain 405 2,016
(₹ 4.9771$ × 405
units)
12,610 60,336 12,610 60,336

$Cost per unit of completed units

= Total Cost - Realisable value from normal loss = ₹ 58,320 - ₹ 610 = 4.9771
Inputs units - Normal loss units 12,205 units - 610 units

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Alternative Solution

Dr. Process-X Account Cr.

Particulars Units (₹) Particulars Units (₹)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units) x
₹ 1.1]
” Additional -- 2,600 ” Process-Y A/c 14,100 41,610
material (₹ 2.951* × 14,100 units)

” Direct wages -- 4,000

” Production OH -- 6,000
15,000 42,600 15,000 42,600

*Cost per unit of completed units

= Total Cost - Realisable value from normal loss = ₹ 42,600 - ₹ 990 = 2.951
Inputs units - Normal loss units 15,000 units - 900 units

Dr. Process-Y Account Cr.

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

Working Notes:
@1. Units Transferred from Process Z Account to Finished Stock = 12,000 Units i.e
95% of Inputs.
So, Input of Z or Output of Y is 12,000 x 100/95 = 12,631 Units and Normal Loss (5%)
is 631 units.
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2. Let’s consider number of units lost under process ‘Y’ as:

For Normal loss =A
For Abnormal loss = B
Now, A + B = 1,469 [i.e. 14,100 – 12,631] …(I)
(A x ₹ 2 per unit) + (B x ₹ 4 per unit) = [ 52,610 – 50,524]
2A + 4B = 2,086 …(II)
Now, putting the values of (I) in (II), we get, 2(1,469 – B) + 4B = 2,086
2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units. Further, A (i.e.
normal loss) = 1,469 + 426 = 1,895 units

#3. % of wastage in Process Y Account = 1895 units = 13.44%

14,100 units

Dr. Process-Z Account Cr.

Particulars Units (₹) Particulars Units (₹)
To Process-Y A/c 12,631 50,524 By Normal Loss A/c [(5% 631 631
of 12,631 units)
x ₹ 1]
” Additional material -- 2,000
” Direct wages -- 3,000
” Production OH -- 4,500 ” Finished Stock A/c (₹ 12,000 59,393
4.9494$ × 12,000
units)
12,631 60,024 12,631 60,024

$Cost per unit of completed units

= Total Cost - Realisable value from normal loss = ₹ 60,024 - ₹ 631 = 4.9494
Inputs units - Normal loss units 12,631 units - 631 units

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C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (May 2012)
A product passes through two processes A and B. During the year 2013, the input to
process A of basic raw material was 8,000 units @ ₹ 9 per unit. Other information for
the year is as follows:
Process A Process B
Output units 7,500 4,800

Normal loss (% to input) 5% 10%

Scrap value per unit (₹ ) 2 10

Direct wages (₹ ) 12,000 24,000

Direct expenses (₹ ) 6,000 5,000

Selling price per unit (₹) 15 25

Total overheads ₹ 17,400 were recovered as percentage of direct wages. Selling
expenses were ₹ 5,000. These are not allocated to the processes. 2/3rd of the output of
Process A was passed on to the next process and the balance was sold. The entire output
of Process B was sold.
Prepare Process A and B Accounts.
Solution:
Process- A Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Input 8,000 72,000 By Normal Loss 400 800
(5% of 8,000 units × ₹ 2)
To Direct Wages -- 12,000 By Abnormal loss 100 1,250
(100 units × ₹ 12.50)
To Direct Exp. -- 6,000 By Process- B A/c 5,000 62,500
(7,500 units× × ₹12.50)
2
3
To Overheads -- 5,800 2,500 31,250
By Profit and Loss A/c
(₹17,400 × 1) (7,500 units× × ₹12.50)
1
3 3
8,000 95,800 8,000 95,800

Cost per unit = ₹95,800 - ₹800 - ₹95,000 = ₹12.50

8,000units - 400units 7,600units
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Process & Operation Costing By: CA PRAKASH PATEL

Process- B Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Process- A A/c 5,000 62,500 By Normal Loss 500 5,000
(10% of 5,000 units × ₹10)
To Direct Wages -- 24,000 By Finished Stock A/c or 4,800 1,04,640
Profit & loss A/c
(4,800 units × ₹ 21.80)
To Direct Expenses -- 5,000
To Overheads -- 11,600
(₹17,400 × 2)
3
To Abnormal gain 300 6,540

5,300 1,09,640 5,300 1,09,640

Cost per unit = ₹1,03,100 - ₹5,000 - ₹98,100 =₹ 21.80

5,000units - 500units 4,500units
Working:
Profit & Loss A/c
Particulars Amount Amount Particulars Amount Amount
(₹) (₹) (₹) (₹)
To Cost of Sales: By Sales:
Process A 31,250 Process A
(2,500 units × ₹ 12.50) (2,500 units × ₹15) 37,500
Process B Process B
(4,800 units × ₹ 21.80) 1,04,640 1,35,890 (4,800 units × ₹ 25) 1,20,000 1,57,500
To Abnormal Loss: By Abnormal gain:
Process A 1,050 Process B [(300 units 3,540
[(100 units × ₹(12.50-2)] × ₹ (21.80-10)]

To Selling expenses 5,000

To Net Profit 19,100

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1,61,040 1,61,040

Note:
1. As mentioned selling expenses are not allocable to process which is debited
directly to the P/L A/c.
2. It is assumed that Process A and Process B are not responsibility centres and
hence, Process A and Process B have not been credited to direct sales. P/L A/c
is prepared to arriving at profit/loss.

Question-2 (Nov-2015)
The following information is furnished by ABC Company for Process - II of its
manufacturing activity for the month of April 2015:
(i) Opening Work-in-Progress - Nil
(ii) Units transferred from Process I – 55,000 units at ₹ 3,27,800
(iii) Expenditure debited to Process – II:
Consumables ₹ 1,57,200
Labour ₹ 1,04,000
Overhead ₹ 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP – 2,000 units (Degree of completion):
Consumables 80%
Labour 60%
Overhead 60%
(vi) Units scrapped - 2,000 units, scrapped units were sold at ₹ 5 per unit
(vii) Normal loss – 4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit
(iii) Determine the value of Work-in-Process and units transferred to Process – III

Solution:
1. Statement of Equivalent Production
Equivalent Production
Input Units Output Units Material- A* Consumables Labour &
Overheads
Details Particulars % Units % Units % Units

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Units 55,000 Units 51,000 100 51,000 100 51,000 100 51,000
transferre transferred to
d from Process- III
Process-I Normal loss
(4% of 2,200 - - - - - -
55,000)
Closing
W-I-P 2,000 100 2,000 80 1,600 60 1,200
Abnormal
Gain (200) 100 (200) 100 (200) 100 (200)
55,000 55,000 52,800 52,400 52,000

*Material A represent transferred-in units from process-I

2. Determination of Cost per Unit
Particulars Amount (₹) Units Per Unit (₹)
(i) Direct Material (Consumables) :
Value of units transferred from Process-I 3,27,800

Less: Value of normal loss (2,200 units × ₹ 5) (11,000)

3,16,800 52,800 6.00
(ii) Consumables added in Process-II 1,57,200 52,400 3.00
(iii) Labour 1,04,000 52,000 2.00
(iii) Overhead 52,000 52,000 1.00
Total Cost per equivalent unit 12.00

3. Determination of value of Work-in-Process and units transferred to Process-III

Particulars Units Rate (₹) Amount (₹)
Value of Closing W-I-P:
Material from Process-I 2,000 6.00 12,000
Consumables 1,600 3.00 4,800
1,200 2.00 2,400
Labour Overhead
1,200 1.00 1,200
20,400
51,000 12.00
Value of units transferred to Process-III 6,12,000
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Question-3 (May 2014)

M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz.
Process-A and Process-B. The details for the year ending 31st March, 2014 are as
follows:
Process A Process - B
40,000 Units introduced at a cost ₹ 3,60,000 -
of Material Consumed ₹ 2,42,000 2,25,000
Direct Wages ₹ 2,58,000 1,90,000
Manufacturing Expenses ₹ 1,96,000 1,23,720
Output in Units 37,000 27,000
5% 10%
Normal Wastage of Input
₹ 15 20
Scrap Value (per unit)
₹ 37
Selling Price (per unit) 61
Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the
balance was sold. The entire output of Process- B was sold.
(b) Indirect expenses for the year was ₹ 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.

Required:
(i) Prepare Process-A and Process-B Account.
(ii) Prepare Profit & Loss Account showing the net profit I net loss for the year.

Solution:
1. Process- A Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Input 40,000 3,60,000 By Normal wastage 2,000 30,000
(2,000 units × ₹ 15)

To Material --- 2,42,000 By Abnormal loss 1,000 27,000

A/c
(1,000 units × ₹ 27)

To Direct wages --- 2,58,000 By Process- B 29,600 7,99,200

(29,600 units × ₹ 27)

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To Manufacturing Exp. --- 1,96,000 By Profit & Loss A/c 7,400 1,99,800
(7,400 units × ₹ 27)

40,000 10,56,000 40,000 10,56,000

Cost per unit = ₹10,56,000 - ₹30,000 = ₹27 per unit

40,000units - 2,000units
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units
Transfer to Process- B = 37,000 units × 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units
Process – B Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Process- A A/c 29,600 7,99,200 By Normal wastage 2,960 59,200
(2,960 units × ₹ 20)
To Material --- 2,25,000 27,000 12,96,000
By Profit & Loss
A/c
--- 1,90,000
To Direct Wages (27,000 units × ₹ 48)
--- 1,23,720
To Manufacturing Exp.

To Abnormal Gain A/c 360 17,280

(360 units × ₹ 48)
29,960 13,55,200 29,960 13,55,200

Cost per unit = ₹13,37,920 - ₹59,200 = ₹48 per unit

29,600units - 2,960units
Normal wastage = 29,600 units × 10% = 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units

2. Profit & Loss Account

Particulars Amount Particulars Amount
(₹) (₹)
To Process- A A/c 1,99,800 By Sales:
- Process-A
To Process- B A/c 12,96,000 2,73,800
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Process & Operation Costing By: CA PRAKASH PATEL

(7,400 units × ₹ 37)

To Abnormal loss A/c 12,000 - Process- B 16,47,000
(27,000 units × ₹ 61) 10,800
To Indirect Expenses 4,48,080 By Abnormal gain 25,000
By Net loss
19,55,880 19,55,880
Working Notes:
Normal wastage (Loss) Account
Particulars Units Amount Particulars Units Amount (₹)
(₹)
To Process- A A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200
(360 units × ₹ 20)
To Process- B A/c 2,960 59,200 By Bank (Sales) 4,600 82,000
4,960 89,200 4,960 89,200
Abnormal Loss Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Process- A A/c 1,000 27,000 By Bank A/c 1,000 15,000
(1,000 units × ₹ 15)
By Profit & Loss A/c --- 12,000
1,000 27,000 1,000 27,000

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Normal loss A/c 360 7,200 By Process- B A/c 360 17,280
(360 units × ₹ 20)
To Profit & Loss A/c 10,080
360 17,280 360 17,280

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Process & Operation Costing By: CA PRAKASH PATEL

(II) Questions based on FIFO Method

A. QUESTION FROM STUDY MATERIAL
Question-4 (Also solved by Wgt. Avg. method as Q-5)
Opening work-in-process 1,000 units (60% complete); Cost ₹ 1,10,000. Units introduced
during the period 10,000 units; Cost ₹ 19,30,000. Transferred to next process - 9,000
units.
Closing work-in-process - 800 units (75% complete). Normal loss is estimated at 10% of
total input including units in process at the beginning. Scraps realise ₹ 10 per unit. Scraps
are 100% complete.
Using FIFO method, COMPUTE equivalent production and cost per equivalent unit.
Also evaluate the output.
Hints: Cost/unit = ₹210.88, Normal Loss = 1,100 units, Abnormal loss = 100 units
Question-5
Refer to information provided in Illustration 4 above and solve this by Weighted Average
Method:
Hints: Cost/unit = ₹209.18, Normal Loss = 1,100 units, Abnormal loss = 100 units

TEST YOUR KNOWLEDGE

Question-3
Hill manufacturing Ltd uses process costing to manufacture Water density sensors for
hydro sector. The following information pertains to operations for the month of May.
Particulars Units
Beginning WIP, May 1 16,000
Started in production during May 1,00,000
Completed production during May 92,000
Ending work in progress, May 31 24,000
The beginning work in progress was 60% complete for materials and 20% complete for
conversion costs. The ending inventory was 90% complete for material and 40% complete
for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are material ₹27,670, direct labour ₹30,120 and factory
overhead ₹ 12,720
Cost incurred during May are material used, ₹ 4,79,000, direct labour ₹1,82,880, factory
overheads ₹ 3,91,160.

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CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost.

Hints:
(i)
Equivalent Units
Input Details Units Output Units Material Conversion
Particulars cost
% Units % Units
Beginning WIP 16,000 From 16,000 40 6,400 80 12,800
beginning
WIP
Unit Introduced 1,00,000 Completed 76,000 100 76,000 100 76,000
output
Closing W-I-P 24,000 90 21,600 40 9,600
Total 1,16,000 Total 1,16,000 1,04,000 98,400

(ii) 5.83

B. PAST YEAR EXAM QUESTIONS

Jan-21. Q1 (c) (5 marks)

MNO Ltd has provided following details:
• Opening work in progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and
overheads 70% complete).
• Input of materials is 55,000 units at ₹ 2,20,000. Amount spent on Labour and
Overheads is ₹ 26,500 and ₹ 61,500 respectively.
• 9,500 units were scrapped; degree of completion for material 100% and for labour
& overheads 60%.
• Closing work in progress is 12,000 units; degree of completion for material 100%
and for labour & overheads 90%.
• Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work in progress. Scrapped units
would fetch ₹ 8.50 per unit.
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Process & Operation Costing By: CA PRAKASH PATEL

You are required to prepare using FIFO method:

(i) Statement of Equivalent production
(ii) Abnormal Loss Account

Solution:
(i) Statement of Equivalent Production (Using FIFO method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
Units introduced 55,000 - From opening 10,000 - 30 3,000
WIP
- From fresh inputs 33,500 100 33,500 100 33,500
43,500 33,500 36,500
Normal Loss 3,250 - -
{5% (10,000 +
55,000 units)}
Abnormal loss 6,250 100 6,250 60 3,750
(9,500 – 3,250)
Closing WIP 12,000 100 12,000 90 10,800
65,000 65,000 51,750 51,050

(ii) Abnormal Loss A/c

Particulars Units (₹) Particulars Units (₹)

To Process-I A/c 6,250 29,698 By Cost Ledger Control 6,250 53,125
(Refer Working A/c
Note-2) (6,250 units × ₹ 8.5)
To Costing Profit - 23,427
& Loss A/c
6,250 53,125 6,250 53,125
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Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(₹) (₹) (₹)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal (27,625) -- --
scrap (3,250 units x ₹ 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047

Total cost per unit = ₹ (3.7174 + 0.5191 + 1.2047) = ₹ 5.4412

2. Valuation of Abnormal Loss

(₹)
Materials (6,250 units × ₹ 3.7174) 23,233.75
Labour (3,750 units × ₹ 0.5191) 1,946.63
Overheads (3,750 units × ₹ 1.2047) 4,517.62
29,698

Nov-18. Q1 (c) (5 marks)

Following details have been provided by M/s AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)
(ii) Units introduced during the year - 17000 units
(iii) Cost of the process (for the period) - ₹ 33,12,720
(iv) Transferred to next process - 15000 units
(v) Closing works-in-progress - 2200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the
beginning). Scraps realise ₹ 50 per unit. Scraps are 100% complete.

Using FIFO method, compute:

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Process & Operation Costing By: CA PRAKASH PATEL

(i) Equivalent production

(ii) Cost per equivalent unit

Solution:
Statement of Equivalent Production Units (Under FIFO Method)

Particulars Input Particulars Output Equivalent

units units Production
(%) Equivalent
units
Opening W-I-P 3,000 From opening W-I-P 3,000 30 900
Units introduced 17,000 From fresh inputs 12,000 100 12,000
Units completed 15,000
(Transferred to next
process)
Normal Loss 2,400 -- --
{12% (3,000 + 17,000
units)}
Closing W-I-P 2,200 80 1760
Abnormal loss 400 100 400
(Balancing figure)
20,000 11,000 15,060

Computation of cost per equivalent production unit :

Cost of the Process (for the period) ₹ 33,12,720

Less: Scrap value of normal loss (₹ 50 × 2,400 units) (₹ 1,20,000)
Total process cost ₹ 31,92,720

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
From the following Information for the month ending October, 2013, prepare Process
Cost accounts for Process III. Use First-in-fist-out (FIFO) method to value equivalent

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Process & Operation Costing By: CA PRAKASH PATEL

production.
Direct materials added in Process III (Opening WIP) 2,000 units at ₹ 25,750
Transfer from Process II 53,000 units at ₹ 4,11,500
Transferred to Process IV 48,000 units
Closing stock of Process III 5,000 units
Units scrapped 2,000 units
Direct material added in Process III ₹
Direct wages 1,97,600
Production Overheads ₹ 97,600
₹ 48,800
Degree of completion:
Opening Closing Scrap
Stock Stock
Materials 80% 70% 100%

Labour 60% 50% 70%

Overheads 60% 50% 70%

The normal loss in the process was 5% of production and scrap was sold at ₹ 3 per unit.
Solution:
Process III
Process Cost Sheet (FIFO Method)
Opening Stock: 2,000 units; Introduced: 53,000 units
Statement of Equivalent Production
Input Output Equivalent production
Item Units Item Units Mat- A (%) Mat- B (%) Labou (%)
r&
OHs.
Opening 2,000 Work on 2,000 - - 400 20 800 40
stock opening WIP
Process II Introduced &
transfer 53,000 completed
during
the period
(48,000 – 2000) 46,000 46,000 100 46,000 100 46,000 100

48,000
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Normal Loss
(2,000+53,000 –
5,000) x 5% 2,500 - - - - - -

Closing WIP 5,000 5,000 100 3,500 70 2,500 50

55,500 51,000 49,900 49,300

Abnormal Gain 500 500 100 500 100 500 100

55,000 55,000 50,500 49,400 48,800

Statement of Cost for each Element

Element of cost Cost (₹) Equivalent Cost per
Production unit (₹)
Material A:
Transfer from Process-II 4,11,500
7,500
Less: Scrap value of Normal Loss (2,500 × ₹ 3)
4,04,000
1,97,600 50,500 8
Material B Wages 97,600 49,400 4
Overheads 48,800 48,800 2
48,800 1
7,48,000 15

Process Cost Sheet

( ₹)
Opening WIP (for completion):
Material- B (400 units × ₹ 4) 1,600
Wages (800 units × ₹ 2) 1,600
Overheads (800 units × ₹ 1) 800
4,000
Introduced and completely processed during the period (46,000 units × ₹ 15)
6,90,000
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Closing WIP:
Material- A (5,000 units × ₹ 8) 40,000
Material- B (3,500 units × ₹ 4) 14,000
Wages (2,500 units × ₹ 2) 5,000
Overheads (2,500 units × ₹ 1) 2,500
61,500
7,500
Abnormal Gain (500 units × ₹ 15)

Process III A/c

Particulars Units Amount Particulars Units Amount
To Balance b/d 2,000 25,750 By Normal Loss 2,500 7,500

To Process II A/c 53,000 4,11,500 By Process IV A/c

(₹6,90,000 + ₹ 4000 + ₹
25,750) 48,000 7,19,750

To Direct Material 1,97,600 By Balance c/d 5,000 61,500

To Direct Wages 97,600

To Production OH 48,800

To Abnormal Gain 500 7,500

55,500 7,88,750 55,500 7,88,750

Question-2
Following information is available regarding Process A for the month of October 2013:
Production Record:
(i) Opening work-in progress 40,000 Units
(Material: 100% complete, 25% complete for labour & overheads)
(ii) Units Introduced 1,80,000 Units
(iii) Units Completed 1,50,000 Units
(iv) Units in-process on 31.10.2013 70,000 Units
(Material: 100% complete, 50% complete for labour & overheads)

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Cost Record: (₹)

Opening Work-in-progress:
Material 1,00,000
Labour 25,000
Overheads 45,000
Cost incurred during the month:
Material 6,60,000
Labour 5,55,000
Overheads 9,25,000
Assure that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process- A Account
Solution:
Statement of Equivalent Production
(FIFO Method)
Input Output Equivalent Production
Particulars Units Particulars Units Material Labour &
Overheads
(%) Units (%) Units
Opening 40,000 Transfer to Process II:
WIP 1,80,000 Opening WIP 40,000 -- -- 75 30,000
1,10,000 100 1,10,000 100 1,10,000
Introduced completed Introduced &
70,000 100 70,000 50 35,000
completed Closing WIP
2,20,000 2,20,000 1,80,000 1,75,000

Statement showing Cost for each element

Item of Cost Equivalent Cost Incurred (₹) Cost per Unit (₹)
Production
Material 1,80,000 6,60,000 3.66667
Labour & Overheads 1,75,000 14,80,000 8.45714

12.12381

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Statement of Apportionment of Cost

Transfer to Process II
Opening WIP Completed
Cost already Incurred ₹ (1,00,000 + 25,000 + 45,000) 1,70,000
Cost Incurred during the Month
Labour & Overheads (30,000 units × ₹8.45714) 2,53,714 4,23,714
Introduced & Completed (1,10,000 units × ₹ 12.12381) 13,33,619
17,57,333
Closing WIP
Material (70,000 units × ₹ 3.66667) 2,56,667
Labour and Overheads (35,000 units × ₹ 8.45714) 2,96,000 5,52,667

Process- A A/c
Particulars Units Amount (₹) Particulars Units Amount (₹)
To Opening WIP 40,000 1,70,000 By Process II A/c 1,50,000 17,57,333

To Materials 1,80,000 6,60,000 By Closing WIP 7,000 5,52,667

To Labour 5,55,000

To Overheads 9,25,000
2,20,000 23,10,000 2,20,000 23,10,000

Question-3
Star Ltd. manufactures chemical solutions for the food processing industry. The
manufacturing takes place in a number of processes and the company uses a FIFO process
costing system to value work-in-process and finished goods. At the end of the last month,
a fire occurred in the factory and destroyed some of the paper files containing records of
the process operations for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the
fire occurred. You have been able to gather some information about the month’s operating
activities but some of the information could not be retrieved due to the damage. The
following information was salvaged:
• Opening work-in-process at the beginning of the month was 800 litres, 70% complete for
labour and 60% complete for overheads. Opening work-in-process was valued at ₹
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26,640.
• Closing work-in-process at the end of the month was 160 litres, 30% complete for labour
and 20% complete for overheads.
• Normal loss is 10% of input and total losses during the month were 1,800 litres partly due
to the fire damage.
• Output sent to finished goods warehouse was 4,200 litres.
• Losses have a scrap value of ₹15 per litre.
• All raw materials are added at the commencement of the process.
• The cost per equivalent unit (litre) is ₹39 for the month made up as follows:
(₹)
Raw Material 23
Labour 7
Overheads
9
39
Required:
A. Calculate the quantity (in litres) of raw material inputs during the month.
B. Calculate the quantity (in litres) of normal loss expected from the process and the quantity
(in litres) of abnormal loss / gain experienced in the month.
C. Calculate the values of raw material, labour and overheads added to the process during the
month.
D. Prepare the process account for the month.
Solution:
A. Calculation of Raw Material inputs during the month:
Quantities Entering Process Litres Quantities Leaving Process Litres
Opening WIP 800 Transfer to Finished Goods 4,200
Raw material input (balancing 5,360 Process Losses 1,800
figure) Closing WIP 160
6,160 6,160

B. Calculation of Normal Loss and Abnormal Loss/Gain

Litres
Total process losses for month 1,800
Normal Loss (10% input) 536
Abnormal Loss (balancing figure) 1,264
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C. Calculation of values of Raw Material, Labour and Overheads added to the process:
Material Labour Overheads
Cost per equivalent unit ₹ 23.00 ₹7.00 ₹9.00
Equivalent units (litre) (refer the working note) 4,824 4,952 5,016
Cost of equivalent units ₹1,10,952 ₹34,664 ₹45,144
Add: Scrap value of normal loss (536 units × ₹ 15) ₹8,040 -- --
Total value added ₹1,18,992 ₹34,664 ₹45,144

Workings:
Statement of Equivalent Units (litre):
Equivalent Production
Input Details Units Output details Material Labour Overheads
Units
Units (%) Units (%) Units (%)
Opening WIP 800 Units completed:
Units
introduced 5,360 - Opening WIP 800 -- -- 240 30 320 40

- Fresh inputs 3,400 3,400 100 3,400 100 3,400 100

Normal loss 536 -- -- -- -- -- --
Abnormal loss 1,264 1,264 100 1,264 100 1,264 100
Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,824 4,952 5,016

D. Process Account for Month

Litres Amount (₹) Litres Amount
(₹)
To Opening WIP 800 26,640 By Finished goods 4,200 1,63,800

To Raw Materials 5,360 1,18,992 By Normal loss 536 8,040

To Wages -- 34,664 By Abnormal loss 1,264 49,296

To Overheads -- 45,144 By Closing WIP 160 4,304

6,160 2,25,440 6,160 2,25,440

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(III) Questions based on Weighted Average Method

A. QUESTION FROM STUDY MATERIAL

TEST YOUR KNOWLEDGE

Question-4
Following information is available regarding Process-I for the month of February, 20X9 :
Production Record:
Units in process as on 1.2.20X9 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.2.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 1.2.20X9 (₹)
Materials 6,000
Labour 1,000
Overhead 1,000
8,000
Cost during the month
Materials 25,600
Labour 15,000
Overhead 15,000
55,600
Presuming that average method of inventory is used, PREPARE:
(i) Statement of equivalent production.
(ii) Statement showing cost for each element.
(iii) Statement of apportionment of cost.
(iv) Process cost account for Process-I.
Hints:
Particulars Material Labour & Overhead
Equivalent Production 20,000 16,000
Cost/unit 1.58 2
Closing WIP ₹13,480

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Question-5
Following details are related to the work done in Process-I by XYZ Company during the
month of March, 20X9:
(₹)
Opening work-in process (2,000 units)
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process-I (38,000 units) 14,80,000
Direct Labour 3,59,000
Overheads 10,77,000
Units scrapped : 3,000 units
Degree of completion :
Materials 100%
Labour and overheads 80%
Closing work-in process : 2,000 units
Degree of completion :
Materials 100%
Labour and overheads 80%
Units finished and transferred to Process-II: 35,000 units
Normal Loss :
5% of total input including opening work-in-process.
Scrapped units fetch ₹20 per piece
You are required to prepare using weighted average method.
(i) Statement of equivalent production
(ii) Statement of cost
(iii) Statement of distribution cost, and
(iv) Process-I Account, Normal Loss Account and Abnormal Loss Account.
Hints:
Particulars Material Labour & Overhead
Equivalent Production 38,000 37,400
Cost/unit 40 40

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Question-6
‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve
sugarcane crushing for juice extraction, then filtration and boiling of juice along with
some chemicals and then letting it cool to cut solidified jaggery blocks.
The main process of juice extraction (Process – I) is done in conventional crusher, which
is then filtered and boiled (Process – II) in iron pots. The solidified jaggery blocks are
then cut, packed and dispatched. For manufacturing 10 kg of jaggery, 100 kg of
sugarcane is required, which extracts only 45 litre of juice.
Following information regarding Process – I has been obtained from the manufacturing
department of Healthy Sweets for the month of January:
Opening work-in process (4,500 litre)
Sugarcane 50,000
Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000
Direct Labour 2,00,000
Overheads 6,00,000
Abnormal Loss: 1,000 kg
Degree of completion:
Sugarcane 100%
Labour and overheads Closing 80%
work-in process: 9,000 litreDegree of
completion:
Sugarcane 100%
Labour and overheads 80%
Extracted juice transferred for filtering and boiling: 39,500 litre (Consider mass of 1 litre
of juice equivalent to 1 kg)
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iii) Statement of distribution cost, and
(iv) Process-I Account.

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Hints:
(i)
Particulars Input Particulars Output Equivalent Production
Units Units
Sugarcane Labour &
O.H.
% Units % Units
Opening WIP 4,500 Completed 39,500 100 39,500 100 39,500
and
transferred to
Process - II
Units 1,00,000 Normal Loss 55,000 -- -- -- --
introduced (55%* of
1,00,000)
Abnormal 1,000 100 1,000 80 800
loss

Closing WIP 9,000 100 9,000 80 7,200

1,04,500 1,04,500 49,500 47,500

(ii)
Particulars Sugarcane Labour Overhead Total
(₹) (₹) (₹) (₹)
Cost per equivalent unit: (C) = 11.111 4.526 13.579 29.216
(A ÷ B)

(iii)
Amount Amount
(₹) (₹)
1. Value of units completed and transferred 11,54,032
(39,500 units × ₹ 29.216)
2. Value of Abnormal Loss:
- Sugarcane (1,000 units × ₹ 11.111) 11,111
- Labour (800 units × ₹ 4.526) 3,621
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- Overheads (800 units × ₹ 13.579) 10,863 25,595

3. Value of Closing W-I-P:
- Sugarcane (9,000 units × ₹ 11.111) 99,999
- Labour (7,200 units × ₹ 4.526) 32,587
- Overheads (7,200 units × ₹ 13.579) 97,769 2,30,355

(iv) Process-I Account Total: 104,500 Units; ₹14,10,000

B. PAST YEAR EXAM QUESTIONS

Nov.-20 Q4 (a) (10 marks)
Following details are related to the work done in Process-I by ABC Ltd. during the month
of May 2019:
(₹)
Opening work in process (3,000 units)
Materials 1,80,500
Labour 32,400
Overheads 90,000
Materials introduced in Process-I (42,000 units) 36,04,000
Labour 4,50,000
Overheads 15,18,000

Units Scrapped : 4,800 Units

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

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

Normal loss: 4% of total input including opening work-in-process

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Scrapped units fetch ₹ 62.50 per piece.

Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit.
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account

Solution:
(i) Statement of Equivalent Production (Weighted Average method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 3,000 Completed and 36,000 100 36,000 100 36,000
transferred to
Process-II
Units introduced 42,000 Normal Loss 1,800 -- -- -- --
(4% of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200

(ii) Statement showing cost for each element

Particulars Materials (₹) Labour (₹) Overhead (₹) Total (₹)
Cost of opening 1,80,500 32,400 90,000 3,02,900
work- in-process
Cost incurred during 36,04,000 4,50,000 15,18,000 55,72,000
the month
Less: Realisable Value (1,12,500) -- -- (1,12,500)
of normal scrap (₹
62.50 × 1,800
units)
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Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400

Equivalent units: (B) 43,200 40,200 40,200

Cost per equivalent 85.00 12.00 40.00 137.00

unit: (C) = (A ÷ B)

Statement of Distribution of cost

Particulars Amount (₹) Amount (₹)

1. Value of units completed and 49,32,000
transferred: (36,000 units × ₹ 137)
2. Value of Abnormal Loss:
- Materials (3,000 units × ₹ 85) 2,55,000
- Labour (2,100 units × ₹ 12) 25,200
- Overheads (2,100 units × ₹ 40) 84,000 3,64,200
3. Value of Closing W-I-P:
- Materials (4,200 units × ₹ 85) 3,57,000
- Labour (2,100 units × ₹ 12) 25,200
- Overheads (2,100 units × ₹ 40) 84,000 4,66,200

(iii) Process-I A/c

Particulars Units (₹) Particulars Units (₹)
To Opening W.I.P:
− Materials 3,000 1,80,500 By Normal 1,800 1,12,500
− Labour -- 32,400 Loss (₹ 62.5 ×
− Overheads -- 90,000 1,800
units)
To Materials 42,000 36,04,000 By Abnormal loss 3,000 3,64,200
introduced
To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900

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(iv) Normal Loss A/c

Particulars Units (₹) Particulars Units (₹)
To Process-I 1,800 1,12,500 By Cost Ledger 1,800 1,12,500
A/c Control A/c
1,800 1,12,500 1,800 1,12,500

(v) Abnormal Loss A/c

Particulars Units (₹) Particulars Units (₹)

To Process-I 3,000 3,64,200 By Cost Ledger 3,000 1,87,500
A/c Control A/c (₹ 62.5 ×
3,000
units)
By Costing Profit & 1,76,700
Loss A/c (Bal. Figure)
3,000 3,64,200 3,000 3,64,200

May-22 Q4 (a) (10 marks)

STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The
complete production operation requires two processes. The raw material first passes
through Process I, where Chemical 'G' is produced. Following data is furnished for the
month April 2022:

Particulars (in kgs.)

Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)

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You are further provided that:

Particulars (in ₹)
Opening work-in-progress cost
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100
Normal process loss may be estimated to be 10% of material input. It has no realizable
value. Any loss over and above normal loss is considered to be 100% complete in material
and processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II
for producing Chemical 'GK'. Further materials are added in Process II which yield 1.20
kg. of Chemical 'GK' for every kg. of Chemical 'G' introduced. The chemicals transferred
to Process II for further processing are then sold as Chemical 'GK' for ₹ 10 per kg. Any
quantity of output completed in Process I, are sold as Chemical 'G' @ ₹ 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical 'G') are: Input
60,000 kg. of Chemical 'G'
Materials Cost ₹ 85,000
Processing Costs ₹ 50,000
You are required:
(i) Prepare Statement of Equivalent production and determine the cost per kg. of
Chemical ‘G' in Process I using the weighted average cost method.
(ii) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without
processing it further in Process-II. Will it be beneficial for the company over the
current pattern of processing 60,000 kg in process-II?
(Note: You are not required to prepare Process Accounts)
Solution:
(i) Statement of Equivalent Production
Particulars Input Particulars Total Material Processing Cost
quantity
% Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000

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Material Input 1,05,000 Normal loss(10% 10,500 - - - -

of
1,05,000)
Abnormal loss(Bal. 4,500 100% 4,500 100% 4,500
fig.)
Closing WIP 16,500 100% 16,500 60% 9,900
1,14,500 1,14,500 1,04,000 97,400

Statement of Cost for each element

Particulars Material Processing Total cost
(₹) (₹) (₹)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25

Alternative Presentation
Statement showing cost per kg of each statement
(₹) (₹)
Material 29,500 + 3,34,500 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
97,400
Total Cost per kg 6.25

(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in- progress
(₹)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:

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Material (16,500 × 3.5) 57,750

Processing cost (9,900 × 2.75) 27,225
84,975

(iii) Calculation of Incremental Profit / Loss after further processing

Particulars (₹) (₹)
Sales if further processed (A) (60,000 x 1.20 x ₹ 10) 7,20,000
Calculation of cost in Process II
Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ₹ 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.

Alternative Presentation
Calculation of Incremental Profit / Loss after further processing
(₹)
If 60,000 units are sold @ ₹ 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ₹ 10) 7,20,000
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, it is
advisable to process further chemical ‘G’.
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C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A Chemical Company carries on production operation in two processes. The material
first pass through Process I, where Product ‘A’ is produced.
Following data are given for the month just ended:
Material input quantity 2,00,000 kg
Opening work-in-progress quantity
(Material 100% and conversion 50% complete) 40,000 kg
Work completed quantity 1,60,000 kg
Closing work-in-progress quantity
(Material 100% and conversion two-third complete) 30,000 kg
Material input cost ₹75,000
Processing cost ₹1,02,000
Opening work-in-progress cost
Material cost ₹20,000
Processing cost ₹12,000
Normal process loss in quantity may be assumed to be 20% of material input. It has no
realisable value.
Any quantity of Product ‘A’ can be sold for ₹ 1.60 per kg.
Alternatively, it can be transferred to Process II for further processing and then sold as
Product ‘AX’ for ₹ 2 per kg. Further materials are added in Process II, which yield two kg.
of product ‘AX’ for every kg. of Product ‘A’ of Process I.
Of the 1,60,000 kg. per month of work completed in Process I, 40,000 kg. are sold as
Product ‘A’ and 1,20,000 kg. are passed through Process II for sale as Product ‘AX’.
Process II has facilities to handle upto 1,60,000 kg. of Product ‘A’ per month, if required.
The monthly costs incurred in Process II (other than the cost of Product ‘A’) are:
1,20,000 kg. of Product ‘A’ 1,60,000 kg. of Product ‘A’
input input
(₹) (₹)
Materials Cost 1,32,000 1,76,000

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Processing Costs 1,20,000 1,40,000

Required:
(i) Determine, using the weighted average cost method, the cost per kg. of Product
‘A’ in Process I and value of both work completed and closing work-in-progress
for the month just ended.
(ii) Is it worthwhile processing 1,20,000 kg. of Product ‘A’ further?
(iii) Calculate the minimum acceptable selling price per kg., if a potential buyer could
be found for additional output of Product ‘AX’ that could be produced with the
remaining Product ‘A’ quantity.
Solution:
(i) Process-I
Statement of Equivalent Production
Inputs Output Equivalent output
Material Conversion
Particulars Kg. Particulars Kg. (%) kg. (%) kg.
Opening W.I.P. 40,000 Normal loss 40,000 -- -- -- --
New material Units
introduced 2,00,000 introduced &
completed 1,60,000 100 1,60,000 100 1,60,000
Abnormal loss 10,000 100 10,000 100 10,000
Closing WIP 30,000 100 30,000 2/3rd 20,000
2,40,000 2,40,000 2,00,000 1,90,000

Process- I
Statement of Cost for each element
Elements of cost Costs of Costs in Total cost Equivalent Cost per
opening WIP process units Kg.
(₹) (₹) (₹) Kg. (₹)
Material Conversion 20,000 75,000 95,000 2,00,000 0.475
cost 12,000 1,02,000 1,14,000 1,90,000 0.600
32,000 1,77,000 2,09,000 1.075

Statement of Apportionment of Cost

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Units Elements Equivalent units Cost/unit Cost Total cost

completed (Kg.)
(₹) (₹) (₹)
Work completed Material 1,60,000 0.475 76,000
Conversion 1,60,000 0.600 96,000 1,72,000
Material 30,000 0.475 14,250
Closing WIP 26,250
Conversion 20,000 0.600 12,000

(ii) Statement showing comparative data to decide whether 1,20,000 kg. of product ‘A’
should be processed further into ‘AX’.
Alternative I – To sell product ‘A’ after Process – I (₹)
Sales 1,20,000 kg. x ₹ 1.60 1,92,000
Less: Cost from Process- I 1,20,000 kg. x ₹ 1.075 1,29,000
Profit 63,000

Alternative II – Process further into ‘AX’

Sales 2,40,000 kg. x ₹ 2.00 4,80,000
Less: Cost from Process- I 1,20,000 kg. x ₹ 1.075 = ₹ 1,29,000
Material in Process- II = ₹ 1,32,000
Processing cost in Process- II = ₹ 1,20,000 3,81,000
Profit 99,000
Hence company should process further
It will increase profit by ₹ 99,000 – ₹ 63,000 = ₹ 36,000

(i) Calculation of minimum selling price per kg.:

Cost of processing remaining 40,000 kg. further (₹)
Material ₹ 1,76,000 - ₹ 1,32,000 44,000
Processing cost ₹ 1,40,000 – ₹ 1,20,000 20,000
Cost from process- I relating to 40,000 kg. ‘A’ (40,000 kg. × ₹1.075) 43,000
Benefit foregone if 40,000 kg. ‘A’ are further processed
40,000 kg. (₹ 1.60 – ₹ 1.075) 21,000
Total cost 1,28,000
Additional quantity of product ‘AX’ (40,000 kg. × ₹ 2) 80,000
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 Minimum selling price = (₹1,28,000/80,000 kg) = ₹1.60

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(IV) Inter process profit

A. QUESTION FROM STUDY MATERIAL
Question-6 (Study Material – illustration-6)
A Ltd. produces product ‘AXE’ which passes through two processes before it is completed
and transferred to finished stock. The following data relate to October 20X8:
Process- I Process- Finished
(₹) II (₹) Stock (₹)
Opening stock 7,500 9,000 22,500
Direct materials 15,000 15,750 --
Direct wages 11,200 11,250 --
Factory overheads 10,500 4,500 --
Closing stock 3,700 4,500 11,250
Inter-process profit included in -- 1,500 8,250
opening stock
Output of Process- I is transferred to Process- II at 25% profit on the transfer price. Output
of Process- II is transferred to finished stock at 20% profit on the transfer price. Stock in
process is valued at prime cost. Finished stock is valued at the price at which it is received
from process II. Sales during the period are ₹ 1,40,000.
PREPARE Process cost accounts and finished goods account showing the profit element
at each stage.
Hints:
Transfer from Cost Profit Total
P-I ₹40,500 ₹13,500 ₹54,000
P-II ₹75,750 ₹36,750 ₹1,12,500
Finished Stock ₹84,425 ₹57,575 ₹1,40,000

B. PAST YEAR EXAM QUESTIONS

May-19. Q2 (b) (5 marks)
KT Ltd. produces a product EMM which passes through two processes before it is
completed and transferred to finished stock. The following data relate to May 2019:

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Process & Operation Costing By: CA PRAKASH PATEL

Particulars Process Finished stock

A B
(₹) (₹) (₹)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock 1,000 4,000
Output of Process A is transferred to Process B at 25% profit on the transfer price and
output of Process B is transferred to finished stock at 20% profit on the transfer price.
Stock in process is valued at prime cost. Finished stock is valued at the price at which
it is received from Process B. Sales during the period are ₹ 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element
at each stage.
Solution:
Process-A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
(₹) (₹) (₹) (₹) (₹) (₹)
Opening stock 5,000 5,000 _ Process B 28,800 21,600 7,200
A/c
Direct materials 9,000 9,000 _
Direct wages 5,000 5,000 _
19,000 19,000 _
Less: Closing (2,000) (2,000) _
stock
Prime Cost 17,000 17,000 _
Overheads 4,600 4,600 _
Process Cost 21,600 21,600 _
Profit (33.33% of 7,200 - 7,200
total cost)
28,800 21,600 7,200 28,800 21,600 7,200

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Process & Operation Costing By: CA PRAKASH PATEL

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

Opening stock 10,000 6,000 4,000 Costing P&L 75,000 44,181 30,819
A/c
Process B A/c 61,675 41,550 20,125

71,675 47,550 24,125

Less: Closing stock (5,000) (3,369) (1,631)

COGS 66,675 44,181 22,494

Profit 8,325 - 8,325

75,000 44,181 30,819 75,000 44,181 30,819

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Process & Operation Costing By: CA PRAKASH PATEL

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (May 2017)
A product passes through three processes ‘X’, ‘Y’ and ‘Z’. The output of process ‘X’ and
‘Y’ is transferred to next process at cost plus 20 per cent each on transfer price and the
output of process ‘Z’ is transferred to finished stock at a profit of 25 per cent on transfer
price. The following information are available in respect of the year ending 31st March,
2014:
Process-X Process-Y Process-Z Finished Stock
(₹) (₹) (₹) (₹)
Opening stock 15,000 27,000 40,000 45,000
Material Wages 80,000 65,000 50,000 --
Manufacturing Overheads 1,25,000 1,08,000 92,000 --
Closing stock 96,000 72,000 66,500 -- 50,000
Inter process profit included in 20,000 32,000 39,000
Opening stock NIL 4,000 10,000 20,000
Stock in processes is valued at prime cost. The finished stock is valued at the price at which
it is received from process ‘Z’. Sales of the finished stock during the period was ₹
14,00,000.
You are required to prepare:
(i) Process accounts and finished stock account showing profit element at each stage.
(ii) Costing Profit and Loss account.
(iii) Show the relevant items in the Balance Sheet.
Solution:
(i) Process ‘X’ Account
Cost Profit Total Particulars Cost Profit Total
Particulars (₹) (₹) (₹) (₹) (₹) (₹)
To Opening Stock 15,000 - 15,000 By Process ‘Y’ 2,96,000 74,000 3,70,000
A/c (Transfer)
To Material 80,000 - 80,000
To Wages 1,25,000 - 1,25,000
Total
2,20,000 - 2,20,000
Less: Closing stock 20,000 - 20,000
Prime Cost 2,00,000 2,00,000
To Manufacturing
96,000 - 96,000

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Process & Operation Costing By: CA PRAKASH PATEL

Overheads 2,96,000 2,96,000

Total cost 74,000
-
To Costing Profit and
Loss A/c (20% on 74,000
transfer Price or 25% 2,96,000 74,000 3,70,000 2,96,000 74,000 3,70,000
on cost)

Process ‘Y’ Account

Dr. Cr.
Cost Profit Total Cost Profit Total
Particulars (₹) (₹) (₹) Particulars (₹) (₹) (₹)
To Opening Stock 23,000 4,000 27,000 By Process ‘Z’ A/c 5,36,379 2,26,121 7,62,500
(Transfer)
To Process ‘X’ A/c 2,96,000 74,000 3,70,000
To Material 65,000 -- 65,000
To Wages 1,08,000 -- 1,08,000
Total 4,92,000 78,000 5,70,000
Less: Closing stock 27,621 4,379 32,000
Prime Cost 4,64,379 73,621 5,38,000
To Manufacturing
Overheads 72,000 -- 72,000
Total cost 5,36,379 73,621 6,10,000

To Costing Profit and -- 1,52,500 1,52,500

Loss A/c (20% on
transfer Price or 25%
on cost)
5,36,379 2,26,121 7,62,500 5,36,379 2,26,121 7,62,500

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Process & Operation Costing By: CA PRAKASH PATEL

Process ‘Z’ Account

Dr. Cr.
Cost Profit Total Cost Profit Total
Particulars (₹) (₹) (₹) Particulars (₹) (₹) (₹)
To Opening Stock 30,000 10,000 40,000 By Finished Stock 7,45,629 5,50,371 12,96,000
A/c (Transfer)

To Process ‘Y’ A/c 5,36,379 2,26,121 7,62,500

To Material 50,000 -- 50,000
To Wages 92,000 -- 92,000

Total 7,08,379 2,36,121 9,44,500

Less: Closing stock 29,250 9,750 39,000

Prime Cost 6,79,129 2,26,371 9,05,500

To Manufacturing
Overheads 66,500 -- 66,500

7,45,629 2,26,371 9,72,000

Total cost

To Costing Profit and -- 3,24,000 3,24,000

Loss A/c (25% on
transfer Price or 33
1/3% on cost)
7,45,629 5,50,371 12,96,000 7,45,629 5,50,371 12,96,000
Finished Stock Account
Dr. Cr.
Cost Profit Total Cost Profit Total
Particulars (₹) (₹) (₹) Particulars (₹) (₹) (₹)
To Opening Stock 25,000 20,000 45,000 By Costing P&L A/c 7,41,862 6,58,138 14,00,000
A/c (Transfer)

To Process ‘Z’ A/c 7,45,629 5,50,371 12,96,000

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Process & Operation Costing By: CA PRAKASH PATEL

Total 7,70,629 5,70,371 13,41,000

Less: Closing stock 28,767 21,233 50,000

To Costing Profit and 7,41,862 5,49,138 12,91,000

Loss A/c

1,09,000 1,09,000

7,41,862 6,58,138 14,00,000 7,41,862 6,58,138 14,00,000

Costing Profit & Loss Account

for the year ending 31st March, 2014
Dr. Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Provision for unrealized By Provision for unrealized profit
profit on closing stock on opening stock
(₹ 4,379 + ₹ 9,750 + ₹ 21,233) 35,362 (₹ 4,000 + ₹ 10,000 + ₹ 20,000) 34,000
To Net Profit 6,58,138 By Process X A/c By 74,000
Process Y A/c By 1,52,500
Process Z A/c 3,24,000
By Finished Stock A/c 1,09,000
6,93,500 6,93,500

Workings:
Calculation of amount of unrealized profit on closing stock:
Process ‘X’ = Nil
Process ‘Y’ = ₹78,000 x ₹32,000 = ₹4,379
₹5,70,000
Process ‘Z’ = ₹2,36,121 x ₹39,000 = ₹9,750
₹9,44,500
Finished Stock = ₹5,50,371 x ₹50,000 = ₹21,333
₹12,96,000

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Process & Operation Costing By: CA PRAKASH PATEL

Balance Sheet as on 31st March, 2014 (Extract)

Liabilities Amount Assets Amount
(₹) (₹)
Net profit 6,58,138 Closing stock:
Process – X 20,000
Process – Y 32,000
Process – Z 39,000
Finished stock 50,000
1,41,000
Less: Provision for unrealized profit 35,362
1,05,638

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Joint Product & By Product By: CA PRAKASH PATEL

Chapter. 10: Joint Product & By Product

Part-A: Joint Product
A. QUESTION FROM STUDY MATERIAL
Question-1
A coke manufacturing company produces the following products by using 5,000 tons of
coal @ ₹1,100 per ton into a common process.

Coke 3,500 tons

Tar 1,200 tons
Sulphate of ammonia 52 tons
Benzol 48 tons
PREPARE a statement apportioning the joint cost amongst the products on the basis of
the physical unit method.

Hints:
Product Joint Cost
Coke 40,10,600
Tar 13,75,000
Sulphate 59,400
Benzol 55,000

Question-2
FIND OUT the cost of joint products A, B and C using average unit cost method from
the following data:
(a) Pre-separation Joint Cost ₹ 60,000
(b) Production data:
Products Units produced
A 500
B 200
C 300
1,000
Hints: Average Cost p.u. = ₹60

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Joint Product & By Product By: CA PRAKASH PATEL
Question-3
FIND OUT the cost of joint products A and B using contribution margin method from
the following data :
Sales
A : 100 kg @ ₹ 60 per kg.
B : 120 kg @ ₹ 30 per kg.
Joint costs
Marginal cost ₹ 4,400 Fixed cost ₹ 3,900
Hints:
A B Basis of Apportionment
Marginal Cost 2,000 2,400 Units
Fixed Cost 3,000 900 Contribution

Question-4
Inorganic Chemicals purchases salt and processes it into more refined products such as
Caustic Soda, Chlorine and PVC. In the month of July, Inorganic Chemicals purchased
Salt for ₹ 40,000. Conversion cost of ₹ 60,000 were incurred upto the split off point, at
which time two sealable products were produced. Chlorine can be further processed into
PVC.
The July production and sales information is as follows:
Production (in ton) Sales Quantity (in ton) Selling price per ton (₹)

Caustic Soda 1,200 1,200 50

Chlorine 800 — —
PVC 500 500 200
All 800 tons of Chlorine were further processed, at an incremental cost of ₹ 20,000 to
yield 500 tons of PVC. There was no beginning or ending inventories of Caustic Soda,
Chlorine or PVC in July.
There is active market for Chlorine. Inorganic Chemicals could have sold all its July
production of Chlorine at ₹ 75 per ton.
Required :
(1) SHOW how joint cost of ₹1,00,000 would be apportioned between Caustic
Soda and Chlorine under each of following methods:
(a) sales value at split- off point ;
(b) physical unit method, and
(c) estimated net realisable value.
(2) Lifetime Swimming Pool Products offers to purchase 800 tonnes of Chlorine in
August at ₹75 per tonne. This sale of Chlorine would mean that no PVC would
be produced in August. EXPLAIN how the acceptance of this offer for the
month of August would affect operating income?
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Joint Product & By Product By: CA PRAKASH PATEL
Hints:
Basis Sale value at Split-off Units NRV
Caustic Soda 50,000 60,000 42,857
Chlorine 50,000 40,000 57,143

TEST YOUR KNOWLEDGE

Question-1
Sun-moon Ltd. produces and sells the following products:
Products Units Selling price at Selling price after
split off point (₹) further processing (₹)
A 2,00,000 17 25
B 30,000 13 17
C 25,000 8 12
D 20,000 10 -
E 75,000 14 20
Raw material costs ₹35,90,000 and other manufacturing expenses cost ₹ 5,47,000 in the
manufacturing process which are absorbed on the products on the basis of their ‘Net
realisable value’. The further processing costs of A, B, C and E are ₹12,50,000; ₹1,50,000;
₹ 50,000 and ₹ 1,50,000 respectively. Fixed costs are ₹ 4,73,000.
You are required to PREPARE the following in respect of the coming year:
(a) Statement showing income forecast of the company assuming that none of its
products are to be further processed.
(b) (b) Statement showing income forecast of the company assuming that products
A, B, C and E are to be processed further.
Can you suggest any other production plan whereby the company can maximise its profits?
If yes, then submit a statement showing income forecast arising out of adoption of that
plan.
Hints:
Contribution No further processing Further processing
A 7,75,000 11,25,000
B 1,38,000 1,38,000
C 25,000 75,000
D 60,000 60,000
E 1,05,000 4,05,000
Total 11,03,000 18,03,000
Less: Fixed Cost (4,73,000) (4,73,000)
Profit 6,30,000 13,30,000

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Joint Product & By Product By: CA PRAKASH PATEL
Question-2
Smile company produces two main products and a by-product out of a joint process. The
ratio of output quantities to input quantities of direct material used in the joint process
remains consistent on yearly basis. Company has employed the physical volume method
to allocate joint production costs to the main products. The net realizable value of the by-
product is used to reduce the joint production costs before the joint costs are allocated to
the main products. Details of company’s operation are given in the table below. During
the month, company incurred joint production costs of ₹ 10,00,000/- The main products
are not marketable at the split off point and thus have to be processed further.
Particulars Product-A Product-B By product
Monthly output in kg. 60,000 1,20,000 50,000
Selling price per kg. ₹ 50 ₹ 30 ₹5
Process costs ₹ 2,00,000 ₹ 3,00,000
FIND OUT the amount of joint product cost that Smile company would allocate to the
product-B by using the physical volume method to allocate joint production costs?
Hints: ₹5,00,000

Question-3
‘Buttery Butter’ is engaged in the production of Buttermilk, Butter and Ghee. It
purchases processed cream and let it through the process of churning until it separates
into buttermilk and butter. For the month of January, ‘Buttery Butter’ purchased 50
Kilolitre processed cream @ ₹ 100 per 1000 ml. Conversion cost of ₹ 1,00,000 were
incurred up-to the split off point, where two saleable products were produced i.e.
buttermilk and butter. Butter can be further processed into Ghee.
The January production and sales information is as follows:
Products Production (in Sales Quantity Selling price
Kilolitre/tonne) (in per Litre/Kg
Kilolitre/tonne) (₹)
Buttermilk 28 28 30
Butter 20 — —
Ghee 16 16 480
All 20 tonne of butter were further processed at an incremental cost of
₹ 1,20,000 to yield 16 Kilolitre of Ghee. There was no opening or closing inventories of
buttermilk, butter or ghee in the month of January.
Required:
(i) SHOW how joint cost would be apportioned between Buttermilk and Butter
under Estimated Net Realisable Value method.
(ii) ‘Healthy Bones’ offers to purchase 20 tonne of butter in February at
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Joint Product & By Product By: CA PRAKASH PATEL
₹ 360 per kg. In case ‘Buttery Butter’ accepts this offer, no Ghee would be produced in
February. SUGGEST whether ‘Buttery Butter’ shall accept the offer affecting its
operating income or further process butter to make Ghee itself?
Hints:
(i) Apportionment of Joint Cost of ₹51,00,000 in ratio of 1:9
(ii) The operating income of ‘Buttery Butter’ will be reduced by
₹ 3,60,000 in February if it sells 20 tonne of Butter to ‘Healthy Bones’, instead of
further processing of Butter into Ghee for sale. Thus, ‘Buttery Butter’ is advised
not to accept the offer and further process butter to make Ghee itself.

Question-4
NN Manufacturing company uses joint production process that produces three products at
the split off point. Joint productions costs during September were ₹ 8,40,000. Product
information for September was as follows:
Particulars Product Product Product
A B C
Units produced 1,500 3,000 4,500
Units sold 2,000 6,000 7,500
Sales prices:
At the split-off ₹ 100
After further processing ₹ 150 ₹ 175 ₹ 50
Costs to process after split-off ₹ ₹ ₹
1,50,000 1,50,000 1,50,000
Assume that product C is treated as a by-product and the company accounts for the by-
product at net realizable value as a reduction of joint cost. Assume also that Product B&C
must be processed further before they can be sold. FIND OUT the total cost of Product A
in September if joint cost allocation is based on net realizable values?

Hints: Product A has no further processing costs, the total cost of Product A is equal to its
allocated joint costs, which are 28.571% of the net joint costs of ₹ 7,65,000, or ₹ 2,18,568.

Question-5 (New Course Material)

RST Limited produces three joint products X, Y and Z. The products are processed further.
Pre-separation costs are apportioned on the basis of weight of output of each joint product.
The following data are provided for a particular month:
Cost incurred up to separation point: ₹ 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80

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Joint Product & By Product By: CA PRAKASH PATEL

₹ ₹ ₹
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45
You are required to:
(i) Prepare a statement showing profit or loss made by each product after further
processing using the presently adopted method of apportionment of pre-separation
cost.
(ii) Advise the management whether, on purely financial consideration, the three
products are to be processed further or not.
Hints:
(i)
Product Product Product
X (in ₹) Y (in ₹) Z (in
₹)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800
(ii) It is advisable to further process only product X and Z and to sale product Y at the
point of separation.

Question-6 (New Course Material)

OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process
results in four products at the spilt-off point - S, P, N and A. Product 'A’ is fully processed
at the split-off point. Product S, P and N can be individually further refined into SK, PM,
and NL respectively. The joint cost of purchasing the crude vegetable oil and
processing it were ₹ 40,000 which is apportioned on the basis of Sales Value at split-off
point. Other details are as follows:
Product Further processing Sales at split- Sales after further
costs (₹) off point (₹) processing (₹)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000

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Joint Product & By Product By: CA PRAKASH PATEL
A - 20,000 -
You are required to identify the products which can be further processed for maximizing
profits and make suitable suggestions.
Hints: Suggested Product to be further processed for maximising profits:
On comparing the figures of "Profit if no further processing" and "Profits if further
processing", one observes that OPR Ltd. is earning more after further processing of Product
S only i.e. ₹ 20,000. Hence, for maximizing profits, only Product S should be further
processed and Product P, N and A should be sold at split-off point.

B. PAST YEAR EXAM QUESTIONS

May-23. Q4(a) (10 marks)

ABC Company produces a Product 'X' that passes through three processes: R, S and T.
Three types of raw materials, viz., J, K, and L are used in the ratio of 40:40:20 in
process R. The output of each process is transferred to next process. Process loss is
10% of total input in each process. At the stage of output in process T, a by-product 'Z'
is emerging and the ratio of the main product 'X' to the by-product 'Z' is 80:20. The
selling price of product 'X' is ₹60 per kg.
The company produced 14,580 kgs of product ‘X’
Material price : Material J @ ₹ 15 per kg; Material K @ ₹ 9 per kg.
Material L@ ₹ 7 per kg Process costs are as follows:
Process Variable cost per kg (₹) Fixed cost of Input (₹)
R 5.00 42,000
S 4.50 5,000
T 3.40 4,800
The by-product 'Z' cannot be processed further and can be sold at ₹ 30 per kg at the
split- off stage. There is no realizable value of process losses at any stage.
Required:
Present a statement showing the apportionment of joint costs on the basis of the sales
value of product 'X' and by-product 'Z' at the split- off point and the profitability of
product 'X' and by-product 'Z.
Solution:
Working Notes:
1. Calculation of Input of Raw Material
Let assume total raw material in Process R be 100%
 Output of Process T will be equal to:
Input R 100%

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 Joint Product & By Product By: CA PRAKASH PATEL
- 10% Normal Loss ₹ 10
Input S ₹ 90%
- 10% Normal loss ₹ 9
Input T 81%
- 10% Normal loss ₹ 8.1
Output of T 72.9
Actual output of X 14,580 units
Which is 80% of the total output

 Output of Process T
= 14580 = 18,225
80%
 Input of Process R = 18225 = 25,000 kgs
72.9%

Alternative presentation for Calculation of Input in Process R, S and T

Working notes:
Process T (Kg.)
To Input (Transfer from process S) 20,250 By Normal loss 2,025
By Output Product X 14,580
By output of by-product Z 3,645
20,250 20,250

Process S (kg.)
To Input (Transfer from process S) 22,500 By Normal loss (10%) 2,250
By Transfer to process T 20,250
22,500 22,500

Process R (kg.)
To Input 25,000 By Normal loss (10%) 2,500
By Transfer to process S 22,500
25,000 25,000
lculation of Joint Cost
2. Calculation of Joint Cost
Process Inputs Variable cost per kg Variable cost Fixed Cost Total Cost
₹ ₹ ₹ ₹
R 25,000 5 1,25,000 42,000 1,67,000
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Joint Product & By Product By: CA PRAKASH PATEL
S 22,500 4.5 1,01,250 5,000 1,06,250
T 20,250 3.4 68,850 4,800 73,650
3,46,900

Raw material J 10000 x 15 ₹ 1,50,000

K 10000 x 9 ₹ 90,000
L 5000 x 7 ₹ 35,000
2,75,000
Add: Processing cost (as above) ₹ 3,46,900
Total Joint Cost 6,21,900

(i) Statement showing apportionment of Joint Cost

Particulars Product X By-Product Z Total
Units 14,580 3,645
Selling price (₹) 60 30
Sales Value (₹) 8,74,800 1,09,350 9,84,150
(₹ 6,21,900 to apportioned in ratio of 5,52,800 69,100 6,21,900
sales value at split off point)

(ii) Statement of Profitability

Particulars Product X By-Product Z Total
Sales Value 8,74,800 1,09,350 9,84,150
Joint Cost (5,52,800) (69,100) (6,21,900)
(As apportioned above)
Profit 3,22,000 40,250 3,62,250

Jan-21. Q4(a) (10 marks)

Mayura Chemicals Ltd buys a particular raw material at ₹ 8 per litre. At the end of the
processing in Department- I, this raw material splits-off into products X, Y and Z.
Product X is sold at the split-off point, with no further processing. Products Y and Z
require further processing before they can be sold. Product Y is processed in
Department-2, and Product Z is processed in Department-3.
Following is a summary of the costs and other related data for the year 2019-20:
Particulars Department
1 2 3
Cost of Raw Material ₹ 4,80,000 - -
Direct Labour ₹ 70,000 ₹ 4,50,000 ₹ 6,50,000

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Joint Product & By Product By: CA PRAKASH PATEL
Manufacturing ₹ 48,000 ₹ 2,10,000 ₹ 4,50,000
Overhead
Products
X Y Z
Sales (litres) 10,000 15,000 22,500
Closing inventory 5,000 - 7,500
(litres)
Sale price per litre (₹) 30 64 50

There were no opening and closing inventories of basic raw materials at the beginning
as well as at the end of the year. All finished goods inventory in litres was complete
as to processing. The company uses the Net-realisable value method of allocating joint
costs.
You are required to prepare:
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each item in
Inventory.
(iii) A comparative statement of Gross profit.
Solution:
(i) Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total
(₹)
X (₹) Y (₹) Z (₹)
Final sales value of 4,50,000 9,60,000 15,00,000 29,10,000
total production (15,000 x ₹ (15,000 x ₹ (30,000 x ₹
(Working Note 1) 30) 64) 50)
Less: Additional -- 6,60,000 11,00,000 17,60,000
cost
Net realisable 4,50,000 3,00,000 4,00,000 11,50,000
value
(at split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)

(ii) Calculation of Cost of goods sold and Closing inventory

Products Total
X (₹) Y (₹) Z (₹) (₹)

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Joint Product & By Product By: CA PRAKASH PATEL

Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000

Add: Additional -- 6,60,000 11,00,000 17,60,000
costs
Cost of goods sold 2,34,000 8,16,000 13,08,000 23,58,000
(COGS)
Less: Cost of closing 78,000 -- 3,27,000 4,05,000
inventory (COGS × (COGS ×
(Working Note 1) 100/3%) 25%)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000

(iii) Comparative Statement of Gross Profit

Products Total
X (₹) Y (₹) Z (₹) (₹)

Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000

(10,000 x ₹ (15,000 x ₹ (22,500 x ₹
30) 64) 50)
Less: Cost of 1,56,000 8,16,000 9,81,000 19,53,000
goods sold
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000

Working Notes:
1. Total production of three products for the year 2019-2020
Products Quantity Quantity of Total Closing
sold in closing production inventory
litres inventory percentage
in litres (%)
(1) (2) (3) (4) = [(2) + (5) = (3)/ (4)
(3)}
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25

2. Joint cost apportioned to each product:

= Total Joint cost x Net Realisable Value of each product

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Joint Product & By Product By: CA PRAKASH PATEL
Total Net Realisable Value

Joint cost of product X = ₹5,98,000 x ₹4,50,000 = ₹2,34,000

₹11,50,000
Joint cost of product Y = ₹5,98,000 x ₹3,00,000 = ₹1,56,000
₹11,50,000
Joint cost of product Z = ₹5,98,000 x ₹4,00,000 = ₹2,08,000
₹11,50,000

Nov-20. Q1(c) (5 marks)

A company's plant processes 6,750 units of a raw material in a month to produce two
products 'M' and 'N'.
The process yield is as under:
Product M 80%
Product N 12%
Process Loss 8%
The cost of raw material is ₹ 80 per unit.
Processing cost is ₹ 2,25,000 of which labour cost is accounted for 66%. Labour is
chargeable to products 'M' and 'N' in the ratio of 100:80.
Prepare a Comprehensive Cost Statement for each product showing:
(i) Apportionment of joint cost among products 'M' and 'N' and
(ii) Total cost of the products 'M' and 'N'.
Solution:
Comprehensive Cost Statement
Particulars Total Cost Product-M Product-N
(₹) (₹) (₹)
No. of units produced * 5,400 units 810 units
Cost of raw material (₹ 80 × 5,40,000
6,750 units)
Processing cost:
- Labour cost (₹ 2,25,000 × 1,48,500
66%)
- Other costs (₹ 2,25,000 - 76,500
1,48,500)
7,65,000

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Total joint cost

(i) Apportionment of joint costs
between the joint products 1,48,500 82,500 66,000
Labour cost in the ratio of 100:80 (1,48,500 x 100) (1,48,500 x 80)
180 180

6,16,500
5,36,087 80,413
Other joint costs (including
(6,16,500 x 5,400) (6,16,500 x 810)
material) in the ratio of output 6,210 6,210
(5,400:810)
7,65,000 6,18,587 1,46,413
(ii) Total product cost

* No. of units produced of Product M = 6750 units x 80% = 5400 units

No. of units produced of Product N = 6750 units x 12% = 810 units

May-19. Q1(c) (5 marks)

A Factory is engaged in the production of chemical Bomex and in the course of its
manufacture a by-product Cromex is produced which after further processing has a
commercial value. For the month of April 2019 the following are the summarised cost
data:
Joint Expenses Separate Expenses
(₹) (₹)
Bomex Cromex
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 100 40
Estimated profit per unit on sale of Cromex 5
Number of units produced 2,000 2,000
units units
The factory uses net realisable value method for apportionment of joint cost to by-
products.
You are required to prepare statements showing :
(i) Joint cost allocable to Cromex
(ii) Product wise and overall profitability of the factory for April 2019.
Solution:
(i) Statement Showing Joint Cost Allocation to ‘Cromex’
Particulars Cromex (₹)
Sales (₹ 40 × 2,000 units) 80,000
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Joint Product & By Product By: CA PRAKASH PATEL
Less: Post Split Off Costs (28,000)
(4,000+18,000+6,000)
Less: Estimated Profit (₹ 5 × 2,000 units) (10,000)
Joint cost allocable 42,000
(ii) Statement Showing Product Wise and Overall Profitability
Particulars Bomex (₹) Cromex (₹) Total (₹)
Sales 2,00,000 80,000 2,80,000
Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)
Less: Post Split Off Costs (36,000) (28,000) (64,000)
Profit 26,000 10,000 36,000
(*) 1,80,000 – 42,000

July-21. Q2(b) (5 marks)

OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process
results in four products at the spilt-off point - S, P, N and A. Product 'A’ is fully processed
at the split-off point. Product S, P and N can be individually further refined into SK, PM,
and NL respectively. The joint cost of purchasing the crude vegetable oi l and processing
it were ₹ 40,000. Other details are as follows:

Product Further processing costs Sales at split-off point Sales after further
(₹) (₹) processing (₹)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -

You are required to identify the products which can be further processed for maximizing
profits and make suitable suggestions.

Solution:

Statement of Comparison of Profits before and after further processing

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Joint Product & By Product By: CA PRAKASH PATEL
S (₹) P (₹) N (₹) A (₹) Total (₹)

A. Sales at split off point 20,000 12,000 28,000 20,000 80,000

B. Apportioned Joint Costs 10,000 6,000 14,000 10,000 40,000
(Refer Working Note)
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000

D. Sales after further 1,20,000 40,000 48,000 - 2,08,000

processing
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint Costs 10,000 6,000 14,000 - -
(Refer Working Note)
G. Profit if further processing(D 30000 2,000 (-) 2,000 - -
– E + F)
H. Increase/ decrease in profit after 20,000 - 4000 - 16,000 - -
further processing (G- C)

Suggested Product to be further processed for maximising profits:

On comparing the figures of "Profit if no further processing" and "Profits if further
processing", one observes that OPR Ltd. is earning more after further processing of Product
S only i.e. ₹ 20,000. Hence, for maximizing profits, only Product S should be further
processed and Product P, N and A should be sold at split-off point.

Working Note:
Apportionment of joint costs on the basis of Sales Value at split -off point
Apportioned joint cost = Total Joint Cost × Sales value of each product
Total Sales value at split-off point
Where,
Total Joint cost = ₹ 40,000
Total sales at split off point (S, P, N and A) = 20,000 + 12,000 + 28,000 + 20,000
= ₹ 80,000
Share of S in joint cost = ₹40,000 x ₹20,000 = ₹10,000
₹80,000

Share of P in joint cost = ₹40,000 x ₹12,000 = ₹6,000

₹80,000

Share of N in joint cost = ₹40,000 x ₹28,000 = ₹14,000

₹80,000

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Joint Product & By Product By: CA PRAKASH PATEL

Share of A in joint cost = ₹40,000 x ₹20,000 = ₹10,000

₹80,000

Alternative Solution
Decision for further processing of Product S, P and N
Products S (₹) P (₹) N (₹)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000

Suggested Product to be further processed for maximising profits:

On comparing the figures of "Profit if no further processing" and "Profits if further
processing", one observes that OPR Ltd. is earning more after further processing of Product
S only i.e. ₹ 20,000. Hence, for maximizing profits, only Product S should be further
processed and Product P, N and A should be sold at split-off point.

May-22. Q5(c) (5 marks)

RST Limited produces three joint products X, Y and Z. The products are processed further.
Pre-separation costs are apportioned on the basis of weight of output of each joint product.
The following data are provided for the month of April, 2022.
Cost incurred up to separation point: ₹ 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
₹ ₹ ₹
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45
You are required to:
(i) Prepare a statement showing profit or loss made by each product after further
processing using the presently adopted method of apportionment of pre-
separation cost.
(ii) Advise the management whether, on purely financial consideration, the three
products are to be processed further or not.

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Joint Product & By Product By: CA PRAKASH PATEL
Solution:
(i) Statement showing profit/loss by each product after further processing
products
Product X Product Y Product Z
(in ₹) (in ₹) (in ₹)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800
* Statement showing apportionment of joint cost on the basis of physical units

Product X Product Y Product Z Total

(in ₹) (in ₹) (in ₹) (₹)
Output (in litre) 100 70 80 250
Weight 0.4 0.28 0.32
(100/250) (70/250) (80/250)
Joint cost apportioned 4,000 2,800 3,200

(ii) Decision whether to process further or not

Product X Product Y Product Z
(in ₹) (in ₹) (in ₹)
Incremental Revenue 2,500 700 1,200
[(50-25) × 100] [(80-70) × 70] [(60-45) × 80]
Less: Further processing cost 2,000 1,200 800
Incremental profit /(loss) 500 (500) 400

Product X Product Y Product Z Total

(in ₹) (in ₹) (in ₹)
Sales 2500 4900 3600 11000
Pre separation costs 4000 2800 3200 10000
Profit/(Loss) (1500) 2100 400 1000

It is advisable to further process only product X and Z and to sale product Y at the
point of separation.

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

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Joint Product & By Product By: CA PRAKASH PATEL
Question-1
In a chemical manufacturing company, three products A, B and C emerge at a single
split off stage in department P. Product A is further processed in department Q, product
B in department R and product C in department S. There is no loss in further
Processing of any of the three products. The cost data for a month are as under:
Cost of raw materials introduced in department P ₹ 12,68,800
Direct Wages Department (₹)
P 3,84,000
Q 96,000
R 64,000
S 36,000
Factory overheads of ₹ 4,64,000 are to be apportioned to the direct wage
departments on basis.
During the month under reference, the company sold all three products after processing
them further as under:

Products A B C
Output sold (kg.) 44,000 40,000 20,000
Selling Price per kg. (₹) 32 24 16
There is no opening or closing stocks. If these products were sold at the split off stage,
that is, without further processing, the selling prices would have been ₹ 20, ₹ 22 and
₹ 10 each per kg respectively for A, B and C.
Required:
(i) Prepare a statement showing the apportionment of joint costs to joint products.
(ii) Present a statement showing product-wise and total profit for the month under
reference as per the company’s current processing policy.
(iii) What processing decision should have been taken to improve the profitability of
the company?
(iv) Calculate the product-wise and total profit arising from your recommendation in
(iii) above.
Solution:

(i) Statement showing the apportionment of joint costs to joint products

Products
A B C Total
Output sold Kg.: (I) 44,000 40,000 20,000
Selling price per kg. at split off (₹): (II) 20 22 10
Sales value at split off (₹): (I) x (II) 8,80,000 8,80,000 2,00,000 19,60,000

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Joint Product & By Product By: CA PRAKASH PATEL
Joint costs (costs incurred in department 8,80,000 8,80,000 2,00,000 19,60,000
P (₹)
(apportioned on the basis of sales value
at the point of split off) i.e. (22:22:5)
(Working Note 1)
(ii) Statement showing product-wise and total profit for the month under reference
(as per the company’s current processing policy)
Products
A B C Total
Output (kg.) : (a) 44,000 40,000 20,000
Selling price per kg. after further 32 24 16
processing (₹): (b)
Sales value after further 14,08,000 9,60,000 3,20,000 26,88,000
processing (₹).:(c) = {(a) x (b)}
Joint costs (₹): (d) 8,80,000 8,80,000 2,00,000 19,60,000
Further processing costs (₹): (e)
(Working Note 2) 1,72,800 1,15,200 64,800 3,52,800
Total costs (₹): (f) = [(d) + (e)} 10,52,800 9,95,200 2,64,800 23,12,800
Profit/ (Loss) (₹): [(c))– (f)} 3,55,200 (35,200) 55,200 3,75,200
Alternatively:
Incremental sales revenue (₹) 5,28,000 80,000 1,20,000
(44,000 units (40,000 units x (20,000 units x
x ₹ ₹
₹ 12) 2) 6)
Less: Further processing costs
(₹) 1,72,800 1,15,200 64,800
[Refer to Working Note 2 (ii)]
Incremental net profit / (loss) 3,55,200 (35,200) 55,200

(iii) Processing decision to improve the profitability of the company.

44,000 units of product A and 20,000 units of product C should be further processed
because the incremental sales revenue generated after further processing is more than
the further processing costs incurred. 40,000 units of product B should be sold at the
point of-split off because the incremental revenue generated after further processing
is less than the further processing costs.
(iv) The product wise and total profit arising from the recommendation in (iii)
above is as follows:

Product A B C Total
Profit (₹) 3,55,200 - 55,200 4,10,400
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Joint Product & By Product By: CA PRAKASH PATEL

Working Notes:
1. Statement of department-wise costs
P Q R S
(₹) (₹) (₹) (₹)
Raw materials 12,68,800
Wages 3,84,000 96,000 64,000 36,000
Overheads 3,07,200 76,800 51,200 28,800
(Apportioned on the basis of
departmental direct wages i.e.
96:24:16:9)
Total Cost 19,60,000 1,72,800 1,15,200 64,800
2. Joint costs and further processing costs
(i) Costs incurred in the department P are joint costs of products A, B and C
and are equal to ₹ 19,60,000.
(ii) Costs incurred in the departments Q, R and S are further processing costs
of products A, B and C respectively. Further processing costs of
products A, B and C thus are ₹ 1,72,800; ₹ 1,15,200 and ₹ 64,800
respectively.
Question-2
A company’s plant processes 1,50,000 kg. of raw material in a month to produce two
products, viz, ‘P’ and ‘Q’. The cost of raw material is ₹ 12 per kg. The processing
costs per month are:

(₹)
Direct Materials 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
The loss in process is 5% of input and the output ratio of P and Q which emerge
simultaneously is 1:2. The selling prices of the two products at the point of split off
are: P ₹ 12 per kg. and Q ₹ 20 per kg. A proposal is available to process P further by
mixing it with other purchased materials. The entire current output of the plant can be
so processed further to obtain a new product ‘S’. The price per kg. of S is ₹ 15 and
each kg of output of S will require one kilogram of input P. The cost of processing
of P into S (including other materials) is ₹ 1,85,000 per month.
You are required to prepare a statement showing the monthly profitability based both
on the existing manufacturing operations and on further processing.
Will you recommend further processing?

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Joint Product & By Product By: CA PRAKASH PATEL
Solution:
Working Notes:
1.
(Kg.)
Material input 1,50,000
Less: Loss of Material in process (5% of 1,50,000 kg.) 7,500
Total output 1,42,500

2. Output of P and Q are in the ratio of 1 : 2 of the total output:

P= 1,42,500 kg x 1 = 47,500 kg
3
Q= 1,42,500 kg x 2 =95,000 kg
3

3. Joint Costs:
(₹)
Material (input) (1,50,000 kg. × ₹ 12) 18,00,000
Direct materials 90,000
Direct Wages 1,20,000
Variable overheads 1,00,000
Fixed overheads 1,00,000
22,10,000
4. Sales Revenue of P, Q and S
P = 47,500 Kg. × ₹ 12 = ₹ 5,70,000
Q = 95,000 Kg. × ₹ 20 = ₹
19,00,000 S = 47,500 Kg. × ₹ 15 = ₹
7,12,500.

5. Apportionment of joint costs viz. ₹ 22,10,000 over P and Q in proportion of

their sales value i.e. ₹ 5,70,000 and ₹ 19,00,000, i.e., 3 : 10 is:

Total P Q
(₹) (₹) (₹)

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Joint Product & By Product By: CA PRAKASH PATEL
Joint cost 22,10,000 5,10,000 17,00,000
apportionment In the (₹ 22,10,000 x 3 ) (₹ 22,10,000 x10 )
ratio of 3 : 10 13 13

6. Total Cost of 47,500 kg. of S = Joint Cost of P + Cost of Processing P into S.

= ₹ 5,10,000 + ₹ 1,85,000 = ₹ 6,95,000.

Statement showing the Monthly Profitability

Based on existing Based on further processing
manufacturing operations of P into S
Products Products
P Q Total S Q Total
Sales quantity (kg.) 47,500 95,000 1,42,500 47,500 95,000 1,42,500
(₹) (₹) (₹) (₹) (₹) (₹)
Sales Revenue 5,70,000 19,00,000 24,70,000 7,12,500 19,00,000 26,12,500
(Working Note 4)
Less: Joint Costs 5,10,000 17,00,000 22,10,000 6,95,000* 17,00,000 23,95,000
(Working Note 5)
Profit 60,000 2,00,000 2,60,000 17,500 2,00,000 2,17,500
*Working Note 6
Recommendation: Further processing of P is not recommended as it results
in a lower profit of P.
Question-3
A company manufactures one main product (M1) and two by-products B1 and B2.
For the month of January 2013, following details are available:
Total Cost upto separation Point ₹ 2,12,400
M1 B1 B2
Cost after separation - ₹ 35,000 ₹ 24,000
No. of units produced 4,000 1,800 3,000
Selling price per unit ₹ 100 ₹ 40 ₹ 30
Estimated net profit as percentage - 20% 30%
to sales value
Estimated selling expenses as 20% 15% 15%
percentage to sales value
There are no beginning or closing inventories.
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Joint Product & By Product By: CA PRAKASH PATEL
Prepare statement showing:
(i) Allocation of joint cost; and
(ii) Product-wise and overall profitability of the company for January 2013.

Solution:
1. Statement showing allocation of Joint Cost
Particulars B1 B2
No. of units Produced 1,800 3,000
Selling Price Per unit (₹) 40 30
Sales Value (₹) 72,000 90,000
Less:Estimated Profit (B1 -20% & B2 -30%) (14,400) (27,000)
Cost of Sales 57,600 63,000
Less: Estimated Selling Expenses (B1 -15% & B2 -15%) (10,800) (13,500)
Cost of Production 46,800 49,500
Less:Cost after separation (35,000) (24,000)
Joint Cost allocated 11,800 25,500
2. Statement of Profitability
Particulars M1 (₹) B1 (₹) B2 (₹)
Sales Value (A) 4,00,000 72,000 90,000
(4,000 × ₹100)
Less:- Joint Cost 1,75,100 11,800 25,500
(2,12,400 -11,800 – 25,500)
- Cost after separation - 35,000 24,000
- Selling Expenses 80,000 10,800 13,500
(M1- 20%, B1-15% & B2-15%)
(B) 2,55,100 57,600 63,000
Profit (A –B) 1,44,900 14,400 27,000
Overall Profit = ₹1,44,900 + ₹14,400 + ₹ 27,000 = ₹ 1,86,300

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Joint Product & By Product By: CA PRAKASH PATEL

Part-B: By Product
A. PAST YEAR EXAM QUESTIONS

Nov-22. Q5(c) (5 marks)

ASR Ltd mainly produces Product 'L' and gets a by-Product 'M' out of a joint process.
The net realizable value of the by-product is used to reduce the joint production costs
before the joint costs are allocated to the main product. During the month of October
2022, company incurred joint production costs of ₹ 4,00,000. The main Product 'L' is not
marketable at the split off point. Thus, it has to be processed further. Details of
company's operation are as under:
Particulars Product L By- Product M
Production (units) 10,000 200
Selling price per kg ₹ 45 ₹5
Further processing cost ₹ 1,01,000 -
You are required to find out:
(i) Profit earned from Product 'L'.
(ii) Selling price per kg of product 'L', if the company wishes to earn a profit of ₹
1,00,000 from the above production.
Solution:
(i) Calculation of profit on product ‘L’
Particular ₹
Sales 4,50,000
Less: Further processing cost (1,01,000)
3,49,000
Less: Joint Production Cost* (3,99,000)
loss (50,000)
*Joint Production Cost = [4,00,000 – (200 × 5)] = 3,99,000

(ii) Calculation of desired selling price of product ‘L’

Desired selling price = Desired Profit + Total Cost
units measured
= 1,00,000+1,01,000+3,99,000 = ₹60 per kg.
10,000
May-16. Q4(a) (8 marks)
A factory producing article A also produces a by-product B which is further processed
into finished product. The joint cost of manufacture is given below:

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Joint Product & By Product By: CA PRAKASH PATEL
Material ₹ 5,000
Labour ₹ 3,000
Overhead ₹ 2,000
₹ 10,000
Subsequent cost in ₹ are given below:
A B
Material 3,000 1,500

Labour 1,400 1,000

Overhead 600 500

5,000 3,000
Selling prices are A ₹ 16,000
B ₹ 8,000
Estimated profit on selling prices is 25% for A and 20% for B.
Assume that selling and distribution expenses are in proportion of sales prices. Show
how you would apportion joint costs of manufacture and prepare a statement showing
cost of production of A and B.
Solution:
Apportionment of Joint Costs
Particulars A (₹) B (₹)
Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of ₹16,000) (20% of ₹ 8,000)
Cost of sales 12,000 6,400
Less: Selling & Distribution exp. 267 133
(Refer working note) (₹ 400 × 2/3) (₹ 400 × 1/3)
Less: Subsequent cost 5,000 3,000

Share of Joint cost 6,733 3,267

So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267

Statement showing Cost of Production of A and B

Elements of cost Joint Cost Subsequent Cost Total Cost
A B A B A B
Material 3,367 1,633 3,000 1,500 6,367 3,133
Labour 2,020 980 1,400 1,000 3,420 1,980
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Joint Product & By Product By: CA PRAKASH PATEL
Overheads 1,346 654 600 500 1,946 1,154
Cost of production 11,733 6,267

Working Note:
Calculation of Selling and Distribution Expenses
Particulars (₹)
Total Sales Revenue (₹ 16,000 + ₹ 8,000) 24,000
Less: Estimated Profit (₹ 4,000 + ₹ 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs (₹ 5,000 + ₹ 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400

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 Service Costing By: CA. PRAKASH PATEL

Chapter. 11: Service Costing

Part-A: Transportation Service

A. QUESTION FROM STUDY MATERIAL

Question-1
A Lorry starts with a load of 20 MT of Goods from Station ‘A’. It unloads 8 MT in
Station ‘B’ and balance goods in Station ‘C’. On return trip, it reaches Station ‘A’ with a
load of 16 MT, loaded at Station ‘C’. The distance between A to B, B to C and C to A
are 80 Kms, 120 Kms and 160 Kms, respectively. COMPUTE “Absolute MT- Kilometer”
and “Commercial MT – Kilometer”.
(MT = Metric Ton or Ton).
Hints: 5,600 MT-km, 5,760 MT-km
Question-2
AXA Passenger Transport Company is running 5 buses between two towns, which are 40
kms apart. Seating capacity of each bus is 40 passengers. Following details are available
from their books, for the month of April 20X9:
Amount (₹)
Salary of Drivers, Cleaners and Conductors 24,000
Salary to Supervisor 10,000
Diesel and other Oil 40,000
Repairs and Maintenance 8,000
Tax and Insurance 16,000
Depreciation 26,000
Interest 20,000
1,44,000
Actual passengers carried were 75% of the seating capacity. All the four
buses run on all days for the month. Each bus made one round trip per day.
CALCULATE cost per passenger – Kilometer.
Hints: Cost per passenger- km = ₹0.40, Passenger- km = 3,60,000

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Question-3
ABC Transport Company has given a route 40 kilometers long to run bus.
(a) The bus costs the company a sum of ₹20,00,000
(b) It has been insured at 3% p.a. and
(c) The annual tax will amount to ₹20,000
(d) Garage rent is ₹20,000 per month.
(e) Annual repairs will be ₹2,04,000
(f) The bus is likely to last for 5 years
(g) The driver’s salary will be ₹30,000 per month and the conductor’s salary will be
₹25,000 per month in addition to 10% of takings as commission [To be shared by
the driver and conductor equally].
(h) Cost of stationery will be ₹1,000 per month.
(i) Manager-cum-accountant’s salary is ₹17,000 per month.
(j) Petrol and oil will be ₹500 per 100 kilometers.
(k) The bus will make 3 up and down trips carrying on an average 40
passengers on each trip.
(l) The bus will run on an average 25 days in a month.
Assuming 15% profit on takings, CALCULATE the bus fare to be charged from each
passenger.
Hints: Fare per passenger = ₹0.9861, passenger- km = 28,80,000 (p.a.)
Question-4
SMC is a public school having five buses each plying in different directions for the
transport of its school students. In view of a larger number of students availing of the bus
service the buses work two shifts daily both in the morning and in the afternoon. The buses
are garaged in the school. The work-load of the students has been so arranged that in the
morning the first trip picks up senior students and the second trip plying an hour later picks
up the junior students. Similarly, in the after- noon the first trip takes the junior students
and an hour later the second trip takes the senior students home.
The distance travelled by each bus one way is 8 km. The school works 25 days in a month
and remains closed for vacation in May, June and December. Bus fee, however, is payable
by the students for all 12 months in a year.
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The details of expenses for a year are as under:

Driver’s salary ₹ 4,500 per month per driver
Cleaner’s salary ₹ 3,500 per month
(Salary payable for all 12 months)
(one cleaner employed for all the five buses)
License fee, taxes, etc. ₹ 8,600 per bus per annum
Insurance ₹ 10,000 per bus per annum
Repairs & maintenance ₹ 35,000 per bus per annum
Purchase price of the bus ₹ 15,00,000 each
Life of each bus 12 years
Scrap value of buses at the end of ₹ 3,00,000
life
Diesel cost ₹ 45.00 per litre
Each bus gives an average mileage of 4 km. per litre of diesel. Seating capacity of each
bus is 50 students.
The seating capacity is fully occupied during the whole year.
Students picked up and dropped within a range up to 4 km. of distance from the school
are charged half fare and fifty per cent of the students travelling in each trip are in this
category. Ignore interest. Since the charges are to be based on average cost you are
required to:
(i) PREPARE a statement showing the expenses of operating a single
bus and the fleet of five buses for a year.
(ii) WORK OUT the average cost per student per month in respect of –
(A) Students coming from a distance of upto 4 km. from the school and
(B) Students coming from a distance beyond 4 km. from the school.
Hints: (i) Cost per month = ₹31,500, ₹1,57,500, No. of Equivalent students = 1,50,750.
(ii) (a) = ₹210, (b) = ₹420.
Question-5
Global Transport Ltd. charges ₹ 90 per ton for its 6-ton truck lorry load from city ‘A’ to
city ‘B’. The charges for the return journey are ₹ 84 per ton. No concession or reduction
in these rates is made for any delivery of goods at intermediate station ‘C’.
In January 20X8, the truck made 12 outward journeys for city ‘B’ with full load out of
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which 2 tons were unloaded twice in the way at city ‘C’. The truck carried a load of 8
tons in its return journey for 5 times but was once caught by police and ₹ 1,200 was paid
as fine. For the remaining trips the truck carried full load out of which all the goods on
load were unloaded once at city ‘C’, but it returned without any load once only from ‘C’
station to ‘A’ station. The distance from city ‘A’ to city ‘C’ and city ‘B’ are 140 km. and
300 km. respectively.
Annual fixed costs and maintenance charges are ₹ 60,000 and ₹ 12,000 respectively.
Running charges spent during January 20X8 are ₹ 2,944.
You are required to FIND OUT the cost per absolute ton-kilometre and the profit for
January, 20X8.
Hints: Monthly cost = ₹8,944, Absolute Ton-km = 44,720, Profit (Jan) = ₹3,224.

Question-6
GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city
B for a particular vendor. It charges ₹ 2,400 per ton from city ‘A’ to city ‘B’ and ₹ 2,200
per ton for the return journey from city ‘B’ to city ‘A’. Goods are also delivered to an
intermediate city ‘C’ but no extra charges are billed for unloading goods in-between
destination city and no concession in rates is given for reduced load after unloading at
intermediate city. Distance between the city ‘A’ to ‘B’ is 300 km and distance from city
‘A’ to ‘C’ is 140 km.
In the month of January, the truck made 12 journeys between city ‘A’ and city ‘B’. The
details of journeys are as follows:
Outward journey No. of journeys Load (in ton)
‘A’ to ‘B’ 10 6
‘A’ to ‘C’ 2 6
‘C’ to ‘B’ 2 4
Return journey No. of journeys Load (in ton)
‘B’ to ‘A’ 5 8
‘B’ to ‘A’ 6 6
‘B’ to ‘C’ 1 6
‘C’ to ‘A’ 1 0

Annual fixed costs and maintenance charges are ₹ 6,00,000 and ₹ 1,20,000 respectively.
Running charges spent during the month of January are ₹ 2,94,400 (includes ₹ 12,400 paid
as penalty for overloading).
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You are required to:

(i) CALCULATE the cost as per (a) Commercial ton-kilometre. (b) Absolute ton-
kilometre
(ii) CALCULATE Net Profit/ loss for the month of January.
Hints:
(ii) (a) ₹7.62 (b) ₹7.65
(ii) (1,200)

TEST YOUR KNOWLEDGE

Question-1
Mr. X owns a bus which runs according to the following schedule:
i) Delhi to Chandigarh and back, the same day.
Distance covered: 250 km. one way.
Number of days run each month : 8
Seating capacity occupied 90%.
ii) Delhi to Agra and back, the same day.
Distance covered: 210 km. one way
Number of days run each month : 10
Seating capacity occupied 85%

iii) Delhi to Jaipur and back, the same da y.

Distance covered: 270 km. one way

Number of days run each month : 6
Seating capacity occupied 100%
iv) Following are the other details:
Cost of the bus ₹ 12,00,000
Salary of the Driver ₹ 24,000 p.m.
Salary of the Conductor ₹ 21,000 p.m.
Salary of the part-time Accountant ₹ 5,000 p.m.
Insurance of the bus ₹ 4,800 p.a.
Diesel consumption 4 km. per litre at ₹ 56 per litre
Road tax ₹ 15,915 p.a.
Lubricant oil ₹ 10 per 100 km.
Permit fee ₹ 315 p.m.

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Repairs and maintenance ₹ 1,000 p.m.

Depreciation of the bus @ 20% p.a.
Seating capacity of the bus 50 persons.
Passenger tax is 20% of the total takings. CALCULATE the bus fare to be charged
from each passenger to earn a profit of 30% on total takings. The fares are to be
indicated per passenger for the journeys:
Delhi to Chandigarh (ii) Delhi to Agra and (iii) Delhi to Jaipur.
Hints:
Fare ₹
Delhi to Chandigarh ₹225
Delhi to Agra ₹189
Delhi to Jaipur ₹243

Question-2
A company is considering three alternative proposals for conveyance facilities for its sales
personnel who has to do considerable traveling, approximately 20,000 kilometres every year.
The proposals are as follows:
(i) Purchase and maintain its own fleet of cars. The average cost of a car is ₹ 6,00,000.
(ii) Allow the Executive use his own car and reimburse expenses at the rate of ₹ 10 per
kilometer and also bear insurance costs.
(iii) Hire cars from an agency at ₹ 1,80,000 per year per car. The company will have to
bear costs of petrol, taxes and tyres.
The following further details are available:
Petrol ₹6 per km. Repairs and maintenance ₹0.20 per km.
Tyre ₹0.12 per km. Insurance ₹ 1,200 per car per annum
Taxes ₹ 800 per car per annum Life of the car: 5 years with annual mileage
of 20,000 km.
Resale value: ₹ 80,000 at the end of the fifth year.
Work out the relative costs of three proposals and rank them.
Hints:
Proposal I II III
Cost/20,0000 km 2,32,400 2,01,200 3,03,200

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B. PAST YEAR EXAM QUESTIONS

Dec-21. Q3(a)-10 marks

Paras Travels provides mini buses to an IT company for carrying its employees from home
to office and dropping back after office hours. It runs a fleet of 8 mini buses for this
purpose. The buses are parked in a garage adjoining the company’s premises. Company is
operating in two shifts (one shift in the morning and one shift in the afternoon). The
distance travelled by each mini bus one way is 30 kms. The company works for 20 days in
a month.
The seating capacity of each mini bus is 30 persons. The seating capacity is normally 80%
occupied during the year. The details of expenses incurred for a year are as under:
Particulars
Driver’s salary ₹ 20,000 per driver per month
Lady attendant’s salary (mandatorily required for ₹ 10,000 per attendant per month
each mini bus)
Cleaner’s salary (One cleaner for 2 mini buses) ₹ 15,000 per cleaner per month
Diesel (Avg. 8 kms per litre) ₹ 80 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ₹ 5,080 per mini bus per month
Garage rent paid ₹ 24,000 per month
Repair & maintenance including engine oil and ₹ 2,856 per mini bus
lubricants (for every 5,760 kms)
Purchase Price of mini bus ₹ 15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual ₹ 3,00,000
life
Paras Travels charges two types of fare from the employees. Employees coming from a
distance of beyond 15 kms away from the office are charged double the fare which is
charged from employees coming from a distance of up-to 15 kms. away from the office.
50% of employees travelling in each trip are coming from a distance beyond 15 kms. from
the office. The charges are to be based on average cost.
You are required to:
(i) Prepare a statement showing expenses of operating a single mini bus for a year,
(ii) Calculate the average cost per employee per month in respect of:
a. Employees coming from a distance upto 15 kms. from the office.
b. Employees coming from a distance beyond 15 kms. from the office.

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Solution:
(i) Statement of Expenses of operating a mini bus in a year
Particulars Rate Per Bus per
(₹) annum (₹)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 p.a. 1,50,000
(B) Maintenance Charges:
Repairs & maintenance including engine 28,560 p.a.
oil and lubricants (Working Note 1)
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960

(ii) Average cost per employee per month:

A. Employee coming from distance of upto 15 km

= Total cost per month
Total no.of equivalent employee
= 1,10,960 = ₹ 1,541.11
72 *
B. Employee coming from a distance beyond 15 km
= 1541.11 × 2 = ₹ 3,082.22

* Considering half fare employees as a base

Full fare employees (12 × 2) 24 employees

Add: Half fare employees (Working Note 3) 12 employees

Total Equivalent number of employees per month 36 employees

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Total Equivalent number of employees per month (morning 72 employees

+ afternoon shift of company)

Working Notes:
1. Calculation of Repairs and maintenance cost of a bus :
Distance travelled in a year:
(4 trip × 2 shifts × 30 km. × 20 days × 12 months) Distance travelled p.a.: 57,600
km.
Repairs and maintenance cost per Bus per annum:
= 57,600 km. x ₹ 2,856 per bus
5,760 km
= ₹ 28,560 per annum

2. Calculation of diesel cost per bus per annum: Distance travelled in a year = 57,600
km
Diesel cost per Bus per annum:
= 57,600 km. x ₹ 80
8 km
= 5,76,000

3. Calculation of equivalent number of employees per bus:

Seating capacity of a bus 30 employees
Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee

[Note: Total Equivalent number of employees per month (morning + afternoon shift
of company can also be calculated considering full fare employees as a base. In that
case the number will be 36. Then fare for employees coming from distance beyond
15km will be 1,10,960 / 36 = ₹ 3,082.22 and employees coming from distance upto
15 km will be 3,082.22 / 2 = ₹ 1,541.11]

Nov-20. Q5(a)-10 marks

SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect tolls. The
company has invested ₹ 900 crore to build the road and has estimated that a total of 120
crore vehicles will be using the highway during the 10 years toll collection tenure. The
other costs for the month of “June 2020” are as follows:
(i) Salary:
• Collection personnel (3 shifts and 5 persons per shift) - ₹ 200 per day per person.
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• Supervisor (3 shifts and 2 persons per shift) - ₹ 350 per day per person.
• Security personnel (2 shifts and 2 persons per shift) - ₹ 200 per day per person.
• Toll Booth Manager (3 shifts and 1 person per shift) - ₹ 500 per day per person.
(ii) Electricity - ₹ 1,50,000
(iii) Telephone - ₹ 1,00,000
(iv) Maintenance cost - ₹ 50 lakhs
(v) The company needs 30% profit over total cost.
Required:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle.
Solution:
Statement of Cost
Particulars (₹)
A. Apportionment ₹ 900crore 1 7,50,00,000
of capital cost ×
10years 12months
B. Other Costs
Salary to Collection (3 Shifts × 5 persons per shift × 30 days 90,000
Personnel × ₹ 200 per day)
Salary to Supervisor (3 Shifts × 2 persons per shift × 30 days 63,000
× ₹ 350 per day)
Salary to Security (2 Shifts × 2 persons per shift × 30 days 24,000
Personnel × ₹ 200 per day)
Salary to Toll Booth (3 Shifts × 1 person per shift × 30 days 45,000
Manager × ₹ 500 per day)
Electricity 1,50,000
Telephone 1,00,000
4,72,000
C. Maintenance cost 50,00,000
Total (A + B + C) 8,04,72,000

(1) Calculation of cost per kilometre:

= Total Cost = ₹ 8,04,72,000
Total km. 120km.
= ₹ 6,70,600

(2) Calculation of toll rate per vehicle:

= Total Cost+ 25% profit = ₹ 8,04,72,000 + ₹ 2,41,41,600 = ₹ 10.46
Vehicles per month 1,00,00,000 vehicles
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Working:
Vehicles per month = Total estimated vehicles × 1 month
10 years 12 months
= 120crore × 1 month = 1 Crore vehicles
10years 12months

May-19. Q4(a)-10 marks

X Ltd. distributes' its goods to a regional dealer using single lorry. The dealer premises
are 40 kms away by road. The capacity of the lorry is 10 tonnes. The lorry makes the
journey twice a day fully loaded on the outward journey and empty on return journey.
The following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ₹ 60 per litre
Engine Oil ₹ 200 per week
Driver's Wages (fixed) ₹ 2,500 per week
Repairs ₹ 600 per week
Garage Rent ₹ 800 per week
Cost of Lorry (excluding cost of tyres) ₹ 9,50,000
Life of Lorry 1,60,000 kms
Insurance ₹ 18,200 per annum
Cost of Tyres ₹ 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ₹ 1,50,000
Vehicle License Cost ₹ 7,800 per annum
Other Overhead Cost ₹ 41,600 per annum
The lorry operates on a 5 day week.
Required:
1. A statement to show the total cost of operating the vehicle for the four week
period analysed into Running cost and Fixed cost.
2. Calculate the vehicle operating cost per km and per tonne km. (Assume 52
weeks in a year)
Solution:
Working Notes:
Particulars For 4 weeks For 1 week (by
dividing by 4)
Total distance travelled (40 k.m × 2 3,200 km 800 km
× 2 trips × 5 days × 4 weeks)
Total tonne km (40 k.m × 10 tonnes × 2 16,000 tonne km 4,000 tonne km
× 5 days × 4 weeks)
(i) Statement showing Operating Cost (Amount in ₹)

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Particulars For 4 For 1 week (by

weeks dividing by 4)

A. Fixed Charges:
Drivers’ wages (₹2,500 4 weeks) 10,000 2,500
Garage rent (₹800 × 4 weeks) 3,200 800
Insurance {(₹18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(₹7,800 ÷ 52 weeks) × 4 weeks} 600 150

Other overheads cost {(₹41,600 ÷ 52 weeks) × 4 3,200 800

weeks}
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × ₹60} 24,000 6,000
Engine Oil (₹200 × 4 weeks)* 800 200
Repairs (₹600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000
₹9,50,000 - ₹1,50,000 x 3200 km
1,60,000km

Depreciation on tyres ₹52,500 x 3,200 km 6,720 1,680

25,000 km
Total (B) 49,920 12,480
C. Total Cost (A + B) 68,320 17,080
*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates
these with time i.e. in weeks instead of running of vehicle.
(ii) Calculation of vehicle operating cost:
Operating cost per k.m. = ₹ 68,320 or ₹ 17,080 = ₹ 21.35
3,200 kms 800 Kms
Operating cost per Tonne-k.m. = ₹ 68,320 or ₹ 17,080 = ₹ 4.27
16,000 4,000

Nov-18. Q4(b)-10 marks

M/s XY Travels has been given a 25 km. long route to run an air- conditioned Mini
Bus. The cost of bus is ₹ 20,00,000. It has been insured @3% premium per annum
while annual road tax amounts to ₹ 36,000. Annual repairs will be ₹ 50,000 and the bus
is likely to last for 5 years. The driver's salary will be ₹2,40,000 per annum and the
conductor's salary will be ₹ 1,80,000 per annum in addition to 10% of the takings as
commission (to be shared by the driver and the conductor equally). Office and
administration overheads will be ₹ 18,000 per annum. Diesel and oil will be ₹ 1,500 per
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100 km. The bus will make 4 round trips carrying on an average 40 passengers on each
trip.
Assuming 25% profit on takings and considering that the bus will run on an average
25 days in a month, you are required to:
(i) prepare operating cost sheet (for the month).
(ii) calculate fare to be charged per passenger km.
Solution:
1. Statement showing the Operating Cost per Passenger-km.
Yearly (₹) Monthly (₹)
(A) Standing Charges:
Insurance Charge ₹. 20,00,000 × 3% 60,000 5,000
Road Tax 36,000 3,000
Depreciation (20,00,000/5) 4,00,000 33,333.33
Total 4,96,000 41,333.33
(B) Maintenance Charges:
Annual Repairs 50,000 4166.67
Office and administration overheads 3,18,000 26,500
Total 3,68,000 30666.67
(C) Running Cost/Charges:
Driver’s Salary 2,40,000 20,000
Conductor’s Salary 1,80,000 15,000
Diesel & Oil 60,000 × 1,500 9,00,000 75,000
100
Total 13,20,000 41,333.33
Total (A+B+C) Cost before commission and 21,84,000 1,82,000
profit
Commission (33,60,000 × 10%) (working note 3,36,000 28,000
2)
Profit (33,60,000 × 25% ) (working note 2) 8,40,000 70,000
Takings (working note 1) 33,60,000 2,80,000
Total Collection/Takings
2. Fare per Passenger-km. =
Total Passenger-km (Working note 3)
= 33,60,000 = ₹1.40
24,00,000
OR
Fare per Passenger-km. (monthly) = 2,80,000 = ₹1.40
2,00,000

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May-22. Q1(d)-5 marks

Coal is transported from two mines X & Y and unloaded at plots in a railway station. X
is at distance of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet
of lorries having carrying capacity of 4 tonnes is used to transport coal from the mines.
Records reveal that average speed of the lorries is 40 kms per hour when running and
regularly take 15 minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading
time is 25 minutes per load.
Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. ₹ 12 per hour Operated Fuel, oil
tyres, repairs and maintenance, etc. ₹ 1.60 per km
You are required to prepare a statement showing the cost per tonne kilometre of carrying
coal from each mine 'X' and 'Y'.
Solution:
Statement showing the cost per tonne-kilometre of carrying mineral from each
mine

Mine X (₹) Mine Y (₹)

Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance andtaxes)

X: 1 hour 30 minutes @ ₹ 12 per hour 18.00

Y: 1 hour 40 minutes @ ₹ 12 per hour 20.00
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
X: 30 km. ₹ 1.60 per km. 48.00
Y: 40 km. ₹ 1.60 per km. 64.00
Total cost per trip (₹) 66.00 84.00
Cost per tonne – km (Refer to working note 2) 1.1 1.05

₹ 66 ₹ 84
60 tonne - km 80 tonne - km

Working notes:

Mine- X Mine- Y

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(1) Total operated time taken pertrip

Running time to & fro 45 minutes 60 minutes

60 minutes 60 minutes
30 km.× 40 km. x
40 km. 40 km.

Un-loading time 15 minutes 15 minutes

Loading time 30 minutes 25 minutes
Total operated time 90 minutes or 100 minutes or
1 hour 30 minutes 1 hour 40 minutes
(2) Effective tones – km. 60 80
(4 tonnes × 15 km.) (4 tonnes × 20 km.)

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in
different directions for transport of customer's goods. The trucks run loaded with
goods and return empty. The distance travelled, number of trips made and the load
carried per day by each truck are as under:
Truck One way Distance No. of trips per Load carried per
No. Km day trip / day tonnes
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two
years is as under
Year Total distance travelled Maintenance Cost ₹
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the year under review:
Diesel ₹ 10 per litre. Each litre gives 4 km per litre of diesel
on an average.
Driver's salary ₹ 2,000 per month
Licence and taxes ₹ 5,000 per annum per truck
Insurance ₹ 5,000 per annum for all the three vehicles
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Purchase Price per ₹ 3,00,000, Life 10 years. Scrap value at the end of life
truck is
₹ 10,000.
Oil and sundries ₹ 25 per 100 km run.
General Overhead ₹ 11,084 per annum
The vehicles operate 24 days per month on an average.
Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on
freight.
Solution:
1. Annual Cost Statement of three vehicles
(₹)
Diesel {(1,34,784 km. ÷ 4 km) × ₹ 10) (Refer to Working Note 1) 3,36,960
Oil & sundries {(1,34,784 km. ÷ 100 km.) × ₹ 25} 33,696
Maintenance {(1,34,784 km. × ₹ 0.25) + ₹ 6,000} 39,696
(Refer to Working Note 2)
Drivers' salary {(₹ 2,000 × 12 months) × 3 trucks} 72,000
Licence and taxes (₹ 5,000 × 3 trucks) 15,000
Insurance 5,000
Depreciation {(₹ 2,90,000 ÷ 10 years) × 3 trucks} 87,000
General overhead 11,084
Total annual cost 6,00,436

2. Cost per km. run

Total annual cost of vehicles (refer to working note 1)
Cost per kilometer run =
Total kilometre travelled annually
= ₹6,00,436 = ₹4.4548
1,34,784 kms
3. Freight rate per tonne km (to yield a profit of 10% on freight)
Total annual cos t of three vehicles (refer working note 1)
Cost per tonne km. =
Total effective tonnes kms. Per annum
= ₹6,00,436 = ₹1.143
5,25,312 kms
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Freight rate per tonne km. = (₹1.143/0.9) / 1 = ₹1.27

Working notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by three
trucks in one year

Truck One way No. of Total Load Total

number distance trips distance carried effective
in kms covered per trip / tonnes
in km per day in km
day tonnes
1 16 4 128 6 384
2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1,824

Total kilometre travelled by three trucks in one year (468 km. × 24 days ×
12 months) = 1,34,784

Total effective tonnes kilometre of load carried by three trucks during one
year (1,824 tonnes km. × 24 days × 12 months) = 5,25,312
Fixed and variable component of maintenance cost:
Difference in maintenance cost
Variable maintenance cost per km=
Difference in distance travelled
= ₹46,050 - ₹45,175
1,60,200 kms – 1,56,700 kms
= ₹0.25

Fixed maintenance cost = Total maintenance cost–Variable maintenance cost

= ₹ 46,050 – 1,60,200 kms × ₹ 0.25 = ₹ 6,000

Question-2
A transport company has been given a 40 kilometre long route to run 5 buses.
The cost of each bus is ₹ 6,50,000. The buses will make 3 round trips per day
carrying on an average 80 percent passengers of their seating capacity. The
seating capacity of each bus is 40 passengers. The buses will run on an average
25 days in a month. The other information for the year 2013-14 are given below:
Garage rent ₹ 4,000 per month
Annual repairs and maintenance ₹ 22,500each bus
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Salaries of 5 drivers ₹ 3,000 each per month

Wages of 5 conductors ₹ 1,200 each per month
Manager’s salary ₹ 7,500 per month
Road tax, permit fee, etc. ₹ 5,000 for a quarter
Office expenses ₹ 2,000 per month
Cost of diesel per litre ₹ 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost
You are required to calculate the bus fare to be charged from each passenger per
kilometre, if the company wants to earn profits of 331/3 percent on taking (total
receipts from passengers).
Solution:
Operating Cost Sheet for the year 2013- 14
Particulars Total Cost (₹)
A. Fixed Charges:
Garage rent (₹4,000 × 12 months) 48,000
Salary of drivers (₹3,000 × 5 drivers ×12 months) 1,80,000
Wages of Conductors (₹1,200 × 5 conductors × 12 months) 72,000
Manager’s salary (₹ 7,500 × 12 months) 90,000
Road Tax, Permit fee, etc. (₹ 5,000 × 4 quarters) 20,000
Office expenses (₹ 2,000 × 12 months) 24,000
Insurance (₹ 6,50,000 × 5 buses × 3%) 97,500
Total (A) 5,31,500
B. Variable Charges:
Repairs and Maintenance (₹ 22,500 × 5 buses) 1,12,500
Depreciation (₹ 6,50,000 × 5 buses × 15%) 4,87,500
Diesel {(3,60,000 km. ÷ 6 km.) × ₹33} 19,80,000
Total (B) 25,80,000
Total Cost (A+B) 31,11,500
Add: 33 1/3 % Profit on takings or 50% on cost 15,55,750
Total Takings (Total bus fare collection) 46,67,250
Total Passenger-km. (Working Note 2) 1,15,20,000
Bus fare to be charged from each passenger per km. 0.405
Working Notes:
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1. Total Kilometres to be run during the year 2013-14

= 40 km.× 2 sides × 3 trips × 25 days × 12 months × 5 buses
= 3, 60,000 Kilometres
2. Total passenger Kilometres
= 3,60,000 km. × 40 passengers × 80% = 1,15,20,000 Passenger- km.

Question-3
The following information relates to a bus operator:
Cost of the bus ₹ 18,00,000
Insurance charges 3% p.a.
Manager-cum accountant's salary ₹ 8,000 p.m.
Annual Tax ₹ 50,000
Garage Rent ₹ 2,500 p.m.
Annual repair & maintenance ₹ 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ₹ 1,20,000
Driver's salary ₹ 15,000 p.m.
Conductor's salary ₹ 12,000 p.m.
Stationery ₹ 500 p.m.
Engine oil, lubricants (for 1200 km.) ₹ 2,500
Diesel and oil (for 10 km.) ₹ 52
Commission to driver and conductor (shared 10% of
equally) collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 40 passengers
in each trip. Assume 15% profit on collections. The bus will work on the
average 25 days in a month.
Calculate fare for passenger-km
Solution:
Working Notes:
1. Calculation of Depreciation of Bus (Per month)
= Cost of the bus – Scrap value at the end of the15 years
Expected life of the bus

= ₹ 18,00,000 - ₹1,20,000
15 years

= ₹1,12,000 p.a.
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Depreciation per month = ₹1,12,000 = ₹9,333.33

12 months
2. Calculation of total distance travelled and Passenger-km. per month
Total distance = 3 trips × 2 × 20 k.m. × 25 days = 3,000 k.m.

Total Passenger-km. = 3 trips × 2 × 20 k.m. × 25 days × 40 passengers

= 1,20,000 Passenger-k.m.

3. Cost of Engine oil, Lubricants and Diesel & oil (Per month)
Engine oil & lubricants = Total distance travelled x ₹2,500
1,200 km

= 3,000 km x ₹2,500 = ₹6,250

1,200 km
Diesel and oil = Total distance travelled x ₹52
10 km
= 3,000 km x ₹52 = ₹15,600
10 km
Statement showing the Operating Cost per Passenger-km.
(₹) (₹)
(i) Standing Charges:
Depreciation {Working Note- (i)} 9,333.33
4,500
Insurance Charge ( ₹18,00,000/12) × 3%
Manager-cum-accountant’s salary 8,000
Annual Tax (p.m.) (₹50,000/ 12) 4,166.67
2,500 28,500
Garage Rent
(ii) Maintenance Charges:
12,500
Repair & Maintenance per month (₹1,50,000/12)
(iii) Running Cost:
Driver’s Salary 15,000
Conductor’s Salary 12,000
Stationery 500
Engine oil & Lubricants {Working Note- 6,250
(iii)} Diesel and oil {Working Note- (iii)} 15,600

Total running cost before deducting commission to

driver and conductor 49,350
49,350
Total cost excluding commission to driver
and conductor 90,350
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Driver’s commission on collection* 6,023.34

Conductor’s commission on collection* 6,023.33
Total Cost (i) +(ii) + (iii) 1,02,396.67
Add: Profit ** 18,070
Total collection 1,20,466.67

Working Note:
Total costs before commission on collection and net profit is ₹ 90,350.
Commission on collection to driver and conductor is 10% of collection and
Profit is 15% of collection means
100% - (10% + 15%) i.e. 75% = ₹ 90,350

So, Total collection = ₹90,350 / 75 *100 = ₹1,20,466.67

*Total Commission on collection = 10% × ₹ 1,20,466.67 = ₹ 12,046.67
Driver’s share = 50% × ₹ 12,046.67 = 6,023.34
Conductor’s share = 50% × ₹ 12,046.67 = 6,023.33
** Profit on collection = ₹ 1,20,466.67 × 15% = ₹ 18,070
Fare per Passenger-km. = Total collection
Total passengers – km (working note (ii)
= ₹1,20,466.67
1,20,000
= ₹1.004 (approx.)

Question – 4
A mini-bus, having a capacity of 32 passengers, operates between two places - 'A'
and 'B'. The distance between the place 'A' and place 'B' is 30 km. The bus makes 10
round trips in a day for 25 days in a month. On an average, the occupancy ratio is 70%
and is expected throughout the year.
The details of other expenses are as under:
Amount (₹)
Insurance 15,600 Per annum
Garage Rent 2,400 Per quarter
Road Tax 5,000 Per annum
Repairs 4,800 Per quarter
Salary of operating staff 7,200 Per month
Tyres and Tubes 3,600 Per quarter
Diesel: (one litre is consumed for every 5 km) 13 Per litre
Oil and Sundries 22 Per 100 km run
Depreciation 68,000 Per annum
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Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit
of 25% on total taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger
kilometer and one way fare per passenger.

Solution:
Operating Cost Statement

Particulars Total Cost Per

annum (₹)
A. Fixed Charges:
Insurance 15,600
Garage rent (₹ 2,400 × 4 quarters) 9,600
Road Tax 5,000
Salary of operating staff (₹ 7,200 × 12 months) 86,400
Depreciation 68,000

Total (A) 1,84,600

B. Variable Charges:
Repairs (₹ 4,800 × 4 quarters) 19,200
Tyres and Tubes (₹ 3,600 × 4 quarters) 14,400
Diesel {(1,80,000 km. ÷ 5 km.) × ₹13} 4,68,000
Oil and Sundries {(1,80,000 km. ÷ 100 km.) × ₹22} 39,600

Total (B) 5,41,200

Total Operating Cost (A+B) 7,25,800

Add: Passenger tax (Refer to WN-1) 3,01,275
Add: Profit (Refer to WN-1) 3,42,359

Total takings 13,69,434

Calculation of Cost per passenger kilometre and one way fare per passenger:

Cost per Passenger-Km. = Total operating cost

Total passengers – km

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= ₹7,25,800 = ₹0.18
40,32,000 passeners - km

One way fare per passenger = Total takings x 30km.

Total passengers –km

= ₹13,69,434 x 30 km = ₹10.20
40,32,000 passengers – km
Working Notes:
1. Let total taking be X then Passenger tax and profit will be as follows:
X = ₹ 7,25,800 + 0.22 X + 0.25X
X – 0.47 X = ₹ 7,25,800
X = ₹7,25,800/0.53 = ₹13,69,434
Passenger tax = ₹ 13,69,434 × 0.22 = ₹
3,01,275 Profit = ₹ 13,69,434 × 0.25 = ₹
3,42,359

2. Total Kilometres to be run during the year

= 30 km.× 2 sides × 10 trips × 25 days × 12 months = 1,80,000 Kilometres

3. Total passenger Kilometres
= 1,80,000 km. × 32 passengers × 70% = 40,32,000 Passenger- km.

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Part-B: Hotel and Lodges Services

A. QUESTION FROM STUDY MATERIAL

Question-7
A company runs a holiday home. For this purpose, it has hired a building at a rent of
₹10,000 per month along with 5% of total taking. It has three types of suites for its
customers, viz., single room, double rooms and triple rooms.
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that
of triple rooms suite as twice of the double rooms suite.
The other expenses for the year 20X8 are as follows:
(₹)
Staff salaries 14,25,000
Room attendants’ wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to CALCULATE the rent to be charged for each type of suite.
Hints: Single room = ₹33.73, Double Room = ₹84.33, Triple room = ₹168.65

Question-8
A lodging home is being run in a small hill station with 100 single rooms. The home offers
concessional rates during six off- season months in a year. During this period, half of the
full room rent is charged. The management’s profit margin is targeted at 20% of the room
rent. The following are the cost estimates and other details for the year ending on 31st
March 20X7. [Assume a month to be of 30 days].
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(i) Occupancy during the season is 80% while in the off- season it is 40% only.
(ii) Total investment in the home is ₹200 lakhs of which 80% relate to
buildings and balance for furniture and equipment.
(iii) Expenses:
o Staff salary [Excluding room attendants] : ₹ 5,50,000
o Repairs to building : ₹ 2,61,000
o Laundry charges : ₹ 80, 000
o Interior : ₹ 1,75,000
o Miscellaneous expenses : ₹ 1,90,800
(iv) Annual depreciation is to be provided for buildings @ 5% and on furniture and
equipment @ 15% on straight-line basis.
(v) Room attendants are paid ₹ 10 per room day on the basis of occupancy of the rooms
in a month.
(vi) Monthly lighting charges are ₹ 120 per room, except in four months in winter when
it is ₹ 30 per room.
You are required to Work out the room rent chargeable per day both during the season and
the off-season months on the basis of the foregoing information.
Hints: Rent during season = ₹204.50,
Rent during off season = ₹102.25, Total rent = ₹36,81,000.

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Part-C: Hospital

Question-9
ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35
beds and 5 more beds can be added, if required.
Rent per month - ₹ 75,000
Supervisors – 2 persons – ₹ 25,000 Per
month – each Nurses – 4 persons – ₹
20,000 per month – each Ward Boys – 4
persons – ₹ 5,000 per month – each
Doctors paid ₹ 2,50,000 per month – paid on the basis of number of patients attended and
the time spent by them
Other expenses for the year are as follows:
Repairs (Fixed) – ₹ 81,000
Food to Patients (Variable) – ₹ 8,80,000
Other services to patients (Variable) – ₹ 3,00,000
Laundry charges (Variable) – ₹ 6,00,000
Medicines (Variable) – ₹ 7,50,000
Other fixed expenses – ₹10,80,000
Administration expenses allocated – ₹ 10,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25
beds are occupied.
The hospital hired 750 beds at a charge of ₹ 100 per bed per day, to accommodate the flow
of patients. However, this does not exceed more than 5 extra beds over and above the
normal capacity of 35 beds on any day.
You are required to –
(a) CALCULATE profit per Patient day, if the hospital recovers on an average
₹ 2,000 per day from each patient
(b) FIND OUT Breakeven point for the hospital.
Hints: (a) ₹55,34,000, (b) 3741 patient days

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B. PAST YEAR EXAM QUESTIONS

Jan-21. Q5(a)-10 marks

ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a
building at a rent of ₹ 50,000 per month with the agreement to bear the repairs and
maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when
the situation demands. Though the unit is open for patients all the 365 days in a year,
scrutiny of accounts for the year 2020 reveals that only for 120 days in the year, the unit
had the full capacity of 100 patients per day and for another 80 days, it had, on an average
only 40 beds occupied per day. But, there were occasions when the beds were full, extra
beds were hired at a charge of ₹ 50 per bed per day. This did not come to more than 5 beds
above the normal capacity on any one day. The total hire charges for the extra beds incurred
for the whole year amounted to ₹ 20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were
paid on the basis of the number of patients attended and time spent by them which on an
average worked out to ₹ 30,000 per month in the year 2020.
The permanent staff expenses and other expenses of the unit were as follows:
₹
2 Supervisors each at a per month salary of 5,000
4 Nurses each at a per month salary of 3,000
2 Ward boys each at a per month salary of 1,500
Other Expenses for the year were as under:
Repairs and Maintenance 28,000
Food supplied to patients 4,40,000
Caretaker and Other services for patients 1,25,000
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of 75,000
patients
General Administration Charges allocated to the unit 71,000

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Required:
(i) What is the profit per patient day made by the unit in the year 2020, if the unit
recovered an overall amount of ₹ 200 per day on an average from each patient.
(ii) The unit wants to work on a budget for the year 2021, but the number of patients
requiring medical care is a very uncertain factor. Assuming that same revenue and
expenses prevail in the year 2021 in the first instance, work out the number of
patient days required by the unit to break even.
Solution:
Workings:
Calculation of number of Patient days
100 Beds × 120 days = 12000
40 Beds × 80 days = 3,200
Extra beds = 400
Total = 15,600

(i) Statement of Profitability

Particulars Amount (₹) Amount (₹)

Income for the year (₹ 200 per patient per day × 31,20,000
15,600 patient days)
Variable Costs:
Doctor Fees (₹ 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (₹ 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (₹ 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ₹ 5,000 × 12) 1,20,000
Nurses (4 persons × ₹ 3,000 × 12) 1,44,000

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Ward Boys (2 persons x ₹ 1500 x12) 36,000

Repairs (Fixed) 28,000
Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000

Calculation of Contribution and profit per Patient day

Total Contribution = ₹ 17,55,000
Total Patient days = 15,600 days
Contribution per Patient day = ₹ 17,55,000 / 15,600 days = ₹ 112.50
Total Profit = ₹ 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = ₹ 6,81,000 / 15,600 days = ₹ 43.65

(ii) Breakeven Point = Fixed Cost / Contribution per Patient day

= ₹ 10,74,000 / ₹ 112.50
= 9,547 patient days

Nov-19. Q3(a)-10 marks

(i) A hotel is being run in a Hill station with 200 single rooms. The hotel offers
concessional rate during six off-season months in a year. During this period, half of
the full room rent s charged. The management’s profit margin is targeted at 20% of
the room rent. The following are the cost estimates and other details for the year
ending 31st march,2019:
1. Occupancy during the season is 80% while in the off-season it is 40%.
2. Total investments in the hotel is ₹300 lakhs of which 80% relates to buildings
and the balances to furniture and other equipment.
3. Room attendants are paid ₹15 per room per day on the basis of occupancy of
rooms in a month.
4. Expenses:
a. Staff salary (excluding that of room attendants) ₹8,00,000
b. Repairs to Buildings ₹3,00,000
c. Laundry charges ₹1,40,000
d. Interior charges ₹2,50,000
e. Misc. Exp. ₹2,00,000
5. Annual depreciation is to be provided on Building @5% and 15% on Furniture
and other Equipment on Straight line method.
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6. Monthly lighting charges are ₹110, except in four months in winter when it is
30 per room and this cost is on the basis of full occupancy for a month.
You are required to workout room rent chargeable per day both during the season
and the off-season months using the foregoing information.
(assume a month to be 30 days and winter season is to be considered as a part off-
season).
Solution:
Working Notes:
(i) Total Room days in a year

Season Occupancy (Room-days) Equivalent Full Room

charge days
Season – 80% 200 Rooms × 80% × 6 28,800 Room Days × 100%
Occupancy months × 30 days in a = 28,800
month = 28,800 Room Days
Off-season – 40% 200 Rooms × 40% × 6 14,400 Room Days × 50%
Occupancy months × 30 days in a = 7,200
month = 14,400 Room Days
Total Room Days 28,800 + 14,400 = 43,200 36,000 Full Room days
Room Days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is ₹110 per month and during
winter season of 4 months it is ₹30 per month. Further it is also given that peak season is
6 months and off season is 6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off
season. Hence, the non-winter season of 8 months include – Peak season of 6 months and
Off season of 2 months.

Accordingly, the lighting charges are calculated as follows:

Season Occupancy (Room-days)
Season & Non-winter – 80% 200 Rooms × 80% × 6 months × ₹ 110 per
Occupancy month = ₹ 1,05,600
Off- season & Non-winter – 200 Rooms × 40% × 2 months × ₹110 per
40% Occupancy (8 – 6 months) month = ₹ 17,600
Off- season & -winter – 40% 200 Rooms × 40% × 4 months × ₹ 30 per
Occupancy months) month = ₹ 9,600
Total Lighting charges ₹ 1,05,600+ ₹ 17,600 + ₹ 9,600 = ₹ 132,800

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Statement of total cost:

(₹)
Staff salary 8,00,000
Repairs to building 3,00,000
Laundry 1,40,000
Interior 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation on Building (₹ 300 Lakhs × 80% × 5%) 12,00,000
Depreciation on Furniture & Equipment (₹ 300 Lakhs × 20% × 15%) 9,00,000
Room attendant’s wages (₹ 15 per Room Day for 43,200 RoomDays) 6,48,000

Lighting charges 1,32,800

Total cost 45,71,000
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,750

Calculation of Room Rent per day:

Total Rent / Equivalent Full Room days = ₹ 57,13,750/ 36,000 = ₹ 158.72
Room Rent during Season – ₹ 158.72
Room Rent during Off season = ₹ 158.72 × 50% = ₹ 79.36

May-18. Q4(b)-10 marks

A group of 'Health Care Services' has decided to establish a Critical Care Unit in a
metro city with an investment of ₹ 85 lakhs in hospital equipments. The unit's capacity
shall be of 50 beds and 10 more beds, if required, can be added.
Other information for a year are as under:
(₹)
Building Rent 2,25,000 per month
Manager Salary (Number of Manager-03) 50,000 per month to each one
Nurses Salary (Number of Nurses-24) 18,000 per month to each Nurse
Ward boy’s Salary (Number of ward boys’ - 9,000 per month per person
24)
Doctor’s payment (Paid on the basis of 5,50,000 per month
number
of patients attended and time spent by them)
Food and laundry services (variable) 39,53,000
Medicines to patients (variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year
Depreciation on equipments 15% per annum on original cost
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It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds
were occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of ₹ 950 per bed to accommodate the flow of
patients. However, this never exceeded the normal capacity of 50 beds on any day.
Find out:
1. Profit per patient day, if hospital charges on an average ₹ 2,500 per day from each
patient.
2. Breakeven point per patient day (Make calculation on annual basis).
Solution:
Number of Patient Days = (200x50) + (105x30) + (60x20)
=14,350 patient days + 250 = 14,600
Statement Showing Profit
Elements of Cost and Revenue Total (₹)
A. Revenue (14,600 x ₹ 2,500) 3,65,00,000
B. Variable Costs
Food and Laundry Service 39,53,000
Medicines to Patients 22,75,000
Doctor’s Payment 66,00,000
Hire Charges of Bed (250 x ₹ 950) 2,37,500
Total Variable Cost 1,30,65,500
C. Fixed Costs
Building Rent 27,00,000
Manager’s Salary (₹ 50,000 x 3 x 12) 18,00,000
Nurse’s Salary (₹ 18,000 x 12 x 24) 51,84,000
Ward boy’s Salary (₹ 9,000 x 12 x 24) 25,92,000
Administrative Overheads 28,00,000
Depreciation on Equipment’s 12,75,000
1,63,51,000
D. Total Cost (B+C) 2,94,16,500
E. Profit (A-D) 70,83,500
Profit per patient day = ₹ 70,83,500/14,600 = ₹ 485.17
(i) Contribution (per patient day) = (₹ 3,65,00,000 – ₹ 1,30,65,500)/ 14,600
= ₹ 1,605.10
BEP = 1,63,51,000/1,605.10 = 10,186.90 or say 10,187 patient days
Notes:
1. Higher Charges for extra beds are a semi variable cost; still, for the sake of convenience
it has been considered a variable cost.

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2. Assumed, the hospital hired 250 beds at a charge of ₹ 950 per bed to accommodate the
flow of patients. However, this never exceeded the 10 beds above the normal capacity
of 50 beds on any day.
3. The fees were paid based on the number of patients attended to and the time spent by
them, which on an average worked out to ₹ 5,50,000 p.m.

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Part-D: Miscellaneous

Question-10 (I.T.)
Following are the data pertaining to Infotech Pvt. Ltd, for the year 20X8-X9

Amount (₹)
Salary to Software Engineers (5 persons) 15,00,000
Salary to Project Leaders (2 persons) 9,00,000
Salary to Project Manager 6,00,000
Repairs & maintenance 3,00,000
Administration overheads 12,00,000

The company executes a Project XYZ, the details of the same as are as follows:
Project duration – 6 months
One Project Leader and three Software Engineers were involved for the entire duration
of the project, whereas Project Manager spends 2 months’ efforts, during the execution
of the project.
Travel expenses incurred for the project – ₹1,87,500
Two Laptops were purchased at a cost of ₹ 50,000 each, for use in the project and the life
of the same is estimated to be 2 years
PREPARE Project cost sheet
Hints: Total project cost = ₹13,75,000

Question-11 (Toll Road)

BHG Toll Plaza Ltd built a 60 km. long highway and now operates a toll plaza to collect
tolls from passing vehicles using the same. The company has invested ₹600 crore to build
the road and has estimated that a total of 60 crore vehicles will be using the highway during
the 10 years toll collection tenure. Toll Operating and Maintenance cost for the month of
April 20X9 are as follows:
(i) Salary to –
➢ Collection Personnel (3 Shifts and 4 persons per shift) - ₹150 per day per person
➢ Supervisor (2 Shifts and 1 person per shift) - ₹ 250 per day per person

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➢ Security Personnel (3 Shifts and 2 persons per shift) - ₹150 per day per person
➢ Toll Booth Manager (2 Shifts and 1 person per shift) - ₹400 per day per person
(ii) Electricity – ₹ 80,000
(iii) Telephone – ₹ 40,000
(iv) Maintenance cost – ₹ 30 Lacs
(v) The company needs 25% profit over total cost to cover interest and
other costs.
Required:
(i) CALCULATE cost per kilometer.
(ii) CALCULATE the toll rate per vehicle (assume there is only type of vehicle).
Hints: (i) ₹8,87,333.33, (ii) ₹13.31

Question-12 (Financial Institutes)

The loan department of a bank performs several functions in addition to home loan
application processing task. It is estimated that 25% of the overhead costs of loan
department are applicable to the processing of home-loan application. The following
information is given concerning the processing of a loan application:
Direct professional labor:
(₹)
Loan processor monthly salary: (4 employees @ ₹ 60,000 each) 2,40,000
Loan department overhead costs (monthly)
Chief loan officer’s salary 75,000
Telephone expenses 7,500
Depreciation Building 28,000
Legal advice 24,000
Advertising 40,000
Miscellaneous 6,500
Total overhead costs 1,81,000
You are required to COMPUTE the cost of processing home loan application on the
assumption that five hundred home loan applications are processed each month.
Hints: Processing cost per loan = ₹570.5

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Question-13 (Power House)

From the following data pertaining to the year 20X8-X9 Prepare a cost statement
showing the cost of electricity generated per kWh by Chambal Thermal Power Station.
Total units generated 10,00,000 kWh

Amount (₹)
Operating labour 15,00,000
Repairs & maintenance 5,00,000
Lubricants, spares and stores 4,00,000
Plant supervision 3,00,000
Administration overheads 20,00,000
5 kWh. of electricity generated per kg of coal consumed @ ₹4.25 per kg. Depreciation
charges @ 5% on capital cost of ₹ 2,00,00,000.
Hints: Total Cost per kwh = ₹6.55

Question-14 (Educational Institute)

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

Other information:

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(i)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinationsin 2 2 2 2
a year
Time spent at library 180 hours 120 hours 240 hours 60 hours
by students per year
Time spent by 208 hours 312 hours 480 hours 1,400 hours
principal for
administration
Teachers for 11 & 12 4 5 6 10
standard
(ii) One teacher who teaches economics for Arts stream students also teaches
commerce stream students. The teacher takes 1,040 classes in a year, it includes
208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students
also teaches business mathematics to commerce stream students. She takes 1,100
classes a year, it includes 160 classes for commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate
their 15% time for higher secondary section.
(v) All school students irrespective of section and age participates in annual functions
and sports activities.
Required:
a) CALCULATE cost per student per annum for all three streams.
b) If the management decides to take uniform fee of ₹ 1,000 per month from all
higher secondary students, CALCULATE stream wise profitability.
c) If management decides to take 10% profit on cost, COMPUTE fee to be charged
from the students of all three streams respectively.
Hints:
a)
Particulars Arts (₹) Commerce Science Total (₹)
(₹) (₹)
Cost per student per 17,397 9,533 19,238 13,610
annum

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b)
Particulars Arts Commerce Science Total
(₹) (₹) (₹) (₹)
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)
c)
Particulars Arts Commerce Science
(₹) (₹) (₹)
Cost per student per annum 17,397 9,533 19,238
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764

Question-15 (Insurance Company)

Sanziet Lifecare Ltd. operates in life insurance business. Last year it launched a new term
insurance policy for practicing professionals ‘Professionals Protection Plus’. The
company has incurred the following expenditures during the last year for the policy:
₹
Policy development cost 11,25,000
Cost of marketing of the policy 45,20,000
Sales support expenses 11,45,000
Policy issuance cost 10,05,900
Policy servicing cost 35,20,700
Claims management cost 1,25,600
IT cost 74,32,000
Postage and logistics 10,25,000
Facilities cost 15,24,000
Employees cost 5,60,000
Office administration cost 16,20,400
Number of policy sold- 528
Total insured value of policies- ₹ 1,320 crore
Required:
(i) CALCULATE total cost for Professionals Protection Plus’ policy segregating the
costs into four main activities namely (a) Product development, Marketing and
Sales support, (b) Operations, (c) IT and (d) Support functions.
(ii) CALCULATE cost per policy.

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(iii) CALCULATE cost per rupee of insured value.

Hints:
(i)
Particulars Amount (₹) Amount (₹)
1. Product Development, Marketing
and Sales Support:
- Policy development cost 11,25,000
- Cost of marketing 45,20,000
- Sales support expenses 11,45,000 67,90,000
2. Operations:
- Policy issuance cost 10,05,900
- Policy servicing cost
35,20,700
- Claims management cost
1,25,600 46,52,200
3. 74,32,000
IT Cost
4. Support functions
- Postage and logistics 10,25,000
- Facilities cost 15,24,000
- Employees cost 5,60,000
- Office administration cost 16,20,400 47,29,400
Total Cost 2,36,03,600
(ii) ₹ 44,703.79
(iii) ₹ 0.0018

Question-16 (New Course Material)

Solar Power Ltd. has a power generation capacity of 1000 Megawatt per day. On an
average it operates at 85% of its installed capacity. The cost structure of the plant is as
under:
Cost particulars Amount (₹ in Lakh)
1. Employee cost per year 2500
2. Solar panel maintenance cost per year 250
3. Site maintenance cost per year 150
4. Depreciation per year 5940
CALCULATE cost of generating 1kW of power.
[ 1 Megawatt = 1,000 kW]

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Hints:
Cost of 1 kW (₹) 2.849

TEST YOUR KNOWLEDGE

Question-3 (Toll-fee)
SLS Infrastructure built and operates 110 k.m. highway on the basis of Built- Operate-
Transfer (BOT) for a period of 25 years. A traffic assessment carried out to estimate the
traffic flow per day shows the following figures:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816
The following is the estimated cost of the project:
Sl. Amount
No. Activities (₹ in lakh)
1 Site clearance 170.70
2 Land development and filling work 9,080.35
3 Sub base and base courses 10,260.70
4 Bituminous work 35,070.80
Bridge, flyovers, underpasses, Pedestrian subway,
5 footbridge, etc 29,055.60
6 Drainage and protection work 9,040.50
7 Traffic sign, marking and road appurtenance 8,405.00
8 Maintenance, repairing and rehabilitation 12,429.60
9 Environmental management 982.00
Total Project cost 114,495.25
An estimated cost of ₹ 1,120 lakh has to be incurred on administration and toll plaza
operation.
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the
following weights has been assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%
2. Car and SUVs 20%
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3. Bus and LCV 30%

4. Heavy commercial vehicles 45%
Required:
(i) CACULATE the total project cost per day of concession period.
(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company
wants to earn a profit of 15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and
recovers its investment]
Hints:
(i) Cost per day of concession period (₹ in lakh): 12.67
(ii)
Sl. Type of vehicle Equivalent Weight Toll fee per
No. cost [B] vehicle
[A] [A×B]
1. Two wheelers ₹ 19.06 1 19.06
2. Car and SUVs ₹ 19.06 4 76.24
3. Bus and LCV ₹ 19.06 6 114.36
4. Heavy commercial vehicles ₹ 19.06 9 171.54

B. PAST YEAR EXAM QUESTIONS

May-23. Q1(d)-5 marks (Toll)

RST Toll Plaza Limited built an 80-kilometre-long highway between two cities and
operates a toll plaza to collect tolls from passing vehicles using the highway. The company
has estimated that 50,000 light weight, 12,000 medium weight and 10,000 heavy weight
vehicles will be using the highway in one month in outward journey and the same number
for return journey.
As per government notification, vehicles used for medical emergencies, Members of
Parliament, and essential services are exempt from toll charges. It is estimated that 10% of
light weight vehicles will pass the highway for such use.
It is the policy of the company that if vehicles return within 24 hours of their outward
journey, the toll fare will be reduced by 25 percent automatically. It is estimated that 30%
of chargeable light weight vehicles return within the specified time frame.
The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight
vehicles and that of heavy weight vehicles as 2 times of the medium weight vehicles.
The toll and maintenance cost for a month is ₹ 59,09,090, The company requires a profit
of 10% over the total cost to cover interest and other costs.
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Required:
(i) Calculate the toll rate for each type of vehicle if concession facilities are not
available on the return journey.
(ii) Calculate the toll rate that will be charged from light weight vehicles if a return
journey concession facility is available, assuming that the revenue earned from
light weight vehicles calculated in option (i) remains the same.
Solution:
Working Notes:
(1) Calculation of equivalent numbers of Light weight vehicles (when no concession
is provided on return journey)

Type of vehicle Monthly Return Ratio Equivalent light

traffic (A) traffic (B) (C) weight [(A + B) × C]
Light weight 45,000* 45,000 1 90,000
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,50,000

*50,000 light vehicles less 10% exempted vehicles

(2) Calculation of equivalent numbers of Light weight vehicles (when concession is

provided on return journey)
Type of vehicle Monthly Return traffic Ratio Equivalent
traffic (C) light weight
(A) (B) [(A + B) × C]
Light weight 45,000* 41,625 1 86,625
[45,000- (45,000 ×
30% × 25%)]
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,46,625

(i) Calculation of toll rate for each type of vehicle:

Total cost to cover ÷ Equivalent type of vehicles
(₹ 59,09,090 + 10% of ₹ 59,09,090) ÷ 2,50,000 equivalent vehicles
(Refer working note 1)
= 65,00,000 ÷ 2,50,000 = ₹ 26
Toll rate for:

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Light weight vehicle = ₹ 26

Medium weight vehicle = ₹ 26 × 2.5 = ₹ 65
Heavy weight vehicle = ₹ 26 × 5 = ₹ 130

(ii) Calculation of toll rate for each type of vehicle:

Revenue earned from Light weight vehicle in (i) above
= 90,000 vehicles × ₹ 26 = ₹ 23,40,000
New toll rate to maintain the same revenue from Light weight vehicle
= ₹ 23,40,000 ÷ 86,625 (Refer working note-2) = ₹ 27.01
Light weight vehicle = ₹ 27.01
Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26

Alternative presentation
(ii) Toll rate to be charged from light weight vehicles if concession applicable
Revenue share in light vehicles = 90,000 × 26 = ₹ 23,40,000
Suppose rate is x, then outward journey 45,000 x; return journey (45,000 - 30% of
45,000) + 13,500 (x - 0.25)
45,000x + 31,500x + 13500 (0.75x) = ₹ 23,40,000
Toll rate to be charged from light weight vehicles : 86,625x = ₹ 23,40,000 =
₹ 27.01
Rate to be charged from 76,500 light weight vehicles @ 27.01; revenue will be
₹ 20,66,494
Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75
= 20.26 revenue will be ₹ 2,73,506

Nov-22. Q1(b)-5 marks

ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and
‘Education Loan’ applications in addition to other services to customers. 30% of the
overhead costs for the branch are estimated to be applicable to the processing of ‘Vehicle
Loan’ applications and ‘Education Loan’ applications each.
Branch is having four employees at a monthly salary of ₹ 50,000 each, exclusively for
processing of Vehicle Loan applications and two employees at a monthly salary of ₹ 70,000
each, exclusively for processing of Education Loan applications.
In addition to above, following expense are incurred by the Branch:
• Branch Manager who supervises all the activities of branch, is paid at ₹ 90,000
per month.
• Legal charges, Printing & stationery and Advertising Expenses are incurred at
₹ 30,000, ₹ 12,000 and ₹ 18,000 respectively for a month.

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• Other expenses are ₹ 10,000 per month. You are required to:
(i) Compute the cost of processing a Vehicle Loan application on the assumption
that 496 Vehicle Loan applications are processed each month.
(ii) Find out the number of Education Loan Applications processed, if the total
processing cost per Education Loan Application is same as in the Vehicle Loan
Application as computed in (i) above.
Solution:
Particulars Vehicle loan Education loan Total (₹)
Applications (₹) Application (₹)
Employee Cost 2,00,000 1,40,000 3,40,000
(₹ 50,000 × 4) (₹ 70,000 × 2)
Apportionment of Branch 27,000 27,000 54,000
manager’s salary
Legal charges, Printing & 18,000 18,000 36,000
stationery and Advertising
expenses
Other expenses 3,000 3,000 6,000
Total cost 2,48,000 1,88,000 4,36,000

(i) Computation of cost of processing a vehicle loan application:

Total Cost ÷ No. of applications
₹ 2,48,000 ÷ 496 = ₹ 500
(ii) Computation of no. of Education loan Processed
Total Cost = No. of applications × Processing cost per application
₹ 1,88,000 = No. of applications × ₹ 500
No. of education loan applications = ₹1,88,000 ÷ ₹500 = 376 applications

July-21. Q4(b)-5 marks

MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its
newly launched 'COVID-19' Insurance policy:
Office administration cost 48,00,000
Claim management cost 3,80,000
Employees cost 16,20,000
Postage and logistics 32,40,000
Policy issuance cost 29,50,000
Facilities cost 46,75,000
Cost of marketing of the policy 1,38,90,000
Policy development cost 35,00,000

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Policy servicing cost 96,45,000

Sales support expenses 32,00,000
I.T. Cost ?
Number of Policy sold: 2,800
Total insured value of policies - ₹ 3,500 Crores Cost per rupee of insured value - ₹ 0.002

You are required to:

(i) Calculate Total Cost for "COVID-19" Insurance policy segregating the costs into
four main activities namely (a) Marketing and Sales support (b) Operations (c) I.T.
Cost and (d) Support functions.
(ii) Calculate Cost Per Policy.

Solution:
1. Calculation of total cost for ‘COVID-19’ Insurance policy
Particulars Amount (₹) Amount (₹)
a. Marketing and Sales support:
- Policy development cost 35,00,000
- Cost of marketing 1,38,90,000
- Sales support expenses 32,00,000 2,05,90,000
b. Operations:
- Policy issuance cost 29,50,000
- Policy servicing cost 96,45,000
- Claim management cost 3,80,000 1,29,75,000
c. IT Cost* 2,21,00,000
d. Support functions

1,43,35,000
- Postage and logistics 32,40,000
- Facilities cost 46,75,000
- Employees cost 16,20,000
- Office administration cost 48,00,000
Total Cost 7,00,00,000

*IT cost
= (₹ 3,500 crores x 0.002) – ₹ 4,79,00,000 = ₹ 2,21,00,000

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(ii) Calculation of cost per policy = Total cost = ₹7,00,00,000 = ₹25,000

No. of Policies 2.800

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS

Question-1 (Costing of Airlines)

In order to develop tourism, ABCL airline has been given permit to operate three flights
in a week between X and Y cities (both side). The airline operates a single aircraft of
160 seats capacity. The normal occupancy is estimated at 60% through out the year of
52 weeks. The one-way fare is ₹ 7,200. The cost of operation of flights are:
Fuel cost (variable) ₹ 96,000 per flight Food served
on board on non-chargeable basis ₹ 125 per passenger
Commission 5% of fare applicable for all booking Fixed
cost:
Aircraft lease ₹ 3,50,000 per flight
Landing Charges ₹ 72,000 per flight
Required:
1. Calculate the net operating income per flight.
2. The airline expects that its occupancy will increase to 108 passengers per flight if
the fare is reduced to ₹ 6,720. Advise whether this proposal should be implemented
or not

Solution:
(i) No. of passengers 160 seats x 60% = 96
(₹) (₹)
Fare collection (96 passengers x ₹7,200) 6,91,200
Variable costs:
Fuel 96,000
Food (96 passengers x ₹125) 12,000
Commission (5% of ₹6,91,200) 34,560 1,42,560
Contribution per flight 5,48,640
Fixed costs:
Aircraft Lease 3,50,000
Landing charges 72,000 4,22,000
Net income per flight 1,26,640
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(ii)
Fare collection (108 passengers x ₹ 6,720) 7,25,760
Variable costs:
Fuel 96,000
Food (108 passengers x ₹125) 13,500
Commission (5% of ₹ 7,25,760) 36,288 1,45,788
Contribution 5,79,972
There is an increase in contribution by ₹ 31,332. Hence the proposal is acceptable.

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Chapter. 12: Standard Costing

Part-I: Material cost variances
A. QUESTION FROM STUDY MATERIAL
Question-1
The standard and actual figures of product ‘Z’ are as under:

Standard Actual
Material quantity 50 units 45 units
Material price per unit ₹ 1.00 ₹ 0.80 CALCULATE
material cost variances.
Hints: MPV = ₹9(F), MUV = ₹5(F), MCV = ₹14(F)
Question-2
NXE Manufacturing Concern furnishes the following information:
Standard: Material for 70 kg finished products 100 kg.
Price of material ₹ 1 per kg.
Actual: Output 2,10,000 kg.
Material used 2,80,000 kg.
Cost of Materials ₹ 2,52,000
CALCULATE: (a) Material usage variance, (b) Material price variance, (c) Material cost
variance.
Hints: (a) MUV = ₹20,000(F), (b) ₹28,000(F), (c) ₹48,000(F)

Question-3 (Nov 22 Q5(a))

The standard cost of a chemical mixture is as follows:
40% material A at ₹ 20 per kg.
60% material B at ₹ 30 per kg.
A standard loss of 10% of input is expected in production. The cost records for a period
showed the following usage:
90 kg material A at a cost of ₹ 18 per kg. 110
kg material B at a cost of ₹ 34 per kg.
The quantity produced was 182 kg. of good product. CALCULATE all material variances.
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Hints:
Material MPV MUV
A 180 (F) 182.22 (A)
B 440 (A) 340.00 (F)

Question-4
ABC Ltd. produces an article by lending two basic raw materials. It operates a standard
costing system and the following standards have been set for raw materials:
Material Standard mix Standard price (₹ per kg)
A 40% 4
B 60% 3
The standard loss in processing is 15%. During April 2021, the company produced 1,700
kgs. of finished output.
The position of stock and purchases for the month of April 2021 are as under:
Material Stock on Stock on Purchased during
01.04.2021 30.04.2021 April 2021
(Kg.) (Kg.) (Kg.) (₹)
A 35 5 800 3,400
B 40 50 1,200 3,000
Opening stock of material is valued at standard price. CALCULATE the following
variances:
(i) Material price variance
(ii) Material usage variance
(iii) Material yield variance
(iv) Material mix variance
(v) Total Material cost variance
Hints:
(i) ₹ 376.25(F)
(ii) ₹ 90(A)
(iii) ₹ 68(A)
(iv) ₹ 22(A)
(v) 286.25 (F)

TEST YOUR KNOWLEDGE

Question-1
For making 10 kg. of CEMCO, the standard material requirements is:

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Material Quantity Rate per kg.

(₹)
A 8 kg 6.00
B 4 kg 4.00
During April, 1,000 kg of CEMCO were produced. The actual consumption of materials is as
under:
Material Quantity Rate per kg.
(Kg.) (₹)
A 750 7.00
B 500 5.00
Calculate (A) Material Cost Variance; (b) Material Price Variance; (c) Material usage
Variance.
Hints:
Material MPV MUV
A 750(A) 300(F)
B 500(A) 400(A)

Question-2
The standard mix to produce one unit of a product is as follows:

Material X 60 units @ ₹ 15 per unit = 900

Material Y 80 units @ ₹ 20 per unit = 1,600
Material Z 100 units @ ₹ 25 per unit = 2,500
240 units 5,000
During the month of April, 10 units were actually produced and consumption was as follows:
Material X 640 units @ ₹ 17.50 per unit = 11,200
Material Y 950 units @ ₹ 18.00 per unit = 17,100
Material Z 870 units @ ₹ 27.50 per unit = 23,925
2,460 units 52,225
Calculate all material variances.
Hints:
Material MPV MUV Mix Yield Variance
X 1600(A) 600(A) 375(A) 225(A)
Y 1900(F) 3000(A) 2600(A) 400(A)
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Z 2175(A) 3250(F) 3875(F) 625(A)

Question-3
J.K. Ltd. manufactures NXE by mixing three raw materials. For every batch of 100 kg. of
NXE, 125 kg. of raw materials are used. In April, 20X2, 60 batches were prepared to produce
an output of 5,600 kg. of NXE. The standard and actual particulars for April, 20X2, are as
follows :
Standard Actual Quantity of
Raw Mix Price per Mix Price per Raw Materials
Materials kg. Kg. Purchased
(%) (₹) (%) (₹) (Kg.)
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
CALCULATE all variances.
Hints:
MPV = ₹3000(A), MUV = ₹14,500(A), Mix = ₹14,500(A), Yield Variance = ₹17,500(F)

Question-4
GAP Limited operates a system of standard costing in respect of one of its products which is
manufactured within a single cost centre. Following are the details.
Budgeted data:
Material Qty Price (₹) Amount (₹)
A 60 20 1200
B 40 30 1200
Inputs 100 2400
Normal loss 20
Output 80 2400
Actual data:
Actual output 80 units.
Material Qty Price (₹) Amount (₹)

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A 70 ? ?
B ? 30 ?

Material Price Variance (A) ₹ 105A

Material cost variance ₹ 275A
You are required to CALCULATE:
(i) Actual Price of material A
(ii) Actual Quantity of material B
(iii) Material Price Variance
(iv) Material Usage Variance
(v) Material Mix Variance
(vi) Material Sub Usage Variance
Hints:
(i) Actual Price of Material A : ₹21.5
(ii) Actual Quantity of Material B : 39 Units
(iii) Material Price Variance : ₹105 (A)
(iv) Material Usage Variance : ₹170 (A)
(v) Material Mix Variance : ₹46 (F)
(vi) Material Yield Variance : ₹216 (A)

Question-5
One kilogram of product K requires two chemicals A and B. The following were the details
of product K for the month of June 2021:
(a) Standard mix for chemical A is 50% and chemical B is 50%.
(b) Standard price kilogram of chemical A is ₹ 12 and chemical B is ₹ 15.
(c) Actual input of chemical B is 70 kilograms.
(d) Actual price per kilogram of chemical A is ₹ 15
(e) Standard normal loss is 10% of total input
(f) Total Material cost variance is ₹ 650 adverse.
(g) Total Material yield variance is ₹ 135 adverse.
You are required to CALCULATE:
(i) Total Material mix variance
(ii) Total Material usage variance
(iii) Total Material price variance
(iv) Actual loss of actual input
(v) Actual input of chemical A

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(vi) Actual price per kg. of chemical B

Hints:
(i) ₹ 45 (A)
(ii) ₹ 180 (A)
(iii) ₹ 470 (A)
(iv) 20 kg.
(v) 40 kg.
(vi) ₹ 20

Question-6
Following data is extracted from the books of XYZ Ltd. for the month of January:
(i) Estimation-
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 800 ? --
Material-B 600 30.00 18,000
--
Normal loss was expected to be 10% of total input materials.
(ii) Actuals-
1480 kg of output produced.
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 900 ? --
Material-B ? 32.50 --
59,825
(iii) Other Information-
Material Cost Variance = ₹ 3,625 (F) Material Price Variance = ₹ 175 (F)
You are required to CALCULATE:
(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance.
Hints:
(i) ₹45
(ii) 650 kg.
(iii) ₹43
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(iv) 886 kg; 664 kg.

(v) ₹210 (A)

B. PAST YEAR EXAM QUESTIONS

Nov-19. Q5(b) (10 marks)
The standard cost of a chemical mixture is as follow:
60% of Material A @ ₹50 per kg
40% Material B @ ₹60 per kg
A standard loss of 25% on output is expected in production. The cost records for a period has
shown the following usage.
540 kg of Material A @ ₹60 per kg
260 kg of Material B @ ₹50 per kg
The quantity processed was 680 kg of good product.
From the above given information
Calculate:
(a) Material cost variance
(b) Material price variance
(c ) Material usage variance
(d) Material mix variance
(e ) Material yield varince
Solution:

May-18. Q5(a)(ii) (5 marks)

Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials
namely Material P and Material Q. The Standard Cost of Mixture is as under:
Material P 150 ltrs. @ ₹ 40 per ltr. Material Q
100 ltrs. @ ₹ 60 per ltr.
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Standard loss @ 20 of total input is expected during production. The cost records for the
period exhibit following consumption: Material
P 140 ltrs. @ ₹ 42 per ltr,
Material Q 110 ltrs. @ ₹ 56 per ltr, Quantity
produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Usage Variance.
(iii) Material Price Variance
Solution:
Workings:
Take the good output of 195 ltr. The standard quantity of material required for 195 ltr. of output
is
195 × 100 = 243.75 ltr.
80
Statement showing computation of Standard Cost/Actual Cost/ Revised Actual Quantity
Material Standard Cost Actual Cost
Quantity Rate Amount Quantity Rate Amount

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

(Kg.) (₹) (₹) (Kg.) (₹) (₹)
A (60% of 146.25 40 5,850.00 140 42 5,880
243.75 ltr.)
B (40% of. 97.50 60 5,850.00 110 56 6,160
243.75 Kg.)
243.75 11,700.00 200 12,040
Notes:
SQ = Standard Quantity = Expected Consumption for Actual Output
A = Actual Quantity of Material Consumed
Q = Standard Price Per Unit

Computation of Variances:
Material Cost Variance = SQ × SP – AQ × AP
A = ₹ 146.25 ltr. × ₹ 40– 140 ltr. × ₹ 42 = ₹ 30.00 (A) B=

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₹ 97.50 ltr. × ₹ 60 – 110 ltr. × ₹ 56 = ₹ 310.00 (A)

Total = ₹ 30.00 (A) + ₹ 310.00 (A)
= ₹ 340.00 (A)
Material Usage Variance = SP × (SQ – AQ)
A = ₹ 40 × (146.25 ltr. –140 ltr.) = ₹ 250.00 (F) B=
₹ 60 × (97.50 ltr. – 110 ltr.) = ₹ 750.00 (A)
Total = ₹ 250.00 (F) + ₹ 750.00 (A)
= ₹ 500.00 (A)

Material Price Variance = AQ × (SP – AP)

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

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
Following are the details of the product Phomex for the month of April 2013: Standard
quantity of material required per unit 5 kg
Actual output 1000 units
Actual cost of materials used ₹ 7,14,000
Material price variance ₹ 51,000 (Fav)
Actual price per kg of material is found to be less than standard price per kg of material by ₹ 10.
You are required to calculate:
(i) Actual quantity and Actual price of materials used.
(ii) Material Usage Variance
(iii) Material Cost Variance.
Solution:
(i) Actual Quantity and Actual Price of material used
Material Price Variance = Actual Quantity (Std. Price – Actual Price) = ₹51,000
Or, AQ (SP – AP) = ₹ 51,000
Or, 10 AQ = ₹ 51,000
Or, AQ = 5,100 kgs
Actual cost of material used is given i.e.
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AQ x AP = ₹ 7,14,000
Or, 5,100 AP = ₹ 7,14,000
AP = ₹ 140
 Actual price is less by ₹ 10
So, Standard Price = ₹ 140 + ₹ 10 = ₹ 150 per kg
Actual Quantity = 5,100 kgs
Actual Price = ₹ 140/kg

(ii) Material Usage Variance

Std. Price (Std. Quantity – Actual Quantity)
Or, SP (SQ – AQ) = ₹ 150 (1,000 units x 5 kg – 5,100 kg)
= ₹ 15,000 (A)
(iii) Material Cost Variance = Std. Cost – Actual Cost
= (SP x SQ) – (AP x AQ)
= ₹ 150 x 5,000 – ₹ 140 x 5,100
= ₹ 7,50,000 – ₹ 7,14,000
= ₹ 36,000 (F)
OR
Material Price Variance + Material Usage Variance
₹ 51,000 (F) + ₹15,000 (A)= ₹ 36,000 (F)

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Part-II: Labour cost variances

A. QUESTION FROM STUDY MATERIAL
Question-5
The standard and actual figures of a firm are as under
Standard time for the job 1,000 hours Standard
rate per hour ₹ 50
Actual time taken 900 hours
Actual wages paid ₹ 36,000 CALCULATE
the variances.
Hints: LRV = ₹9,000(F), Efficiency variance = ₹5,000(F), LCV = ₹14,000(F)

Question-6
The standard labour employment and the actual labour engaged in a week for a job are as
under:
Skilled Semi-skilled Unskilled
workers workers workers
Standard no. of workers in the gang 32 12 6
Actual no. of workers employed 28 18 4
Standard wage rate per hour 3 2 1
Actual wage rate per hour 4 3 2
During the 40 hours working week, the gang produced 1,800 standard labour hours of work.
CALCULATE :
(a) Labour Cost Variance (b) Labour Rate Variance
(c) Labour Efficiency Variance (d) Labour Mix Variance
(e) Labour Yield Variance
Hints:
LRV LEV Mix Variance LYV
Skilled 1120(A) 96(F) 480(F) 384(A)
Semi-Skilled 720(A) 576(A) 480(A) 96(A)
Unskilled 160(A) 56(F) 80(F) 24(A)

Question-7
The standard and actual figures of a firm are as under Standard time for the job 1,000
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hours
Standard rate per hour ₹ 50
Actual time taken 900 hours
Actual wages paid ₹ 36,000 CALCULATE variances.
Hints:
(i) Labour Rate variance = ₹9,000 (F),
(ii) Efficiency variance = ₹5,000 (F)
(iii) Total labour cost variance = ₹14,000 (F)

Question-8
The standard output of product ‘EXE’ is 25 units per hour in manufacturing department of a
company employing 100 workers. The standard wage rate per labour hour is ₹ 6.
In a 42 hours week, the department produced 1,040 units of ‘EXE’ despite 5% of the time
paid being lost due to an abnormal reason. The hourly wages actually paid were
₹ 6.20, ₹ 6 and ₹ 5.70 respectively to 10, 30 and 60 of the workers.
CALCULATE relevant labour variances.
Hints:
1. Labour cost variance = ₹ 432 (F)
2. Labour rate variance = 672 (F)
3. Labour efficiency variance = 1,020 (F)
4. Labour Idle time variance = 1,260 (A)

Question-9
NPX Ltd. uses standard costing system for manufacturing of its product X. Following is the
budget data given in relation to labour hours for manufacture of 1 unit of Product X :
Labour Hours Rate (₹)
Skilled 2 6
Semi-Skilled 3 4
Un- Skilled 5 3
Total 10
In the month of January, total 10,000 units were produced following are the details:
Labour Hours Rate Amount
(₹) (₹)
Skilled 18,000 7 1,26,000
Semi-Skilled 33,000 3.5 1,15,500
Un- Skilled 58,000 4 2,32,000
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Total 1,09,000 4,73,500

Actual Idle hours (abnormal) during the month:

Skilled: 500
Semi- Skilled: 700
Unskilled: 800
Total 2,000
CALCULATE:
(a) Labour Variances.
(b) Also show the effect on Labour Rate Variance if 5,000 hours of Skilled Labour are paid
@ ₹ 5.5 per hour and balance were paid @ ₹ 7 per hour.
Hints:
(a) Labour Variances:
a. Labour Cost Variance= (SH×SR – AH×AR)= ₹ 83,500 (A)
b. Labour Rate Variance = (SR – AR )×AHPaid = ₹ 59,500 (A)
c. Labour Efficiency Variance = (SH – AH) × SR = ₹ 15,800 (A)
d. Labour Idle Time Variance = (Idle Hours × SR) = ₹ 8,200 (A)
e. Labour Mix Variance = (RSH – AHWorked )×SR = ₹ 11,500 (F)
f. Labour Yield Variance = (SH – RSH) × SR = ₹ 27,300 (A)

(b) ₹ 52,000 (A)

B. PAST YEAR EXAM QUESTIONS

May-19. Q3 (a) (10 marks)
A gang of workers normally consists of 30 skilled workers, 15 semi -skilled workers
and 10 unskilled workers. They are paid at standard rate per hour as under:
Skilled ₹ 70
Semi-skilled ₹ 65
Unskilled ₹ 50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of
output. During the week ended 31st March, 2019, the gang consisted of 40 skilled, 10 semi-
skilled and 5 unskilled workers. The actual wages paid were at the rate of ₹ 75, ₹ 60 and ₹
52 per hour respectively. Four hours were lost due to machine breakdown and 1,600
units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
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(i) Labour Cost Variance (ii) Labour Rate Variance

(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time Variance
Solution:
(i) Labour Cost Variance = Standard Cost – Actual Cost
= ₹1,14,400 – ₹1,54,400
= 40,000 (A)
(1,600*75+400*60+200*52= ₹1,54,400)
Or
Types of workers Standard Cost – Actual Cost Amount (₹)
Skilled Workers (30x40x70/2,000x1,600)- 52,800 (A)
(40x40x75) 67,200-1,20,000
Semi- Skilled (15x40x65/2,000x1,600)- 7,200 (F)
(10x40x60) 31,200-24,000
Un-Skilled Workers (10x40x50/2,000x1,600)- 5,600 (F)
(5x40x52) 16,000-10,400
Total 1,14,400-1,54,400 40,000 (A)

(ii) Labour Rate Variance

Types of workers Actual Hours × (Standard Rate - Amount (₹)
Actual Rate)
Skilled Workers 1,600 hours × (₹70.00 – ₹75.00) 8,000 (A)
Semi- Skilled 400 hours × (₹65.00 – ₹60.00) 2,000 (F)
Un-Skilled Workers 200 hours × (₹50.00 – ₹52.00) 400 (A)
Total ₹8,000 (A) + ₹2,000 (F) + ₹400 (A) 6,400 (A)

(iii) Labour Efficiency Variance

Types of workers Standard Rate × (Standard Hours – Amount
Actual Hours) (₹)
Skilled Workers ₹70.00 × (960 hours – 1,440 hours) 33,600 (A)
Semi- Skilled ₹65.00 × (480 hours – 360 hours) 7,800 (F)
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Un-Skilled Workers ₹50.00 × (320 hours – 180 hours) 7,000 (F)

Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)

Alternatively labour efficiency can be calculated on basis of labour hours paid

Types of workers Standard Rate × (Standard Hours – Amount
Actual Hours) (₹)
Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)
Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)
Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)

(iv) Labour Mix Variance

= Total Actual Time Worked (hours) × {Average Standard Rate per hour of
Standard Gang Less Average Standard Rate per hour of Actual Gang} @on the basis of
hours worked
= 1,980 hours × ₹1,14,400 – 1,440hrs.×₹70 + 360hrs.×₹65 + 180hrs.×₹50
1,760 hrs. 1,980 hrs.
= ₹ 4,500 (A)
Or
Labour Mix Variance
Types of workers Std. Rate x (Revised Actual Hours Worked- Amount (₹)
Actual Hours Worked)
Skilled Workers ₹70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)
Semi- Skilled ₹65 × (540 hrs. – 360 hrs.) 11,700 (F)
Un Skilled Workers ₹50 × (360 hrs. – 180 hrs.) 9,000 (F)
Total ₹25,200 (A) + ₹11,700 (F) + ₹9,000 (F) 4,500 (A)
(v) Labour Idle Time Variance
Types of workers Standard Rate × (Hours Paid – Hours Amount (₹)
Worked)
Skilled Workers ₹70.00 × (1,600 hours – 1,440 hours) 11,200 (A)
Semi- Skilled ₹65.00 × (400 hours – 360 hours) 2,600 (A)
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Un-Skilled Workers ₹50.00 × (200 hours – 180 hours) 1,000 (A)

Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)
Verification:
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance + Labour Idle Time Variance
= 6,400 (A) + 18,800 (A) + 14,800 (A) = ₹ 40,000 (A)
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance
= 6400(A) + 33600(A)= ₹40000(A)
In this case, labour idle time variance is a part of labour efficiency variance.
Working Notes:
Category Standard Cost Actual (1600 units) Revised
Hrs. Rate Amt. (₹) Hrs. Rate Amt. (₹) Actual
Hours
Skilled 960 70.00 67,200 1,440 1,08,000 1,080
(1,980x6/11)
(30Wx40x1,600/ 2, 000) (40Wx36) 75.00
Semi- 480 65.00 31,200 360 21,600 540
Skilled (15Wx40 x1,600/2,000) (1,980x3/11)
(10Wx36) 60.00
Unskilled 320 50.00 16,000 180 52.00 9,360 360
(10Wx40 x1,600/2,000) (1,980x2/11)
(5Wx36)
Total 1,760 65 1,14,400 1,980 1,38,960 1,980

July-2021 Q5 (a) (10 marks)

The standard output of a Product 'DJ' is 25 units per hour in manufacturing department of
a Company employing 100 workers. In a 40 hours week, the department produced 960
units of product 'DJ' despite 5% of the time paid was lost due to an abnormal reason. The
hourly wage rates actually paid were ₹ 6.20, ₹ 6.00 and ₹ 5.70 respectively to Group 'A'
consisting 10 workers, Group 'B' consisting 30 workers and Group 'C' consisting 60
workers. The standard wage rate per labour is same for all the workers. Labour Efficiency
Variance is given ₹ 240 (F).
You are required to compute:
(i) Total Labour Cost Variance.
(ii) Total Labour Rate Variance.
(iii) Total Labour Gang Variance.
(iv) Total Labour Yield Variance, and
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(v) Total Labour Idle Time Variance.

Solution:
Working Notes:
1. Calculation of Standard Man hours

When 100 workers work for 1 hour, the standard output is 25 units.

Standard man hours per unit = 100 hours = 4 hours per unit
25 units
2. Calculation of standard man hours for actual output:
= 960 units x 4 hours = 3,840 hours.

3. Calculation of actual cost

Type of No of Actual Rate Amount Idle Hours Actual
Workers Workers Hours (₹) (₹) (5% of hours hours
Paid paid) Worked
Group ‘A’ 10 400 6.2 2,480 20 380
Group ‘B’ 30 1,200 6 7,200 60 1,140
Group ‘C’ 60 2,400 5.7 13,680 120 2,280
100 4,000 23,360 200 3,800

4. Calculation of Standard wage Rate:

Labour Efficiency Variance = 240F
(Standard hours for Actual production – Actual Hours) x SR = 240F
(3,840 – 3,800) x SR = 240
Standard Rate (SR) = ₹ 6 per hour

(i) Total Labour Cost Variance

= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 6) – 23,360 = 320A

(ii) Total Labour Rate Variance

= (Standard Rate – Actual Rate) x Actual Hours
Group ‘A’ = (6- 6.2) 400 = 80A
Group ‘B’ = (6- 6) 1,200 = 0
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Group ‘C’ = (6 – 5.7) 2,400 = 720F

640F

(iii) Total Labour Gang Variance

= Total Actual Time Worked (hours) × {Average Standard Rate per hour of
Standard Gang -Average Standard Rate per hour of Actual Gang@}
@
on the basis of hours worked

= 3,800 x (6 – 3,840 x 6) = 0
3,800
(iv) Total Labour Yield Variance
= Average Standard Rate per hour of Standard Gang × {Total Standard Time
(hours) - Total Actual Time worked (hours)}
= 6 x (3,840 – 3,800)
= 240F
(v) Total Labour idle time variance
= Total Idle hours x standard rate per hour
= 200 hours x 6
= 1,200A

May-2022 Q5 (b) (10 marks)

A manufacturing department of a company has employed 120 workers. The standard
output of product ''NPX" is 20 units per hour and the standard wage rate is ₹ 25 per
labour hour.
In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time
paid being lost due to an abnormal reason. The hourly wages actually paid were ₹ 25.70
per hour.
Calculate:
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance
Solution:
Working Notes:
1. Calculation of standard man hours
When 120 worker works for 1 hr., then the std. output is 20 units.
Std. man hour per unit = 120 hours = 6 hrs
20 units
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2. Calculation of std. man hours for actual output

Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.
Standard for actual Actual
Hours Rate Amount Actual hrs. Idle Production Rate Amount
(₹) (₹) paid time hrs. (₹) paid
hrs. (₹)
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)

(i) Labour cost variance

= Std. labour cost – Actual labour cost
= 1,50,000 – 1,48,032 = ₹ 1,968 F

(ii) Labour rate variance

= (SR – AR) × AHPaid
= (25 - 25.70) × 5,760 = ₹ 4,032 A

(iii) Labour efficiency variance

= (SH – AH) × SR
= (6,000 – 5,472) × 25 = ₹ 13,200 F

(iv) Labour Idle time variance

= Idle Hours × SR
= 288 × 25 = ₹ 7,200 A

Note: Variances can also be calculated for one worker instead of 120.

D. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
The standard labour employment and the actual labour engaged in a 40 hours week for a job
are as under:
Standard Actual
Category of Workers No. of Wage Rate per No. of Wage Rate
workers hour (₹) workers per hour (₹)
Skilled 65 45 50 50
Semi-skilled 20 30 30 35
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Unskilled 15 15 20 10
Standard output: 2,000 units; Actual output: 1,800 units Abnormal Idle time 2 hours in the
week
Calculate:
(i) Labour Cost Variance
(ii) Labour Efficiency Variance
(iii) Labour Idle Time Variance.
Solution:
Working Note:
Table Showing Standard & Actual Cost
Worker Standard Standard Standard Actual Actual Actual Idle Actual hours
Hours Rate per Cost for Hours Paid Rate Cost time worked
Hour Actual per
(a) (b) Output (d ) hour (h)=(d)-(g)
(c) = (a x (e) (f) = (d) x (g)
b) (e)
Skilled 2,340 hrs. ₹ 45 ₹1,05,300 2,000 hrs. ₹ 50 ₹1,00,000 100 hrs. 1,900 hrs.
[(65 Workers x (50 (50 (2,000 hrs.-100
Workers hrs.)
40 hrs.)/ 2,000 x 40 hrs.) Workers x
units)] x1,800 2 hrs.)
units
Semi- 720 hrs. ₹30 ₹21,600 1,200 hrs. ₹35 ₹42,000 60 hrs. 1,140 hrs.
skilled [(20 Workers x (30 (30 (1,200 hrs.-60
Workers
40 hrs.)/ 2,000 x 40 hrs.) Workers x hrs.)
units)] x1,800 2 hrs.)
units
Unskilled 540 hrs. ₹15 ₹8,100 800 hrs. ₹10 ₹8,000 40 hrs. 760 hrs.
[(15 Workers x (20 (20 (800 hrs.-40
40 hrs.)/ 2,000 Workers Workers x hrs.)
units)] x1,800 x 40 hrs.) 2 hrs.)
units
Total 3,600 hrs. ₹1,35,000 4,000 hrs. ₹1,50,000 200 hrs. 3,800 hrs.

Calculation of Variances
(i) Labour Cost Variance = Standard Cost for actual output – Actual cost
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Skilled worker = ₹1,05,300 - ₹1,00,000

= ₹ 5,300 (F)
Semi-skilled worker = ₹ 21,600 - ₹ 42,000
= ₹ 20,400 (A)
Unskilled Worker = ₹ 8,100 - ₹ 8,000
= ₹100 (F)
Total = ₹5,300 (F) + ₹20,400 (A) + ₹100 (F)
= ₹15,000 (A)
(ii) Labour Efficiency Variance = Std. Rate x (Standard hours – Actual hours
worked) Skilled worker = ₹ 45 x (2,340 hrs. - 1,900 hrs.)
= ₹19,800 (F)
Semi-skilled worker = ₹ 30 x (720 hrs. - 1,140 hrs.)
= ₹ 12,600 (A)
Unskilled Worker = ₹ 15 x (540 hrs. - 760 hrs.)
= ₹ 3,300 (A)
Total = ₹19,800 (F) + ₹12,600 (A) + ₹3,300 (A)
= ₹3,900 (F)
(iii) Labour Idle Time Variance = Std. Rate x Idle Time
(Hrs.) Skilled worker = ₹ 45 x 100 hrs.
= ₹ 4,500 (A)
Semi-skilled worker = ₹ 30 x 60 hrs.
= ₹ 1,800 (A)
Unskilled worker = ₹ 15 x 40 hrs.= ₹ 600 (A)
Total = ₹ 4,500 (A) + ₹ 1,800 (A) + ₹ 600 (A)
= ₹ 6,900 (A)
Question-2
The following information has been provided by a company:
Number of units produced and sold 6,000
Standard labour rate per hour ₹8
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Standard hours required for 6,000 units -

Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance ₹ 68,376 (A)
You are required to calculate:
(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit.
Solution:
SR – Standard labour Rate per Hour
AR – Actual labour rate per hour
SH – Standard Hours
AH – Actual hours
(i) Labour rate Variance = AH(SR – AR)
= 17,094 (8 – AR) = 68,376 (A) = - 68,476
= 8 – AR = -4
= AR = ₹ 12
(ii) Labour Efficiency = SH × 100 = 105.3
AH
= SH = AH x 105.3 = 17,094 x 105.3
100 100
= 17,999.982
= SH = 18,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= 8(18,000 – 17,094)
= 8 × 906
= ₹ 7,248 (F)

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(iv) Standard Labour Cost per Unit = 18,000 x 8 = ₹24

6,000
(v) Actual Labour Cost Per Unit = 17,094 x 12 = ₹ 34.19
6,000

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Part-III: Variable overhead variances

A. QUESTION FROM STUDY MATERIAL
Question-10
From the following information of G Ltd., CALCULATE (i) Variable Overhead Cost
Variance; (ii) Variable Overhead Expenditure Variance and (iii) Variable Overhead
Efficiency Variance:
Budgeted production 6,000 units
Budgeted variable overhead ₹ 1,20,000
Standard time for one unit of output 2 hours
Actual production 5,900 units
Actual overhead incurred ₹ 1,22,000
Actual hours worked 11,600 hours
Hints: (i) ₹4000 (A), (ii) ₹6000(A), (iii) ₹20000 (F)

TEST YOUR KNOWLEDGE

Question-7
The following data for Pijee Ltd. is given:
Budget Actual
Production (in units) 400 360
Man hours to produce above 8,000 7,000
Variable overheads (in ₹) 10,000 9,150
The standard time to produce one unit of the product is 20 hours.
CALCULATE relevant Variable overhead variances.
Hints:
(i) Variable overhead cost variance : ₹150 (A)
(ii) Variable overhead expenditure variance : ₹400 (A)
(iii) Variable overhead efficiency variance : ₹250 (F)

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Part-IV: Fixed cost variances

A. QUESTION FROM STUDY MATERIAL

Question-11
The cost detail of J&G Ltd. for the month of September, 20X8 is as follows:

Budgeted Actual
Fixed overhead ₹15,00,000 ₹15,60,000
Units of production 7,500 7,800
Standard time for one unit 2 hours -
Actual hours worked - 16,000 hours
Required:
CALCULATE (i) Fixed Overhead Cost Variance (ii) Fixed Overhead Expenditure Variance
(iii) Fixed Overhead Volume Variance (iv) Fixed Overhead Efficiency Variance and (v)
Fixed Overhead Capacity Variance.
Hints: (i) 0, (ii) ₹60,000(A), (iii) ₹60,000(F), (iv) ₹40,000(A), (v) ₹1,00,000(F)

Question-12
The overhead expense budget for a factory producing to a capacity of 200 units per month is
as follows:
Description of overhead Fixed cost Variable cost per Total cost
per unit in ₹ unit in ₹ per unit in ₹
Power and fuel 1,000 500 1,500
Repair and maintenance 500 250 750
Printing and stationary 500 250 750
Other overheads 1,000 500 1,500
₹ 3,000 ₹ 1,500 4,500
The factory has actually produced only 100 units in a particular month. Details of overheads
actually incurred have been provided by the accounts department and are as follows:
Description of overhead Actual cost
Power and fuel ₹ 4,00,000
Repair and maintenance ₹ 2,00,000

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Printing and stationary ₹ 1,75,000

Other overheads ₹ 3,75,000
You are required to CALCULATE the Overhead volume variance and the overhead expense
variances.
Hints:
Particular ₹
Fixed overhead volume variance 3,00,000(A)
Fixed overhead expenditure variance 4,00,000 (A)
Variable overhead expenditure variance NIL

Question-13
The following information was obtained from the records of a manufacturing unit using
standard costing system.
Standard Actual
Production 4,000 units 3,800 units
Working days 20 21
Machine hours 8,000 hours 7,800 hours
Fixed Overhead ₹ 4,00,000 ₹ 3,90,000
Variable Overhead ₹1,20,000 ₹1,20,000
You are required to CALCULATE the following overhead variance:
(a) Variable overhead variances
(b) Fixed overhead variances
Hints:
(a) Variable overhead expenditure variance = 3,000(A), Efficiency Variance = 3,000 (A)
(b) Expenditure variance = ₹10,000 (F), Volume = ₹20,000(A),
Efficiency variance = ₹10,000(A), Capacity = ₹30,000(A), Calendar = ₹20,000(F)

TEST YOUR KNOWLEDGE

Question-8
XYZ Company has established the following standards for factory overheads.
Variable overhead per unit: ₹ 10/-
Fixed overheads per month ₹ 1,00,000
Capacity of the plant 20,000 units per month. The actual data for the month are as follows:
Actual overheads incurred ₹ 3,00,000
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Actual output (units) 15,000 units Required:

CALCULATE overhead variances viz:
1. Production volume variance
2. Overhead expense variance
Hints: Fixed overhead volume variance = ₹25,000(A)
Fixed overhead expense variance = ₹50,000(A)
Variable overhead expense variance = NIL

Question-9
A company has a normal capacity of 120 machines, working 8 hours per day for 25 days in a
month. The fixed overheads are budgeted at ₹1,44,000 per month. The standard time
required to manufacture one unit of product is 4 hours.
In April, 20X2, the company worked 24 days of 840 machine hours per day and produced
5,305 units of output. The actual fixed overheads were ₹1,42,000.
CACULATE:
(i) Expense variance
(ii) Volume variance
(iii) Total fixed overheads variance.
Hints: (i) ₹2,000(F), (ii) ₹16,680(A), (iii) ₹14,680(A)

Question-10
Following information is available from the records of a factory:
Budget Actual
Fixed overhead for June, 20X2 ₹10,000 ₹12,000
Production in June, 20X2 (units) 2,000 2,100
Standard time per unit (hours) 10 –
Actual hours worked in June – 21,000
CALCULATE:
i. Fixed overhead cost variance,
ii. Expenditure variance,
iii. Volume variance

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Hints: (i) ₹1,500(A), (ii) ₹2,000(A), (iii) ₹500 (F)

Question-11
XYZ Ltd. has furnished you the following information for the month of August, 20X2:
Budget Actual
Output (Units) 30,000 32,500
Hours 30,000 33,000
Fixed overheads ₹45,000 ₹50,000
Variable Overheads ₹60,000 ₹68,000
Working days 25 26
CALCULATE overhead variances.
Hints:
Fixed overhead Variance: Expenditure = ₹5,000(A), Volume = ₹3,750(F), Efficiency =
₹750(A), Capacity = ₹2,700(F), Calendar = ₹1,800(F)
Variable Overhead variances: Expenditure = ₹2,000(A), Efficiency = ₹1,000(A)
Question-12
S.V. Ltd. has furnished the following data:
Budget Actual
No. of working days 25 27
Production in units 20,000 22,000
Fixed overheads ₹30,000 ₹31,000
Budgeted fixed overhead rate is ₹1.00 per hour. In July, 20X2, the actual hours worked were
31,500.
CALCULATE the following variances:
(i) Volume variance.
(ii) Expenditure variance.
(iii) Total overhead variance.
Hints: (i) ₹1,000(A), (ii) ₹3,000(F), (iii) ₹2,000(F)

Question-13
The following data has been collected from the cost records of a unit for computing the
various fixed overhead variances for a period:
Number of budgeted working days 25
Budgeted man-hours per day 6,000
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Output (budgeted) per man-hour (in units) 1

Fixed overhead cost as budgeted ₹ 1,50,000
Actual number of working days 27
Actual man-hours per day 6,300
Actual output per man-hour (in-units) 0.9
Actual fixed overhead incurred ₹ 1,56,000 CALCULATE
fixed overhead variances:
(a) Expenditure Variance
(b) Volume Variance,
(c) Fixed Cost Variance.
Hints: (a) ₹6,000(A), (b) ₹3,090(F), (c) ₹2,910(A)

B. PAST YEAR EXAM QUESTIONS

Dec-21. Q5 (a) (10 marks)

In a manufacturing company the standard units of production for the year were fixed at
1,20,000 units and overhead expenditures were estimated to be as follows:
Particulars Amount (₹)
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% are ofvariable 1,80,000
nature)
Variable 6,00,000
Actual production during the month of April, 2021 was 8,000 units. Each month has 20
working days. During the month there was one public holiday. The actual overheads were
as follows:
Particulars Amount (₹)
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of 19,200
variable)
Variable 48,000

You are required to calculate the following variances for the month of April 2021:
i. Overhead Cost variance
ii. Fixed Overhead Cost variance
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iii. Variable Overhead Cost variance

iv. Fixed Overhead Volume variance
v. Fixed Overhead Expenditure Variance
vi. Calendar Variance
Solution:
Workings:
Budgeted Fixed Overheads ₹12,00,000 ₹ 10
Fixed Overheads = =
Budgeted Output 1,20,000 units
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of ₹ 1,08,000
₹1,80,000
Budgeted Fixed Overheads ₹1,08,000 ₹ 0.90
Fixed Overheads = =
Budgeted Output 1,20,000units
Standard Rate of Absorption of Fixed Overheads per unit (₹10 + ₹ 10.90
₹0.90)
Fixed Overheads Absorbed on 8,000 units @ ₹ 10.90 ₹ 87,200
Budgeted Variable Overheads ₹ 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ₹ 1,80,000 ₹ 72,000
Total Budgeted Variable Overheads ₹ 6,72,000
Budgeted Variable Overheads ₹5.60
Standard Variable Cost per unit = =
Budgeted Output
₹ 6,72,000
1,20,000 units
Standard Variable Overheads for 8,000 units @ ₹5.60 ₹ 44,800
Budgeted Annual Fixed Overheads (₹ 12,00,000 + 60% of ₹ 1,80,000) ₹ 13,08,000
Possible Fixed Overheads =
Budgeted Fixed Overheads
×Actual Days ₹ 1,03,550
Budgeted Days
₹ 1,09,000
= x19 Days
20 Days

Actual Fixed Overheads (₹1,10,000 + 60% of ₹ 19,200) ₹ 1,21,520

Actual Variable Overheads (₹48,000 + 40% of ₹19,200) ₹ 55,680

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COMPUTATION OF VARIANCES
i. Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (₹ 87,200 + ₹ 44,800) – (₹ 1,21,520 + ₹ 55,680)
= ₹ 45,200 (A)
ii. Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed
Overheads
= ₹ 87,200 – ₹ 1,21,520
= ₹ 34,320 (A)
iii. Variable Overhead Cost Variance = Standard Variable Overheads for Production–
Actual Variable Overheads
= ₹ 44,800 – ₹ 55,680
= ₹ 10,880 (A)
iv. Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
= ₹ 87,200 – ₹1,09,000
= ₹ 21,800 (A)
v. Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads – Actual
Fixed Overheads
= ₹ 10.90 × 10,000 units – ₹ 1,21,520
= ₹ 12,520 (A)
vi. Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= ₹ 1,03,550 – ₹ 1,09,000
= ₹ 5,450 (A)
OR
Calendar Variance = (Actual days – Budgeted days) x Standard fixed overhead rate per day
Standard fixed overhead rate per day = 1308000/20*12 = ₹ 5450
Fixed Overhead Calendar Variance = (19-20) x 5450 = 5450(A)

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Jan-21. Q5 (b) (10 marks)

Premier Industries has a small factory where 52 workers are employed on an average for 25
days a month and they work 8 hours per day. The normal down time is 15%. The firm has
introduced standard costing for cost control. Its monthly budget for November, 2020 shows
that the budgeted variable and fixed overhead are ₹ 1,06,080 and ₹ 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the
end of the month:
Actual hours worked 8,100 hrs.
Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ₹ 1,02,000

Actual Fixed Overheads ₹ 2,00,000

You are required to calculate:
(i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio.

Solution:
Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance

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= Std. overhead for Actual hours – Actual variable Overhead

= ( ₹1,06,080 x 8,100 ) - ₹1,02,000
8,840
= 4800A
(b) Variable overhead efficiency variance
Std. rate per hour × (Std. hours for actual production – Actual hours)
₹ 1,06,080
= (8,800 hours – 8,100 hours)
8,840
= 8400 F

(ii) Fixed overhead variances

(a) Fixed overhead budget variance

= Budgeted overhead – Actual overhead
= ₹ 2,21,000 – ₹ 2,00,000
= 21,000 F

(b) Fixed overhead capacity variance

= Std rate x (Actual hours – budgeted hours)
₹ 2,21,000
= x (8,100 – 8,840)
8,840
= 18,500 A

(c) Fixed overhead efficiency variance

= Std rate x (Std hours for actual production – Actual hours)
₹ 2,21,000
= x (8,800 – 8,100)
8,840
= 17,500 F
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(iii) Control Ratios

(a) Capacity Ratio
Actual hours
= x 100
Budgeted hours

= x 100 = 91.63%
(b) Efficiency Ratio
Standard hours
= x 100
Actual hours
= 8,800 x 100 = 108.64 %
8,100
(c) Activity Ratio
Standard hours
= x 100
Budgted hours
= 8,800 x 100 = 99.55%
8,840

Nov-20. Q3 (a) (10 marks)

ABC Ltd. has furnished the following information regarding the overheads for the month of
June 2020:
(i) Fixed Overhead Cost Variance ₹ 2,800 (Adverse)
(ii) Fixed Overhead Volume Variance ₹ 2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June,2020 ₹ 12,000
(v) Actual rate of recovery of overheads ₹ 8 Per Hour
From the above given information

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Calculate:
(i) Fixed Overhead Expenditure Variance
(ii) Actual Overheads Incurred
(iii) Actual Hours for Actual Production
(iv) Fixed Overhead Capacity Variance
(v) Standard hours for Actual Production
(vi) Fixed Overhead Efficiency Variance
Solution:
(1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ₹ 12,000 – ₹ 12,800 (as calculated below) = ₹ 800 (A)

(2) Fixed Overhead Cost Variance= Absorbed Fixed Overheads – Actual Fixed
Overheads
2,800 (A) = ₹ 10,000 – Actual Overheads Actual Overheads = ₹ 12,800

(3) Actual Hours for Actual Production = ₹ 12,800/ ₹8 = 1,600 hrs.

(4) Fixed Overhead capacity Variance
= Budgeted Fixed Overheads for Actual Hours– Budgeted Fixed Overheads
= ₹ 5 x 1600 hrs. – ₹ 12,000 = ₹ 4,000 (A)
(5) Standard Hours for Actual Production
= Absorbed Overheads/ Std. Rate
= ₹ 10,000/ ₹ 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance
= Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ₹ 10,000 – ₹ 5 x 1,600 hrs. = ₹ 2,000 (F)

Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads

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2,000 (A) = Absorbed Fixed Overheads – ₹12,000 Absorbed Fixed Overheads

= ₹ 10,000
(ii) Standard Rate/ Hour = ₹ 5 (₹ 12,000/2,400 hrs.)

Nov-18. Q1 (b) (5 marks)

A manufacturing concern has provided following information related to fixed overheads:
Standard Actual
Output in a month 5000 units 4800 units
Working days in a month 25 days 23 days
Fixed overheads ₹ 5,00,000 ₹ 4,90,000
Compute:
(vii) Fixed overhead variance
(viii) Fixed overhead expenditure variance
(ix) Fixed overhead volume variance
(x) Fixed overhead efficiency variance
Solution:
Calculation of Variances:
(i) Fixed Overhead Variance: Standard fixed overhead – Actual fixed overhead
= ₹ [ (5,00,000÷5000) ×4800] – ₹ 4,90,000 = ₹ 10,000 (A)
(ii) Fixed Overhead Expenditure Variances: Budgeted fixed overhead – Actual fixed overhead
= ₹ 5,00, 000 – ₹ 4,90, 000 = ₹ 10,000 (F)
(iii) Fixed Overhead Volume Variance: Standard fixed overhead – Budgeted fixed overhead
= ₹ 4,80, 000 – ₹ 5,00, 000 = ₹ 20,000 (A)
(iv) Fixed Overhead efficiency Variance: Standard fixed overhead – Budgeted fixed overhead for
Actual days
= ₹ 4,80, 000 – [(₹ 5,00, 000÷25) ×23] = ₹ 20,000 (F)

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1

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SJ Ltd. has furnished the following information:

Standard overhead absorption rate per unit ₹ 20
Standard rate per hour ₹4
Budgeted production 12,000 units
Actual production 15,560 units
Actual overheads were ₹ 2,95,000 out of which ₹ 62,500 fixed . Actual
hours 74,000
Overheads are based on the following flexible budget
Production (units) 8,000 10,000 14,000
Total Overheads (₹) 1,80,000 2,10,000 2,70,000
You are required to calculate the following overhead variances (on hour’s basis)
with appropriate workings:
1. Variable overhead efficiency and expenditure variance
2. Fixed overhead efficiency and capacity variance.
Solution:
(a) Variable Overhead rate per unit
= Difference of Overhead at two level
Difference in Production units
= ₹2,10,000 - ₹1,80,000 = ₹15
10,000units - 8,000units
(b) Fixed Overhead = ₹ 1,80,000 - (8,000 units x ₹ 15) = ₹ 60,000
(c) Standard hours per unit of production = Std. Overhead Absorption Rate
Std. Rate per hour
= ₹20 = 5hours
₹4
(d) Standard Variable Overhead Rate per hour = Variable Overhead per unit
Std. hour per unit
= ₹15 = ₹3
5 hours
(e) Standard Fixed Overhead Rate per hour = ₹ 4- ₹ 3 = ₹ 1
(f) Actual Variable Overhead = ₹ 2,95,000 – ₹ 62,500= ₹ 2,32,500
(g) Actual Variable Overhead Rate per Hour = ₹2,32,500 = ₹3.1419
74,000hours
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(h) Budgeted hours = 12,000 units x 5 hours = 60,000 hours

(i) Standard Hours for Actual Production = 15,560 units x 5 hours = 77,800 hours
(i) Variable Overhead Efficiency and Expenditure Variance:
Variable Overhead Efficiency Variance = Std. Rate per hour (Std. Hours – Actual Hours)
= ₹ 3 (77,800 hours - 74,000 hours)
= ₹ 11,400 (F)
Variable Overhead Expenditure Variance = Actual Hours (Std. Rate - Actual Rate)
= 74,000 hours (₹ 3 - ₹ 3.1419)
= ₹ 10,500 (A)
(ii) Fixed Overhead Efficiency and Capacity Variance:
Fixed Overhead Efficiency Variance = Std. Rate per Hour (Std. Hours-Actual Hours)
= ₹ 1(77,800 hours -74,000 hours) = ₹ 3,800 (F)
Fixed Overheads Capacity Variance = Std. Rate per Hour (Actual Hours -Budgeted Hours)
= ₹ 1(74,000 hours – 60,000 hours)
= ₹ 74,000 - ₹ 60,000= ₹ 14,000 (F)

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Part-V: Mix variances

A. QUESTION FROM STUDY MATERIAL
TEST YOUR KNOWLEDGE
Question-14 (Material & Labour)
The following standards have been set to manufacture a product:
Direct Material: (₹)
2 units of A @ ₹ 4 per unit 8.00
3 units of B @ ₹3 per unit 9.00
15 units of C @ ₹1 per unit 15.00
32.00
Direct Labour: 3 hours @ ₹8 per hour 24.00
Total standard prime cost 56.00
The company manufactured and sold 6,000 units of the product during the year. Direct
material costs were as follows:
12,500 units of A at ₹4.40 per unit 18,000
units of B at ₹2.80 per unit 88,500 units of C
at ₹1.20 per unit
The company worked 17,500 direct labour hours during the year. For 2,500 of these hours,
the company paid at ₹12 per hour while for the remaining, the wages were paid at standard
rate.
CALCULATE (i) Materials price variance & Usage variance and (ii) Labour rate &
Efficiency variances.
Hints: MPV = ₹19,100(A), MUV = ₹500(A), LRV = ₹10,000(A), LEV = ₹4,000(F)

Question-15 (Mix Variance)

The following data has been collected from the cost records of a unit for computing the various
fixed overhead variances for a period:
Number of budgeted working days 25
Budgeted man-hours per day 6,000
Output (budgeted) per man-hour (in units) 1
Fixed overhead cost as budgeted ₹ 1,50,000
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Actual number of working days 27

Actual man-hours per day 6,300
Actual output per man-hour (in-units) 0.9
Actual fixed overhead incurred ₹ 1,56,000
CALCULATE fixed overhead variances:
(i) Expenditure Variance
(ii) Volume Variance,
(iii) Fixed Cost Variance.
Hints:
(i) Expenditure Variance: ₹6,000 (A)
(ii) Volume Variance: ₹3,090 (F)
(iii) Fixed Cost Variance: ₹2,910 (A)

Question-16
The following information is available from the cost records of Novell & Co. for the month of
March 2021:
Materials purchased 20,000 units @ ₹ 88,000
Materials consumed 19,000 units
Actual wages paid for 4,950 hrs. ₹ 24,750
Units produced 1,800 units
Standard rates and pieces are:
Direct material ₹ 4 per unit
Standard output 10 number for one unit
Direct labour rate ₹ 4.00 per hour
Standard requirement 2.5 hours per unit
You are required to CALCULATE relevant material and labour variance for the month.
Hints:
1. Material cost variance = ₹ 11,600 (A)
2. Material price variance = ₹ 7,600 (A)
3. Material usage variance = ₹ 4,000 (A)
4. Labour cost variance = ₹ 6,750 (A)
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5. Labour rate variance = ₹ 4,950 (A)

6. Labour efficiency variance = ₹ 1,800 (A)

Question-17 16.
Paras Synthetics uses Standard costing system in manufacturing of its product ‘Star 95 Mask’.
The details are as follows;
Direct Material 0.50 Meter @ ₹ 60 per meter₹ 30
Direct Labour 1 hour @ ₹ 20 per hour ₹ 20
Variable overhead 1 hour @ ₹ 10 per hour ₹ 10
Total ₹ 60

During the month of August, 10,000 units of ‘Star 95 Mask’ were manufactured.

Details are as follows:

Direct material consumed 5700 meters @ ₹ 58 per meter
Direct labour Hours ? @ ? ₹ 2,24,400
Variable overhead incurred ₹ 1,12,200
Variable overhead efficiency variance is ₹ 2,000 A. Variable overheads are based on Direct
Labour Hours.
You are required to calculate the missing data and all the relevant Variances.
Hints:
(i) Material Variances
Budget Std. for actual Actual
Price Amount Price Amount Price Amount
Quantity (₹) (₹) Quantity (₹) (₹) Quantity (₹) (₹)
Material 0.5 60 30 5,000 60 3,00,000 5,700 58 3,30,600
Material Cost Variance = ₹ 30,600(A)
Material Price Variance = ₹ 11,400 (F)
Material Usage Variance = ₹ 42,000 (A)

(ii) Variable Overheads variances = ₹ 12,200(A)

Variable overhead Efficiency Variance = ₹ 10,200 (A)

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(iii) Labour variances

Budget Std. for actual Actual
Rate Amount Rate Amount Rate Amount
Hours (₹) (₹) Hours (₹) (₹) Hours (₹) (₹)
Labour 1 20 20 10,000 20 2,00,000 10,200 22 2,24,400

Actual Rate = ₹ 2,24,400÷10,200 hours = ₹22

Labour Cost Variance = ₹ 24,400 (A)

Labour Rate Variance = ₹ 20,400 (A)
Labour Efficiency Variance = ₹ 4,000 (A)

B. PAST YEAR EXAM QUESTIONS

May-23. Q5(a) (10 marks)

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

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(ii) Calculate the material usage variance, labour cost variance, and labour efficiency
variance.
(iii) Calculate the fixed overhead cost variance, the fixed overhead expenditure variance
and the fixed overhead volume variance.
Note: Indicate the nature of variance i.e Favourable or Adverse.
Solution:
(i) Calculation of Standard price per kg and the standard quantity of raw material:
Standard Price
(a) Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
12,500 (F) = (SP × AQ) – ₹ 3,12,500
12,500 (F) = (SP × 25,000) – ₹ 3,12,500
SP = ₹ 13
Standard Quantity
(b) Material Cost Variance = Standard Cost – Actual Cost 1,800 (A) = SQ ×
₹13 – ₹ 3,12,500
SQ = 23,900 kg.

(ii) Calculation of Material Usage Variance, Labour Cost Variance and Labour
Efficiency Variance
(a) Material Usage Variance = Standard Cost of Standard Quantity for
Actual Output – Standard Cost of Actual Quantity
= SQ × SP – AQ × SP
Or
= SP × (SQ – AQ)
= ₹ 13 × (23,900 kg. – 25,000 kg.)
= ₹ 14,300 (A)
(b) Labour Cost Variance = Standard Cost – Actual Cost
= (SH × SR) – (AH × AR)
= ₹ 2,39,000 – ₹ 2,30,000
= ₹ 9,000 (F)
(c) Labour Efficiency Variance= Standard Cost of Standard Time for
Actual Production – Standard Cost of Actual Time
= (SH × SR) – (AH × SR)

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Or
= (SH – AH) × SR
= ₹ 50 × [4,780 hrs. – 5,000 hrs.]
= ₹ 11,000 (A)

(iii) Calculation of Fixed Overhead Cost Variance, Fixed Overhead Expenditure

Variance and Fixed Overhead Volume Variance:
(a) Fixed overhead cost variance = Standard Fixed Overheads –
Actual Fixed Overheads
= 18,279 – 19,500
= ₹ 1,221(A)
(b) Fixed Overhead Expenditure = Budgeted Fixed Overheads –
Actual Fixed Overheads
Variance = ₹ 19,120 – ₹ 19,500
= ₹ 380 (A)

(c) Fixed overhead volume variance = (Budgeted output – Actual Output) X

Budgeted rate per unit
= (2,00,000 – 1,91,200) 0.0956
= ₹ 8,800 x 0.0956
= ₹ 841 (A)

Alternative presentation to part (iii) (a) and (b)

(i) Fixed Overhead Cost Variance:
= Overhead absorbed for actual production – Actual overhead incurred
= ₹19,120 x 1,91,200 – 19,500 = ₹ 1,221(A)
2,00,000
(iii) Fixed Overhead Volume Variance:
= Absorbed overhead – Budgeted overhead
= ₹19,120 x 1,91,200 – 19,120 = ₹ 841(A)
2,00,000

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Working Notes:
1. Standard time to produce 10 units of product X is 15 minutes. Therefore we can
manufacture 40 units in an hour.
Hours available in a week
125 Workers x 40 Hours = 5,000 hours
Therefore budgeted output = 5,000 x 40 units per hour = 2,00,000 units
Alternatively
Budgeted time per unit = 15 units = 1.5 minutes
10 units
So, Budgeted output = 5, 000 Hours × 60 Minutes = 2,00,000 units
1.5 Minutes
Actual output = 23,900 x 8 units = 1,91,200 units
Standard hour for actual output = 1, 91, 200 × 0.25 Hrs = 4, 780 Hrs
10 units
2.
Labour
Budget Revised standard Actual
Hours Rate ₹ Hours Rate ₹ Hours Rate ₹
5,000 50 2,50,000 4,780 50 2,39,000 Skilled 3000 50 1,50,000
Semi-
Skilled 2000 40 80,000
5000 2,30,000
3.
Budget Actual
Units 2,00,000 1,91,200
Fixed Overheads 19,120 19,500

4. Standard Fixed overheads:

19,120 ×1,91,200 = ₹18,279
2,00,000
Budgeted rate per unit:
19,120 = ₹ 0.0956
2,00,000
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May-16. Q3(a) (8 marks)

X Associates undertake to prepare income tax returns for individuals for a fee. They use the
weighted average method and actual costs for the financial reporting purposes. However, for
internal reporting, they use a standard costs system. The standards, based on equivalent
performance, have been established as follows:
Labour per return 5 hrs @ ₹ 40 per hour
Overhead per return 5 hrs @ ₹ 20 per hour
For March 2015 performance, budgeted overhead is ₹98,000 for standard labour hours
allowed.
The following additional information pertains to the month of March 2015:
March 1 Return-in-process (25% complete) 200 No.
Return started in March 825 Nos
March 31 Return-in-process (80% complete) 125 Nos
Cost Data:
March 1 Return-in-process labour ₹ 12,000
- Overheads ₹ 5,000
March 1 to 31 Labour : 4,000 hours ₹ 1,78,000
Overheads ₹ 90,000
You are required to compute:
(a) For each element, equivalent units of performance and the actual cost per
equivalent unit.
(b) Actual cost of return-in-process on March 31.
(c) The standard cost per return.
(d) The labour rate and labour efficiency variance as well as overhead volume and
overhead expenditure variance.
Solution:
(a) Statement Showing Cost Elements Equivalent Units of Performance and the Actual
Cost per Equivalent Unit

Detail of Returns Detail of Details Equivalent Units

Input Output Labour Overheads
Units Units Units % Units %
Returns in 200 Returns 900 900 100 900 100
Process at Start Completed in
March
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Returns Started in 825 Returns in 125 100 80 100 80

March Process at the
end of March

1,025 1,025 1,000 1,000

Costs: (₹) (₹)

From previous month 12,000 5,000
During the month 1,78,000 90,000

Total Cost 1,90,000 95,000

Cost per Equivalent Unit 190.00 95.00

(b) Actual cost of returns in process on March 31:

Numbers Stage of Rate per Total
Completion Return (₹) (₹)
Labour 125 returns 0.80 190.00 19,000
Overhead 125 returns 0.80 95.00 9,500
28,500
(c) Standard Cost per Return:
Labour 5 Hrs × ₹ 40 per hour = ₹ 200
Overhead 5 Hrs × ₹ 20 per hour = ₹ 100
₹ 300
Budgeted volume for March = ₹ 98,000 / 1000 = 980 Returns
Actual labour rate = ₹ 178000 / 4000 = ₹44.50

(d) Computation of Variances:

Statement Showing Output (March only) Element Wise Labour Overhead
Actual performance in March in terms of equivalent units as
Calculated above 1,000 1,000
Less: Returns in process at the beginning of March in
terms of equivalent units i.e. 25% of returns (200) 50 50

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950 950
Variance Analysis:
Labour Rate Variance
= Actual Time × (Standard Rate – Actual Rate)
= Standard Rate × Actual Time – Actual Rate × Actual Time
= ₹ 40 × 4,000 hrs. – ₹ 1,78,000 = ₹ 18,000(A)

Labour Efficiency Variance

= Standard Rate × (Standard Time – Actual Time)
= Standard Rate × Standard Time – Standard Rate × Actual Time
= ₹ 40 × (950 units × 5 hrs.) – ₹ 40 × 4,000 hrs.
= ₹ 30,000(F)

Overhead Expenditure or Budgeted Variance

= Budgeted Overhead – Actual Overhead
= ₹ 98,000 – ₹ 90,000
= ₹ 8,000(F)

Overhead Volume Variance

= Recovered/Absorbed Overhead – Budgeted Overhead
= 950 Units × 5 hrs. × ₹20 – ₹ 98,000 = ₹ 3,000(A)

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (Material & Labour)
ABC Ltd. had prepared the following estimation for the month of April:
Quantity Rate (₹) Amount (₹)
Material-A 800 kg. 45.00 36,000
Material-B 600 kg. 30.00 18,000
Skilled labour 1,000 hours 37.50 37,500
Unskilled labour 800 hours 22.00 17,600
Normal loss was expected to be 10% of total input materials and an idle labour time of 5%
of expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost
accounting department:
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The company has produced 1,480 kg. finished product by using the followings:
Quantity Rate (₹) Amount (₹)
Material-A 900 kg. 43.00 38,700
Material-B 650 kg. 32.50 21,125
Skilled labour 1,200 hours 35.50 42,600
Unskilled labour 860 hours 23.00 19,780
You are required to calculate:
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Solution:
Material Variances:
SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (₹) (₹) (WN-2) (₹) (₹) (₹) (₹)
Material
A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700
B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825

WN-1: Standard Quantity (SQ):

Material A- 800kg. x 1,480kg. = 939.68 or 940 kg.
0.9 x 1,400kg.
Material B- 600kg. x 1,480kg. = 704.76 or 705 kg.
0.9 x 1,400kg.

WN- 2: Revised Standard Quantity (RSQ):

Material A- 800kg. x 1,550kg = 885.71 or 886 kg.

1,400kg.
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Material B- 600kg. x 1,550kg. = 664.28 or 664 kg.

1,400kg.

(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}

= {63,450 – 59,825} = 3,625 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {60,000 – 59,825} = 175 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 – 59,790} = 3,660 (F)
Labour Variances:
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (WN-4)
(₹) (₹) (₹) (₹) (₹) (₹)
Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380
WN- 3: Standard Hours (SH):
Skilled labour- 0.95 x 1,000hr. x 1,480kg. =1,115.87 or 1,116 hrs.
0.90 x 1,400kg.
Unskilled labour- 0.95x 800hr. x 1,480kg. = 892.69 or 893 hrs
0.90 x 1,400kg.
WN- 4: Revised Standard Hours (RSH):
Skilled labour- (1,000hr. / 1,800 hr.) x 2,060hr. = 1,144.44 or 1,144 hrs.
Unskilled labour- ( 800hr. / 1,800 hr.) x 2,060hr. = 915.56 or 916 hrs.
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380} = 884 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
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= {61,496 – 63,920} = 2,424 (A)

(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {61,496 – 63,052} = 1,556 (A)
Question-2 (All Variances)
SP Limited produces a product 'Tempex' which is sold in a 10 Kg. packet. The standard cost
card per packet of 'Tempex' are as follows:
(₹)
Direct materials 10 kg @ ₹ 45 per kg 450
Direct labour 8 hours @ ₹ 50 per hour 400
Variable Overhead 8 hours @ ₹ 10 per hour 80
Fixed Overhead 200
1,130
Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual cost for this quarter are as follows :

(₹)

Direct Materials 8,900 Kg @ ₹ 46 per 4,09,400

Kg.
Direct Labour 7,000 hours @ ₹ 52 per 3,64,000
hour
Variable Overhead incurred 72,500
Fixed Overhead incurred 1,92,000
You are required to calculate :
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance.
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Solution:
(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ₹ 45 (9,000 kg. – 8,900 kg.)
= ₹ 4,500 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 8,900 kg. (₹ 45 – ₹ 46) = ₹ 8,900 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kg. × ₹ 45) – (8,900 kg. × ₹ 46)
= ₹ 4,05,000 – ₹ 4,09,400
= ₹4,400 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ₹ 50 ( 9,000 x 8hours – 7,000 hrs.)
10
= ₹ 50 (7,200 hrs. – 7,000 hrs.)
= ₹ 10,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 7,000 hrs. (₹ 50 – ₹52)
= ₹ 14,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ₹ 50) – (7,000 hrs. × ₹ 52)
= ₹ 3,60,000 – ₹ 3,64,000
= ₹4,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ₹ 10) – ₹ 72,500
= ₹ 500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= ₹ 200 x 9,000kgs. - ₹1,92,000
10 kgs
= ₹ 1,80,000 – ₹ 1,92,000 = ₹ 12,000 (Adverse)
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Question-3 (All variances)

Gama Ltd. has furnished the following standard cost data per' unit of production: Material
10 kg @ ₹ 10 per kg.
Labour 6 hours @ ₹ 5.50 per hour Variable
overhead 6 hours @ ₹ 10 per hour.
Fixed overhead ₹ 4,50,000 per month (Based on a normal volume of 30,000 labour hours.) The
actual cost data for the month of August 2013 are as follows:
Material used 50,000 kg at a cost of ₹ 5,25,000.
Labour paid ₹ 1,55,000 for 31,000 hours worked
Variable overheads₹ 2,93,000
Fixed overheads ₹ 4,70,000
Actual production 4,800 units.
Calculate:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance.
Solution:
Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = ₹ 4,50,000 ÷ 5,000 units = ₹ 90 per unit
Or
= ₹ 4,50,000 ÷ 30,000 hours = ₹ 15 per hour.
(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × ₹10) - ₹ 5,25,000
= ₹ 4.80,000 – ₹ 5,25,000
= ₹ 45,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × ₹ 5.50) – ₹1,55,000
= ₹ 1,58,400 – ₹ 1,55,000
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= ₹ 3,400 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= (₹ 90 x 4,800 units) – ₹ 4,70,000
= ₹ 38,000 (A)
OR = (Budgeted Rate × Std. Hours) – Actual Overhead
= (₹ 15 x 4,800 units × 6 hours) – ₹ 4,70,000
= ₹ 38,000 (A)
(iv) Variable Overhead Cost Variance= (Std. Rate × Std. Hours) – Actual Overhead
= (4,800 units × 6 hours × ₹ 10) - ₹ 2,93,000
= ₹ 2,88,00 - ₹ 2,93,000
= ₹ 5,000 (A)
Question-4 (Material & Labour)
KPR Limited operates a system of standard costing in respect of one of its products which
is manufactured within a single cost centre. The Standard Cost Card of a product is as
under:
Standard Unit cost (₹ )
Direct material 5 kg. @ ₹ 4.20 21.00
Direct labour 3 hours @ ₹ 3.00 9.00
Factory overhead ₹ 1.20 per labour hour 3.60
Total manufacturing cost 33.60
The production schedule for the month of June, 2013 required completion of 40,000 units.
However, 40,960 units were completed during the month without opening and closing
work-in- process inventories.
Purchases during the month of June, 2013, 2,25,000 kg. of material at the rate of ₹ 4.50
per kg. Production and Sales records for the month showed the following actual
results.
Material used 2,05,600 kg.
Direct labour 1,21,200 hours; cost incurred ₹ 3,87,840
Total factory overhead cost incurred ₹ 1,00,000
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Sales 40,000 units

Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price.
Required:
(i) Calculate material variances based on consumption of material.
(ii) Calculate labour variances and the total variance for factory overhead.
(iii) Prepare Income statement for June, 2013 showing actual gross margin.
(iv) An incentive scheme is in operation in the company whereby employees are paid a
bonus of 50% of direct labour hour saved at standard direct labour hour rate. Calculate
the Bonus amount.
Solution:
(i) Material variances:
(a) Direct Material Cost Variance = Standard Cost – Actual Cost
= (40,960 units × 5 kg.× ₹ 4.20) – (2,05,600 kg.× ₹4.50)
= ₹ 8,60,160 – ₹ 9,25,200 = ₹ 65,040 (A)
(b) Material Price Variance = Actual Qty. (Std. Price – Actual Price)
= 2,05,600* kg. (₹ 4.20 – ₹4.50) = ₹ 61,680 (A)
(*Material variances are calculated on the basis of consumption)
(c) Material Usages Variance = Std. Price (Std. Qty. – Actual Qty.)
= ₹ 4.20 (40,960 units x 5 kg. – 2,05,600 kg.)
= ₹ 3,360 (A)
(ii) Labour Variances and Overhead Variances:
(a) Labour Cost Variance = Standard cost – Actual cost
= (40,960 units × 3 hours × ₹ 3) – ₹ 3,87,840
= ₹19,200 (A)
(b) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 1,21,200 hours (₹ 3 – ₹ 3.20)
= ₹ 24,240 (A)
(c) Labour Efficiency Variance = Std. Rate (Std. Hour – Actual Hour)
= ₹ 3 (40,960 units × 3 hour – 1,21,200 hour)
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= ₹ 5,040 (F)

(d) Total Factory Overhead Variance

= Factory Overhead Absorbed – Actual Factory Overhead
= (Actual Hours × Std. Rate) – Actual Factory Overhead
= (40,960 units × 3 hours × ₹1.20) – ₹1,00,000
= ₹ 47,456 (F)
(iii) Preparation of Income Statement
Calculation of unit selling price (₹)
Direct material 21.00
Direct labour 9.00
Factory overhead 3.60
Factory cost 33.60
Margin 25% on factory cost 8.40
Selling price 42.00

Income Statement
(₹) (₹)
Sales (40,000 units × ₹ 42) 16,80,000
Less: Standard cost of goods sold (40,000 units × 13,44,000
₹33.60)
3,36,000
Less: Adverse Variances:
Material Price variance 61,680
Material Usage variance 3,360
Labour Rate variance 24,240 89,280
2,46,720
Add: Favourable variances:
Labour efficiency variance 5,040
Factory overhead 47,456 52,496
Actual gross margin 2,99,216
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(iv)
(v) Labour hour saved (₹)
Standard labour hours (40,960 units x 3 hours) 1,22,880
Actual labour hour worked 1,21,200
Labour hour saved 1,680
Bonus for saved labour = 50% (1,680 hours x ₹ 3) = ₹ 2,520.

Question-5 (Ratio)
Calculate Efficiency and Capacity ratio from the following figures: Budgeted
production 80 units
Actual production 60 units
Standard time per unit 8 hours
Actual hours worked 500 hours.
Solution:
Efficiency Ratio = Actual output in terms of standard hours x 100
Actual hour worked
Or, 60 units x 8 hours x 100 Or, 480 hours x 100 = 96%
500 hours 500 hours

Capacity Ratio = Actual hour worked x 100

Budgeted hours
Or, 500 hours x 100 Or, 500 hours x 100 = 78.12%
80 units x 8 hours 640 hours

Question-6 (Sales variance)

Compute the sales variances (total, price and volume) from the following figures:

Product Budgeted Budgeted Price per Unit Actual Actual Price

quantity (₹) quantity per unit (₹)
P 4000 25 4800 30
Q 3000 50 2800 45
R 2000 75 2400 70
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S 1000 100 800 105

Solution:
Working:
Product Budgeted Actual Budgeted Actual Budgeted Standard Actual
Price Price Qty. Qty. Sales Sales (Actual sales (₹)
(₹) (₹) (₹) Sales at
Budgeted
price) (₹)
(a) (b) (c) (d) (e) = (a × (f) = (a × d) (g) =(b x d)
c)
P 25 30 4,000 4,800 1,00,000 1,20,000 1,44,000
Q 50 45 3,000 2,800 1,50,000 1,40,000 1,26,000
R 75 70 2,000 2,400 1,50,000 1,80,000 1,68,000
S 100 105 1,000 800 1,00,000 80,000 84,000
5,00,000 5,20,000 5,22,000
Calculation of Variances:
Sale Price Variance = Actual Quantity (Actual Price – Budgeted Price)
= Actual Sales – Standard. Sales
= ₹ 5,22,000 – ₹ 5,20,000 = ₹ 2,000 (F)

Sales Volume Variance = Budgeted Price (Actual Quantity – Budgeted Quantity)

= Standard Sales – Budgeted Sales
= ₹ 5,20,000 – ₹ 5,00,000 = ₹ 20,000 (F)
Total Sales Variance = Actual Sales – Budgeted Sales
= ₹ 5,22,000 – ₹ 5,00,000 = ₹ 22,000 (F)
Verification, Total Sales Variance = Sales Price Variance + Sales Volume Variance
₹ 22,000 (F) = ₹ 2,000 (F) + ₹ 20,000 (F)

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 Marginal Costing By: CA. PRAKASH PATEL

Chapter. 13: Marginal Costing

Part-A: Small concept based questions

(Marginal concept, BEPS, MOS, FC, P/V Ratio, Desired Sale etc).

A. QUESTION FROM STUDY MATERIAL

Question-1 (BEP)
MNP Ltd sold 2,75,000 units of its product at ₹37.50 per unit. Variable costs are ₹ 17.50
per unit (manufacturing costs of ₹ 14 and selling cost ₹ 3.50 per unit). Fixed costs are
incurred uniformly throughout the year and amounting to ₹ 35,00,000 (including
depreciation of ₹ 15,00,000). There is no beginning or ending inventories.
Required:
COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.
Hints: 1,75,000 units, 1,00,000 units
Question-2 (BEP & Desired Sale)
You are given the following particulars CALCULATE:
(a) Break-even point
(b) Sales to earn a profit of ₹ 20,000
i. Fixed cost ₹ 1,50,000
ii. Variable cost ₹ 15 per unit
iii. Selling price is ₹ 30 per unit
Hints: (a) 10,000 units, (b) ₹3,40,000
Question-3 (BEP & Fixed Cost)
PQR Ltd. has furnished the following data for the two years:
20X3 20X4
Sales ₹ 8,00,000 ?
Profit/Volume Ratio (P/V ratio) 50% 37.5%
Margin of Safety sales as a % of total sales 40% 21.875%

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There has been substantial savings in the fixed cost in the year 20X4 due to the
restructuring process. The company could maintain its sales quantity level of 20X3 in
20X4 by reducing selling price.
You are required to CALCULATE the following:
(i) Sales for 20X4 in Value,
(ii) Fixed cost for 20X4,
(iii) Break-even sales for 20X4 in Value.
Hints: (i) ₹6,40,000, (ii) ₹5,00,000, (iii) ₹1,87,500

Question-4 (BEP, P/V Ratio, MOS-Graphical Presentation)

You are given the following data for the year 20X7 of Rio Co. Ltd:

Variable cost 60,000 60%

Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
Find out (a) Break-even point, (b) P/V ratio, and (c) Margin of safety.
Also draw a break-even chart showing contribution and profit.
Hints: (a) ₹75,000, (b) 40%, (c) ₹25,000

Question-5 (BEP- Graphical Presentation)

PREPARE a profit graph for products A, B and C and find break-even point from the
following data:
Products A B C Total
Sales (₹) 7,500 7,500 3,750 18,750
Variable cost (₹) 1,500 5,250 4,500 11,250
Fixed cost (₹) --- --- --- 5,000
Hints: Composite BEP = ₹12,500

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Question-6 (MOS)
A company earned a profit of ₹ 30,000 during the year 20X4. If the marginal cost and
selling price of the product are ₹ 8 and ₹ 10 per unit respectively, FIND OUT the amount
of margin of safety.
Hints: MOS = ₹1,50,000
Question-7 (BEP & MOS)

A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio of
40%. Its fixed costs amount to ₹ 5 lakhs.
CALCULATE the following:
i. Break-even sales
ii. Total sales
iii. Total variable cost
iv. Current profit
New ‘margin of safety’ if the sales volume is increased by 7 ½ %.
Hints: (i) ₹12,50,000, (ii) ₹20,00,000, (iii) VC = ₹12,00,000, (iv) ₹3,00,000,
(v) New MOS = ₹9,00,000
Question-8 (Reasoning)
By noting “P/V will increase or P/V will decrease or P/V will not change”, as the case
may be, STATE how the following independent situations will affect the P/V ratio:
(i) An increase in the physical sales volume;
(ii) An increase in the fixed cost;
(iii) A decrease in the variable cost per unit;
(iv) A decrease in the contribution margin;
(v) An increase in selling price per unit;
(vi) A decrease in the fixed cost;
(vii) A 10% increase in both selling price and variable cost per unit;
(viii) A 10% increase in the selling price per unit and 10% decrease in the physical sales
volume;

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(ix) A 50% increase in the variable cost per unit and 50% decrease in the fixed cost.
(x) An increase in the angle of incidence.

TEST YOUR KNOWLEDGE

Question-1 (Basic- P/V Ratio)

If P/V ratio is 60% and the Marginal cost of the product is ₹ 20. CALCULATE the selling
price?
Hints: VC = ₹40 & SP = ₹100 and VC = ₹20 then SP = ₹50

Question-2 (Desire sale and profit)

The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity
sales. Find the capacity sales when fixed costs are ₹ 90,000. Also COMPUTE profit at 75%
of the capacity sales.
Hints: Profit (75% Capacity) = ₹22,500

Question-3 (Basic- FC & BEP)

(₹)
1. Determine profit, when sales = 2,00,000
Fixed cost = 40,000
BEP = 1,60,000
2. Determine sales, when fixed cost = 20,000
Profit = 10,000
BEP = 40,000
Hints: (i) ₹10,000, (ii) Sales = ₹60,000

Question-4 (Basic- FC & BEP)

A company has three factories situated in north, east and south with its Head Office in
Mumbai. The management has received the following summary report on the operations
of each factory for a period:

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(₹ in ‘000)
Sales Profit
Actual Over/(Under) Actual Over/(Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
CALCULATE for each factory and for the company as a whole for the period :
1. the fixed costs. 2. break-even sales.
Hints: (i) Fixed cost = ₹1,350, (ii) BEP (Total) = ₹2,500

Question-5 (BEP)
A company sells its product at ₹ 15 per unit. In a period, if it produces and sells 8,000 units,
it incurs a loss of ₹ 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ₹
4 per unit. CALCULATE break-even point both in terms of Value as well as in units.
Hints: Fixed Cost = ₹1,20,000, BEP = 12,000 units or ₹1,80,000

Question-6 (Mix)
You are given the following data:
Sales Profit
Year 20x8 ₹1,20,000 8,000
Year 20x9 ₹1,40,000 13,000
FIND OUT –
(i) P/V ratio,
(ii) B.E. Point,
(iii) Profit when sales are ₹1,80,000,
(iv) Sales required earn a profit of ₹12
(v) Margin of safety in year 20X9.
Hints: FC = ₹22,000, BEP = ₹88,000, Profit = ₹23,000, Sales = ₹1,36,000, MOS =
₹52,000

Question-7
A single product company sells its product at ₹60 per unit. In the year 20x8 company
operated at a margin of safety of 40%. The fixed cost amounted to ₹3,60,000 and the
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variable cost ratio to sales was 80%.

In 20X9, it is estimated that the variable cost will go up by 10% and the fixed cost will
increase by 5%.
(i) FIND the selling price required to be fixed in 20X9 to earn the same P/V
ratio as in 20X8.
(ii) Assuming the same selling price of ₹ 60 per unit in 20X9, FIND the number
of units required to be produced and sold to earn the same profit as in 20X8.
Hints: (i) Profit (20x8) = ₹2,40,000, SP (20x9) = 66 p.u.
(ii) No. of units = 85,834 units

Question-8 (MOS)
A company has made a profit of ₹ 50,000 during the year 20X8-X9. If the selling price
and marginal cost of the product are ₹ 15 and ₹ 12 per unit respectively, FIND OUT the
amount of margin of safety.
Hints: P/V ratio = 20%, MOS = ₹2,50,000

Question-9 (Basic)
(a) If margin of safety is ₹ 2,40,000 (40% of sales) and P/V ratio is 30% of AB Ltd,
CALCULATE its (1) Break even sales, and (2) Amount of profit on sales of
₹9,00,000.
(b) X Ltd. has earned a contribution of ₹2,00,000 and net profit of ₹1,50,000 of sales of
₹8,00,000. What is its margin of safety ?
Hints: (a) Profit = ₹1,62,000, (b) BEP = ₹2,00,000, MOS = ₹6,00,000

Question-10 (BEP, MOS and Desire sale)

A company had incurred fixed wxpenses of ₹4,50,000, with sales of ₹15,00,000 and earned
a profit of ₹3,00,000 during the first half year. In the second half, it suffered a loss of
₹1,50,000.
Calculate:
1. The profit-volume ratio, break-even point and margin of safety for the first half year.
2. Expected sales volume for the second half year assuming that selling price and fixed
expenses remained unchanged during the second half year.
3. The break-even point and margin of safety for the whole year.
Hints: (i) MOS = ₹6,00,000 (ii) Expected Sales = ₹6,00,000, (iii) MOS = ₹3,00,000

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Question-11 (BEP, P/V Ratio, FC)

The following information is given by Star Ltd.:
Margin of Safety ₹ 1,87,500
Total Cost ₹ 1,93,750
Margin of Safety 3,750 units
Break-even Sales 1,250 units
Required:
CALCULATE Profit, P/V Ratio, BEP Sales (in ₹) and Fixed Cost.
Hints: MOS = 75%, Sales = ₹2,50,000, Profit = ₹56,250, BEP = ₹62,500, FC = ₹18,750

Question-12 (BEP)
(a) You are given the following data for the coming year for a factory.
Budgeted output 8,00,000 units
Fixed expenses ₹40,00,000
Variable expenses per unit ₹ 100
Selling price per unit ₹ 200
Draw a break-even chart showing the break-even point.
(b) If price is reduced to ₹ 180, what will be the new break-even point?
Hints: (a) BEP = 40,000 units, (b) New BEP = 50,000 units

Question-13 (Simple Question)

A company has made a profit of ₹ 50,000 during the year. If the selling price and marginal
cost of the product are ₹ 15 and ₹ 12 per unit respectively, FIND OUT the amount of
margin of safety.
Hints: ₹ 2,50,000

B. PAST YEAR EXAM QUESTIONS

Jan-21. Q1(a) (5 marks)

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

Solution:
Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ₹ 10,00,000 x 63% = ₹ 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable
cost is ₹ 6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% - 30% = 70%
Thus, Revised sales = ₹ 6,30,000/70% = = ₹ 9,00,000
Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to
sales ratio
= ₹ 5,40,000 (₹ 9,00,000 x 60%) x 30%
= ₹ 1,62,000
(ii) Revised sales = ₹ 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= ₹ 9,00,000 x 60%
= ₹ 5,40,000

Nov-19. Q1(d) (5 marks)

When volume is 4000 units, average cost is ₹3.75 per unit. When volume is 5000 units,
average cost is ₹3.50 per unit. The Break-Even point is 6000 units.
Calculate: (i) Variable cost per unit, (ii) Fixed cost and (iii) Profit volume ratio.
Solution:

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Part-B: Unique Questions

(Marginal concepts, BEP, MOS, FC, P/V Ratio, Desired sale etc)

A. QUESTION FROM STUDY MATERIAL

Question-9 (Desired Sale)

A company has a P/V ratio of 40%. COMPUTE by what percentage must sales be
increased to offset: 20% reduction in selling price?
Hints: Sales to be increased by 60%
Question-10 (NP Ratio & Composite BEP)
M.K. Ltd. manufactures and sells a single product X whose selling price is ₹ 40 per unit
and the variable cost is ₹ 16 per unit.
(i) If the Fixed Costs for this year are ₹ 4,80,000 and the annual sales are at 60% margin
of safety, CALCULATE the rate of net return on sales, assuming an income tax
level of 40%
(ii) For the next year, it is proposed to add another product line Y whose selling price
would be ₹ 50 per unit and the variable cost ₹ 10 per unit. The total fixed costs are
estimated at ₹ 6,66,600. The sales mix of X : Y would be 7 : 3. DETERMINE at
what level of sales next year, would M.K. Ltd. break even? Give separately for both
X and Y the break-even sales in rupee and quantities.
Hints: (i) 21.6%
(ii)
X Y
BEP (Units) 16,202 6,944
BEP (₹) ₹6,48,080 ₹3,47,200

TEST YOUR KNOWLEDGE

Question-14 (Composite BEP)
The product mix of a Gama Ltd. is as under:

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Products
M N
Units 54,000 18,000
Selling price ₹ 7.50 ₹ 15.00
Variable cost ₹ 6.00 ₹ 4.50
FIND the break-even points in units, if the company discontinues product ‘M’ and
replace with product ‘O’. The quantity of product ‘O’ is 9,000 units and its selling price
and variable cost respectively are ₹18 and ₹9. Fixed costs ₹15,000.
Hints: BEP: N = 1,000 units, O = 500 units

Question-15
Prisha Limited manufactures three different products and the following information has
been collected from the books of accounts:
Products
A B C
Sales Mix 40% 35% 25%
Selling Price ₹ 300 ₹ 400 ₹ 200
Variable Cost ₹ 150 ₹ 200 ₹ 120
Total Fixed Costs ₹ 18,00,000
Total Sales ₹ 60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture
of Product C and replace it with Product E, when the following results are anticipated:

Products
A B E
Sales Mix 45% 30% 25%
Selling Price ₹ 300 ₹400 ₹ 300
Variable Cost ₹ 150 ₹200 ₹ 150
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Total Fixed Costs ₹ 18,00,000

Total Sales ₹ 64,00,000
Required:
(i) Calculate the total contribution to sales ratio and present break-even sales at
existing sales mix.
(ii) Calculate the total contribution to sales ratio and present break-even sales at
proposed sales mix.
(iii) State whether the proposed sales mix is accepted or not?
Hints: Present Break-Even Sales At Existing Sales Mix = ₹37,89,473.68
Present Break-Even Sales At Proposed Sales Mix. = ₹ 36,00,000

B. PAST YEAR EXAM QUESTIONS

May-23. Q1(c) (5 marks)

The following information pertains to ZB Limited for the year:
Profit volume ratio 30%
Margin of Safety (as % of total sales 25%
Fixed cost ₹ 12,60,000

You are required to calculate:

(i) Break even sales value (₹).
(ii) Total sales value (₹) at present,
(iii) Proposed sales value (₹) if company wants to earn the present profit after reduction of
10% in fixed cost,
(iv) Sales in value (₹) to be made to earn a profit of 20% on sales assuming fixed cost
remains unchanged,
(v) New Margin of Safety if the sales value at present as computed in (ii) decreased by
12.5%.
Solution:
(i) Calculation of Break-even sales in value:
= Fixed Cost ÷ P/V Ratio
= ₹ 12,60,000 ÷ 30% = ₹ 42,00,000
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(ii) Calculation of Total Sales value:

Sales value (S) = Break-even Sales + Margin of Safety Or, S = 42,00,000 + 0.25S
Or, 0.75 S = 42,00,000
Or, S = 42,00,000 ÷ 0.75
Or, Sales = ₹ 56,00,000

(iii) Calculation of proposed sales value to earn present profit:

Present profit = Sales – Variable cost – Fixed Cost
= ₹ 56,00,000 – 70% of 56,00,000 – ₹ 12,60,000
= ₹ 56,00,000 – ₹ 39,20,000 – ₹ 12,60,000
= ₹ 4,20,000
Proposed Sales value (S) = 0.7S + (90% of ₹ 12,60,000) + 4,20,000 S = 0.7S +
11,34,000 + 4,20,000
S = 15,54,000 ÷ 0.3 = ₹ 51,80,000

(iv) Calculation of sales value to earn 20% on sales:

Sales Value (S) = 0.7 S + 12,60,000 + 0.2S S = 12,60,0000 ÷ 0.10 = ₹ 1,26,00,000

(v) New Margin of Safety:

= (Sales – BES) ÷ Sales
= (87.5% of 56,00,000 – 42,00,000) ÷ (87.5% of 56,00,000)
= (49,00,000 – 42,00,000) ÷ 49,00,000
= 7,00,000 ÷ 49,00,000 = 14.29%
Or
= (Sales – BES)
= (87.5% of 56,00,000 – 42,00,000)
= ₹ 7,00,000

May-22. Q4(b) (5 marks)

UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps
and sells its lamps at ₹ 450 per unit.
During the quarter ending on 31st December, 2021, it produced and sold 12,000 units and
suffered a loss of ₹ 35 per unit.
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During the quarter ending on 31st March, 2022, it produced and sold 30,000 units and earned
a profit of ₹ 40 per unit.
You are required to calculate:
(i) Total fixed cost incurred by UV ltd. per quarter.
(ii) Break Even sales value (in rupees)
(iii) Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e., quarter
ending on 30th June, 2022).
Solution:

Quarter ending Quarter ending

31st 31st March,
December, 2022
2021 (₹) (₹)
Sales (No. of units sold x ₹ 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × [30,000 ×
35] 40]

P/V Ratio = Change in Profit ×100

Change in Sales
= 16,20,000 ×100 = 20%
81,00,000

(i) Fixed Cost = Sales × P/V ratio – profit

= ₹ 1,35,00,000 × 20% – 12,00,000
= ₹ 15,00,000

Alternative Presentation for the calculation of Fixed cost

Quarter ending Quarter ending
31st December, 31st March,
2021 2022
(₹) (₹)
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Marginal Costing By: CA. PRAKASH PATEL

Sales (No. of units sold x ₹ 450 per unit) 54,00,000 1,35,00,000

Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000

VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)

= 64,80,000 / 18,000 =₹ 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) ₹15,00,000

(ii) Break even sales value (in Rupees) = Fixed Cost x 100
P/V ratio
= 15,00,000 = ₹75,00,000
20%

(iii) Profit, if sales reach 50,000 units for the quarter ending 30th June, 2022
(₹)
Sales (50,000 × ₹ 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Contribution 45,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000

Dec-21. Q2(b) (10 marks)

AZ company has prepared its budget for the production of 2,00,000 units. The variable cost
per unit is ₹ 16 and fixed cost is ₹ 4 per unit. The company fixes its selling price to fetch a
profit of 20% on total cost.
You are required to calculate:
(i) Present break-even sales (in ₹ and in quantity).
(ii) Present profit-volume ratio.
(iii) Revised break-even sales in ₹ and the revised profit-volume ratio, if it reduces its
selling price by 10%.
(iv) What would be revised sales- in quantity and the amount, if a company desires a profit
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Marginal Costing By: CA. PRAKASH PATEL

increase of 20% more than the budgeted profit and selling price is reduced by 10% as
above in point (iii).
Solution:
Variable Cost per Unit=₹16
Fixed Cost per Unit =₹ 4, Total Fixed Cost= 2,00,000 units x ₹ 4 = ₹8,00,000
Total Cost per Unit =₹20
Selling Price per Unit=Total Cost+ Profit =₹ 20+₹ 4 =₹ 24
Contribution per Unit=₹ 24-₹16=₹ 8

(i) Present Break-even Sales (Quantity) = Fixed cost = ₹8,00,000

Contribution margin per unit ₹8
= 1,00,000 units
Present Break-even Sales (₹) = 1,00,000 units x ₹ 24 = ₹ 24,00,000
(ii) Present P/V Ratio = 8 x 100 = 33.33%
24
(iii) Revised Selling Price per Unit = ₹ 24 – 10% of ₹ 24 = ₹ 21.60
Revised Contribution per Unit=₹ 21.60-₹ 16 = ₹ 5.60
(iv) Revised P/V Ratio = 5.60 x 100 = 25.926 %
21.6
Revised Break-even point (₹) = Fixed cost = 8,00,000 = ₹ 30,85,705
P/V Ratio 25.926%
OR
Revised Break-even point (units) = Fixed cost
Contribution margin per unit
= 8,00,000 =1,42,857 Units
5.60
Revised Break-even point (₹) = 1,42,857 units x ₹ 21.60 = ₹ 30,85,711

Jan-21. Q3(a) (10 marks)

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

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Capacity utilisation (%) 90 60

Sales (₹) 63,00,000 48,00,000
Variable Cost (₹) 39,60,000 22,50,000
Fixed Cost (₹) 13,00,000 15,00,000
Assuming that the proposal is implemented, calculate:
(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ₹ 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ₹ 60,00,000, what
percentage of increase in selling price is required to sustain an increase of 5% in fixed
overheads.
Solution:
Workings:
1. Statement showing computation of Breakeven of merged plant and other
required information
S. Plan A Plant B Merged
No. Particulars Before After Before After Plant
(90%) (100%) (60%) (100%) (100%)
(₹) (₹) (₹) (₹) (₹)
(i) Sales 63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000
(ii) Variable cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000
(iii) Contribution 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(i - ii)
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000

2. PV ratio of merged plant = Contribution x 100

Sales
= ₹68,50,000 x 100
₹ 1,50,00,000

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Marginal Costing By: CA. PRAKASH PATEL

(i) Break even sales of merged plant = Fixed Cost

P/V Ratio
= ₹28,00,000
45.67%
= ₹ 61,30,939.34 (approx.)
Capacity utilisation = ₹ 61,30,939.34 x 100 = 40.88%
₹ 1,50,00,000

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

= (₹ 1,50,00,000 x 80%) x P/v ratio – fixed cost
= ₹ 1,20,00,000 x 45.67% – ₹ 28,00,000
= ₹ 26,80,400

(iii) Sales to earn a profit of ₹ 60,00,000

Desired sales = Fixed Cost + Desired Profit
P/V Ratio
= ₹ 28,00,000 + ₹60,00,000
45.67%
= ₹ 1,92,68,666 (approx.)

(iv) Increase in fixed cost

= ₹ 28,00,000 x 5% = ₹ 1,40,000
Therefore, percentage increase in sales price
= ₹1,40,000 x 100 = 0.726% (approx.)
₹ 1,92,68,666

May-19. Q5(a) (5 marks)

M/s Gaurav Private Limited is manufacturing and selling two products:
'BLACK' and 'WHITE' at selling price of ₹ 20 and ₹ 30 respectively.
The following sales strategy has been outlined for the financial year 2019-20:
(i) Sales planned for the year will be ₹ 81,00,000 in the case of 'BLACK' and ₹
54,00,000 in the case of 'WHITE'.
(ii) The selling price of 'BLACK' will be reduced by 10% and that of 'WHITE' by 20%.
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(iii) Break-even is planned at 70% of the total sales of each product.

(iv) Profit for the year to be maintained at ₹ 8,26,200 in the case of 'BLACK' and ₹
7,45,200 in the case of 'WHITE'. This would be possible by reducing the present
annual fixed cost of ₹ 42,00,000 allocated as ₹ 22,00,000 to 'BLACK' and ₹
20,00,000 to 'WHITE'.
You are required to calculate:
(1) Number of units to be sold of 'BLACK' and 'WHITE' to Break even during the
financial year 2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit
mentioned at (iv) above.
Solution:
(i) Statement showing Break Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (₹) 18 24
Number of Units to be sold 4,50,000 2,25,000
Break Even sales (in Units),70% of total sales 3,15,000 1,57,500
Or
Break Even sales (in ₹),70% of total sales 56,70,000 37,80,000

(ii) Statement Showing Fixed Cost Reduction

Profit to be maintained (₹) 8,26,200 7,45,200
Margin of Safety (70% of Sales) (₹) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (₹) 27,54,000 24,84,000
Less: Profit (₹) 8,26,200 7,45,200
Revised Fixed Cost (₹) 19,27,800 17,38,800
Present Fixed Cost (₹) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200

Nov-18. Q2(b) (10 marks)

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A manufacturing company is producing a product 'A' which is sold in the market at ₹45
per unit. The company has the capacity to produce 40000 units per year. The budget
for the year 2018-19 projects a sale of 30000 units.
The costs of each unit are expected as under:
₹
Materials 12
Wages 9
Overheads 6
Margin of safety is ₹ 4,12,500. You are required to:
(i) calculate fixed cost and break-even point.
(ii) calculate the volume of sales to earn profit of 20% on sales.
(iii) if management is willing to invest ₹ 10,00,000 with an expected return of 20%,
calculate units to be sold to earn this profit.
(iv) Management expects additional sales if the selling price is reduced to ₹ 44.
Calculate units to be sold to achieve the same profit as desired in above (iii).
Solution:
Margin of Safety = Profit = ₹4,12,500
P/V Ratio
= Profit = ₹4,12,500
45- (12+9+6)
45
= Profit = ₹4,12,500
18/45
Profit = ₹1,65,000 or P/V = (18/45) x 100 = 40%
(i) Fixed Cost
Profit = (Sales × P/V Ratio) – Fixed Cost
₹1,65,000 = (30,000 x 18/45) – Fixed Cost
Or Fixed Cost = ₹5,40,000 - ₹1,65,000
= ₹3,75,000
OR
Profit = Contribution – Fixed Cost=₹ 5,40,000-₹ 3,75,000 =₹.1,65,000
P/V Ratio = 18/45 = 40%

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Break-even Point = Total Sales – Margin of Safety

= ₹ (30,000 × 45) – 4,12,500
= 13,50,000 – 4,12,500 =₹ 9,37,500
OR
BEP Cost = Fixed = ₹3,75,000 = ₹9,37,000 or 20833.33 units
P/V Ratio 40%

(ii) Let’s assume, Sales Volume = S unit so total sales value is

45 S and Contribution is 45 S - 27 S =18 S
Now, Contribution = Fixed Cost + Desired Profit 18 S
= 3,75,000 + 9 S (20% of 45 S)
Or, 9S = 3,75,0000
So, S = 3,75,000 units
9
Volume of sale = 3,75,000 x 45 = ₹18,75,000 units or 41666.67
9
(iii) Contribution = Fixed Cost + Desired Profit
18S = 3,75,000 + Return on Investment
18S = 3,75,000 + 2,00,000

S = 5,75,000 units = 31,945 Units (approx.)

18
So,31,945 Units to be sold to earn a return of ₹ 2,00,000.
(iv) Revised Contribution = Fixed Cost + Desired Profit
17S = 3,75.000 + 2,00,000
S = 5,75,000 units
17
S = 33,824 units (approx.)
 Additional Sales to be sold to achieve the same profit is 33,824 Units.

May-18. Q5(b) (10 marks)

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Marginal Costing By: CA. PRAKASH PATEL

PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of

2,000 pieces. The Cost Accountant has presented following information for the year
to the management:

Particulars Amount (₹) Amount (₹)

Sales 1,500 pieces @ ₹ 1,800 per piece 27,00,000
Direct Material 5,94,200
Direct Labour 4,42,600
Overheads (40% Fixed) 11,97,000 22,33,800
Net Profit 4,66,300
Evaluate following options:
(i) If selling price is increased by ₹ 200, the sales will come down to 60% of the total
annual capacity. Should the company increase its selling price?
(ii) The company can earn a profit of 20% on sales if the company provide TIEPIN with
ready-made suit. The cost of each TIEPIN is ₹ 18. Calculate the sales to earn a
profit of 20% on sales.
Solution:
(i) Evaluation of Option (i)
Selling Price = ₹ 1800 + ₹ 200 = ₹ 2,000
Sales = 2000 x 60% = 1200 Pieces
(₹)
Sales (1,200 pieces @ ₹ 2,000) 24,00,000
Less: Direct Material (₹5,94,000 x 1200)
1500 units 4,75,360

Direct Labour (₹4,42,600 x 1200 )

1500 units 3,54,080

Variable Overhead ( ₹ 11,97,000x 60% × 1,200)

1500 units 5,74,560

Contribution 9,96,000

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Marginal Costing By: CA. PRAKASH PATEL

Less: Fixed cost ( Rs. 11,97,000x40% ) 4,78,800

Profit 5,17,200
If price has been increased by 11.11% (increases by 200 on 1,800) sales goes
down by 20% (decreased by 300 on 1,500). Change in demand is greater than
change in price. Since the variable costs are still same profit has been arose
to ₹ 5,17,200 in-spite of high elasticity of demand. PH gems would not be able
to sustain this policy on account of change if any in variable costs.

(ii) Evaluation of Option (ii)

(₹)
Sales 1,800.00
Less: Direct Material (₹5,94,200) 396.13
1,500

Cost of Tie PIN 18.00

Direct Labour (₹4,42,600) 295.07
1,500
Variable Overheads (₹11,97,000 x 60%) 478.80
1,500
Contribution 612.00
P/V Ratio (₹ 612/1800x100) 34.0%
Sales to required earn a profit of 20%
Sales = ₹ 4,78,800 + 0.20 of Sales
34.00 %
Sales = ₹ 34,20,000 or 1,900 units (₹ 34,20,000/1800)
To earn profit 20% on sales of readymade suit (along with TIE PIN) company
has to sold 1,900 units i.e. 95% of the full capacity. This sales level of 1,900
units is justified only if variable cost is constant. Any upside in variable cost
would impact profitability, to achieve the desired profitability. Production has
to be increased but the scope is limited to 5% only.
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 Marginal Costing By: CA. PRAKASH PATEL

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
A company produces single product which sells for ₹ 20 per unit. Variable cost
is ₹ 15 per unit and Fixed overhead for the year is ₹ 6,30,000.
Required:
(i) Calculate sales value needed to earn a profit of 10% on sales.
(ii) Calculate sales price per unit to bring BEP down to 1,20,000 units.
(iii)Calculate margin of safety sales if profit is ₹ 60,000.
Solution:
(a) Suppose Sales units are x then S = V + F + P
(S = Sales ; V = Variable Cost; F = Fixed Cost; P = Profit)
₹ 20x = ₹ 15x + ₹ 6,30,000 + ₹ 2x
₹ 20x - ₹17x = ₹ 6,30,000
x 6,30,000 = 2,10,000 units
3
Sales value = 2,10,000 units ₹ 20 = ₹ 42,00,000 to earn a profit of 10% on sales.
(b) Sales price to bring down BEP to 1,20,000 units
B.E.P (Units) = FixedCost
Contribution per unit
Or, Contribution per unit = ₹6,30,000 = ₹ 5.25
1,20,000units

So, Sales Price = ₹ 15 + ₹ 5.25 = ₹ 20.25

(c) Margin of Safety Sales = Profit or, ₹60,000

P/V Ratio P/V Ratio
where, P/V Ratio = Contribution per unit x 100 Or, ₹5 x 100 = 25%
Sales Price ₹20

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Marginal Costing By: CA. PRAKASH PATEL

Margin of Safety Sales = ₹ 60,000 = ₹2,40,000

25%
So if profit is ₹ 60,000, margin of safety sale will be ₹ 2,40,000.

Question-2
PQ Ltd. reports the following cost structure at two capacity levels:
(100% capacity) (75% capacity)
2,000 units 1,500 units
Production overhead I ₹ 3 per unit ₹ 4 per unit
Production overhead II ₹ 2 per unit ₹ 2 per unit
If the selling price, reduced by direct material and labour is ₹ 8 per unit, what would be
its break-even point?

Solution:
Computation of Break-even point in units:
2,000 units 1,500 units
Production Overhead I: Fixed Cost (₹) 6,000 6,000
(2,000 unit x ₹ (1,500 unit x ₹
3) 4)
Selling price – Material and labour (₹) (A) 8 8
Production Overhead II (Variable Overhead) (B) 2 2
Contribution per unit (A) – (B) 6 6
Breakeven Point = Fixed cost = ₹60,000 = 1,000 units
Contribution per unit ₹6

Question-3
MNP Ltd sold 2,75,000 units of its product at ₹ 37.50 per unit. Variable costs are ₹
17.50 per unit (manufacturing costs of ₹ 14 and selling cost ₹ 3.50 per unit). Fixed
costs are incurred uniformly throughout the year and amount to ₹ 35,00,000
(including depreciation of ₹15,00,000). there are no beginning or ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.

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Marginal Costing By: CA. PRAKASH PATEL

(iii) Estimate the number of units that must be sold to earn an income (EBIT) of ₹
2,50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of ₹ 2,50,000.
Assume 40% corporate Income Tax rate.
Solution:
(i) Contribution = ₹ 37.50 - ₹ 17.50 = ₹ 20 per unit.

Break even Sales Quantity = Fixed cost = ₹35,00,000 = 1,75,000 units

Contribution margin per unit ₹20

Cash Break even Sales Qty = Cash Fixed Cost = ₹20,00,000 = 1,00,000 units
Contribution margin per unit 20

(ii) P/V ratio = Contribution / unit x 100 = ₹20 x 100 = 53.33%

Selling Price / unit 37.50

(iii) No. of units that must be sold to earn an Income (EBIT) of ₹ 2, 50,000

Fixed cost + Desired EBIT level = 35,00,000 + 2,50,000 = 1,87,500 units

Contribution margin per unit 20

(iv) After Tax Income (PAT) = ₹2, 50,000

Tax rate = 40%
Desired level of Profit before tax = ₹2,50,000 x100 = ₹4,16,667
60
Estimate Sales Level = Fixed Cost + Desired Profit
P/ V ratio
Or, Fixed cost + desired profit x selling price per unit
Contribution per unit
= ₹35,00,000 + ₹4,16,667 = ₹73,43,750
53.33%

Question-4
The following figures are related to LM Limited for the year ending 31st March, 2014 :
Sales - 24,000 units @ ₹ 200 per unit; P/V Ratio 25% and Break-even Point 50% of
sales. You are required to calculate:
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Marginal Costing By: CA. PRAKASH PATEL

(i) Fixed cost for the year

(ii) Profit earned for the year
(iii) Units to be sold to earn a target net profit of ₹ 11,00,000 for a year.
(iv) Number of units to be sold to earn a net income of 25% on cost.
(v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

Solution:
Break- even point (in units) is 50% of sales i.e. 12,000 units.
Hence, Break- even point (in sales value) is 12,000 units x ₹ 200 = ₹ 24,00,000
(i) We know that Break even sales = Fixed cost
P/V Ratio
Or, ₹24,00,000 = Fixed cost
25%
Or, Fixed Cost = ₹24,00,000 x 25% = ₹6,00,000
So Fixed Cost for the year is ₹ 6,00,000
(ii) Contribution for the year = (24,000 units × ₹ 200) × 25% = ₹ 12,00,000
Profit for the year = Contribution – Fixed Cost
= ₹ 12,00,000 - ₹ 6,00,000 = ₹ 6,00,000
(iii) Target net profit is ₹11,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= ₹11,00,000 + ₹ 6,00,000 = ₹ 17,00,000
Contribution per unit = 25% of ₹ 200 = ₹ 50 per unit
No. of units = ₹17,00,000 = 34 units
₹50 per unit
So, 34,000 units to be sold to earn a target net profit of ₹ 11,00,000 for a year.
(iv) Net desired total Sales (Number of unit × Selling price) be x then desired profit
is 25% on Cost or 20% on Sales i.e. 0.2 x
Desired sales = Fixed cost + desired profit
P/V Ratio
x = 6,00,000 + 0.2 x
25%
or, 0.25 x = 6,00,000 + 0.2 x
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Marginal Costing By: CA. PRAKASH PATEL

or, 0.05 x = 6,00,000

or, x = ₹ 1,20,00,000
No. of units sold = ₹1,20,00,000 = 60,000 units
₹200
(v) If Break- even point is to be brought down by 4,000 units then Break-even point
will be 12,000 units – 4,000 units = 8,000 units
Let Selling price be ₹ x and fixed cost and variable cost per unit remain
unchanged i.e. ₹ 6,00,000 and ₹ 150 respectively.
Breakeven point: Sales revenue = Total cost 8,000 x = 8,000 × ₹ 150 + ₹ 6,00,000

Or, 8,000 x = ₹ 12,00,000 + ₹ 6,00,000

Or, x = ₹18,00,000 = ₹25
8,000
 Selling Price should be ₹ 225
Hence, selling price per unit shall be ₹ 225 if Break-even point is to be brought down
by 4,000 units.
Question-5
MFN Limited started its operation in 2012 with the total production capacity of 2,00,000
units. The following data for two years is made available to you:
2012 2013
Sales units 80,000 1,20,000
Total cost (₹) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is expected to
continue in 2014 as well. Selling price is ₹ 40 per unit.
You are required to calculate:
(i) Break-Even Point (in units)
(ii) Profit at 75% of the total capacity in 2014
Solution:
2012 2013 Difference
Sales Units 80,000 1,20,000 40,000

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Marginal Costing By: CA. PRAKASH PATEL

Sale Value @ ₹ 40 32,00,000 48,00,000 16,00,000

Total Cost (₹) 34,40,000 45,60,000 11,20,000
Variable Cost per unit = Change in total cost
Change in sale volume
= 11,20,000 = ₹28 per unit
40,000 units
Total Fixed Cost (₹) = ₹ 45,60,000 – (1,20,000 units × ₹28) = ₹12,00,000

(i) Break-even point (in units) = Fixed cost

Contribution per unit
= ₹12,00,000 = 1,00,000 units
(₹40 - ₹28)
(ii) Profit at 75% Capacity in 2014.
= (2,00,000 units × 75%) × Contribution per unit – Fixed Cost
= 1,50,000 units × ₹ 12 - ₹ 12,00,000 = ₹ 6,00,000.

Question-6
Arnav Ltd. manufacture and sales its product R-9. The following figures have been
collected from cost records of last year for the product R-9:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold ₹ 2,30,000
General & Administration Overhead 2% of Cost of Goods Sold ₹ 71,000
Selling & Distribution Overhead 4% of Cost of Sales ₹ 68,000
Last Year 5,000 units were sold at ₹185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
Solution:
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Marginal Costing By: CA. PRAKASH PATEL

Working Notes:
(i) Calculation of Cost of Goods Sold (COGS):
COGS = {(DM- 0.3 COGS) + (DL- 0.15 COGS) + (FOH- 0.10 COGS + ₹2,30,000)
+ (G&AOH- 0.02 COGS + ₹ 71,000)}
Or COGS = 0.57 COGS + ₹ 3,01,000
Or COGS = ₹3,01,000 = ₹7,00,000
0.43
(ii) Calculation of Cost of Sales (COS):
COS = COGS + (S&DOH- 0.04 COS + ₹ 68,000)
Or COS = ₹ 7,00,000 + (0.04 COS + ₹ 68,000)
Or COS = ₹7,68,000 = ₹8,00,000
0.96

(iii) Calculation of Variable Costs:

Direct Material - (0.3 × ₹ 7,00,000) ₹ 2,10,000
Direct Labour- (0.15 × ₹ 7,00,000) ₹ 1,05,000
Factory Overhead- (0.10 × ₹ 7,00,000) ₹ 70,000
General & Administration OH- (0.02 × ₹ 7,00,000) ₹ 14,000
Selling & Distribution OH (0.04 × ₹ 8,00,000) ₹ 32,000
₹4,31,000

(iv) Calculation of total Fixed Costs:

Factory Overhead- ₹ 2,30,000
General & Administration OH- ₹ 71,000
Selling & Distribution OH- ₹ 68,000
₹3,69,000

(v) Calculation of P/V Ratio:

P/V ratio = Contribution x 100 = Sales – variable cost x 100
Sales Sales
= (₹185 x 5,000 units) – ₹4,31,000 x 100 = 53.41%
₹185 x 5,000 units

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Marginal Costing By: CA. PRAKASH PATEL

(a) Break-even sale = Fixed cost =₹3,69,000 = ₹6,90,882

P/V ratio 53.41%
(b) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 1,25,000
(c) Margin of safety (%) = Sales – Breakeven sales x 100
Sales
= ₹9,25,000 – 6,90,882 x 100 = 25.31%
₹9,25,000
(d) Profit if the sales were 10% less than the actual sales:
Profit = 90% (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 4,44,600 - ₹ 3,69,000 = ₹ 75,600
Question-7
Maxim Ltd. manufactures a product “N-joy”. In the month of August 2014, 14,000
units of the product “N-joy” were sold, the details are as under:
(₹)

Sale Revenue 2,52,000

Direct Material 1,12,000
Direct Labour 49,000
Variable Overheads 35,000
Fixed Overheads 28,000
A forecast for the month of September 2014 has been carried out by the General
manger of Maxim Ltd. As per the forecast, price of direct material and variable
overhead will be increased by 10% and 5% respectively.
Required to calculate:
(i) Number of units to be sold to maintain the same quantum of profit that made in
August 2014.
(ii) Margin of safety in the month of August 2014 and September 2014.
Solution:
Calculation of Profit made in the month of August 2014 by selling 14,000 units.
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Marginal Costing By: CA. PRAKASH PATEL

Amount per unit Amount (₹)

(₹)
Sales Revenue 18.00 2,52,000
Less: Variable Costs:
-
Direct Material 8.00 1,12,000
-
Direct Labour 3.50 49,000
- - Variable Overhead 2.50 35,000
Contribution 4.00 56,000
Less: Fixed Overhead 2.00 28,000
Profit 2.00 28,000
(i) To maintain the same amount of profit i.e. ₹ 28,000 in September 2014 also, the
company needs to maintain a contribution of ₹ 56,000.
Let, number of units to be sold in September 2014 is ‘x’, then the contribution
will be
₹ 18 x – [(₹8 × 1.10) + ₹ 3.5 + (₹ 2.5 × 1.05)] x = ₹ 56,000
₹ 18 x – (₹ 8.8 + ₹ 3.5 + ₹ 2.625) x = ₹ 56,000
Or, x = ₹56,000 = 18,211.38 units or 18,212 units
₹3.075

(ii) Margin of safety

August 2014 September
2014
Profit ₹ 28,000 ₹ 28,000
P/V Ratio ₹4 x 100 ₹3.075 x 100
₹18 ₹18
₹1,26,000 ₹1,63,902.44
Margin of Safety (Profit x 100) (28,000 x 18 x 100) (28,000 x 18 x 100)
P/V Ratio 400 307.5

Question-8
Maryanne Petrochemicals Ltd. is operating at 80 % capacity and presents the following
information:
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Marginal Costing By: CA. PRAKASH PATEL

Break-even Sales ₹ 400 crores

P/V Ratio 30 %
Margin of Safety ₹ 120 crores
Maryanne’s management has decided to increase production to 95 % capacity level
with the following modifications:
(a) The selling price will be reduced by 10%.
(b) The variable cost will be increased by 2% on sales
(c) The fixed costs will increase by ₹ 50 crores, including depreciation on additions,
but excluding interest on additional capital.
Additional capital of ₹ 100 crores will be needed for capital expenditure and working
capital.
Required:
(i) Indicate the sales figure, with the working, that will be needed to earn ₹ 20
crores over and above the present profit and also meet 15% interest on the
additional capital.
(ii) What will be the revised
(a) Break-even Sales
(b) P/V Ratio
(c) Margin of Safety
Solution:
Working Notes:
1. Total Sales = Break -even Sales + Margin of Safety
= ₹ 400 crores + ₹ 120 crores
= ₹ 520 crores
2. Variable Cost = Total Sales × (1- P/V Ratio)
= ₹ 520 crores × (1 – 0.3)
= ₹ 364 crores
3. Fixed Cost= Break-even Sales × P/V Ratio
= ₹ 400 crores × 30%
= ₹ 120 crores
4. Profit = Total Sales – (Variable Cost + Fixed Cost)

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Marginal Costing By: CA. PRAKASH PATEL

= ₹ 520 crores – (₹ 364 crores + ₹ 120 crores)

= ₹ 36 crores
(i) Revised Sales figure to earn profit of ₹ 56 crores (i.e. ₹ 36 crores + ₹ 20 crores)
Revised Sales = Revised Fixed cost* + Desired profit
Revised P/V ratio**
= ₹185 crores + ₹56 crores
28%
= ₹860.71 Crores
*Revised Fixed Cost = Present Fixed Cost + Increment in fixed cost + Interest on
additional Capital
= ₹ 120 crores + ₹ 50 crores + 15% of ₹ 100 crores
= ₹ 185 crores

**Revised P/V Ratio : Let current selling price per unit be ₹ 100.
Therefore, Reduced selling price per unit = ₹ 100 × 90% = ₹ 90
Revised Variable Cost on Sales = 70%+ 2% = 72%
Variable Cost per unit = ₹ 90 × 72% = ₹ 64.80
Contribution per unit = ₹ 90 - ₹ 64.80 = ₹ 25.20
Revised P/V ratio = Contribution x 100 = ₹25.2 x 100 = 28%
Sales ₹90
(ii) (a) Revised Break-even Sales = Fixed cost x 100 = ₹185 crores = ₹660.71
crores P/V ratio 28%
(b) Revised P/V Ratio = 28% (as calculated above)
(c) Revised Margin of safety = Total Sales – Break-even Sales
= ₹ 860.71 crores - ₹ 660.71 crores
= ₹ 200 crores.
Question-9
Maximum Production capacity of KM (P) Ltd. is 28000 units per month. Output at
different levels along with cost data is furnished below:
Activity Level
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Marginal Costing By: CA. PRAKASH PATEL

Particulars of Costs 16,000 units 18,000 units 20,000 units

Direct Material ₹ 12,80,000 ₹ 14,40,000 ₹ 16,00,000

Direct labour ₹ 17,60,000 ₹ 19,80,000 ₹ 22,00,000

Total factory overheads ₹ 22,00,000 ₹ 23,70,000 ₹ 25,40,000

You are required to work out the selling price per unit a an activity level of 24,000 units
by considering profit at the rate of 25% on sales.
Solution:
Computation of Overheads:
Variable overheads per unit = Change in factory overheads
Change in factory level

= 23,70,000 – 22,00,000 or 25,40,000 – 23,70,000

18000- 16,000 20,000 – 18,000
=17,000 = ₹85 per unit
2,000

Fixed Overhead
Activity level = 16,000 units
Particulars Amount (₹)
Total factory overheads 22,00,000
Less : Variable overheads 16,000 units @ ₹85 per unit 13,60,000

Fixed Overhead 8,40,000

Computation of Costs at Activity Level 24,000 units
Per Unit (₹) Amount (₹)
Direct Material (12,80,000/16,000) 80.00 19,20,000
Direct Labour (17,60,000/16,000) 110.00 26,40,000
Variable Overhead ( As calculated above) 85.00 20,40,000
Fixed Overhead 8,40,000
Total Cost 74,40,000
Computation of Selling Price at activity level 24,000 units
Profit required is 25% on selling price, hence cost will be 75%.
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Marginal Costing By: CA. PRAKASH PATEL

Therefore, desired profit = 25 x 74,40,000 = ₹24,80,000

75
Cost of 24,000 units 74,40,000
Desired Profit 24,80,000
Total Sales 99,20,000
Selling price per unit = Total sales = 99,20,000 = ₹413.33 or ₹413
No. of units 24,000

Question-10 (RTP Nov. 20) New Course

SK Lit. is engaged in the manufacture of tyres. Analysis of income statement indicated a profit
of ₹ 150 lakhs on a sales volume of 50,000 units. The fixed costs are ₹ 850 lakhs which
appears to be high. Existing selling price is ₹ 3,400 per unit. The company is considering to
revise the profit target to ₹ 350 lakhs. You are required to compute –
(i) Break- even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%.
(iii) Volume to be achieved to earn target profit at the revised selling price as calculated in
(ii) above, if a reduction of 8% in the variable costs and ₹ 85 lakhs in the fixed cost is
envisaged.
Solution:
Sales Volume 50,000 Units
Computation of existing contribution
Particulars Per unit (₹) Total (₹ In lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700
(i) Break-even sales in units = Fixed cost = ₹85,00,000 = 42,500 units
Contribution per unit 2,000
Break even sales in rupees = 42,500 units × ₹ 3,400 = ₹ 1,445 lakhs
OR
P/V Ratio = 2,000 x 100 = 58.82%
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Marginal Costing By: CA. PRAKASH PATEL

3,400

B.E.P. (Rupees) = FC = 8,50,00,000 = ₹1445 Lakhs (approx.)

P/V Ratio 58.82%
(ii) Number of units sold to achieve a target profit of ₹350 lakhs:
Desired Contribution = Fixed Cost + Target Profit
= 850 L + 350 L = 1,200L
No. of units to be sold = Desired contribution = 12,00,00,000 = 60,000 units
Contribution per unit 2,000

(iii) Profit if selling price is increased by 15% and sales volume drops by 10%:
Existing Selling Price per unit = ₹ 3,400
Revised selling price per unit = ₹ 3,400 x 115% = ₹ 3,910
Existing Sales Volume = 50,000 units
Revised sales volume = 50,000 units – 10% of 50,000 = 45,000 units.

Statement of profit at sales volume of 45,000 units @ ₹ 3910 per unit

Particulars Per unit (₹) Total (₹ In lakhs)
Sales 3,910.00 1,759.50

Less: Variable Costs 1,400.00 630.00

Contribution 2,510.00 1,129.50

Less: Fixed Cost 850.00

Profit 279.50
(vi) Volume to be achieved to earn target profit of ₹350 lakhs with revised selling
price and reduction of 8% in variable costs and ₹85 lakhs in fixed cost:
Revised selling price per unit = ₹ 3,910
Variable costs per unit existing = ₹1,400
Revised Variable Costs
Reduction of 8% in variable costs = ₹ 1,400 – 8% of 1,400
= ₹ 1,400 – ₹112 = ₹1,288

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Marginal Costing By: CA. PRAKASH PATEL

Total Fixed Cost (existing) = ₹ 850 lakhs

Reduction in fixed cost = ₹ 85 lakhs
Revised fixed cost = ₹ 850 lakhs – ₹ 85 lakhs = ₹765 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = ₹ 3,910 – ₹ 1,288 = ₹ 2,622
Desired Contribution = Revised Fixed Cost + Target Profit
= ₹ 765 lakhs + ₹350 lakhs = ₹1,115 lakhs
No. of units to be sold = Desired contribution = ₹1,115 lakhs = 42,525 units
Contribution per units ₹2,622

Part-C: Cost Indifference and Shut-down Point

A. QUESTION FROM STUDY MATERIAL

TEST YOUR KNOWLEDGE

Question-16 (Shut-down point)
Mr. X has 2,00,000 investments in his business firm. He wants a 15 per cent return on his
money. From an analysis of recent cost figures, he finds that his variable cost of operating is
60 per cent of sales, his fixed costs are ₹ 80,000 per year. Show COMPUTATIONS to answer
the following questions:
(i) What sales volume must be obtained to break even?
(ii) What sales volume must be obtained to get 15 per cent return on investment?
(iii) Mr. X estimates that even if he closed the doors of his business, he would incur
₹ 25,000 as expenses per year. At what sales would he be better off by locking
his business up?
Hints: (i) BEP = ₹2,00,000 (ii) Contribution = ₹1,10,000 (iii) Shut down point =
₹1,37,500
Question-17 (Cost Indifference)
The following are cost data for three alternative ways of processing the clerical work for
cases brought before the LC Court System:

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Marginal Costing By: CA. PRAKASH PATEL

A B C
Manual (₹) Semi-Automatic (₹) Fully-Automatic (₹)

Monthly fixed
cost:
Occupancy 15, 000 15,000 15,000
Maintenance --- 5,000 10,000
contract
Equipment lease --- 25,000 1,00,000
Unit Variable
Costs (per
report):
Supplies 40 80 20
Labour ₹200 ₹60 ₹20
(5 hrs × ₹40) (1 hr × ₹60) (0.25 hr × ₹80)
Required
(i) CALCULATE cost indifference points. Interpret your results.
(ii) If the present case load is 600 cases and it is expected to go up to 850 cases
in near future, SELECT most appropriate on cost considerations?
Hints: Cost indifference: A& B = 300 units, B & C = 800 units, A & C = 550 units
Question-18 (BEP & Cost-Indifference)
XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You
are given that the unit contribution of Y is onefifth less than the unit contribution of X, that
the total of F 1 and F2 is ₹1,50,000, that the BEP of X is 1,800 units (for BEP of X, F2 is
not considered) and that 3,000 units is the indifference point between X and Y.(i.e. X and
Y make equal profits at 3,000 unit volume, considering their respective fixed costs). There
is no inventory buildup as whatever is produced is sold.
Required
FIND OUT the values F1 and F2 and units contributions of X and Y.
Hints:
Contribution FC
X 50 ₹90,000
Y 40 ₹60,000

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B. PAST YEAR EXAM QUESTIONS

July-21 Q1(b) (5 marks)

LR Ltd. is considering two alternative methods to manufacture a new product it intends to
market. The two methods have a maximum output of 50,000 units each and produce identical
items with a selling price of ₹ 25 each. The costs are:

Method-1 Method-2
Semi-Automatic Fully-Automatic
(₹) ( ₹)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000
You are required to calculate:
(1) Cost Indifference Point in units. Interpret your results.
(2) The Break-even Point of each method in terms of units.
Solution:
(i) Cost Indifference Point

Method-1 and Method-2

(₹)
Differential Fixed Cost (I) ₹ 2,00,000
(₹ 3,00,000 – ₹ 1,00,000)
Differential Variable Costs (II) ₹5
(₹ 15 – ₹ 10)
Cost Indifference Point (I/II) 40,000
(Differential Fixed Cost / Differential Variable Costs
per unit)

Interpretation of Results

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At activity level below the indifference points, the alternative with lower fixed costs and
higher variable costs should be used. At activity level above the indifference point,
alternative with higher fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Method-1, Semi-Automatic
Product ≥ 40,000 units Method-2, Automatic

Break Even point (in units)

Method-1 Method-2
Fixed cost 1,00,000 3,00,000
BEP (in units) = = 10,000 = 20,000
Contribution per unit (25-15) (25-10)

Part-D: Miscellaneous Questions

A. QUESTION FROM STUDY MATERIAL

Question-11 (Profit Calc. under –Marginal & Absorption)

Wonder Ltd. manufactures a single product, ZEST. The following figures relate to ZEST
for a one-year period:
Activity Level 50% 100%
Sales and production (units) 400 800
(₹) (₹)
Sales 8,00,000 16,00,000
Production costs:
- Variable 3,20,000 6,40,000
- Fixed 1,60,000 1,60,000
Selling and distribution costs:
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Marginal Costing By: CA. PRAKASH PATEL

- Variable 1,60,000 3,20,000

- Fixed 2,40,000 2,40,000
The normal level of activity for the year is 800 units. Fixed costs are incurred evenly
throughout the year, and actual fixed costs are the same as budgeted. There were no stocks
of ZEST at the beginning of the year.
In the first quarter, 220 units were produced and 160 units were sold. Required:
(a) COMPUTE the fixed production costs absorbed by ZEST if absorption costing is used?
(b) CALCULATE the under/over-recovery of overheads during the period?
(c) CALCULATE the profit using absorption costing?
(d) CALCULATE the profit using marginal costing?
Hints: (a) ₹44,000, (b) ₹4,000, (c) Profit = ₹40,000, (d) Profit = ₹28,000
Question-12 (Profit Calculation)
The profit for the year of R.J. Ltd. works out to 12.5% of the capital employed and the
relevant figures are as under:
Sales ₹ 5,00,000
Direct Materials ₹ 2,50,000
Direct Labour ₹ 1,00,000
Variable Overheads ₹40,000
Capital Employed ₹ 4,00,000
The new Sales Manager who has joined the company recently estimates for next year a
profit of about 23% on capital employed, provided the volume of sales is increased by 10%
and simultaneously there is an increase in Selling Price of 4% and an overall cost reduction
in all the elements of cost by 2%.
Required:
Find Out by computing in detail the cost and profit for next year, whether the proposal of
Sales Manager can be adopted.
Hints: Proposal of sales manager should be accepted (ROCE = 23.19%, Profit =
₹92,780).
Question-13 (Opportunity Cost)
A company can make any one of the 3 products X, Y or Z in a year. It can exercise its
option only at the beginning of each year.
Relevant information about the products for the next year is given below.

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X Y Z
Selling Price (₹ / unit) 10 12 12
Variable Costs (₹ / unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs (₹) 30,000
Required
COMPUTE the opportunity costs for each of the products.
Hints: Opportunity cost: X = ₹6,000, Y = ₹8,000, Z = ₹8,000
Question-14 (Decision making – Key factor)
X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X
Ltd. facilitates production of any one spare part for a particular period of time. The
following are the cost and other information for the production of the two different spare
parts A and B:
Part A Part B
Per unit
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine A 0.6 hrs 0.25 hrs.
Machine Time: Machine B 0.5 hrs. 0.55 hrs.
Target Price (₹) 145 115
Total hours available Machine A 4,000 hours
Machine B 4,500 hours
Alloy available is 13,000 kgs. @ ₹ 12.50 per kg.
Variable overheads per machine hours Machine A: ₹ 80
Machine B: ₹ 100
Required
(i) Identify the spare part which will optimize contribution at the offered price.
(ii) If Y Ltd. reduces target price by 10% and offers ₹ 60 per hour of unutilized machine
hour, calculate the total contribution from the spare part identified above?
Hints: (i) Spare part ‘A’ shall optimize contribution (i.e. A = 1,79,982 & B = 1,62,500)
(ii) Total Contribution = ₹1,53,345

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Question-15 (Decision making)

ABC Limited produces and sells two product- X and Y. The product is highly demanded
in the market. Following information relating to both the products are given as under :
X Y
Direct Materials 140 180
Direct Wages 60 100
Variable Overheads (₹ 5 per machine hour) 20 40
Selling price 300 450
The company is facing scarcity of machine hours for working. The availability of
machine hours are limited to 60,000 hrs in a month. At present, the monthly demand of
product X and product Y is 8,000 units and 6,000 units respectively. The fixed expenses
of the company are ₹ 2,25,000 per month.
You are required to:
DETERMINE the product mix that generates maximum profit to the company in the
given situation and also CALCULATE the profit of the company.
Hints:
(i) Product mix to maximise the profit
Produce ‘X’ = 8,000 units
Hours Required = 32,000 hrs (8,000 units × 4 hrs.)
Balance Hours Available = 28,000 hrs (60,000 hrs. – 32,000 hrs.)
Produce ‘Y’ (balance) = 3,500 units (28,000 hrs./ 8 hrs.)
(ii) Profitability of the concern in the best Product mix
X (₹) Y (₹) Total (₹)
Sales (in units) 8,000 units 3,500 units
Contribution per unit 80 130
Contribution 6,40,000 4,55,000 10,95,000
Less: Fixed cost 2,25,000
Profit 8,70,000

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Question-16 (Special Order)

PQR Ltd. manufactures medals for winners of athletic events and other contests. Its
manufacturing plant has the capacity to produce 10,000 medals each month. The
company has current production and sales level of 7,500 medals per month. The current
domestic market price of the medal is ₹ 150.
The cost data for the month of August 2021 is as under:
(₹
)
Variable costs:
- Direct materials 2,62,500
- Direct labour cost 3,00,000
- Overhead 75,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,75,000
10,87,500
PQR Ltd. has received a special one-time only order for 2,500 medals at ₹ 120 per medal.
Required:
(i) Should PQR Ltd. accept the special order? Why? EXPLAIN briefly.
(ii) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each
month. The special order must be taken either in full or rejected totally.
ANALYSE whether PQR Ltd. should accept the special order or not.
Hints:
(i) The offer for 2,500 unit be accepted as it increases the profit by ₹ 87,500 (₹
1,25,000 – ₹ 37,500).
(ii) By accepting the special order at ₹ 120 per unit, the total profit of the company is
increased by ₹ 22,500 (₹ 60,000 – ₹ 37,500) hence the order may be accepted,
however, other qualitative factors may also be taken care-off.

Question-17 (Make or Buy Decision)

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

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Marginal Costing By: CA. PRAKASH PATEL

Direct materials cost ₹ 375 per unit

Direct labour cost ₹ 80 per unit
Variable factory overhead ₹ 16 per unit
Fixed factory overhead ₹ 500 lakhs
The purchase price of the component is ₹ 485. The fixed overhead would continue to be
incurred even when the component is bought from outside.
REQUIRED:
(a) Should the part be made or bought from outside considering that the present
facility when released following a buying decision would remain idle?
(b) In case the released capacity can be rented out to another manufacturer for
₹ 32,00,000 having good demand. What should be the decision?
Hints:
(a) The decision shall be made comparing the marginal cost of making and buying
the component.
Here the variable cost of making the component is ₹ 471 as compared to buying
cost of ₹ 485. The component shall be made by using own production facility as
it would save the company ₹ 14 per unit.
(b) If by releasing the production facility the company can earn a rental income of ₹
32,00,000, then the additional cost of buying from outside and the rental income
from releasing the capacity shall be compared for making decision.
The component should be bought from outside as it would save the company ₹
4,00,000 in fixed cost.

TEST YOUR KNOWLEDGE

Question-19 (Profit Calc. under – Marginal & Absorption)
XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilisation
is reckoned as 90%. Standard variable production costs are ₹11 per unit. The fixed costs
are ₹3,60,000 per year. Variable selling costs are ₹3 per unit and fixed selling costs are
₹2,70,000 per year. The unit selling price is ₹20.
In the year just ended on 30th June, 20X4, the production was 1,60,000 units and sales
were 1,50,000 units. The closing inventory on 30th June was 20,000 units. The actual
variable production costs for the year were ₹ 35,000 higher than the standard.
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Marginal Costing By: CA. PRAKASH PATEL

(i) Calculate the profit for the year

a. by absorption costing method and
b. by marginal costing method.
(ii) Explain the difference in the profits.
Hints: Absorption = ₹2,59,275, Marginal = ₹2,39,375

Question-20 (Determine Selling price- Cost Sheet)

An Indian soft drink company is planning to establish a subsidiary company in Bhutan to
produce mineral water. Based on the estimated annual sales of 40,000 bottles of the mineral
water, cost studies produced the following estimates for the Bhutanese subsidiary:
Total annual costs Percent of Total
Annual Cost which is
variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%
The Bhutanese production will be sold by manufacturer’s representatives who will receive
a commission of 8% of the sale price. No portion of the Indian office expenses is to be
allocated to the Bhutanese subsidiary. You are required to
1. COMPUTE the sale price per bottle to enable the management to realize an estimated
10% profit on sale proceeds in Bhutan.
2. CALCULATE the break-even point in rupees sales as also in number of bottles for the
Bhutanese subsidiary on the assumption that the sale price is ₹ 14 per bottle.
Hints: (i) SP per bottle = ₹15, (ii) BEP = ₹4,48,000
Question-21 (Determine profit- Cost Sheet)
An automobile manufacturing company produces different models of Cars. The budget in
respect of model 007 for the month of March, 20X9 is as under:
Budgeted Output 40,000 Units
₹ In lakhs ₹ In lakhs
Net Realisation 2,10,000
Variable costs:
Material 79,200
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Marginal Costing By: CA. PRAKASH PATEL

Labour 15,600
Direct Expenses 37,200 1,32,000
Specific Fixed Costs 27,000
Allocated Fixed Cost 33,750 60,750
Total Cost 1,92,750
Profit 17,250
Sales 2,10,000
CALCULATE:
(i) Profit with 10 percent increase in selling price with a 10% reduction in sales volume.
(ii) Volume to be achived to maintain the proginal profit after a 10% rise in material
costs, at the originally budgeted selling price per unit.
Hints: (i) Profit = ₹28,350, (ii) Required sales = 44,521 units
Question-22
A company is considering four alternative proposals for a new toy manufacturing
Machine launched in the market. New machine is expected to produce approximately
25,000 toys every year. The proposals are as follows:
(i) Purchase and maintain the new toy manufacturing Machine and bear all related
costs. These machines will run on fuel. The average cost of a Machine is ₹
10,00,000. Life of the machine is 4 years with annual production of 25,000 toys
and the Resale value is ₹ 2,00,000 at the end of the fourth year.
(ii) Hire from Agency-A: It can hire the machine from the Agency-A and pay hire
charges at the rate of ₹ 20 per toy and bear no other cost.
(iii) Hire from Agency-B: It can hire the machine from the Agency-B and pay hire
charges at the rate of ₹ 12 per toy and also bear insurance costs. All other costs
will be borne by Agency-B.
(iv) Hire from Agency-C: Hire machine from Agency-C at ₹ 2,50,000 per year. These
machines are more advanced and run on electricity and therefore, the running cost
is considerably low. The company will have to bear costs of electricity, licensing
fees and spare parts. However, Repairs and maintenance and Insurance cost are
borne by Agency-C.

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Marginal Costing By: CA. PRAKASH PATEL

The following further details are available:

The cost of Fuel is ₹ 8 per toy, the cost of spare parts is ₹ 0.20 per toy and the cost of
electricity is ₹ 2 per toy. Further, the cost of Repairs and maintenance is ₹ 0.25 per toy,
the amount of licensing fees to be paid is ₹ 5,000 per machine per annum and the cost of
Insurance to be paid is ₹ 25,000 per machine per annum. Consider no taxes.

You are required to:

(i) CALCULATE the relative costs of four proposals on cost per toy basis.
(ii) RANK the proposals on the basis of total cost for 25,000 toys per year.
(iii) RECOMMEND the best proposal to company in view of (ii) above.

Hints:
Proposals
Particulars
Purchase of Hire Hire Hire
machine Agency-A Agency-B Agency-C
(₹) (₹) (₹) (₹)
Total Cost (A) 4,41,250 5,00,000 3,25,000 3,10,000

No. of toys 25,000 25,000 25,000 25,000

(units) (B)

(i) Cost per toy 17.65 20.00 13.00 12.40

(A/B)

(ii) Ranking of III IV II I

proposals

Recommendation: Proposal of Hire machine from Agency-C is acceptable as the cost

of manufacturing toys is lowest.
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 Marginal Costing By: CA. PRAKASH PATEL

B. PAST YEAR EXAM QUESTIONS

May-23. Q4(c) (5 marks)

MNP Company Limited produces two products 'A' and 'B'. The relevant cost and sales data
per unit of output is as follows.
Particulars Product A Product B
(₹) (₹)
Direct material 55 60
Direct labour 35 45
Variable factory overheads 40 20
Selling Price 180 175
The availability of machine hours is limited to 55,000 hours for the month. The monthly
demand for product ‘A’ and product 'B' is 5,000 units and 6,000 units, respectively. The fixed
expenses of the company are ₹1,40,000 per month. Variable factory overheads are
₹ 4 per machine hour. The company can produce both products according to the market
demand.
Required:
Calculate the product mix that generates maximum profit for the company in the situation and
also calculate profit of the company.
Solution:
Particulars Product A Product B
₹ ₹
Selling Price 180 175
Variable cost:
Direct Material 55 60
Direct labour 35 45
Variable factory overheads 40 20
130 125
Contribution 50 50
Machine hour (p.u.) 10 5
Contribution per hour 5 10
Rank II I
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Calculation of Product Mix

Hours available 55,000
Product B (6000 x 5) 30,000
Balance Hours 25,000
Product A (2500 x 10) 25,000
Balance Hours 0

Calculation of Profit
₹
Contribution
A 2500 units x 50
B 6000 units x 50 4,25,000
Less: Fixed cost (1,40,000)
Profit 2,85,000

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1 (Profit Calc. Under- Marginal & Absorption Costing)

Mega Company has just completed its first year of operations. The unit costs on a normal
costing basis are as under:
(₹)
Direct material 4 kg @ ₹ 4 = 16.00
Direct labour 3 hrs @ ₹ 18 = 54.00
Variable overhead 3 hrs @ ₹ 4 = 12.00
Fixed overhead 3 hrs @ ₹ 6 = 18.00
100.00
Selling and administrative costs:
Variable ₹ 20 per unit
Fixed ₹ 7,60,000
During the year the company has the following activity:
Units produced = 24,000
Units sold = 21,500
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Marginal Costing By: CA. PRAKASH PATEL

Unit selling price = ₹ 168

Direct labour hours worked = 72,000
Actual fixed overhead was ₹ 48,000 less than the budgeted fixed overhead. Budgeted
variable overhead was ₹ 20,000 less than the actual variable overhead. The company used
an expected actual activity level of 72,000 direct labour hours to compute the predetermine
overhead rates.
Required :
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
Reconcile the difference between the total income under absorption and
marginal costing.

Solution:
(i) Computation of Unit Cost & Total Income
Unit Cost Absorption Marginal
Costing (₹) Costing (₹)
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead (₹12 + 12.83 12.83
₹20,000/24,000)
Fixed Overhead 18.00 --

Unit Cost 100.83 82.83

Income Statements
Absorption Costing (₹)
Sales (21,500 units × ₹168) 36,12,000
Less: Cost of goods sold (Refer the working note) (21,19,917)
14,92,083
(11,90,000)

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Less: Selling & Distribution Expenses 3,02,083

Profit
Marginal Costing (₹)
Sales (as above) 36,12,000
Less: Cost of goods sold (Refer the working note) (17,80,917)
18,31,083

Less: Selling & Distribution (4,30,000)

Expenses Contribution 14,01,083
Less: Fixed Factory and Selling & Distribution Overhead
(₹ 3,84,000 + ₹ 7,60,000) (11,44,000)
2,57,083
Profit
(ii) Under or over absorption of overhead:
(₹)
Fixed Overhead:
Budgeted (₹6 × 72,000 hours) 4,32,000
Actual (₹4,32,000 – ₹48,000) 3,84,000
Over-absorption 48,000
Variable Overhead: Budgeted (₹4 × 72,000 hours)
Actual (₹2,88,000 + ₹20,000) 2,88,000
Under-absorption
3,08,000
20,000

(iii) Reconciliation of Profit:

Difference in Profit: ₹ 3,02,083 – ₹ 2,57,083 = ₹ 45,000
Due to Fixed Factory Overhead being included in Closing Stock in Absorption
Costing not in Marginal Costing.
Therefore, Difference in Profit = Fixed Overhead Rate (Production – Sale)
= ₹18 (24,000 – 21,500) = ₹45,000
Working Note:
Calculation of Cost of Goods Sold
Absorption Costing Marginal Costing
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Marginal Costing By: CA. PRAKASH PATEL

Direct Materials (₹16 × 3,84,000 3,84,000

24,000) 12,96,000 12,96,000
Direct labour (₹54 × 24,000) 3,08,000 3,08,000
Variable OH
(₹12 × 24,000 + ₹20,000)
Fixed Overhead (₹18 × 24,000) 4,32,000 --
24,20,000 19,88,000
-- --
Add: Opening stock (2,52,083) (2,07,083)
Less: Closing Stock
(24,000 – 21,500) (₹24,20,000 x 2500 units) (₹19,88,000 x 2500 units)
24,000 units 24,000 units

Cost of Goods Produced

Add: Adjustment for over/ 21,67,917 17,80,917
under absorption (48,000) --
21,19,917 17,80,917

Question-2 (Profit Calc. Under- Marginal & Absorption Costing)

ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The
variable production costs are ₹ 40 per unit and the variable selling expenses are ₹ 12
per sold unit. The budgeted fixed production expenses were ₹ 24,00,000 per annum
and the fixed selling expenses were ₹ 16,00,000. During the year ended 31st March,
2014, the company worked at 80% of its capacity. The operating data for the year
Production 3,20,000 units
Sales @ ₹ 80 per unit 3,10,000 units
Opening stock of finished goods 40,000 units
are as follows:
Fixed production expenses are absorbed on the basis of capacity and fixed selling
expenses are recovered on the basis of period.
You are required to prepare Statements of Cost and Profit for the year ending 31st March,
2014:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing
Solution:
(i) Statement of Cost and Profit under Marginal Costing
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Marginal Costing By: CA. PRAKASH PATEL

for the year ending 31st March, 2014

Output = 3,20,000 units
Particulars Amount Amount
(₹) (₹)
Sales: 3,10,000 units @ ₹ 80 2,48,00,000
Marginal cost / variable cost:
Variable cost of production (3,20,000 x ₹ 40) 1,28,00,000
Add: Opening stock 40,000 units @ ₹ 40 16,00,000

1,44,00,000
Less: Closing Stock ( ₹1,44,00,000 x 50,000 units*) (20,00,000)
3,60,000 units

Variable cost of production of 3,10,000 units 1,24,00,000

Add: Variable selling expenses @ ₹ 12 per unit 37,20,000 1,61,20,000
Contribution (sales – variable cost)
86,80,000

Less: Fixed production cost 24,00,000

Fixed selling expenses 16,00,000
(40,00,000)
Actual profit under marginal costing 46,80,000
* Closing stock = 40,000 + 3,20,000 – 3,10,000 = 50,000 units

Statement of Cost and Profit under Absorption Costing

for the year ending 31st March, 2014
Output = 3,20,000 units
Particulars Amount (₹) Amount (₹)
Sales: 3,10,000 units @ ₹ 80 2,48,00,000
Less: Cost of Goods sold:
Variable cost of production
(3,20,000 @ ₹ 40) 1,28,00,000

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Add: Fixed cost of production absorbed 19,20,000

3,20,000 units @ ₹ 6 (1) 1,47,20,000

Add: Opening Stock (₹1,47,20,000 x 40,000) 18,40,000

3,20,000 1,65,60,000

Less: Closing Stock (₹1,65,60,000 x (23,00,000)

50,000)
3,60,000
1,42,60,000

Production cost of 3,10,000 units

Adjustment for Over/ under-absorption: 4,80,000
1,47,40,000
Under absorption of fixed production overheads (2)
Cost of Goods Sold
37,20,000
Selling expenses: 16,00,000 (2,00,60,000)
Variable: ₹ 12 x 3,10,000 units
Fixed
Actual profit under absorption costing 47,40,000
Working:
1. Absorption rate for fixed cost of production = ₹24,00,000 = ₹6 per unit
4,00,000 units
2. Fixed production overhead under absorbed = ₹ (24,00,000 – 19,20,000)
=₹4,80,000.

D. PAST YEAR EXAM QUESTIONS

Nov-22. Q4(a) (5 marks)

An agriculture based company having 210 hectares of land is engaged in growing three
different cereals namely, wheat, rice and maize annually. The yield of the different crops and
their selling prices are given below:
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Wheat Rice Maize

Yield (in kgs per hectare) 2,000 500 100
Selling Price (₹ per kg) 20 40 250

The variable cost data of different crops are given below:

(All figures in ₹ per kg)
Crop Labour charges Packing Materials Other variable expenses
Wheat 8 2 4
Rice 10 2 1
Maize 120 10 20

The company has a policy to produce and sell all the three kinds of crops. The
maximum and minimum area to be cultivated for each crop is as follows:
Crop Maximum Area (in hectares) Minimum Area (in hectares)
Wheat 160 100
Rice 50 40
Maize 60 10

You are required to:

(i) Rank the crops on the basis of contribution per hectare.
(ii) Determine the optimum product mix considering that all the three cereals are to
be produced.
(iii) Calculate the maximum profit which can be achieved if the total fixed cost per
annum is ₹ 21,45,000.
(Assume that there are no other constraints applicable to this company)

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Solution:
(i) Statement showing Ranking of crops on the basis of Contribution per
hectare
Sl. No Particulars Wheat Rice Maize
(I) Sales price per kg (₹) 20 40 250
(II) Variable cost* per kg (₹) 14 13 150
(III) Contribution per kg (₹) 6 27 100
(IV) Yield (in kgs per hectare) 2,000 500 100
(V) Contribution per hectare (₹) 12,000 13,500 10,000
(VI) Ranking II I III

*Variable cost = Labour Charges +Packing Material+ Other Variable Expenses

Therefore, to maximize profits, the order of priority of production would be
Rice, Wheat and Maize.
(ii) & (iii) Statement showing optimum product mix considering that all the
three cereals are to be produced and maximum profit thereof

Sl. Particulars Wheat Rice Maize Total

No.
(i) Minimum Area (in hectare) 100 40 10 150
(ii) Remaining area (in hectare) 60
(iii) Distribution of remaining area 50 10 - 60
based on ranking considering
Maximum area
(iv) Optimum mix (in hectare) 150 50 10 210
(v) Contribution per hectare (₹) 12,000 13,500 10,000
(vi) Total contribution (₹) 18,00,000 6,75,000 1,00,000 25,75,000
(vii) Fixed cost (₹) 21,45,000
(viii) Maximum Profit (₹) 4,30,000

Optimum Product Mix and calculation of maximum profit earned by company

can also be presented as below

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(ii) Optimum Product Mix:

Particular Area Yield Total Production
(in hectares) (kg per hectare) (in kgs)
(a) Maximum of Rice 50 500 25000
(b) Minimum of Maize 10 100 1000
(c) Balance of Wheat 150 2000 300000
210 326000

(iii) Calculation of maximum profit earned by the company:

Production Contribution Total
(in kgs) (₹ per kg) contribution
(₹)
(a) Rice 25,000 24 6,75,000
(b) Maize 1,000 100 1,00,000
(c) Wheat 3,00,000 6 18,00,000
Total contribution 25,75,000
Less: Total Fixed Cost per annum (21,45,000)
Maximum profits earned by the 4,30,000
company

Nov-20. Q1(b) (5 marks)

Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse it's production mix in
respect of these three products - 'X', 'Y' and 'Z'.
You have the following information:
X Y Z
Direct Materials ₹ (per unit) 160 120 80
Variable Overheads ₹ (per unit) 8 20 12
Direct labour:
Departments: Rate per Hour Hours per Hours per Hours per
(₹) unit unit unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11
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From the current budget, further details are as below :

X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (₹) 312 400 240
Sales departments estimate of possible sales in 12,000 16,000 24,000
the coming year (in units)

There is a constraint on supply of labour in Department-A and its manpower cannot be

increased beyond its present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product mix.

Solution:

(i) Statement Showing “Calculation of Contribution/ unit”

Particulars X Y Z
(₹) (₹) (₹
)
Selling Price (A) 312 400 240
Variable Cost:
Direct Material 160 120 80
Direct Labour
Dept. A (Rate x Hours) 24 40 20
Dept. B (Rate x Hours) 48 120 88
Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200
Contribution per unit (A - B) 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Rank I II III
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Existing Hours = 10,000 x 6 hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs. Best
possible product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000 hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000 hrs.)
Produce ‘Z’ (balance) = 9,600 units (48,000 hrs./ 5 hrs.)

(ii) Statement Showing “Contribution”

Product Units Contribution/ Unit Total Contribution

(₹) (₹)
X 12,000 72 8,64,000
Y 16,000 100 16,00,000
Z 9,600 40 3,84,000
Total 28,48,000

May-22. Q1(c) (5 marks)

Top-tech a manufacturing company is presently evaluating two possible machines for the
manufacture of superior Pen-drives. The following information is available:
Particulars Machine A Machine B
Selling price per unit ₹ 400.00 ₹ 400.00
Variable cost per unit ₹ 240.00 ₹ 260.00
Total fixed costs per year ₹ 350 lakhs ₹ 200 lakhs
Capacity (in units) 8,00,000 10,00,000
Required:
(i) Recommend which machine should be chosen?
(ii) Would you change your answer, if you were informed that in near future demand will
be unlimited and the capacities of the two machines are as follows?
Machine A - 12,00,000 units
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Machine B - 12,00,000 units

Why?

Solution:

Machine-A Machine-B Total

A Selling price per unit (₹) 400 400
B Variable cost per cost (₹) 240 260
C Contribution per unit (₹) [A-B] 160 140
D Units 8,00,000 10,00,000
E Total contribution (₹ [C×D] 12,80,00,000 14,00,00,000 26,80,00,000
F Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
G Profit [E-F] (₹) 9,30,00,000 12,00,00,000 21,30,00,000
H Profit per unit [G÷D] (₹) 116.25 120.00

(ii) Machine B has the higher profit of ₹2,70,00,000 than the Machine-A. Further,
Machine-B’s fixed cost is less than the fixed cost of Machine-A and higher capacity.
Hence, Machine B be recommended.
Note: This question can also be solved as below:
Indifferent point = Difference in fixed cost / difference in variable cost per unit
= 1,50,00,000 / 20 = 7,50,000 units
At the level of demand 7,50,000 units both machine options equally profitable. If
demand below 7,50,000 units, select machine B (with lower FC).
If demand above 7,50,000 units, select machine A (with lower VC).
(iii) When the capacities of both the machines are same and demand for the product is
unlimited, calculation of profit will be as follows:

Machine-A Machine-B Total

A Contribution per unit (₹) 160 140
B Units 12,00,000 12,00,000
C Total contribution (₹) [A×B] 19,20,00,000 16,80,00,000 36,00,00,000
D Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000

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E Profit [C-E] (₹) 15,70,00,000 14,80,00,000 30,50,00,000

F Profit per unit [E÷B] (₹) 130.83 123.33

Yes, the preference for the machine would change because now, Machine A is having higher
contribution and higher profit, hence recommended.

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Chapter. 14: Budget & Budgetary Costing

Part-A: Flexible Budget

A. QUESTION FROM STUDY MATERIAL
Question-1
A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes
details of expenses as under:
Variable expenses ₹1,260
Semi-variable expenses ₹1,200
Fixed expenses ₹1,800
The semi-variable expenses go up by 10% between 85% and 95% activity and by
20% above 95% activity. PREPARE a flexible budget for 80, 90 and 100 per cent
activities.

Hints:
Capacity 70% 80% 90% 100%
Total Expense (₹) 4260 4440 4740 5040
Recovery Rate 0.61 0.55 0.53 0.50

Question-2
A department of Company X attains sale of ₹ 6,00,000 at 80 per cent of its
normal capacity and its expenses are given below:
Administration costs: (₹)
Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750
Selling costs:
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
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Sales office expenses 1 per cent of sales

General expenses 1 per cent of sales
Distribution costs:
Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales

PREPARE flexible administration, selling and distribution costs budget, operating at 90

per cent, 100 per cent and 110 per cent of normal capacity.

Hints:
Capacity 80% 90% 100% 110%
Sales (₹) 6,00,000 6,75,000 7,50,000 8,25,000
Total Cost (₹) 2,35,250 2,49,500 2,63,750 2,78,000

Question-3
Action Plan Manufacturers normally produce 8,000 units of their product in a month, in
their Machine Shop. For the month of January, they had planned for a production of
10,000 units. Owing to a sudden cancellation of a contract in the middle of January, they
could only produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and
the Foreman of the shop is paid a 10% of the savings as bonus when in any month the
indirect manufacturing cost incurred is less than the budgeted provision.
The Foreman has put in a claim that he should be paid a bonus of ₹88.50 for the month of
January. The Works Manager wonders how anyone can claim a bonus when the Company
has lost a sizeable contract.

The relevant figures are as under:

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Indirect manufacturing Expenses for a Planned for Actual in costs

normal month January January
(₹) (₹) (₹)
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600
Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
100 100 100
Insurance
5,290 5,875 4,990
Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the
performance in January? Substantiate your answer with facts and figures. EXPLAIN.
Hints:
Particulars Flexible Budget Actual Difference
Total Expense (₹) 4705 4990 285

TEST YOUR KNOWLEDGE

Question-1
ABC Ltd. is currently operating at 75% of its capacity. In the past two years, the levels
of operations were 55% and 65% respectively. Presently, the production is 75,000 units.
The company is planning for 85% capacity level during 20X3-20X4. The cost details
are as follows:
55% 65% 75%
(₹) (₹) (₹)
Direct Materials 11,00,000 13,00,000 15,00,000
Direct Labour 5,50,000 6,50,000 7,50,000
Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative 1,60,000 1,60,000 1,60,000
Overheads
24,40,000 28,00,000 31,60,000
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Profit is estimated @ 20% on sales.

The following increases in costs are expected during the year:
In percentage
Direct Materials 8
Direct Labour 5
Variable Factory Overheads 5
Variable Selling Overheads 8
Fixed Factory Overheads 10
Fixed Selling Overheads 15
Administrative Overheads 10
PREPARE flexible budget for the period 20X3-20X4 at 85% level of capacity. Also
ascertain profit and contribution.
Hints: Contribution = ₹14,57,300, Profit = ₹9,46,300

Question-2
TQM Ltd. has furnished the following information for the month ending 30th June,
20X9:
Master Budget Actual Variance
Units produced and sold 80,000 72,000
Sales (₹) 3,20,000 2,80,000 40,000 (A)
Direct material (₹) 80,000 73,600 6,400 (F)
Direct wages (₹) 1,20,000 1,04,800 15,200 (F)
Variable overheads (₹) 40,000 37,600 2,400 (F)
Fixed overhead (₹) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200
The Standard costs of the products are as follows:
Per unit (₹)
Direct materials (1 kg. at the rate of ₹1 per kg.) 1.00
Direct wages (1 hour at the rate of ₹ 1.50) 1.50
Variable overheads (1 hour at the rate of ₹ 0.50) 0.50
Actual results for the month showed that 78,400 kg. of material were used and 70,400
labour hours were recorded.
Required:
1. Prepare flexible budget for the month and compare with the actual result.
2. Calculate material, labour, sales price, variable overhead and fixed overhead
expenditure variance and sales volume (profit) variance.

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Hints: (i)
Particulars Flexible Budget Actual
Net Profit 32,000 24,800
(ii) SPV = 8000 (A), MPV = 4800 (F), MUV = 6400 (A), LRV = 800 (F), Labour
Efficiency Variance = 2400 (F), V.O. = 1600 (A), FOEV = 800 (F), Sales Volume
Variance = 4000 (A)

Question-3
During the FY 2020-21, P Limited has produced 60,000 units operating at 50%
capacity level. The cost structure at the 50% level of activity is as under:
(₹)
Direct Material 300 per unit
Direct Wages 100 per unit
Variable Overheads 100 per unit
Direct Expenses 60 per unit
Factory Expenses (25% fixed) 80 per unit
Selling and Distribution Exp. (80% variable) 40 per unit
Office and Administrative Exp. (100% fixed) 20 per unit
The company anticipates that in FY 2021-22, the variable costs will go up by 20% and
fixed costs will go up by 15%.
The selling price per unit will increase by 10% to ₹ 880 Required:
(i) CALCULATE the budgeted profit/ loss for the FY 2020-21.
(ii) PREPARE an Expense budget on marginal cost basis for the FY 2021-22 for
the company at 50% and 60% level of activity and FIND OUT the profits at
respective levels.
Hints:
(i) Profit = 60,00,000
(ii)
60,000 units 72,000 units
Per unit(₹) Amount(₹) Per unit(₹) Amount(₹)
Profit -- 25,44,000 -- 37,15,200

Question-4
The accountant of manufacturing company provides you the following details for year
2020-21:
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(₹) (₹)
Direct materials 1,75,000 Other variable costs 80,000
Direct Wages 1,00,000 Other fixed costs 80,000
Fixed factory overheads 1,00,000 Profit 1,15,000
Variable factory overheads 1,00,000 Sales 7,50,000
During the year, the company manufactured two products A and B and the output and
costs were:
A B
Output (units) 2,00,000 1,00,000
Selling price per unit ₹ 2.00 ₹ 3.50
Direct materials per unit ₹ 0.50 ₹ 0.75
Direct wages per unit ₹ 0.25 ₹ 0.50
Variable factory overhead is absorbed as a percentage of direct wages. Other variable
costs have been computed as: Product A ₹ 0.25 per unit; and B ₹ 0.30 per unit.
During 2021-22, it is expected that the demand for product A will fall by 25 % and for
B by 50%. It is decided to manufacture a further product C, the cost for which is
estimated as follows:
Product C
Output (units) 2,00,000
Selling price per unit ₹ 1.75
Direct materials per unit ₹ 0.40
Direct wages per unit ₹ 0.25
It is anticipated that the other variable costs per unit will be the same as for product A.
PREPARE a budget to present to the management, showing the current position and
the position for 2021-22. Comment on the comparative results.
Hints: Introduction of Product C is likely to increase profit by ₹ 10,000 (i.e. from ₹
1,15,000 to ₹ 1,25,000) in 2021-22 as compared to 2020-21. Therefore, introduction of
product C is recommended.

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B. PAST YEAR EXAM QUESTIONS

May-23. Q3(a)-10 marks

PQR Limited manufactures three products - Product X, Product Y and Product
Z. The output for the current year is 2,50,000 units of Product X, 2,80,000 units
of Product Y and 3,20,000 units of Product Z respectively.
Selling price of Product X is 1.25 times of Product Z whereas Product Y can be
sold at double the price at which product Z can be sold. Product Z can be sold at
a profit of 20% on its marginal cost.
Other information are as follows:
Product X Product Y Product Z
Direct Material Cost (Per unit) ₹ 20 ₹ 20 ₹ 20
Direct Wages Cost (per unit) ₹ 16 ₹ 24 ₹ 16
Raw material used for manufacturing all the three products is the same. Direct
Wages are paid @ ₹ 4 per labour hour,
Total overhead cost of the company is ₹ 52,80,000 for the year, out of which ₹ 1
per labour hour is variable and the rest is fixed.
In the next year it is expected that sales of product X and product Z will increase
by 12% and 15% respectively and sale of product Y will decline by 5%. The total
overhead cost of the company for the next year is estimated at ₹ 55,08,000. The
variable cost of ₹ 1 per labour hour remains unchanged.
It is anticipated that all other costs will remain same for the next year and there
is opening and closing stock. Selling Price per unit of each product will remain
unchanged in the next year.
Required:
Prepare a budget showing the current position and the position for the next year
clearly indicating the total product-wise contribution and profit for the company
as a whole.
Solution:
(i) Budget showing current position of total product wise contribution
and profitability
Particulars Product Product Y Product Total
X (₹) (₹) Z (₹) (₹)
A Direct material cost(per 20 20 20
unit)

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B Direct wages cost(per unit) 16 24 16

C Variable overheadper unit 4 6 4
(Refer WN-1)
D Total variable cost/ Marginal 40 50 40
cost per unit [A+B+C]

E Add: Profit [20% of D] - - 8

F Selling price unit [D+E] - - 48

G Price weight 1.25 2 1

H Selling price per unit [Selling 60 96 48
price of Product Z × G]
I Contribution per unit [H- 20 46 8
D]
J Quantity to be sold 2,50,000 2,80,000 3,20,000
K Total Contribution [J×I] 50,00,000 1,28,80,000 25,60,000 2,04,40,000

L Fixed Overheads [Refer 13,20,000

WN-1]
M Profit 1,91,20,000

Working Notes:
1. Segregation of Overheads into variable and fixed in current year
Particulars Product Product Product Total
X (₹) Y (₹) Z (₹) (₹)
A Total overhead cost - - - 52,80,000
B Labour hour per unit 4 6 4
[Direct wages Cost ÷
Re.1]
C Quantity produced 2,50,000 2,80,000 3,20,000
D Total variable 10,00,000 16,80,000 12,80,000 39,60,000
overhead cost [B×C]
E Fixed overhead cost 13,20,000
[A-D]

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(ii) Budget showing next year’s position of total product wise

contribution and Profitability

Particulars Product Product Y Product Z Total

X (₹) (₹) (₹) (₹)
A Selling price per 60 96 48
unit
B Contribution per 20 46 8
unit
C Quantity to be 2,80,000 2,66,000 3,68,000
sold [112% of [95% of [115% of
2,50,000] 2,80,000] 3,20,000]
D Total 56,00,000 1,22,36,000 29,44,000 2,07,80,000
Contribution
[B×C]
Fixed Overheads 13,20,000
[Refer WN-2]
Profit 1,94,60,000

Working Notes:
2. Segregation of Overheads into variable and fixed in next year
Particulars Product X Product Y Product Z Total
(₹) (₹) (₹) (₹)
A Total overhead cost - - - 55,08,000
B Labour hour per unit 4 6 4
[Direct wages Cost ÷
Re.1]
C Quantity produced 2,80,000 2,66,000 3,68,000
D Total variable 11,20,000 15,96,000 14,72,000 41,88,000
overhead cost [B×C]
E Fixed overhead cost 13,20,000
[A-D]

Nov-22. Q1(a)-05 marks

A Ltd. is a pharmaceutical company which produces vaccines for diseases like
Monkey Pox, Covid-19 and Chickenpox. A distributor had given an order for
1,600 Monkey Pox Vaccines. The company can produce 80 vaccines at a time.
To process a batch of 80 Monkey Pox vaccines, the following costs would be
incurred:
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₹
Direct Materials 4,250
Direct wages 500
Lab set-up cost 1,400
The Production Overheads are absorbed at a rate of 20% of direct wages and
20% of total production cost is charged in each batch for Selling, distribution
and administration Overheads. The company is willing to earn profit of 25% on
sales value.
You are required to determine:
(i) Total Sales value for 1,600 Monkey Pox Vaccines
(ii) Selling price per unit of the Vaccine.
Solution:
(i) & (ii) Calculation of Sales value and Selling price per unit of Monkey
Pox vaccine
Particulars Amount (₹) Amount (₹) for 1600 Amount (₹)
per Batch units or 20 batches per unit
Direct materials 4,250 85,000 53.125
Direct wages 500 10,000 6.250
Lab set-up cost 1,400 28,000 17.500
Production overheads (20% 100 2,000 1.250
of direct wages)
Production Cost 6,250 1,25,000 78.125
Selling, distribution and 1,250 25,000 15.625
administration cost (20%
of Production cost)
Total Cost 7,500 1,50,000 93.75
Add: Profit (1/3rd of Totalcost 2,500 50,000 31.25
or 25% of Sales value)
Sales value 10,000 2,00,000 125.00

Jan-21. Q3(b)-10 marks

XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys
at its 70% capacity on per annum basis. Company is in the process of determining
sales price for the financial year 2020-21. It has provided the following
information:
Direct Material ₹ 60 per unit
Direct Labour ₹ 30 per unit Indirect

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Overheads:
Fixed ₹ 65,50,000 per annum
Variable ₹ 15 per unit
Semi-variable ₹ 5,00,000 per annum up to 60% capacity and ₹ 50,000 for
every 5% increase in capacity or part thereof up to 80%
capacity and thereafter ₹ 75,000 for every 10% increase
in capacity or part thereof.
Company desires to earn a profit of ₹ 25,00,000 for the year. Company has
planned that the factory will operate at 50% of capacity for first six months of
the year and at 75% of capacity for further three months and for the balance three
months, factory will operate at full capacity.
You are required to :
(1) Determine the average selling price at which each of the toy should be sold
to earn the desired profit.
(2) Given the above scenario, advise whether company should accept an offer to
sell each Toy at:
(a) ₹ 130 per Toy
(b) ₹ 129 per Toy
Solution:
(1) Statement of Cost
For first For further For Total
6 3 months remaining 3
months months
6,00,000 x 6,00,000 x 6,00,000 x
6/12 x 50% 3/12 x 75% 3/12
= 1,50,000 = 1,12,500 = 1,50,000 4,12,500
units units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed 32,75,000 16,37,500 16,37,500 65,50,000
Expenses
Indirect Semi-
variable expenses

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- For first six months @ 2,50,000

5,00,000 per annum
- For further three months 1,62,500
@ 6,50,000* per
annum
- For further three months 2,12,500 6,25,000
@ 8,50,000** per
annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per 128.45
Toy

* ₹ 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ₹ 6,50,000

** ₹ 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to
100%) × 75,000] = ₹ 8,50,000
(2) (a) Company Should accept the offer as it is above its targeted sales price of
₹ 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of ₹
128.45 per toy.

Nov-20. Q1(a)-5 marks

G Ltd. manufactures a single product for which market demand exists for
additional quantity. Present sales of ₹ 6,00,000 utilises only 60% capacity of the
plant. The following data are available:
(1) Selling price : ₹ 100 per unit
(2) Variable cost : ₹ 30 per unit
(3) Semi-variable expenses : ₹ 60,000 fixed + ₹ 5 per unit
(4) Fixed expenses : ₹ 1,00,000 at present level,
estimated to increase by 25% at and above 80% capacity.
You are required to prepare a flexible budget so as to arrive at the operating
profit at 60%, 80% and 100% levels.
Solution:
Flexible Budget
Activity Level 60% 80% 100%
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Production (units) 6,000 8,000 10,000

(₹) (₹) (₹)
Sales @ ₹ 100 per unit 6,00,000 8,00,000 10,00,000
Variable Cost 2,10,000 2,80,000 3,50,000
(@ ₹ 35 (₹ 30 + ₹ 5) per unit)
Contribution (A) 3,90,000 5,20,000 6,50,000
Fixed Cost (part of semi-variable 60,000 60,000 60,000
cost)
Other Fixed Cost 1,00,000 1,25,000 1,25,000
Total Fixed Cost (B) 1,60,000 1,85,000 1,85,000
Operating Profit (A – B) 2,30,000 3,35,000 4,65,000

Nov-19. Q5(a)-10 marks

PJ Ltd. Manufactures hockey sticks. It sells the products at ₹500 each and makes
a profit of ₹125 on each stick. The company is producing 5000 sticks annually
by using 50% of its machinery capacity.
The cost of each stick is as under:
Direct Material ₹150
Direct wages ₹50
Works overhead ₹125 (50% fixed)
Selling Expenses ₹50 (25% variable)
The anticipation for the next year is that cost will go up as under:
Fixed charges 10%
Direct wages 20%
Direct material 5%
There will not be any change in selling price
There is an additional order for 2000 sticks in the next year.
Calculate the lowest price that can be quoted so that the company can earn the same
profit as it earned in te current year ?
Solution:
Selling Price = ₹ 500
Profit = ₹ 125
No of Sticks = 5,000
Particular Current Year Next Year
(₹) (₹)
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Direct Material 150 157.50

(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50

Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,000) 5,00,000 5,50,000

=
1,87,500

Let: Lowest Price Quoted = K

Now, Sales = Target Profit (5,000 units × ₹ 125) + Variable Cost + Fixed Cost
Or, = (5,000 × 500) + (2,000 × K) = 6,25,000 + 20,47,500 + 5,50,000
Or, K = ₹ 361.25

So, Lowest Price that can be quoted to earn the profit of ₹ 6,25,000 (same as current
year) is ₹ 361.25

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS)

Question-1
RST, Limited is presently operating at 50% capacity and producing 30000 units.
The entire output is sold at a price of ₹ 200 per unit. The cost structure at the 50%
level of activity is as under:

(₹)

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Direct Material 75 per unit

Direct Wages 25 per unit
Variable Overheads 25 per unit
Direct Expenses 15 per unit
Factory Expenses (25% fixed) 20 per unit
Selling and Distribution Exp. (80% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 5 per unit
The company anticipates that the variable costs will go up by 10% and fixed
costs will go up by 15%.
You are required to prepare an Expense budget, on the basis of marginal cost
for the company at 50% and 60% level of activity and find out the profits
at respective levels.

Solution:
Expense Budget of RST Ltd. for the period
Per unit 30,000 units 36,000 units
(₹) Amount (₹) Amount (₹)
Sales (A) 200.00 60,00,000 72,00,000
Less: Variable Costs:
- Direct Material 82.50 24,75,000 29,70,000
- Direct Wages 27.50 8,25,000 9,90,000
- Variable Overheads 27.50 8,25,000 9,90,000
- Direct Expenses 16.50 4,95,000 5,94,000
- Variable factory expenses 16.50 4,95,000 5,94,000
(75% of ₹ 20 p.u.)
- Variable Selling & Dist. exp. 8.80 2,64,000 3,16,800
(80% of ₹ 10 p.u.)
Total Variable Cost (B) 53,79,000 64,54,800
179.30 6,21,000 7,45,200
Contribution (C) = (A – B)
Less: Fixed Costs: 20.70
- Office and Admin. exp. (100%) -- 1,72,500 1,72,500
- Fixed factory exp. (25%) -- 1,72,500 1,72,500
- Fixed Selling & Dist. exp. (20%) -- 69,000 69,000
Total Fixed Costs (D) -- 4,14,000 4,14,000
Profit (C – D) -- 2,07,000 3,31,200

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Question-2 (Dec 2021 Q1(b))

S Ltd. has prepared budget for the coming year for its two products A and B.
Product A (₹) Product B (₹)
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be
increased by 1,500 units and 500 units respectively but for this purpose the
variable overhead and fixed overhead will be increased by 10% and 5%
respectively for the both products.
You are required to prepare flexible budget for both the products:
(a) Before marketing efforts
(b) After marketing efforts.
Solution:
(a) Flexible Budget before marketing efforts:
Product A (₹) Product B (₹)
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000

Raw material cost 60.00 3,60,000 42.00 3,78,000

Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
110.00 6,60,000 70.00 6,30,000
Total cost
10.00 60,000 8.00 72,000
Profit

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(b) Flexible Budget after marketing efforts:

Product A (₹) Product B (₹)
7,500 units 9,500 units
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000

Raw material cost 60.00 4,50,000 42.00 3,99,000

Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000
Variable overhead per unit 13.20 99,000 6.60 62,700
Fixed overhead per unit 6.72 50,400 3.98 37,800

Total cost 109.92 8,24,400 70.58 6,70,500

Profit 10.08 75,600 7.42 70,500

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Part-B: Functional Budget

A. QUESTION FROM STUDY MATERIAL
Question-4
A single product company estimated its sales for the next year quarter-
wise as under:

Quarter Sales (Units)

I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000 units and the company expects to
maintain the closing stock of finished goods at 16,250 units at the end of the year.
The production pattern in each quarter is based on 80% of the sales of the current
quarter and 20% of the sales of the next quarter.
The opening stock of raw materials in the beginning of the year is 10,000 kg. and the
closing stock at the end of the year is required to be maintained at 5,000 kg. Each unit
of finished output requires 2 kg. of raw materials.
The company proposes to purchase the entire annual requirement of raw materials in the
first three quarters in the proportion and at the prices given below:

Quarter Purchase of raw materials % to total Price per kg.

annual requirement in quantity (₹)
I 30% 2
II 50% 3
III 20% 4
The value of the opening stock of raw materials in the beginning of the year is
₹ 20,000. You are required to PREPARE the following for the next year,
quarter wise:
(i) Production budget (in units).
(ii) Raw material consumption budget (in quantity).
(iii) Raw material purchase budget (in quantity and value).
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Priced stores ledger card of the raw material using First in First out method.
Hints:
Particulars I II III IV
a. Production (Units) 31,500 38,250 42,000 48,250
b. Consumption (₹) 63,000 76,500 84,000 96,500
c. Purchase (₹) 1,89,000 4,72,500 2,52,000 -
Total Raw Material purchase = 3,15,000 units

Question-5
A company is engaged in the manufacture of specialised sub-assemblies
required for certain electronic equipment. The company envisages that in the
forthcoming month, December, 20X9, the sales will take a pattern in the ratio
of 3 : 4 : 2 respectively of sub-assemblies, ACB, MCB and DP.
The following is the schedule of components required for manufacture:
Component requirements
Sub-assembly Selling Price Base board IC08 IC12 IC26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price (₹) 60 20 12 8
The direct labour time and variable overheads required for each of the
sub- assemblies are:
Labour hours Variable overheads
Grade A Grade B

ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (₹) 5 4 —
The labourers work 8 hours a day for 25 days a month.
The opening stocks of sub-assemblies and components for December, 20X9 are as
under:
Sub-assemblies Components
ACB 800 Base Board 1,600
MCB 1,200 IC08 1,200
DP 2,800 IC12 6,000
IC26 4,000
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Fixed overheads amount to ₹7,57,200 for the month and a monthly profit
target of ₹ 12 lacs has been set.
The company is eager for a reduction of closing inventories for December, 20X9
of sub-assemblies and components by 10% of quantity as compared to the opening
stock. PREPARE the following budgets for December 20X9:
(a) Sales budget in quantity and value.
(b) Production budget in quantity
(c) Component usage budget in quantity.
(d) Component purchase budget in quantity and value.
Manpower budget showing the number of workers and the amount of wages
payable.
Hints:
ACB MCB DP
Sales (Units) 6300 8400 4200
Sales (₹) 32,72,000 42,00,000 14,70,000
Production (Units) 6,220 8,280 3,920
Component IC08 49,760 16,560 7,840
Component IC12 24,880 82,800 15,680
Component IC26 12,440 49,680 31,360
Board 6,220 8,280 3,920

TEST YOUR KNOWLEDGE

Question-5
Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and
Heavyhigh (HH) for the year 20X9-X0. The company’s policy is to hold closing
stock of finished goods at 25% of the anticipated volume of sales of the
succeeding month. The following are the estimated data for two products:

Minimax (MM) Heavyhigh (HH)

Budgeted Production units 1,80,000 1,20,000
(₹) (₹)
Direct material cost per unit 220 280
Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000

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The estimated units to be sold in the first four months of the year 20X9- X0 are as
under
April May June July
Minimax 8,000 10,000 12,000 16,000
Heavyhigh 6,000 8,000 9,000 14,000
PREPARE production budget for the first quarter in monthwise.
Hints:
Product MM HH
Production Cost ₹1,12,71,111 ₹1,01,04,167

Question-6
Concorde Ltd. manufactures two products using two types of materials and one
grade of labour. Shown below is an extract from the company’s working papers for
the next month’s budget:
Product- Product-
A B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5
Material-X and Material-Y cost ₹ 4 and ₹ 6 per kg and labours are paid ₹ 25 per
hour. Overtime premium is 50% and is payable, if a worker Works for more than
40 hours a week. There are 180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked
by the d workers in actually manufacturing the products is 80%. In addition non-
productive down-time is budgeted at 20% of the productive hours worked.
There are 5 days weeks in the budgeted period and it is anticipated that sales
and production will occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:

Product-A 400 units

Product-B 200 units
Material-X 1,000 kg.
Material-Y 500 kg.
The anticipated closing stocks for budget period are as below:
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Product-A 4 days sales

Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the
direct workers, showing the quantities and values, for the next month.
Hints: Production: A = 2480, B = 4300
Purchase Budget: X = ₹1,47,800, Y = ₹2,75,616
Wages (hrs): A = 11,160, B = 32,250
Total Wages = 12,67,875

Question-7
XY Co. Ltd manufactures two products viz., X and Y and sells them through two
divisions, East and West. For the purpose of Sales Budget to the Budget
Committee, following information has been made available for the year 2014-
15:
Budgeted Sales Actual
Product Sales
East Division West East West
Division Division Division
X 400 units at ₹ 9 600 units at ₹ 9 500 units at ₹ 9 700 units at ₹ 9
Y 300 units at ₹ 21 500 units at ₹ 200 units at ₹ 400 units at ₹
21 21 21
Adequate market studies reveal that product X is popular but under priced. It
is expected that if the price of X is increased by ₹ 1, it will, find a ready market.
On the other hand, Y is overpriced and if the price of Y is reduced by ₹ 1 it will
have more demand in the market. The company management has agreed for
the aforesaid price changes. On the basis of these price changes and the
reports of salesmen, following estimates have been prepared by the Divisional
Managers:
Percentage increase in sales over budgeted sales

Product East Division West Division

X + 10% + 5%
Y + 20% +10%
With the help of intensive advertisement campaign, following additional sales
(over and above the above mentioned estimated sales by Divisional Mangers) are
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possible:
Product East Division West Division
X 60 units 70 units
Y 40 units 50 units
You are required to prepare Sales Budget for 2015-16 after incorporating above
estimates and also show the Budgeted Sales and Actual Sales of 2014-15.
Hints:
Statement Showing Sales Budget for 2015-16
Product X Product Y Total
Division
Qty. Rate (₹) Amt. (₹) Qty. Rate (₹) Amt. (₹) Amt. (₹)
East 5001 10 5,000 4003 20 8,000 13,000
West 7002 10 7,000 6004 20 12,000 19,000
Total 1,200 12,000 1,000 20,000 32,000
Statement Showing Sales Budget for 2014-15
Division Product Product Total
X Y
Qty. Rate (₹) Amt. (₹) Qty Rate (₹) Amt. (₹) Amt. (₹)
.
East 400 9 3,600 300 21 6,300 9,900
West 600 9 5,400 500 21 10,500 15,900
Total 1,000 9,000 800 16,800 25,800

Statement Showing Actual Sales for 2014-15

Product Product Total
Division X Y
Qty. Rate (₹) Amt. (₹) Qty. Rate (₹) Amt. (₹) Amt. (₹)
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 10,800 600 12,600 23,400

Question-8
K Ltd. produces and markets a very popular product called ‘X’. The company
is interested in presenting its budget for the second quarter of 2020-21.

The following information are made available for this purpose:

(i) It expects to sell 1,50,000 bags of ‘X’ during the second quarter of 2020-
21 at the selling price of ₹ 1,200 per bag.

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(ii) Each bag of ‘X’ requires 2.5 mtr. of raw – material ‘Y’ and 7.5 mtr. of
raw– material ‘Z’.
(iii) Stock levels are planned as follows:
Particulars Beginning of End of Quarter
Quarter
Finished Bags of ‘X’ (Nos.) 45,000 33,000
Raw – Material ‘Y’ (mtr) 96,000 78,000
Raw – Material ‘Z’ (mtr) 1,71,000 1,41,000
Empty Bag (Nos.) 1,11,000 84,000
(iv) ‘Y’ cost ₹160 per mtr., ‘Z’ costs ₹30 per mtr. and ‘Empty Bag’ costs
₹110 each.
(v) It requires 9 minutes of direct labour to produce and fill one bag of
‘X’. Labour cost is ₹ 70 per hour.
(vi) Variable manufacturing costs are ₹ 60 per bag. Fixed manufacturing
costs ₹ 40,00,000 per quarter.
(vii) Variable selling and administration expenses are 5% of sales and fixed
administration and selling expenses are ₹ 3,75,000 per quarter.
Required
(i) PREPARE a production budget for the said quarter in quantity.
(ii) PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty
Bags’ for the said quarter in quantity as well as in rupees.
(iii) COMPUTE the budgeted variable cost to produce one bag of ‘X’.

Hints:
(i) 1,38,000
(ii)
Particulars ‘Y’ ‘Z’ Empty Bags
Mtr. Mtr. Nos.
Cost of Purchase (₹) 5,23,20,000 3,01,50,000 1,22,10,000

(iii) 805.50

B. PAST YEAR EXAM QUESTIONS

May-23. Q2(a)-10 marks

A Limited has furnished the following information for the months from 1st January to 30th
April, 2023:
January February March April
Number of Working days 25 24 26 25
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Production (in units) per working day 50 55 60 52

Raw Material Purchases (% by weights to 21% 26% 30% 23%
total of 4 months)
Purchase price of raw material (per kg) ₹ 10 ₹ 12 ₹ 13 ₹ 11
Quantity of raw material per unit of product: 4 kg.
Opening stock of raw material on 1stJanuary: 6,020 kg. (Cost ₹ 63, 210)
Closing stock of raw material on 30thApril: 5,100 kg.
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw materials (in kgs) month-by- month and in total.
(ii) Calculate the month-wise quantity and value of raw materials purchased.
(iii) Prepare the priced stores ledger for each month using the FIFO method.

Solution:
(i) Calculation of consumption of Raw Material (in kgs) month by month and total
Particulars Jan Feb March April Total
No. of working days 25 24 26 25 -
Production (Per day) 50 55 60 52 -
Production 1,250 1,320 1,560 1,300 5,430
Raw Material Consumed (in kgs) 5,000 5,280 6,240 5,200 21,720

Calculation of Raw Material Purchased

Purchased (Kg)
Closing stock on 30th April 5,100
Add: Raw Material consumed 21,720
Less: Opening stock on 1st January (6,020)
Raw Material purchased 20,800

(ii) Calculation of month wise quantity and value of raw material purchased
% Purchased (Kg) Price (₹) Value (₹)
January 21 4,368 10 43,680
February 26 5,408 12 64,896
March 30 6,240 13 81,120
April 23 4,784 11 52,624
Total 20,800 2,42,320
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(iii) Store Price Ledger by using FIFO method.

Receipts Issue Balance
Months ParticularsQty Rate Amount Qty Rate Amount Qty Rate Amount
(₹) (₹) (₹)
Jan Opening 6,020 10.5 63,210
Purchases 4,368 10 43,680 6,020 10.5 63,210
4,368 10 43,680
Consumption 5,000 10.5 52,500 1,020 10.5 10,710
4,368 10 43,680
Feb Purchases 5,408 12 64,896 1,020 10.5 10,710
4,36 10 43,680
8
5,40 12 64,896
8
Consumption 1,020 10.5 10,710 108 10 1,080
4,260 10 42,600 5,40 12 64,896
8
March Purchase 6,240 13 81,120 108 10 1,080
5,40 12 64,896
8
6,24 13 81,120
0
Consumption 108 10 1,080
5,408 12 64,896
724 13 9,412 5,51 13 71,708
6
April Purchases 4,784 11 52,624 5,51 13 71,708
6
4,78 11 52,624
4
Consumption 5,200 13 67,600 316 13 4,108
4,78 11 52,624
4
56,732

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Nov-18. Q5(a)-10 marks

An electronic gadget manufacturer has prepared sales budget for the next few months.
In this respect, following figures are available:

Months Electronic gadgets'

sales
January 5000 units
February 6000 units
March 7000 units
April 7500 units
May 8000 units

To manufacture an electronic gadget, a standard cost of ₹ 1,500 is incurred and it is

sold through dealers at an uniform price of ₹ 2,000 per gadget to customers. Dealers
are given a discount of 15% on selling price.
Apart from other materials, two units of batteries are required to manufacture a gadget.
The company wants to hold stock of batteries at the end of each month to cover 30%
of next month's production and to hold stock of manufactured gadgets to cover 25% of
the next month's sale.
3250 units of batteries and 1200 units of manufactured gadgets were in stock
on 1st January.
Required:
(i) Prepare production budget (in units) for the month of January, February, March
and April.
(ii) Prepare purchase budget for batteries (in units) for the month of January, February
and March and calculate profit for the quarter ending on March.
Solution:
(i) Preparation of Production Budget (in Units)
January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% 1,500 1,750 1,875 2,000
of next month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)
Production of electronic 5,300 6,250 7,125 7,625
Gadgets
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(ii) Preparation of Purchase budget

January February March April
Consumption/production of Batteries 10,600 12,500 14,250 15,250
(@ 2 per Gadget)
Add: Closing Stock (30% of next 3750 4275 4575
month’s production)
Less: Opening Stock 3,250 3,750 4275

Purchase of Batteries 11,100 13,025 14,550

Statement Showing Profit
Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per ₹. 2,000 ₹. 2,000 ₹. 2,000 ₹. 2,000
unit*
Less: Discount 300 300 300 300
@15% of selling
price
Less: Standard 1500 1500 1500 1500
cost of
Manufacturing per
gadget Cost
Profit (B) (selling 200 200 200 200
Price-discount-
cost)
Total Profit (A × B) ₹.10,00,000 ₹.12,00,000 ₹.14,00,000 ₹.36,00,000

July-21. Q5(b)-10 marks

PSV Ltd. manufactures and sells a single product and estimated the following related
information for the period November, 2020 to March, 2021.
Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Opening Stock of 7,500 3,000 9,000 8,000 6,000
Finished Goods (in Units)

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

Selling Price per unit(in₹) 10 12 15 15 20

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Additional Information:
• Closing stock of finished goods at the end of March, 2021 is 10,000 units.
• Each unit of finished output requires 2 kg of Raw Material 'A' and 3 kg of Raw Material
'B'.
You are required to prepare the following budgets for the period November, 2020 to March,
2021 on monthly basis:
(i) Sales Budget (in ₹)
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material 'A' and 'B' separately (in units)
Solution:
(i) Sales Budget (in ₹)
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in Units) 30,000 35,000 38,000 25,000 40,000 1,68,000
Selling Price per
10 12 15 15 20 -
unit (₹)
Total Sales (₹) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000

(ii) Production Budget (in units)

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

(iii) Raw material budget (in units)

For Raw material ‘A’
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material consumption 2 2 2 2 2 -
p.u. (kg.): (b)

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Total raw material 51,000 82,000 74,000 46,000 88,000 3,41,000

consumption (Kg.): (a × b)

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For Raw material ‘B’

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

May-22. Q3(a)-10 marks

SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23
commencing on 1st April 2022, production will be constrained by direct labour. It is estimated
that only 12,000 hours of direct labour hours will be available in each month.
For market reasons, production of either of the two garments must be at least 25% of the
production of the other. Estimated cost and revenue per garment are as follows:
Shirt (₹) Short (₹)
Sales price 60 44
Raw Materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22
From the month of July 2022 direct labour will no longer be a constraint. The company expects
to be able to sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock
at the beginning of July 2022.
Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the
year. Following additional information is available:
• The company intends to carry stock of finished garments sufficient to meet 40% of the
next month's sale from July 2022 onwards.
• The estimated selling price will be same as above.
Required:
I. Calculate the number of shirts and shorts to be produced per month in the first quarter of
financial year 2022-2023 to maximize company's profit.
II. Prepare the following budgets on a monthly basis for July, August and September 2022:
(i) Sales budget showing sales units and sales revenue for each product.

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(ii) Production budget (in units) for each product.

Solution:
I. Calculation of number of shirts & shorts to be produced per month:
Contribution per labour hour:
Shirts (₹) Shorts (₹)
A Sales Price per unit 60 44
B Variable Cost:
- Raw materials 30 16
- Direct labour 8 4
38 20
C Contribution per unit [A-B] 22 24
D Labour hour per unit 1 hour 0.5 hour
E Contribution per labour hour [C÷D] 22 48

Production plan for the first three months:

Since, Shorts has the higher Contribution per labour hour, it will be made first. Shirts
will be 25% of Shorts. The quantity will be determined as below:

Let the Quantity of Shorts be X and Shirts will be 0.25 X, then

(Qty. of Shorts × labour hour per unit) + (Qty. of Shirts × labour hour per unit) = Total
labour hours available
Or, (X × 0.5 hour) + (0.25X × 1 hour) = 12,000 hours
Or, 0.5X + 0.25X = 12,000 Or, 0.75X = 12,000
Or, X = 12,000÷0.75
= 16,000 units of Shorts

Therefore, for Shirts = 25% of 16,000 units = 4,000 units

Production per month for the first quarter will be:
Shorts- 16,000 units & Shirts- 4,000 units

II. (i) Sales Budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022
Shirts Shorts Shirts Shorts Shirts Shorts
A Sales demand 15,000 20,000 16,500 22,000 18,150 24,200
B Selling price per unit 60 44 60 44 60 44
(₹)
C Sales Revenue (₹) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800

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(ii) Production budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022 October 2022
Shirts Shorts Shirts Shorts Shirts Shorts Shirts Shorts
A Opening stock 0 0 6,600 8,800 7,260 9,680
B Sales demand 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
C Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
D Production 21,600 28,800 17,160 22,880 18,876 25,168
[B+C-A]

C. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS

Question-1
AK Limited produces and sells a single product. Sales budget for calendar year 2013 by
a quarters is as under:

Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000
The year is expected to open with an inventory of 6,000 units of finished products and
close with inventory of 8,000 units. Production is customarily scheduled to provide for
70% of the current quarter’s sales demand plus 30% of the following quarter demand.
The budgeted selling price per unit is ₹ 40. The standard cost details for one unit of the
product are as follows:
Variable Cost ₹ 34.50 per unit
Fixed Overheads 2 hours 30 minutes @₹ 2 per hour based on a budgeted production
volume of 1,10,000 direct labour hours for the year. Fixed overheads are evenly
distributed through- out the year.
You are required to:
(i) Prepare Quarterly Production Budget for the year.
(ii) In which quarter of the year, company expected to achieve bread-even point.

Solution:
(i) Production Budget for the year 2013 by Quarters
I II III IV Total
Sales demand(Unit) 18,000 22,000 25,000 27,000 92,000
I Opening Stock 6,000 7,200 8,100 8,700 30,000
II 70% of Current Quarter ‘s 12,600 15,400 17,500 18,900 64,400
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Demand
III 30% of Following Quarter’s 6,600 7,500 8,100 7,400* 29,600
Demand
IV Total Production(II &III) 19,200 22,900 25,600 26,300 94,000
V Closing Stock (I+IV-Sales) 7,200 8,100 8,700 8,000 32,000
*Balancing Figure
(ii) Break Even Point = Fixed Cost ÷ PV Ratio
= ₹ 2,20,000 ÷ 13.75% = ₹16,00,000 or 40,000 units.
P/V Ratio = (₹40 - ₹34.50 = ₹ 5.50) ÷ 40 × 100 =13.75%
(Or, Break Even Point = Fixed Cost ÷ Contribution = ₹ 2,20,000 ÷ ₹ 5.50 = 40,000
Units) Total sales in the quarter II is 40,000 equal to BEP means BEP achieved in II
quarter.

Question-2
A Light Motor Vehicle manufacturer has prepared sales budget for the next few
months, and the following draft figures are available:

Month No. of vehicles

October 4,000
November 3,500
December 4,500
January 6,000
February 6,500
To manufacture a vehicle a standard cost of ₹ 2,85,700 is incurred and sold
through dealers at an uniform selling price of ₹ 3,95,600 to customers. Dealers
are paid 12.5% commission on selling price on sale of a vehicle.
Apart from other materials four units of Part-X are required to manufacture a
vehicle. It is a policy of the company to hold stocks of Part-X at the end of the
each month to cover 40% of next month’s production. 4,800 units of Part-X
are in stock as on 1st October.
There are 950 nos. of completed vehicles are in stock as on 1st October and it
is policy to have stocks at the end of each month to cover 20% of the next
month’s sales.
You are required to
(a) Prepare Production budget (in nos.) for the month of October, November,
December and January.
(b) Prepare a Purchase budget for Part-X (in units) for the months of October,
November and December.
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(c) Calculate the budgeted gross profit for the quarter October to December.

Solution:

(a) Preparation of Production Budget (in nos.)

October November December January
Demand for the month (Nos.) 4,000 3,500 4,500 6,000
Add: 20% of next month’s demand 700 900 1,200 1,300
(950) (700) (900) (1,200)
Less: Opening Stock
3,750 3,700 4,800 6,100
Vehicles to be produced

(b) Preparation of Purchase budget for Part-X

October November December
Production for the month 3,750 3,700 4,800
(Nos.) 1,480 1,920 2,440
Add: 40% of next (40% of (40% of (40% of
month’s production 3,700) 4,800) 6,100)
5,230 5,620 7,240
20,920 22,480 28,960
No. of units required for (5,230 × 4 (5,620 × 4 (7,240 × 4
units) units) units)
production Less: Opening (4,800) (5,920) (7,680)
(1,480 × 4 (1,920 × 4
Stock units) units)
16,120 16,560 21,280
No. of units to be purchased

(c) Budgeted Gross Profit for the Quarter October to December

October November December Total
Sales in nos. 4,000 3,500 4,500 12,000
Net Selling Price per unit* ₹ 3,46,150 ₹ 3,46,150 ₹ 3,46,150
41,538
Sales Revenue (₹ in lakh) 13,846 12,115.25 15,576.75
34,284
Less: Cost of Sales (₹ in lakh) 11,428 9,999.50 12,856.50
(Sales unit × Cost per unit)

Gross Profit (₹ in lakh) 2,418 2,115.75 2,720.25 7,254

* Net Selling price unit = ₹ 3,95,600 – 12.5% commission on ₹ 3,95,600 = ₹
3,46,150
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Question-4
G Ltd. manufactures two products called ‘M’ and ‘N’. Both products use a
common raw material Z. The raw material Z is purchased @ ₹ 36 per kg from
the market. The company has decided to review inventory management
policies for the forthcoming year.
The following forecast information has been extracted from departmental
estimates for the year ended 31st March 2016 (the budget period):

Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
Additional information:
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material
cost.
- The cost of placing an orders is ₹ 320 per order.
The management of G Ltd. has decided that there should not be more than 40 orders
in a year for the raw material Z.
Required:
(a) Prepare functional budgets for the year ended 31st March 2016 under the
following headings:
(i) Production budget for Products M and N (in units).
(ii) Purchases budget for Material Z (in kgs and value).
(b) Calculate the Economic Order Quantity for Material Z (in kgs).
(c) If there is a sole supplier for the raw material Z in the market and the supplier
do not sale more than 4,000 kg. of material Z at a time. Keeping the
management purchase policy and production quantity mix into
consideration, calculate the maximum number of units of Product M and N
that could be produced.

Solution:
(a) (i) Production Budget (in units) for the year ended 31st March 2016
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 Budget & Budgetary Costing By: CA. PRAKASH PATEL

Product M Product N
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
28,320 13,160
0.96 0.94

(ii) Purchase budget (in kgs and value) for Material Z

Product M Product N
No. of units to be produced 29,500 14,000
Usage of Material Z per unit of 5 kg. 6 kg.
production Material needed for 1,47,500 kg. 84,000 kg.
production 1,63,889 kg. 88,421 kg.
1,47,500 84,000
Materials to be purchased 0.90 0.95

Total quantity to be purchased 2,52,310 kg.

Rate per kg. of Material Z ₹36
Total purchase price ₹90,83,160
(b) Calculation of Economic Order Quantity for Material Z
2 x 2,52,310kg .x ₹320
EOQ =
₹36 x 11%
₹16,14,78,400
=
₹ ₹3.96
= 6,385.72 kg.

(c) Since, the maximum number of order per year can not be more than 40 orders
and the maximum quantity per order that can be purchased is 4,000 kg. Hence,
the total quantity of Material Z that can be available for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.

Product M Product N

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Material needed for 1,03,929 kg. 56,071 kg.

production to maintain the 1,60,000 x 1,63,889 1,60,000 x 88,421
same production mix 2,52,310 2,52,310

Less: Process wastage 10,393 kg. 2,804 kg.

Net Material available for 93,536 kg. 53,267 kg.
production
Units to be produced 18,707 units 8,878 units
93,536 kg. 53,267 kg.
5kg. 6kg.

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Part-C: Master Budget

A. QUESTION FROM STUDY MATERIAL
Question-6
Float glass Manufacturing Company requires you to PREPARE the Master budget for the next year
from the following information:

Sales:
Toughened Glass ₹ 6,00,000
Bent Glass ₹ 2,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ₹ 150 per month
Factory overheads:
Indirect labour –
Works manager ₹ 500 per month
Foreman ₹ 400 per month
Stores and spares 2.5% on sales
Depreciation on machinery ₹ 12,600
Light and power ₹ 3,000
Repairs and maintenance ₹ 8,000
Others sundries 10% on direct wages
Administration, selling and distribution expenses ₹ 36,000 per year
Hints: Net Profit = ₹1,90,000

TEST YOUR KNOWLEDGE

Question-9

The accountant manufacturing company provides you the following details for years
20x9:
(₹) (₹)
Direct Material 1,75,000 Other variable cost 80,000
Direct wages 1,00,000 Other fixed cost 80,000
Fixed factort overheads 1,00,000 Profit 1,15,000
Variable factory overheads 1,00,000 Sales 7,50,000
During the year, the company manufactured two products A and B and the output and costs were:

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A B
Output (units) 2,00,000 1,00,000
Selling price per unit ₹ 2.00 ₹ 3.50
Direct materials per unit ₹ 0.50 ₹ 0.75
Direct wages per unit ₹ 0.25 ₹ 0.50

Variable factory overhead is absorbed as a percentage of direct wages. Other variable

costs have been computed as: Product A ₹0.25 per unit; and B ₹0.30 per unit.
During 20x0 it is expected that the demand for product A will fall by 25% and for B
by 50%. It is decided to manufacturing a further product C , the cost for which are
estimated as follows:
Product C
Output (units) 2,00,000
Selling price per unit ₹1.75
Direct material per unit ₹0.40
Direct wages per unit ₹0.25
It is anticipated that the other variable costs per unit will be the same as for product A.
PREPARE a budget to present to the management, showing the current position and
the position for 20X0 . Comment on the comparative results.
Hints:
Particulars Current Position 20x0
Profit 1,15,000 1,25,000

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Part-D: Budgeted Ratio

A. QUESTION FROM STUDY MATERIAL
Question-7
Following data is available for DKG and Co:
Standard working hours 8 hours per day of 5 days per week
Maximum capacity 50 employees
Actual working 40 employees
Actual hours expected to be worked per 6,400 hours
four week
Std. hours expected to be earned per four 8,000 hours
weeks
Actual hours worked in the four- week 6,000 hours
period.
Standard hours earned in the four- week 7,000 hours.
period

The related period is of 4 weeks. In this period there was a one special
day holiday due to national event. CALCULATE the following ratios:
(1) Efficiency Ratio, (2) Activity Ratio, (3) Calendar Ratio, (4) Standard Capacity
Usage Ratio, (5) Actual Capacity Usage Ratio. (6) Actual Usage of Budgeted
Capacity Ratio.
Hints: (i) 116.67%, (ii) 109.375%, (iii) 95%, (iv) 80%, (v) 75%, (vi) 93.75%

B. ADDITIONAL QUESTIONS FOR PRACTICE (PAST YEAR EXAM QUESTIONS

Question-1
Calculate efficiency and activity ratio from the following data:
Capacity ratio = 75%
Budgeted output = 6,000 units
Actual output = 5,000 units
Standard Time per unit = 4 hours

Solution:
Capacity Ratio = Actual Hours x 100
Budgeted Hours

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75% = Actual Hours

6,000 units x 4 hour per unit
0.75 = Actual Hours
6,000 units x 4 hour per unit

0.75 = Actual Hours

24,000 Hours
AH = 18,000 Hours

Efficiency Ratio = Actual Output in term of Standard Hours x 100

Actual Hours worked

= 5,000 units x 4 hours per unit x 100

18,000 units
= 20,000 hours x 100 = 111.11 %
18,000 hours
Activity Ratio = Actual output in term of Standard Hours x 100
Budgeted output in term of standard hours

= 20,000 units x 100

6,000 units x 4 hour per unit
= 20,000 units x 100
24,000 units
= 83.33%

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