Soft copy of Practice Manual - Cost and Management Accounting

EXECUTIVE PROGRAMME

MODULE 1, PAPER 2

PRACTICE MANUAL

Cost and Management Accounting

APRIL 2016

Price : Rs. 300/-

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

No part of this Publication may be translated or copied in any form or by any means without the prior written permission of The Institute of Company Secretaries of India.

The PRACTICE MANUAL has been prepared by competent persons and the Institute hopes that it will facilitate the students in preparing for the Institute's examinations. It is, however, to be noted that the answers are to be treated as model answers and not as exhaustive and there can be alternative solutions available for a questions provided in this practice manual. The Institute is not in any way responsible for the correctness or otherwise of the answers.

The Practice Manual contains the information based on the Laws/Rules applicable at the time of preparation. Students are expected to be well versed with the amendments in the Laws/Rules made upto six months prior to the date of examination.

Please note that the paper of Cost and Management Accounting is in Optical Mark Recognition (OMR) format, but to give an insight into the problem solving technique, this practice manual is prepared to build competency in practical aspects by providing the students with a pool of solved practical problems.

ISBN No. : 978-93-82207-70-2

Printed at : Chandu Press/1,000/April 2016

(ii)

PREFACE

“Knowledge is a treasure, but practice is the key to it” -Lao Tzu

In the contemporary era, the global business is exemplified under the intense competition from

domestic as well as transnational players. Competitive advantages of the inclusive economy can

be achieved by placing right strategy in right direction. The successful achievement of the goals

requires constant update and brushing up of one’s specializations and skills. It is observed time

and again that the updating of knowledge is fundamental to development of changing times. In

line with the dynamic nature of the economy, the students must be equipped and thorough in

their analytical abilities to work in the dynamic environment. This demands the development of

basic theoretical concepts as well as practical aspects of this growing and competitive

specialization.

In lines with updating the information, the Institute in the past brought Practice Manual on

Financial Treasury and Forex Management (Professional Programme) and Company Accounts

and Auditing Practices (Executive Programme). Now, we are presenting the Practice Manual

prepared specifically for the subject “Cost and Management Accounting” to the students of

Executive Programme. This Practice Manual is a learning instrument which serves as a refresher.

Though the pattern of the paper will be in OMR format, but to give an insight into the problem

solving technique, this Practice Manual is prepared to build competency in practical aspects by

providing the students with a pool of solved practical problems.

This Practice Manual is not intended to replace the study material but to supplement the same.

Therefore, the students are expected to make a holistic study of both the study material and

Practice Manual to gain maximum benefit and acquire in-depth knowledge of the subject.

I acknowledge with thanks all those experts, authors and institutions whose material has been

consulted and referred in preparation of this Practice Manual. I place on record my sincere

appreciation to Ms. Akansha Rawat, Executive (Academics) in the Academic Team at the Institute

headed by Ms. Sonia Baijal, Director for this initiative.

I have great pleasure in introducing this practice manual to the students. I am sure, this manual

will prove to be useful and beneficial to the students. Therefore, I advise all the students to take

maximum benefit out of it by meticulously practicing the questions given therein. As the saying

goes “Practice makes a man perfect”, practicing more will develop clear knowledge of

fundamental concepts to solve practical questions correctly and give a stronger hold in the

subject.

My best wishes to you all!

New Delhi CS Mamta Binani

25th April, 2016 President, ICSI

(iii)

CONTENTS

Sl. No. Subject Page No.

1 Introduction to Cost and Management Accounting 1

2 Material Cost 9

3 Labour Cost 55

4 Direct Expenses and Overheads 86

5 Activity Based Costing 132

6 Cost Records 192

7 Costing Systems 259

8 Marginal Costing 303

9 Standard Costing 354

10 Budget, Budgeting and Budgetary Control 391

11 Cost Accounting Records and Cost Audit 428

12 Analysis and Interpretation of Financial Statement 434

(v)

1

Question 1

Question 1

Define costing and discuss its objectives.

Answer

Costing is defined as the technique and process of ascertaining costs. The technique refers to principles, which are applied for ascertaining cost of products, jobs, processes and services. Costing involves the classifying, recording, and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales values and the ascertainment of profitability.

In practice, the terms costing, cost accounting and cost accountancy are most often used interchangeably although they are defined differently. The main objectives of costing may be summarised as follows:

(i) To analyse and classify all expenditures with reference to the cost of products and operations.

(ii) To arrive at the cost of production of every unit, job, operation, process, department or service and to develop cost standard.

(iii) To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial measures.

(iv) To provide data for periodical profit and loss accounts and balance sheets and also, to explain in detail the exact reasons for profit or loss revealed in total in the profit and loss account.

(v) To reveal sources of economies in production having regard to methods, types of equipment, design, output and layout.

(vi) To provide actual figures of cost for comparison with estimates and to serve as guide for future estimates or quotations and to assist the management in their price fixing policy.

(vii) To analyse the variance between budgeted and actuals so that corrective action may be taken.

(viii) To present comparative cost data for different periods and various volumes of output.

1

Introduction to Cost and

Management Accounting

2

(ix) To record the relative production results of each unit of plant and machinery in use as a basis for examining its efficiency.

(x) To provide information to enable management to make short-term decisions of various types.

Question 2

The scope of Cost accounting is very wide. Discuss

Answer

The Scope of Cost Accounting is very wide and includes:

(a) Cost Ascertainment: The main function of cost accounting is the ascertainment of cost of product or services rendered. It includes collection, analysis of expenses and measurement of production at different stages of manufacture. The collection, analysis and measurement requires different methods of costing for different types of production such as Historical costs, Standard costs, Process cost, Operation cost etc. It can be done in two ways, namely

(i) Post Costing, where the ascertainment of cost is done based on actual information as recorded in financial books.

(ii) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where cost information is available as and when a particular activity is completed, so that the entire cost of a particular job is available the moment it is completed.

(b) Control of Costs: In the era of competition, the goal of every business is to sustain; in costs at the lowest point with efficient operating conditions. To sustain, It is essential to examine each individual item of cost in the light of the services or benefits obtained so that maximum utilisation of the money expended or- it may be recovered. This requires planning and use of standard for each item of cost for locating deviations, if any, and taking remedial measures.

(c) Proper matching of cost with revenue: In cost accounting manager prepares monthly or quarterly statements to reflect the cost and income data identified with the sale of that period.

3

(d) Aids to Management Decision-making: Decision-making is a process of choosing between two or more alternatives, based on the resultant outcome of the various alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved through a good cost accounting system

Question 3

The limitations of financial accounting have made the management to realize the importance of cost accounting. In the light of the above briefly discuss the various advantages of cost accounting.

Answer

Cost accounting increases the overall productivity of an organisation and serves as an important tool, in bringing prosperity to the nation. Thus, the importance of cost accounting can be discussed as under:

(a) Costing as an Aid to Management

Cost accounting provides invaluable aid to management. It provides detailed costing information to the management to enable them to maintain effective control over stores and inventory, to increase efficiency of the organisation and to check wastage and losses. It facilitates delegation of responsibility for important tasks and rating of employees.

(b) Costing as an Aid to Creditors

Investors, banks and other money lending institutions have a stake in the success of the business concern and are, therefore, benefited immensely by the installation of an efficient system of costing. They can base their judgment about the profitability and future prospects of the enterprise on the costing records.

4

(c) Costing as an Aid to Employees

Employees have a vital interest in their employer’s enterprise in which they are employed. They are benefited by a number of ways by the installation of an efficient system of costing. They are benefited, through continuous employment and higher remuneration by way of incentives, bonus plans, etc.

(d) Costing as an Aid to National Economy

An efficient system of costing brings prosperity to the business enterprise which in turn results in stepping up of the government revenue. The overall economic development of a country takes place as a consequence increase in efficiency of production.

Question 4

Define and explain the term (a) cost centre and (b) cost unit.

Answer

(a) Cost centre

According to the Chartered Institute of Management Accountants, London, cost centre means, “a production or service location, function, activity or item of equipment whose costs may be attributed to cost units”. Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. Thus cost centre refers to one of the convenient unit into which the whole factory organisation has been appropriately divided for costing purposes.

Cost centres may be classified as follows:

(i) Productive, Unproductive and Mixed Cost Centres

(ii) Personal and Impersonal Cost Centre

(iii) Operation and Process Cost Centre

(b) Cost unit

The Chartered Institute of Management Accountants, London, defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”. A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions. These smaller sub-divisions are attributed to products or services to determine product cost or service cost or cost of time spent for a particular job etc. For example:

Industry/Product Cost unit

Automobile Number

Brick works 1000 bricks

Cement Tonne

Transport Tonne - Kilometre

Passenger - Kilometre

5

Question 5

Distinguish between:

(a) Cost accounting and management accounting

(b) Imputed Costs and Common Costs

Answer

(a) Cost accounting and management accounting

Cost Accounting Management Accounting

1. Cost accounting is concerned with the ascertainment, allocation, distribution and accounting aspects of costs.

Management accounting is concerned with impact and effect aspect of costs.

2. Cost accounting data generally serves as a base to which the tools and techniques of management accounting can be applied to make it more purposeful and management oriented.

The management accounting data is derived both, from the cost accounts and financial accounts.

3. A cost accountant collects and presents costing data.

Management accountant analyses and decides specific business problems on the basis of data available.

4. The cost accountant is generally placed at a lower level of hierarchy.

The management accountant generally is placed at a higher level of hierarchy.

5. The approach of the cost accountant is much narrower

The approach of management accountant is wider as it includes interpretation of economic and statistical data along with the costing data.

6. Tools and techniques like variable costing, break-even analysis, standard costing, etc., are used.

Management accounting, in addition to the techniques of cost accounting, uses other techniques like cash flow, ratio analysis, etc.

7. Cost accounting does not include financial accounting and has nothing to do with tax accounting.

Management accounting includes both financial accounting as well as tax accounting. It also embraces tax planning and tax accounting.

8. Cost accounting is more Management accounting is concerned

6

concerned with short-term planning.

equally with short-term and long-term planning

9. Cost accounting is mostly historical in its approach and it projects the past.

Management accounting is futuristic in its approach.

10. Cost accounting system can be installed without management accounting.

Management accounting cannot be installed without a proper cost accounting system.

(b) Imputed Costs and Common Costs

Imputed costs are the costs that are not incurred but are useful while taking decision pertaining to a particular situation. These costs are known as imputed or notional costs and they do not appear in financial records. These costs are notional in nature and do not involve any cash outlay. It is the value of a benefit where no actual cost is incurred. Interest on internally generated funds, rental value of company owned property and salaries of owners of a single proprietorship or partnership are some examples of imputed costs. When alternate capital investment projects are being evaluated it is necessary to consider the imputed interest on capital before a decision is arrived as to which is the most profitable project.

Common costs are costs, which are incurred for more than one product, job, territory or any other specific costing object. It is the cost of services employed in the creation of two or more outputs which is not allocated to those outputs on a clearly justified basis. They are not easily related with individual products and hence are generally apportioned. Common costs are not only common to products, but they may be common to process, functions, responsibilities, customs, sales territories, periods of time and similar costing units. In general, management decisions influence the occurrence of common costs e.g., rent of the factory in a common cost to all departments located in a factory.

Question 6

Explain the significance of decision-making costs. Briefly explain the various type of costs used by the management in decision-making.

Answer

There are certain costs which are specially used for decision making by the management. Such decision making costs may be relevant costs or irrelevant costs.

Various types of costs used by management in decision making are briefly described below:

• Opportunity costs : Opportunity cost is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received if the asset is utilized in its next best alternative.

• Differential cost : Differential cost has been defined as “the difference in total cost between alternatives, calculated to assist decision making”. It helps management

7

to know the additional profit that would be earned if idle capacity is used or when additional investments are made.

• Imputed costs : Some costs are not incurred and are useful while taking decision pertaining to a particular situation. Examples: Interest on internally generated funds, salaries of owners of proprietorship or partnership, notional rent etc.

• Out-of-pocket costs : Out-of-pocket costs signify such outlay required for an activity. The management would like to know that the income from a particular project will at least cover the expenditure for the project. Acceptance of a special order requires to be considered as additional costs need not be incurred if the special order is not accepted. Hence the importance of out-of-pocket costs.

• Marginal costs : It is the aggregate of variable costs, i.e., prime cost plus variable overheads. Thus, costs are classified as fixed and variable.

• Replacement costs : This is the cost of replacing an asset at current market values e.g. when the cost of replacing an asset is considered, it means the cost of purchasing the asset at the current market price is important and not the cost at which it was purchased.

Question 7

“Management accounting is concerned with accounting information which is useful to management”. Comment.

Answer

According to CIMA, London : “Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for: (a) formulating strategy; (b) planning and controlling activities; (c) decision taking; (d) optimising the use of resources; (e) disclosure to shareholders and others external to the entity; (f) disclosure to employees; (g) safeguarding assets.

The fundamental objective of management accounting is to assist the management in carrying out its duties efficiently so that maximize profits or minimize losses of management.

The main objectives of management accounting are as follows:

1. To formulate Planning and policy

Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the program of activities. It facilitate the preparation of statements in the light of past results and gives estimation for the future.

2. To interpretation of financial documents

Management accounting is to present financial information to the management. Financial information must be presented in such away that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

8

3. To assist in Decision-making process

Management accounting makes decision-making process more scientific with the help of various modern techniques. Information/figure relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed accordingly which will provide a base for taking sound decisions.

4. To help in control

Management accounting is a helpful for managerial control. Management accounting tools e.g. standard costing and budgetary control are helpful in controlling performance. Cost control is affected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting.

5. To provide report

Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. It informs the performance of various departments regularly to the top management.

6. To Facilitate Coordination of Operations

Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.

***

9

Question 1

Question 1

What are the different techniques of inventory control?

Answer

The following are the common techniques of inventory control:

(i) Min-max Plan

(ii) The two-bin System

(iii) Order Cycling System

(iv) ABC Analysis

(v) Fixation of various levels

(vi) Use of Perpetual Inventory System and Continuous Verifications

(vii) Use of Control Ratios

(viii) Review of Slow and Non-moving Items.

Question 2

Explain the concept of ’ABC Analysis’ as a technique of inventory control.

Answer

ABC Analysis is a system of selective inventory control whereby the measure of control

over an item of inventory varies with its usage value. It exercises discriminatory control

over different items of stores grouped on the basis of the investment involved. Usually the

items of material are grouped into three categories viz; A,B and C according to their use

value during a period. In other words, the high use value items are controlled more closely

than the items of low use value.

(i) ‘A’ Category of items consists of only a small percentage i. e., about 10% of the

total items of material handled by the stores but require heavy investment i. e.,

about 70% of inventory value, because of their high prices and heavy requirement.

(ii) ‘B’ Category of items comprises of about 20% of the total items of material

handled by stores. The percentage of investment required is about 20% of the

total investment in inventories.

2

Material Cost

10

(iii) ‘C’ Category of items does not require much investment. It may be about 10% of

total inventory value but they are nearly 70% of the total items handled by stores.

‘A’ Category of items can be controlled effectively by using a regular system ,which ensures

neither over-stocking nor shortage of materials for production. Such a system plans its

total material requirements by making budgets. The stocks of materials are controlled by

fixing certain levels like maximum level, minimum level and re-order level. A reduction in

inventory management costs is achieved by determining economic order quantities after

taking into account ordering cost and carrying cost. To avoid shortages and to minimize

heavy investment of funds in inventories, the techniques of value analysis, variety

reduction, standardization etc. are used along with aforesaid techniques.

In the case of ‘B’ category of items, as the sum involved is moderate, therefore, the same

degree of control as applied in ‘A’ category of items is not warranted. The order for the

items, belonging to this category may be placed after reviewing their situation periodically.

This category of items can be control by routine control measures.

For ‘C’ category of items, there is no need of exercising constant control. Orders for items in

this group may be placed either after six months or once in a year, after ascertaining

consumption requirements.

Question 3

Distinguish between Bin Card and Stores Ledger.

Answer

Difference between Bin Card and Stores Ledger

Bin Card Stores Ledger

It is a quantity record

It is kept inside the stores

It is maintained by the store-keeper

The postings are done before the transactions take place

Each transaction is individually posted

It is a record of quantity and value

It is kept outside the stores

It is maintained by the accounts department

The postings are done after the transactions take place

Transactions may be posted periodically and in total

Question 4

How will you treat the normal and abnormal losses of material arising during storage, in

cost accounting?

11

Answer

The difference between book balance and actual physical stock, which may either be gain

or loss, should be transferred to Inventory Adjustment Account pending scrutiny to

ascertain the reason for the difference.

If on scrutiny, the difference arrived at is considered as normal, then such a difference

should be transferred to overhead control account and if abnormal, it should be debited to

Costing Profit and Loss Account.

In case of normal losses, an alternative method may be used. Under this method the price of

the material issued to production may be inflated so as to cover the normal loss.

Question 5

What do you mean by scrap? How will you treat it in cost accounting?

Answer

Scrap

Scrap represents the unusable loss which can be sold. It is a residue which is measurable

and has a Minor value. It may result from the processing of materials, obsolete stock or

defective parts.The sale value is credited to the concerned department which produced it. If

the vale is negligible, it is credited to the Costing Profit and Loss Account.

Scrap may arise in the form of turnings, boring’s, filings etc. from metal; sawdust in timber

industry, off-cuts and cut pieces in leather industry.

Accounting Treatment

(i) Where the scrap has negligible value, it is charged to good units. Income is credited

to other income.

(ii) The sale value can be reduced from the material cost.

(iii) If the scrap is of very little value, then only a quantity record need be kept.

(iv) The cost is calculated by reducing the sale price by the selling cost and this sum is

taken as a credit to the production overhead account.

(v) Scrap arising in one job may be used in another. Such transfers should be properly

recorded on material transfer notes.

Question 6

What are defectives? Discuss the accounting treatment of defectives in cost accounting.

12

Answer

Defectives refers to those units or portion of production, which do not meet the prescribed

specifications. Such units can be reworked or re-conditioned by the use of additional

material, labour and/or processing and brought to the point of either standard or sub-

standard units.

The possible way of treating defectives in cost accounting are as follows:

(a) When defectives are normal and it is not beneficial to identity them job-wise, then

the following methods may be used—

1. Charged to good products: The cost of rectification of normal defectives is

charged to good units. This method is used when defectives rectified are

normal.

2. Charged to general overheads: If the department responsible for defectives

cannot be identified, the rework costs are charged to general overheads.

3. Charged to departmental overheads: If the department responsible for

defectives can be correctly identified, the rectification costs should be charged

to the department.

(b) When normal defectives are easily identifiable with specific job the rework costs

are debited to the identified job.

(c) When defectives are abnormal and due to uncontrollable factors,, the rework cost

should be charged to the Costing Profit and Loss Account.

Question 7

Explain why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any

other method of pricing material issues.

Answer

LIFO has following advantages:

(a) The cost of the material issued will be reflecting the current market price.

(b) The use of the method during the period of rising prices does not reflect undue high

profit in the income statement.

(c) In the case of falling price, profit tend to rise due to lower material cost, yet the

finished goods appear to be more competitive and are at market price.

(d) During the period of inflation, LIFO will tend to show the correct profit.

Question 8

Distinguish between bill of material and material requisition note.

13

Answer

Bill of material Material Requisition Note

1. It is document by the drawing office 1. It is prepared by the foreman of the

consuming department

2. It is a complete schedule of component

parts and raw materials required for a

particular job or work order.

2. It is a document authorizing Store –

keeper to issue material to the

consuming department.

3. It often serves the purpose of a Store

Requisition as it shows the complete

schedule of materials required for a

particular job i.e. it can replace stores

requisition.

3. It cannot replace a bill of materials.

4. It can be used for the purpose of

quotation.

4. It is useful in arriving historical cost.

5. It helps in keeping a quantitative control

on materials drawn through stores

requisition.

5. It shows the material actually drawn

from stores.

Question 9

Shiva Limited buys its annual requirement in 6 instalments. Quarterly requirement of

material is 120000 units. Each unit costs Rs.24 and the ordering cost is Rs. 250. Annual

inventory carrying cost is estimated at 10% of unit cost. Find the total annual cost of the

existing inventory policy. How much money can be saved by Economic Order Quantity?

Answer

(i) Total Annual Cost under Existing Inventory Policy

Rs.

Ordering Cost : 6 orders x Rs. 250 1500

Carrying Cost

(Average Inventory x 10% of unit cost Rs. 24)

or

or 40000 x 2.40 96000

Total Cost 97500

14

(ii) Total Annual Cost under EOQ

EOQ = √

= √

= √

= 10000 units

Rs.

Ordering Cost :

x Rs. 250 12000

Carrying Cost :

or 5000 units x Rs. 2.4 12000

Total Cost 24000

Saving due to EOQ (97500 – 24000) = Rs. 73500

Question 10

Babbu Limited manufactures a special product which requires a component ‘Kachari.’ The

following particulars are collected for the year ending 31st March, 2016 :

(i) Weekly requirement of Kachari : 2000 Units

(ii) Cost of placing an order : Rs. 1000 per order

(iii) Cost per unit of Kachari : Rs. 65

(iv) Annual carrying cost : 20% on cost of average inventory

The company has been offered a quantity discount of 4% on the purchase of ‘Kachari’

provided the order size is 26000 components at a time.

You are required to:

(i) Compute the Economic Order Quantity

(ii) Advise whether the quantity discount offer can be accepted.

Answer

(i) Calculation of EOQ:

EOQ =√

= √

15

= √

= √ = 4000 units

(ii) Evaluation of Quantity Discount offer:

(a) Total cost when EOQ is ordered:

No. of orders = 2000 x 52/4000 =26 orders

Average inventory = 4000/2 = 2000 units

Ordering Cost : 26 x Rs.1000

Carrying Cost : 2000 Units x Rs.13

Purchase Cost : (2000 x 52) x Rs.65

Rs.

26000

26000

6760000

Total Cost 6812000

(b) Total Cost when quantity discount is accepted

No. of orders =

Average inventory =

Purchase price = Rs. 65 x 0.96 = Rs. 62.40 per units

Carrying Cost: 20% of Rs. 62.40 = Rs. 12.48 per unit

Ordering Cost: 4 x Rs. 1000

Carrying Cost: 13000 units x Rs.12.48

Purchase Cost: (2000 x 52) x Rs. 62.40

Rs.

4000

162240

6489600

Total Cost 6655840

Saving due to quantity discount (Rs. 6812000 - 6655840) = Rs. 156160

Advice- the total cost of inventory is lower if quantity discount offer is accepted. Hence, the

company is advised to accept the quantity discount offer.

16

Question 11

The following information is provided by Chandu Agro-Chems Ltd.:

Fertilizer

Fe - I Fe - II

Monthly consumption 2000 bags 1440 bags

Relevant ordering cost per purchase order Rs. 1200 Rs. 1400

Purchase price per bag Rs. 576 Rs. 597.30

Annual relevant carrying cost 10% 10%


(i) Compute Economic Order Quantity (EOQ) for both Fe- I and Fe- II.

(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total

annual relevant carrying costs for both Fe - I and Fe - II.

(iii) For the EOQ, compute the number of deliveries per year for both Fe- I and Fe- II.

Answer

(i) Computation EOQ:

Fe-I Fe-II

EOQ=√

√

=√

=√

=1000 units

√

=√

=√

=900 units (Approx)

17

(ii) Total Annual Relevant Costs:

Fe-I Fe-II

No. of orders

Average inventory

Ordering cost

Carrying cost

2000 x 12/1000 =24 Orders

1000/2 =500 units

Rs.

24 x 1200 = 28800

500 x 57.6 = 28800

1440 x 12/900 =19.2 Orders

900/2 = 450 units

Rs.

19.2 x 1400 = 26880

450 x 59.73 = 26879

Total annual relevant Cost 57600 53759

In case of ‘Fe-II’, relevant Costs can be taken as:

(19.2 or 20 orders x 1400) + (450x59.73)

= 28000 + 26879

= Rs. 54879

(iii) No. of deliveries =

For ‘Fe-I’ =

For ‘Fe-II’ =

Question 12

Shiva Limited provides the following information relating to their operation for a year:

Ordering cost

Inventory carrying cost

Cost of material

Usage

Lead time to supply

Rs. 500 per order

10% per annum on average inventory

Rs. 520 per unit

500 to 1500 units per week

2 to 4 weeks

You are required to compute:

(i) Economic Order Quantity

(ii) Re-order stock Level

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(iii) Maximum stock level

(iv) Minimum stock level

(v) If the supplier is willing to supply quarterly 13000 units at a discount of 4%, is it worth

accepting?

Answer

Annual consumption = Normal usage per week x 52 weeks

= (500+1500)/2 or 1000 x 52 =52000 units.

Inventory carrying cost = 10% of 520 = Rs. 52 per unit per annum

(i) Economic Order Quantity:

EOQ = √

= √

=1000 units

(ii) Re-order Level

= Maximum usage x Maximum re-order period

= 1500 x 4 = 6000 units per week

(iii) Maximum Level

= (Re-order level + Re-order quantity) – (Mini. usage x Mini. re-order period)

= (6000 + 1000) – (500 x 2)

= 7000 – 1000 = 6000 units

(iv) Minimum Level

= Re-order level – (Normal usage x Average re-order period)

= 6000 – (1000 x 3)

= 3000 units

(v) Evaluation of Discount offer:

Discounted offer price = 520 – 4% of 520 = 520 -20.80 = Rs. 499.20

Carrying cost at discount offer = 10% of 499.20 = Rs. 49.92

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Particulars At EOQ At Discount Offer

No. of orders(52000/Order size)

Average inventory(Order size/2)

52000/1000=52

1000/2 = 500 units

52000/13000=4

13000/2 = 6500 units

Ordering cost (No. of Orders x 500)

Carrying cost (At EOQ - 500 x

52=26000; At discount offer - 6500

x 49.92=324480)

Cost of purchase (52000x price)

Rs.

26000

26000

27040000

Rs.

2000

324480

25958400

Total cost 27092000 26284880

Since the total cost under quarterly supply of 13000 units with 4% discount is lower than

that when order size is 1000 units (EOQ), therefore the offer should be accepted.

Question 13

From the following data for the year ended 31st March, 2016, calculate (i) Inventory

turnover ratio and (ii) The number of days for which the average inventory is held.

Rs.

Opening stock 115000

Purchases during the year 2240000

Closing stock 265000

Answer

(1.) Inventory turnover ratio =

=

=11

(2.) Average Number of days for which the average inventory held =

=

20

Working Note :

1. Cost of raw material Consumed = Opening stock Rs. 1,15,000 + Purchase

Rs.22,40,000 - closing stock Rs. 265000 = Rs.2090000

2. Average stock = (Opening stock + closing stock ) / 2

= (115000+265000)/2 = Rs.190000

Question 14

The following data is available in respect of material ‘X’ and ‘Y’ for the year ended 31st

March, 2016:

Material X Material Y

Stock on 1st April, 2015

Purchases during the year

Stock on 31st March, 2016

Rs.

210000

1942500

240000

Rs.

190000

645000

220000

Calculate the inventory turnover ratio of the above two items and put forward your

comments on them.

Answer

Material ‘X’

Rs.

Material ‘Y’

Rs.

Stock on 1st April,2015

Add : Purchases

Less : Stock on 31st march 2016

Cost of raw material consumed

Average inventory : (opening +

closing)/2

Inventory turnover ratio : (material

consumed ÷Average inventory)

Inventory storage period :

(365/Inventory turnover ratio)

210000

1942500

2152500

-240000

1912500

225000

8.5times

365/8.5= 43 Days

(approx)

190000

645000

835000

-220000

615000

205000

3 times

365/3=122 Days

(approx)

Comments : Material X is more fast moving than Material Y.

21

Question 15

Poowa Ltd. uses three raw materials X, Y and Z for a particular product for which the

following data apply:

Raw

Material

Usage per

unit

of product

(kgs)

Re-order

Quantity

(kgs)

Price per

kg

Rs.

Delivery Period in days

Minimum Average Maximum

X

Y

Z

5

2

3

20000

10000

20000

10

30

15

4

6

3

6

9

5

8

12

7

Daily production varies from 350 to 450 units, averaging 400 units of the said product.

What would be the following quantities?

(i) Minimum Stock Level of X

(ii) Maximum Stock Level of Y

(iii) Re-order Level of Z

(iv) Average Stock Level of Y

Answer

(i) Minimum Level of X = Re-order Level – (Average Usage x Average delivery

period)

= 18000 – (5x400x6)

= 18000 – 12000

= 6000 Kgs.

Note : Re-order Level of X = Max. usage x Max. delivery period

= (5 x 450) x 8

=18000 Kgs.

(ii) Maximum Level of Y = (Re-order Level + Re-order quantity) – (Min. usage x Min.

delivery period )

= (10800 + 10000)- (2 x 350 x 6 )

= 20800 – 4200

= 16600 Kgs.

Note : Re-order Level of Y =Max. usage x Max. delivery period

=2 x 450 x12 =10800 Kgs.

22

(iii) Re-order Level of Z =Maximum usage x maximum delivery period

= 3 x 450 x 7 =9450 Kgs.

(iv) Average Level of Y =(Minimum Level of Y + Maximum Level of Y)/2

= (3600 + 16600)/2

= 10100 Kgs.

OR Average Level of Y = Minimum of Y + ½ of Re-order quantity of Y

= 3600 + ½ x 10000

= 8600 Kgs.

Note : Minimum Level of Y = Re-order Level - (Average usage x Average delivery

period)

= 10800 – (2 x 400 x 9)

= 10800 – 7200

= 3600 Kgs.

Question 16

Nanu Ltd. has provided the following data relating to a particular material which is used

for Baby train toys:

Monthly demand of the Baby train toys : 5000 toys

Purchase price of material : Rs. 51.10 per unit

Cost of placing an order : Rs. 2000 per order

Carrying cost of average inventory : 10% per annum

Re-order period : 10 to 18 days

Consumption of raw material varies from 250 units to 450 units per day, the average

consumption being 350 units.

You are required to calculate:

(i) Re-order Level

(ii) Maximum Level

(iii) Minimum Level

(iv) Average Level

Answer

(1.) Re-order level = Maximum consumption x Maximum re-order period

= 450 units x 18 days

= 8100 units

23

(2.) Maximum level =(Re-order level +Re-order quantity) – (Minimum consumption x

Minimum re-order period)

= [8100+10000(EOQ)] – (250 x 10)

= 18100 – 2500

=15600 units

(3.) Minimum Level = Re-order Level – (Avg. cons. x Avg. Re-order period)

= 8100 – (350 x 14)

= 8100 – 4900

= 3200 units

(4.) Average level = (Maximum level + Minimum Level ) / 2

= (15600+3200)/2

=9400 units

OR

Average level = Minimum level + ½ of re-order quantity

= 3200 +10000 x 1/2

=8200 units

Working Note :

(1.) Re-order quantity ( Economic order Quantity ) = √

=√

=√

=1000 units

(2.) Average Re-order period = (10+18)/2 = 14 Days.

Question 17

Peena Ltd. manufactures a special product, which requires material ‘XE’. The following

particulars were collected for the year 2015-16:

Cost of material ‘XE’ : Rs.130 per unit

Ordering Cost : Rs. 1500 per order

24

Required return on investment in average inventory : 10% per annum

Rent, insurance expenses etc. : Rs. 7 per unit per annum

Re-order Period : 2 to 4 weeks

Normal usage : 1500 units per week

Minimum usage : 900 units per week

Maximum usage : 2100 units per week

Required:

(i) Economic Order Quantity

(ii) Re-order Level

(iii) Maximum Level

(iv) Minimum Level

(v) Average Level

Answer

Workings:

1. Annual Usage = 1500 Units X 52 = 78000 Units

2. Inventory Carrying Cost = (10% of Rs. 130) + Rs. 7 = Rs. 20 per unit

3. Normal reorder period =

(i) Economics Order Quantity (EOQ) = √

= √

= √

= 3420.53 or 3421 units

(ii) Re-order Level = (Max. usage x max. Re-order Period)

= 2100 x 4

= 8400 units

(iii) Maximum Level = (Re-order Level + Re-order quantity or EOQ) – (Min. usage x

min re-order period)

= (8400 + 3421) – (900 x 2)

= 11821 – 1800

= 10021 Units

25

(iv) Minimum level = Re-order level – (Normal usage x Normal re-order period)

= 8400 – (1500 x 3)

= 8400 – 4500

= 3900 Units

Average level = (Minimum level + maximum level) /2

= (3900 + 10021) / 2

= 6960.5 or 6961 Units

Question 18

Jaggu Ltd. has received an offer of quantity discount on its order of materials as under:

Price per unit Order size (No. of units)

Rs.

105 Less than 5000

100 5000 and less than 10000

95 10000 and less than 20000

91 20000 and less than 30000

90 30000 and above

The annual requirement for the material is 60000 units. Cost of placing an order is Rs.

15000 and the inventory holding cost is estimated at 20% of the material cost per annum.


(i) Compute the most economical purchase level

(ii) Compute Economic Order Quantity if there are no quantity discount and the

purchase price per units is Rs. 110.

Answer

(i) Computation of most economic purchase level

Order size

(units)

No. of

orders

Ordering cost

(2) x Rs.15000

Carrying

cost

Rs.

Cost of

purchase

Rs.

Total cost

(3+4+5) Rs.

(1) (2) (3) (4) (5) (6)

4000

5000

15

12

225000

180000

42000

50000

6300000

6000000

6567000

6230000

26

10000

20000

30000

6

3

2

90000

45000

30000

95000

182000

270000

5700000

5460000

5400000

5885000

5687000

5700000

The above table shows that the total cost of 60000 units including ordering and carrying

costs is minimum of Rs. 5687000 when the order size is 20000 units. Hence, the most

economic purchase level is 20000 units.

(ii) Computation of EOQ:

EOQ = √

= √

=√

=√

=9045.34 or 9045 units

Working Notes:

Order size(units) 4000 5000 10000 20000 30000

No. of Orders

(60000/ order Size)

15 12 6 3 2

Average inventory

(Units = order size

/2)

2000 2500 5000 10000 15000

Carrying cost per

unit (Rs.)

105x.20=21 100x.20=20 95x.20=19 91x.20=18.20 90x.20=18

Total Carrying cost

Rs. (Avg. inventory x

carrying cost per

unit)

42000 50000 95000 182000 270000

Cost of Purchase

Rs.

60000 x105

=6300000

60000 x100

=600000

60000 x95

=5700000

60000 x91

=5460000

60000 x90

=5400000

27

Question 19

Prepare a Stores Ledger Account from the following transactions of Richa Ltd. during the

month of January, 2016:

Jan.1 Opening balance 600 units @ Rs. 25 per unit

Jan.4 Receipt 500 units @ Rs. 22 per unit

Jan.6 Issue 300 units

Jan.8 Receipt 400 units costing Rs. 9600


Jan.14 Receipt 100 units costing Rs. 2500

Jan.15 Shortage 40 units

Jan.20 Receipt 250 units @ Rs. 26 per unit



The issues up to 10.01.2016 will be priced at LIFO and from 14.01.2016 issues will be

priced at FIFO. Shortage will be charged as overhead.

Answer

Stores Ledger Account for January, 2016

(LIFO up to 10-01-2016 and after that FIFO)

Date

Receipts Issues Balance

Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

1-1-16 - - - - - - 600 25 15000

4-1-16 500 22 11000 - - - 600

500

25

22

26000

6-1-16 - - - 300 22 6600 600

200

25

22

19400

8-1-16 400 24 9600 - - - 600

200

400

25

22

24

29000

28

10-1-16 - - - 350 24 8400 600

200

50

25

22

24

20600

14-1-16 100 25 2500 - - - 600

200

50

100

25

22

24

25

23100

15-1-16 - - - 40

(Shor

tage)

25 1000 560

200

50

100

25

22

24

25

22100

20-1-16 250 26 6500 -- - - 560

200

50

100

250

25

22

24

25

26

28600

22-1-16 - - - 200 25 5000 360

200

50

100

250

25

22

24

25

26

23600

27-1-16 - - - 360

40

25

22

9880 160

50

100

250

22

24

25

26

13720

29

Question 20

The following are the details of receipts and issues of a material of stores in Mahi Ltd. for

the quarter ending 30th June, 2015:

Date of

Receipt

Units Rate per

unit (Rs.)

Date of

Issue

Units

April 5

April 25

May 10

May 22

June 19

June 27

1800

2500

1600

1000

900

2000

52

53

53.50

54

55

54.50

April 3

April 27

May 15

June 10

June 20

June 28

1500

2100

1700

1600

1300

1900

There were 2100 units in stock on April 1, 2015 which were valued at Rs. 51 per unit.

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

company reported a shortage of 70 units on 30th April, 2015 and 80 units on 30th June,

2015. The shortage is treated as inflating the price of remaining material on account of

shortage.

You are required to prepare a Stores Ledger Account.

Answer

Store Ledger Account

For the Quarter ending 30th June , 2015

(Weighted Average Method)

Date


Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Rate for

further issue

(Rs.)

April-1 - - - - - - 2100 107100 51

April-3 - - - 1500 51 76500 600 30600 51

April-5 1800 52 93600 - - - 2400 124200 124200/2400

=51.75

30

April-25 2500 53 132500 - - - 4900 256700 256700/4900

=52.39

April- 27 - - - 2100 52.39 110019 2800 146681 52.39

April- 30 - - - 70

Short

.

- - 2730 146681 146681/2730

=53.73

May-10 1600 53.50 85600 - - - 4330 232281 232281/4330

=53.64

May-15 - - - 1700 53.64 91188 2630 141093 53.64

May-22 1000 54 54000 -- - - 3630 195093 195093/3630

=53.74

June-10 - - - 1600 53.74 85984 2030 109109 53.74

June-19 900 55 49500 - - - 2930 158609 158609/2930

=54.13

June-20 - - - 1300 54.13 70369 1630 88240 54.13

June-27 2000 54.5 109000 - - - 3630 197240 197240/3630

=54.34

June-28 - - - 1900 54.34 103246 1730 93994 54.34

June -30 - - - 80

Short

- - 1650 93994 93944/1650=

56.93

Question 21

The quarterly production of Priya Limited’s product which has a steady market is 60000

units. Each unit of the product requires 1.5 Kg. of raw material. The cost of placing one

order for raw material is Rs. 7500 and the inventory carrying cost is Rs. 6 per unit per

annum. The lead time for procurement of raw material is 36 days and a safety stock of

9000 Kgs. of raw materials is maintained by the company. The company has been able to

negotiate the following discount structure with the raw material supplier:

31

Order Quantity (Kgs.) Discount (Rs.)

Less than 60000

60000-80000

80000-100000

100000-150000

150000-300000

300000-400000

Nil

25000

50000

120000

150000

200000


(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,

three, four, or six orders in the year.

(iii) State the number of orders which the company should place to minimize the cost

after taking EOQ also into consideration.

Answer

Working Notes:

1. Annual production = 60000 x 4 = 240000 units

2. Annual requirement of raw material = 240000 x 1.5 = 360000 Kgs.

3. EOQ = √

= √

= √

= 30000 Kgs.

4. Total cost of procurement and storage when the order size is equal to EOQ or 30000

Kgs.

No. of orders 360000/30000 = 12 orders

Average inventory 30000/2 = 15000 Kgs.

Total ordering cost : 12 x 7500 Rs. 90000

Total carrying cost : 15000 x 6 Rs. 90000

Total cost Rs. 180000

32

(i) Re-order point =Lead time consumption + Safety stock

= (360000/360) x 36 + 9000 Kgs.

= 36000+9000

= 45000 Kgs.

(ii) Statement showing the total cost of procurement and storage of raw material (after

considering the discount)

Order

size

(kgs)

No. of

Orders

Total of

Procurement

Rs.

Average

Stock

(kgs)

Total cost of

Storage of

raw materials

(Rs.)

Discount

(Rs.)

Total cost

(Rs.)

(1) (2) (3)=(2)x Rs.7500 (4)=(1)/2 (5)=(4) x Rs.6 (6) (7)=3+5+6

60000

90000

120000

180000

360000

6

4

3

2

1

45000

30000

22500

15000

7500

30000

45000

60000

90000

180000

180000

270000

360000

540000

1080000

25000

50000

120000

150000

200000

200000

250000

262500

405000

887500

(iii) Number of orders which the company should place to minimize the costs after taking

EOQ also into consideration is 12 orders each of size 30000 kgs. The total cost of

procurement and storage in this case comes to Rs. 180000, which is minimum.

Question 22

Assume that the following quantity discount schedule for a particular material is

available to a retail store:

Order size (units) Discount

0 – 4999 0%

5000 – 9999 4%

10000 – 14999 6%

15000 – 19999 10%

20000 – 24999 11%

25000 and above 12%

33

The per unit cost of the material with no discount is Rs. 30. The monthly demand is 2500

units. Ordering cost is Rs. 2500 per order and annual inventory carrying cost is Rs. 4.5 per

unit. Determine the optimal order quantity and the associated minimum total cost of

inventory and purchasing costs.

Answer

Statement Showing Total Cost at Various Order Sizes

Order

Size

(Units)

No. of

orders

In a

years

Ordering

Cost

Rs.

Average

Inventory

(Units)

Carrying

Cost

Rs.

Price

Per

Units

Rs.

Purchase

Cost (Rs.)

(6)x3000

0

Total Cost

Rs.

(1) (2) =

3000/(1)

(3)=(2) x

Rs.2500

(4)=(1)/2 (5)=(4)x

Rs.4.50

(6) (7) (8)=3+5+

7

5000

10000

15000

20000

25000

5774(EOQ)

5

3

2

1.5 or 2

1.2 or 2

5.2 or 6

12500

7500

5000

5000

5000

15000

2500

5000

7500

10000

12500

2887

11250

22500

33750

45000

56250

12992

28.80

28.20

27.00

26.70

26.40

28.80

864000

846000

810000

801000

792000

864000

887750

876000

848750

851000

853250

891992

Minimum total cost of inventory and purchasing Rs. 848750 for order size 15000 units.

Hence, Optimal Order quantity is 15000 units.

Working Notes:

1. Prices with discount – at 4% =30 x .96 = Rs. 28.80; at 6% - 30 x .94 = Rs. 28.2 at-

10% - 30 x .90 = Rs. 27; at 11% - 30 x .89 = Rs. 26.7 & at 12 % - 30 x .88 = Rs. 26.4

2. EOQ without discount:

EOQ = √

= √

= 5774 units

34

Question 23

Prepare Bin Card from the following information:

Material Received Material Issued

Date G. R. No. Units Date Req. No. Units

2.3.16

14.3.16

20.3.16

27.3.16

101

112

209

304

2500

1900

3200

1100

8.3.16

15.3.16

18.3.16

24.3.16

28.3.16

222

283

338

436

572

1100

800

1300

600

1900

On 31st March, 2016 stock was verified and it revealed a shortage of 35 units in stock.

Answer

Bin Card

Description ...................................... Bin...............................................

Store Ledger Folio ............................ Code No. ...................................

Maximum Level.....................

Minimum Level......................

Re-Order Level........................

Date

March,

2016


Quantity

(units)

Remarks G.R. No. or

M.R. No-

Quantity

(Units)

Requisition

No.

Quantity

(Units)

2-3-16 101 2500 - - 2500

Verified

By

8-3-16 - - 222 1100 1400

14-3-16 112 1900 - - 3300

15-3-16 - - 283 800 2500

35

18-3-16 - - 338 1300 1200

20-3-16 209 3200 - - 4400

24-3-16 - - 436 600 3800

27-3-16 304 1100 - - 4900

28-3-16 - - 572 1900 3000

31-3-16 - - Shortage 35 2965

Question 24

Baidhnath Chemicals Ltd. take a periodic inventory of their stock of chemical ‘CM’ at the

end of each month. The physical inventory taken on March 31st, 2016 shows a balance of

3500 litres of chemical ‘CM’ in hand @ Rs. 81 per litre.

The following purchases were made during April, 2016:

April 3 10000 litres @ Rs. 82 per litre


April 17 20000 litres @ Rs. 83.50 per litre


A physical inventory on 30th April, 2016 discloses that there is a stock of 14000 litres.

You are required to compute the value of inventory on April 30, 2016 by each of the

following method:

(i) First in First Out

(ii) Last in First Out

(iii) Weighted Average Cost Method.

Answer

(i) Valuation of inventory under FIFO Method

8000 Ltrs. @ Rs. 85 out of Purchase on 26th April

Rs.

680000

6000 Ltrs @ Rs. 83.50 out of Purchase on 17th April 501000

Value of closing inventory of 14000 Ltrs. on 30-04-2016 1181000

36

(ii) Valuation of inventory under LIFO Method

3500 Ltr @ Rs. 81 out of Opening Stock

Rs.

283500

10000 Ltr @Rs. 82 out of Purchase on 3rd April 820000

500 Ltr @ Rs. 83 out of Purchase on 11th April 41500

Value of closing inventory of 14000 Ltrs. on 30-04-2016 1145000

(iii) Valuation of inventory under Weighted Average Cost Method

Date Particulars Amounts (Rs.)

1-4-16 3500 Ltrs. @Rs. 81 283500

3-4-16 10000 Ltrs. @ Rs. 82 820000

11-4-16 15000 Ltrs. @ Rs. 83 1245000

17-4-16 20000 Ltrs. @ Rs. 83.50 1670000

26-4-16 8000 Ltrs. @ Rs. 85 680000

Total Cost of 56500 Ltrs. 4698500

Weighted Average Cost per Litre

=4698500/56500= Rs. 83.159

Value of Closing Inventory on 30th April, 2016

=14000 Ltrs x Rs. 83.159 = Rs. 11,64,226

Question 25

The following are the detail of receipts and issue of an item of stores for the month of

April, 2016:-

April, 2016

1 Received 1000 units @ Rs. 12 Per unit

5 Received 2000 units @Rs. 15 Per unit

10 Issued 1500 units

37


15 Shortage 100 Units (As reported by Store verifier)


25 Issued 2500 units

Prepare Stores Ledger Account:

(i) Charging Shortage as overhead, and

(ii) Inflating the price of remaining material on account of shortage. Materials are

charged to production department on the basis of weighted average price.

Answer

(i) Charging Shortage as overhead

Stores Ledger Account (Weighted average method)

Date

April,

2016


Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

Units Value

(Rs.)

Rate for

further issue

(Rs.)

1 1000 12 12000 - - - 1000 12000 12000/1000=

12

5 2000 15 30000 - - - 3000 42000 42000/3000=

14

10 - - - 1500 14 21000 1500 21000 14

13 1000 16 16000 - - - 2500 37000 37000/2500=

14.80

15 - - - 100

Short.

14.80 1480 2400 35520 14.80

20 2000 18 36000 - - - 4400 71520 71520/4400=

16.25

25 - - - 2500 16.25 40625 1900 30895 30895/1900=

16.26

38

Working Note

Rs. 1480 as cost of shortage will be added to factory overhead.

(ii) Shortage treated by Inflated Price Method

Stores Ledger Account ( Weighted average method )

Date

April,

2016


Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Rate for further issue

(Rs.)

1 1000 12 12000 - - - 1000 12000 12000/1000=12

5 2000 15 30000 - - - 3000 42000 42000/3000=14

10 - - - 1500 14 21000 1500 21000 14

13 1000 16 16000 - - - 2500 37000 37000/2500=14.80

15 - - - 100

Short.

- - 2400 37000 37000/2400 =15.42

20 2000 18 36000 - - - 4400 73000 73000/4400=16.59

25 - - - 2500 16.59 41475 1900 31525 31525/1900=16.59

Working Note

On April 13, 2016, balance was 2500 units costing Rs. 37000. Then on April 15, 2016,

shortage of 100 units was detected. So, by inflated price method, Rs. 37000 is taken as the

cost of remaining 2400 units only, and accordingly the issue rate of the material is

increased from Rs. 14.80 to Rs. 15.42 per unit.

Question 26

From the data given below, answer the following:

(a) What is the value of the balance of material X in stock at the close of the forth

week if issues are priced on LIFO basis ?

(b) What is the value of forth week's issue of material Y if they are priced on FIFO

basis?

39

(c) What is the simple average price of the four weeks’ receipts of material Y?

(d) What is the weighted average price of the four weeks’ receipts of material X?

Week

Received Issues

Material X Material Y Material X Material Y

Qty.

(Kg.)

Amount

(Rs.)

Qty.

(Kg.)

Amount

(Rs.)

Qty.

(Kg.)

Qty.

(Kg.)

I

II

III

IV

250

300

200

250

10000

12600

9000

10500

1250

1400

750

1600

18750

22400

12000

27200

175

250

300

300

1500

1200

1300

1100

Opening

Stock

200 7600 2000 29000 - -

Answer

(a) Value of the balance of material X in stock at the close of the forth week if issues are

priced on LIFO basis

Week


Kg. Rate

(Rs.)

Amount

(Rs.)

Kg. Rate

(Rs.)

Amount

(Rs.)

Kg. Rate

(Rs.)

Rate for further

issue

Kg. (Rs.)

Opening

Balance

200 38 7600 - - - 200 7600 200 - 38

I Week 250 40 10000 175 40 7000 275 10600 200 - 38

75 - 40

II Week 300 42 12600 250 42 10500 325 12700 200 - 38

75 - 40

50 - 42

III Week 200 45 9000 200

50

50

45

42

40

13100 225 8600 200 - 38

25 - 40

IV Week 250 42 10500 250

25

25

42

40

38

12450 175 6650 175 - 38

Note : It is presumed that issues are made regularly per Week.

40

(b) Value of forth week's issue of material Y on FIFO basis .

Total receipts of Y = 2000+1250+1400+750+1600=7000 Kgs.

Total issues of Y = 1500+1200+1300+1100=5100 Kgs.

Value of Closing Stock of 1900 Kgs. (7000-5100):

1600 Kg.(IV Week) Rs. 27200

300 Kg. (III Week) Rs. (12000/750) x 300 = Rs. 4800

Total Value Rs. 32000

(c) Simple average price of the four weeks’ receipts of material Y

Week Kg. Amount (Rs.) Rate per Kg. Rs.

I 1250 18750 15

II 1400 22400 16

III 750 12000 16

IV 1600 27200 17

Simple average price =4

17 16 16 15 = Rs. 16 per Kg.

(d) Weighted average price of the four weeks’ receipts of material X .

Week Kg. Amount (Rs.)

I 250 10000

II 300 12600

III 200 9000

IV 250 10500

Total 1000 42100

Weighted average price = 1000

42100= Rs. 42.10 per Kg.

Question 27

A timber merchant purchased 10,000 c.ft. timber logs on 1st December, 2015 @ Rs. 720

per c.ft and stored them in his timber yard for four months for seasoning.

In the timber yard, the following items of expenses were incurred during the period of

seasoning :

41

(a) Rent of the yard (area 2,000 sq.ft.) @ Rs. 25,000 per month.

(b) Salaries of 5 watchmen and khalasis @ Rs. 5,000 each per month.

(c) Incidental expenses of maintenance, lighting etc. @ Rs. 2,500 per month.

(d) Annual share of general overhead expenses of the business Rs.. 200000.

(e) Insurance charges for the logs to be seasoned @ 1% on the value of he unseasoned

logs for the period of seasoning.

50% of the floor of the yard has been set apart for seasoning of timber and the remaining

floor area for stocking seasoned timber. Loss in volume of logs due to seasoning 10% .

Calculate the selling rate of the seasoned log per cubic ft. to the nearest rupee on 1st April,

2016, so that 10% profit on Sales may be eared.

Answer

Calculation of Selling Rate of Seasoned Logs

Particulars Qty. c.ft. Amount Rs.

Cost of timber logs @ Rs. 720 per c.ft.

Half of the rent of the yard for four months

@ Rs. 25,000 per month (25,000 x 4 x 50%)

Half of Salaries of 5 watchmen and khalasis

@ Rs. 5,000 each per month for four months

(5 x 5000 x 4 x 50%)

Half of incidental expenses for maintenance,

lighting etc. for four months @ Rs. 2,500 per

month

Half of four months general overhead

expenses

@ Rs. 2,00,000 a year

Insurance Charges @ 1% of the value of

unseasoned logs (Rs. 72,00,000)

Loss in volume of logs due to seasoning 10%

Cost of seasoned timber

Cost of seasoned timber per cubic ft. =

Rs.

Profit 10% on Sales (

)

Selling price per cubic ft.

Say selling Price per cubic ft.

10,000

1,000

9,000

72,00,000

50,000

50,000

5,000

1,00,000

72,000

74,77,000

830.78

92.31

923.09

923

42

Question 28

Following information relating to a particular material are available in the cost records of

Bhalu Ltd. for the month of April, 2016:

Purchases Units Rate per unit Freight Charges

(Rs.) (Rs.)

3 April 20000 15 15000

20 April 15000 16 13500

30 April 10000 18 11000

Opening inventory: 8000 units @ Rs. 15.50 including freight on 1st April, 2016

Closing inventory: 15000 units on 30th April

You are required to calculate (i) Value of closing stock, (ii) Cost of raw material consumed

by following

(a) FIFO, (b) LIFO, and (c) Weighted Average Cost Method of issue assuming that no issue

can be made on the last day of the month.

Answer

(i) Rate of purchase on 3rd April = 15+(15000/20000) = Rs. 15.75

Rate of purchase on 20th April =16+(13500/15000)=Rs.16.90

Rate of purchase on 30th April=18+(11000/10000)=Rs.19.10

(a) Value of closing stock under FIFO

Out of purchase on 30th April :10000 @ Rs. 19.10

Out of purchase on 20th April: (15000-10000) = 5000@ Rs. 16.90

Rs.

191000

84500

Value of closing stock 275500

(b) Value of closing stock under LIFO

Out of purchase on 30th April:10000 @ Rs. 19.10

Out of opening stock : (15000-10000) = 5000 @ Rs. 15.50

Rs.

191000

77500


mailto:=%[email protected]

mailto:=%205000@

43

(a) Value of closing stock under Weighted Average

Out of purchase on 30th April:10000 @ Rs. 19.10

Remaining 5000 units valued at weighted average cost:

(8000x15.50)+(20000x15.75)+(15000x16.90)/(8000+20000+15000)

= (124000+315000+253500)/43000

= 692500/43000 = Rs.16.105

Hence, value of 5000 units @ Rs.16.105

Rs.

191000

80525


(ii) Calculation of cost of raw material consumed

Particulars FIFO (Rs.) LIFO (Rs.) Weighted

Average (Rs.)

Opening stock:8000 @ Rs. 15.50

3rd April : 20000 @ Rs. 15.75

20th April : 15000 @ Rs. 16.90

30th April : 10000 @ Rs. 19.10

124000

315000

253500

191000

124000

315000

253500

191000

124000

315000

253500

191000

883500 883500 883500

Less : Closing Stock 275500 268500 271525

Cost of Raw Material Consumed 608000 615000 611975

Question 29

Pouru Ltd. needs quarterly 18150 units of raw material ‘X’ @ Rs. 75 per unit. Ordering cost

is expected Rs. 6250 per order. The company keeps safety stock of one month’s

requirement to meet emergency. The carrying cost is expected to be 10% per unit of

average inventory.


(i) Minimum Inventory level

(ii) Economic Order Quantity

44

(iii) Maximum Inventory level

(iv) Average Inventory level

(v) Total Annual Ordering Cost

(vi) Total Annual Carrying Cost

(vii) Total Inventory Cost excluding purchase cost

Answer

Working Notes

1. Annual requirement of material = 18150 x 4 = 72600 units

2. Carrying Cost per units = 10% of Rs. 75 = Rs. 7.50 per unit

(i) Minimum inventory = Safety stock of one month’s requirement = 72600/12 =

6050 units

(ii) EOQ =√

= √

= √

= √

= 11000 units

(iii) Maximum inventory = minimum inventory + EOQ

= 6050 + 11000 = 17050 units

(iv) Average inventory = (minimum + maximum)/2

= (6050+17050)/2

= 11550 units

(v) Total annual ordering cost = 11000

72600or 6.6 order x Rs. 6250

= Rs. 41250

Or practically 6.6 or 7 orders x Rs. 6250 = Rs. 43750

(vi) Total Annual Carrying Cost = Average inventory x per unit carrying cost

= 11550 x 7.50

= Rs. 86625

Note = Average inventory = safety stock + ½ of EOQ

45

= 6050 + 11000 x ½

= 6050 + 5500 = 11550 units

(vii) Total inventory cost = 41250 + 86625 = Rs.127875

Or 43750 + 86625 = Rs. 130375

Question 30

The components X and Y are used as follows:

Minimum usage : 150 units per day

Maximum usage : 250 units per day

Normal usage : 200 units per day

Delivery Period : X – 3 to 7 days; Y – 2 to 4 days

Economic Order Quantity : X – 2000 units, Y – 1000 units

You are required to calculate for each component:

(i) Re – Order Level

(ii) Minimum Level

(iii) Maximum Level

(iv) Average level

Answer

Particulars X Y

(i) Re-order level

= (Max. usage x max. Re-order

Period)

250 X 7 = 1750 units 250 X 4 = 1000 units

(ii) Minimum level

= Re-order level – (Normal usage x

Normal Re-order period)

Note - Normal Re-order period

= (Min + Max)/2

1750 – (250 X 5)

= 750 units

(3+7)/2 = 5 days

1000 – (200 X 3 )

= 400 units

(2+4)/2 = 3 days

(iii) Maximum level = (ROL + ROQ) –

(Min. usage x Min. Re-order

period)

(Note – ROQ = EOQ )

(1750 +2000) – (150

x 3)

= 3750 – 450

= 3300 units

(1000 + 1000) – (150

x 2)

= 2000 – 300

=1700 units

46

(iv) Average level = (Min. level + Max.

level)/2 (or)

Min. level + ½ of ROQ

(750 + 3300 )/2 =

2025 units

(or)

750 +2000 X ½

= 1750 units

(400 + 1700)/2 =

1050 units

(or)

400 + 1000 X ½

= 900 units

Question 31

Prepare a store Ledger Account by using of Simple Average Price Method, from the

following information pertaining to a particular material:

01.4.16 Opening balance 2000 units @ Rs. 20 per unit

03.4.16 Purchase 1500 units @ Rs. 24 per unit

09.4.16 Issue 800 units







Answer

Stores Ledger Account

(Simple Average Price Method)

Date Receipts Issues Balance Rate for further issue

(Rs.)

Qty Rate

Rs.

Amount

Rs.

Qty Rate

Rs.

Amount

Rs.

Qty Amount

Rs.

1.4.16

3.4.16

9.4.16

13.4.16

15.4.16

19.4.16

22.4.16

27.4.16

29.4.16

-

1500

-

-

1400

-

-

2500

-

-

24

-

-

25

-

-

23

-

-

36000

-

-

35000

-

-

57500

-

-

-

800

700

-

600

500

-

900

-

-

22

22

-

23

24.5

-

24

-

-

17600

15400

-

13800

12250

-

21600

2000

3500

2700

2000

3400

2800

2300

4800

3900

40000

76000

58400

43000

78000

64200

51950

109450

87850

20

(20+24)/2=2

2

22

22

(20+24+25)/3=23

(24+25)/2=24.5

24.5

(24+25+23)/3=24

(25+23)/2=24

47

Question 32

The following receipts and issues were recorded in the books of Mogari Udyog Ltd.:

01.1.2016 Opening stock 1500 units @ Rs. 40 per unit





15.1.2015 Return from production department 50 units @ Rs. 40 per unit





You are required to (i) prepare a Stores Ledger Account showing how the values of issues

would be. Calculate under Weighted Average Cost Method if Base Stock of 500 units is

maintained. (ii) Find out value of closing stock on 31st January, 2016.

Answer

(i) Stores Ledger Account

(Base stock of 500 units under weighted Average cost method)

Date Receipts Issues Balance Rate for further issue

(Rs.)

Qty Rate

Rs.

Amount

Rs.

Qty Rate

Rs.

Amount

Rs.

Qty Amount

Rs.

1.1.16

3.1.16

6.1.16

-

1000

-

-

45

-

-

45000

-

-

-

800

-

-

42.5

-

-

34000

500

1000

500

2000

500

20000

40000

20000

85000

20000

Base stock 500-40

40000/1000=40

85000/2000=42.50

51000/1200=42.50

48

9.1.16

13.1.16

15.1.16

17.1.16

20.1.16

22.1.16

27.1.16

-

1200

50

(Return)

-

1000

-

-

-

47

40

-

48

-

-

-

56400

2000

-

48000

-

-

500

-

-

700

-

400

600

42.5

-

-

45.21

-

46.45

46.45

21250

-

-

31647

-

18580

27870

1200

500

700

500

1900

500

1950

500

1250

500

2250

500

1850

500

1250

51000

20000

29750

20000

86150

20000

88150

20000

56503

20000

104503

20000

85923

20000

58053

29750/700=42.50

86150/1900=45.34

88150/1950=45.21

56503/1250=45.20

104503/2250=46.45

85923/1850=46.45

58053/1250=46.44

(ii) Value of closing stock on 31st January, 2016; 500+1250=1750 units

At Rs. 78053 (20000 + 58053) .

Question 33

Prepare a Stores Ledger Account from the following information adopting LIFO method of

pricing of issues of materials:

01.4.2016 Opening balance 5000 kgs @ Rs. 20 per kg.

02.4.2016 Issued to Department A - 700 kgs

05.4.2016 Received from suppliers - 2000 kgs @ Rs. 19 per kg.

07.4.2016 Issued to Department B - 1400 kgs

10.4.2016 Issued to Department C - 1100 kgs


18.4.2016 Issued to Department D - 1750 kgs.

22.4.2016 Returned from department B (out of issue on 7.4.2016) - 50 kgs.


49

Answer

Stores Ledger Account

(LIFO Method)

Date Receipts Issues Balance

Qty Rate

Rs.

Amount

Rs.

Qty Rate

Rs.

Amount

Rs.

Qty Rate

Rs.

Amount

Rs.

1.4.16

2.4.16

5.4.16

7.4.16

10.4.16

14.4.16

18.4.16

22.4.16

26.4.16

-

-

2000

-

-

2500

-

50

1000

-

-

19

-

-

22

-

19

23

-

-

38000

-

-

55000

-

950

23000

-

700

-

1400

600

500

-

1750

-

-

-

20

-

19

19

20

-

22

-

-

-

14000

-

26600

21400

-

38500

-

-

5000

4300

4300

2000

4300

600

3800

3800

2500

3800

750

3800

750

50

3800

750

50

1000

20

20

20

19

20

19

20

20

22

20

22

20

22

19

20

22

19

23

100000

86000

124000

97400

76000

131000

92500

93450

116450

Question 34

Ritu Ltd. produces a product which has a quarterly demand of 15000 units. The product

requires a component ‘XE’ which is purchased at Rs.45 per unit. 3 units of component ‘XE’

are required to produce one unit of finished product. The ordering cost is Rs. 810 per order

and the carrying cost is 18% per annum of average inventory. You are required to:

(i) Calculate the Economic Order Quantity

50

(ii) If the minimum lot size to be supplied is 15000 units, what is the extra cost to be

born by the company?

(iii) What is the minimum Carrying Cost, the company has to incur?

Answer

Annual consumption of component ‘XE’ = 15000 x 4 x 3

= 180000 units

(i) Calculation of Economic Order Quantity

EOQ = √

= √

= √

= √

= 6000 units

(ii) Calculation of Extra Cost if minimum lot size is 15000 Units

Particulars If lot size is EOQ (6000 units) If lot size is 15000 units

No. of orders = 180000

units/

lot size

Average inventory = lot

size/2

Ordering Cost

Carrying Cost

30 Orders

3000 Units

Rs.

30 x 810 = 24300

3000 x 8.10 = 24300

12 Orders

7500 Units

Rs.

12 x 810 = 9720

7500 x 8.10 = 60750

Total Inventory Cost 48600 70470

Extra Cost = 70470 – 48600

= Rs. 21870

(iii) Minimum Carrying Cost = Carrying Cost at EOQ lot size = Rs. 24300.

51

Question 35

The following detail is collected form the cost records of Priya Ltd. for the year ending 31st

March,2016: Stock of raw materials on 1st April, 2015: 20000 Units at Rs. 270000

purchase of raw materials during the year: 172000 Units at Rs. 25,85,600 Raw material

returned to supplier during the year: 5000 units at Rs. 75400

Freight Inward : Rs. 165000

Rent of godown used for storage of materials : Rs. 240000

Salary of store-keeper : Rs. 180000

Demurrage charges levied by transporter for delay

in collection of materials : Rs. 31000

Normal loss due to shrinkage : 5% of material

purchased

Abnormal loss due to absorption of moisture

before receipt of material : 1670 units

Stock of raw material on 31st March, 2016 : 27000 units

Compute the value of closing stock of raw materials on 31st March, 2016

Answer

Computation of value of closing stock of Raw materials

Particulars Quantity (Units) Amount (Rs.)

Opening stock of raw materials

Add : Purchase of raw materials less purchase return

(172000 - 5000 = 167000 units and 2585600-

75400 = Rs. 2510200)

Add: Freight Charges

Add: Demurrage Charges

Less : Abnormal loss

(2510200+165000+31000 = 2706200 x

)

Less : Normal loss due to shrinkage 5% of 167000

20000

167000

(1670)

(8350)

270000

2510200

165000

31000

(27062)

Cost of raw materials 176980 2949138

Value of closing Stock

27000 449919

Note : Rent of godown and salary of store-keeper are not included in the cost of materials.

52

Question 36

The following information is provided by Mahi Ltd.:

Date Particulars Units Rate per Unit

(Rs.)

1-3-2016

8-3-2016

10-3-2016

15-3-2016

22-3-2016

26-3-2016

29-3-2016

31-3-2016

Opening Stock

Purchase

Issue

Purchase

Issue

Issue

Purchase

Issue

1100

1500

800

2000

600

1200

1500

900

35

40

38

45

You are required to calculate the (i) cost of raw material consumed and (ii) value of

closing inventory applying the Last in First Out method of pricing raw materials under the

Perpetual Inventory and Periodic Inventory Control System.

Answer

Particulars Units Perpetual Inventory

Method

Periodic Inventory Method

Date Units Rate

(Rs.)

Amount

(Rs.)

Units Rate

(Rs.)

Amount

(Rs.)

Raw Material

Consumed

(i)Cost of Raw

material

Consumed

10.3.16

22.3.16

26.3.16

31.3.16

800

600

1200

900

40

38

38

45

32000

22800

45600

40500

1500

2000

45

38

67500

76000

Total Cost 3500 140900 3500 143500

53

(ii)Value of Closing

Inventory

(6100–3500 =

2600 units)

1100

700

200

600

35

40

38

45

38500

28000

7600

27000

1100

1500

35

40

38500

60000

Value of Closing

Inventory

2600 101100 2600 98500

Question 37

Madhulika Ltd. Manufactures a product from a raw material, which is purchased at Rs. 90

per kg. The company incurs a handling cost of Rs. 820 plus freight of Rs. 680 per order. The

incremental carrying cost of inventory of raw material is Rs.1.25 per kg. Per month. In

addition, the cost of working capital finance on the investment in inventory of raw

material is Rs. 9 per kg. per annum. The annual production of the product is 100000 units

and one unit is obtained from 2 kg of raw material.

Required :

(1.) Calculate the economic order quantity of raw materials.

(2.) Advice, how frequently should orders for procurement be placed.

(3.) 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?

Answer

Annual requirement of raw material in kgs. = 2 kg. x 100000=200000 kgs.

Handling & freight cost per order = Rs. 820 x Rs. 680=Rs.1500

Carrying cost per unit per annum + Investment cost per Kg. per annum

= (1.25 x12months) + Rs.9 (Investment in inventory per kg. per annum)

= Rs.24 per kg.

(1.) E.O.Q. = √

= √

= 5000 kgs.

54

(2.) Frequency of orders for procurement :

Annual consumption = 200000kg.

Quantity per order = 5000kg.

No. of orders per annum = 200000/5000=40 Orders

Frequency of placing orders =12/40=0.3months OR 365/40=9 Days

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

Quantity of Quarterly orders = (200000 kgs/4) = 50000 kgs. Per Order

No of orders = 4

Total cost

(when order size is 50000 kgs)

Order placing cost = (4 x 1500) = Rs. 6000

Carrying cost = (50000 x 24/2) = Rs. 600000

Rs. 606000

Total cost :

(When order size is equal to EOQ)

No of orders = 40

Order placing cost = 40 x 1500 = Rs. 60000

Carrying cost = 5000*24/2 = Rs. 60000

Total cost = (60000+60000) = Rs. 120000

Increase in cost to be compensated by discount =Rs. (606000-120000) = Rs. 486000

Reduction per kg. in the purchase price of raw material = (486000 / 200000) =

Rs. 2.43 per kg.

Percentage of discount in the price of raw material to be negotiated = 2.43 x 100/90

= 2.70%.

***

55

Question 1

Question 1

What is idle time? Discuss its treatment in cost accounting.

Answer

When workers are paid on time basis, there is usually a difference between the time for which the workers are paid and the time actually spent by them in production. The loss of time for which the employer pays but obtains no direct benefit is termed as idle time.

In other words, idle time cost represents the wages paid for the time lost, i.e. time during which the worker was idle.

Treatment of idle time in cost accounting

Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into the labour cost rates. In the case of indirect workers, normal idle time is spread over all the products or jobs through the process of absorption of factory overheads.

Abnormal idle time cost is not included as a part of production cost and is shown as a separate item in the Costing Profit and Loss Account, so that normal costs are not disturbed.

Question 2

State the circumstances in which time rate system of wage payment can be preferred in a factory.

Answer

Circumstances in which time rate system of wage payment can be preferred:

1. Persons whose services cannot be directly or tangibly measured, e.g., general helpers, supervisory and clerical staff etc.

2. Workers engaged on highly skilled jobs or rendering skilled services, e.g., tool making, inspection and testing.

3. Where the pace of output is independent of the operator, e.g., automatic chemical plants.

Question 3

What do you understand by ‘Time keeping and Time booking’? State their objectives.

3

Labour Cost

56

Answer

Time-keeping is necessary for the purpose of recording attendance and for calculating wages. Time-booking means a record from the utilization point of view; the purpose is cost analysis and cost apportionment. Record keeping is correct when time – keeping and time –booking tally.

The objectives of time keeping are:

1. Pay –roll preparation;

2. Finding out the labour cost of a job/product/service;

3. Attendance records to meet statutory requirements;

4. Determining productivity and controlling labour cost;

5. Calculating overhead cost of a job, product or service;

6. To maintain discipline in attendance;

7. To distinguish between normal and over-time, late attendance and early leaving; and

8. To provide internal check against dummy workers.

The objectives of time-booking are:

1. To apportion overheads against jobs;

2. To calculate the labour cost of jobs done;

3. To ascertain idle time for the purpose of control;

4. To find out that the time during which a worker is in the factory is properly utilized;

5. To evaluate labour performance, to compare actual and budgeted time;

6. To determine overhead rates of absorbing overhead expenses under the labour hour and machine hour methods;

7. To calculate wages and bonus provided the system of payment depends on the time taken.

Question 4

What is overtime? State its treatment in cost accounting.

Answer

Overtime refers to the situation when a worker works beyond his normal working hours. The overtime rate is always higher than the normal rate and is usually double the normal rate. The Factories Act and Sops and Establishments Act have fixed the normal working hours, defined what constitutes overtime, the rate of overtime and maximum hours of overtime.

Overtime consists of two elements viz. the normal cost and the extra payment or premium. The premium is known as overtime cost. The normal cost is allocated to the production

57

order or cost centre/ unit on which the worker is working. The treatment of overtime cost varies according to the circumstances.

Treatment of Overtime premium in Cost Accounting:

In cost accounting the treatment of overtime premium will be as follows:

1. If the overtime is resorted to at the desire of the customer, than the entire amount of overtime including overtime premium should be charged to the job directly.

2. If it is due to a general pressure of work to increase the output, the premium as well as overtime wages may be charged to general overheads.

3. If it is due to the negligence or delay of workers of a particular department, it may be charged to the concerned department.

4. If it is due to circumstances beyond control, it may be charged to Costing Profit & Loss Account.

Question 5

What do you understand by ‘Labour Turnover’? What are the effects of Labour Turnover on cost of production? How is it measured?

Answer

Labour turnover is the ratio of the number of persons leaving in a period to the average number employed. It is the change in the composition of the labour force in an organization. It can be measured by relating the engagements and losses in the labour force to the total number employed at the beginning of the period. All the losses must be taken into account regardless of the cause for leaving.

Effects of Labour Turnover

It increases cost of production due to the following reasons:

1. Cost of selecting / replacing workers

2. Cost of training imparted to new workers

3. Production planning cannot be properly executed and this results in production loss

4. Loss due to defectives and wastage

5. Loss due to mishandling of tools, equipments, breakages, etc.

Measurement of Labour Turnover

Method Formula for Measuring Labour Turnover

Separation Rate Method

58

Net Labour Turnover Rate Method or Replacement Method

Labour Flux Rate Method (

) (

)

Question 6

Enumerate the remedial steps to be taken to minimize the labour turnover?

Answer

The following steps are useful for minimizing labour turnover:

(a) Exit interview: An interview may be arranged with each outgoing employee to ascertain the reasons of his leaving the organization.

(b) Job analysis and evaluation: to ascertain the requirement of each job.

(c) Organization should make use of a scientific system of recruitment, placement and promotion for employees.

(d) Organization should create healthy atmosphere, providing education, medical and housing facilities for workers.

Committee for handling workers grievances may be made comprising of members from

management and workers

Question 7

Describe briefly, how wages may be calculated under the following systems:

(1) Gantt task and bonus system

(2) Emerson’s efficiency system

(3) Rowan system

(4) Halsey system

(5) Barth system.

Answer

(1.) Gantt task and bonus system : As per this system, a higher standard is set and payment is made at time rate to a worker for production below the standard. If the standards are achieved or exceeded, the payment is made at a higher piece rate. The piece rate fixed also includes an element of bonus to the extent of 20%. Bonus is calculated over the time rate.

(2.) Emerson’s Efficiency System : Though minimum daily wages is guaranteed, efficiency is also rewarded. Standard is set based on the time and motion study. Bonus is payable when efficiency reaches 66-2/3% and increases as the output increases.

59

Under this system wages may be calculated as below:

Performance wages

Below 66 ⁄ % -- Time rate without any bonus

66 ⁄ % - 100% efficiency -- Bonus varies between 1% to 20%*

Above 100% efficiency -- Bonus of 20% of basic wages plus 1% for every 1% increase in efficiency.

*At 100% efficiency the bonus percentage will be 20%.

(3.) Rowan System: As per this system standard time allowance is fixed for the performance of a job and bonus is paid if time is saved.

Wages under Rowan System

Total wages = (Time taken x hourly rate) + (

)

(4.) Halsey System: Under this system a standard time is fixed for each job. If there is no saving on this standard time allowance, the worker is paid only his day rate. The bonus is 50% of the standard time saved.

Wages under Halsey System

Total wages = Time taken x hourly rate + (50% of time saved x hourly rate)

(5.) Barth System:

Earnings under Barth System = Hourly rate ×√

This scheme does not guarantee wages. Under this scheme total wages is higher for less efficient people. As the efficiency increases, the earnings decrease. Therefore this plan is particularly suitable for trainees and beginners and also for unskilled workers.

Question 8

Skilled workers in Rukmani Limited are paid a guaranteed wage rate of Rs. 90 per hour. The standard time per unit for a particular product is 8 hours. M an operator, has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of Rs. 112.50 on the manufacture of that particular product.

What could have been his total earnings and effective hourly rate, had he been put on Halsey Incentive Plan (50%)?

Answer

Let ‘H’ hours be the total time worked by the operator M;

Under Rowan Plan;

Total earnings = Normal wages + Bonus

= (Hours worked x Rate per hour) + (Time saved/Time allowed) x Time taken x Rate per hour

= 112.50 x H = (H x90) + {(8 - H)/8} x H x 90

60

112.50 = 90 + (720 – 90H)/8

22.50 = 90 – 11.25H

11.25H = 67.50

H = 6

Hence, Time taken = 6 hours

Under Halsey (50%) Plan:

Total earnings = Normal wages + Bonus

= (Hours worked x Rate per hour) + (Time saved x Rate per hour x 50%)

= (6 x 90) + (2 x 90 x 50%)

= 540 + 90

= Rs. 630

Effective hourly rate = Rs.630/6 = Rs. 105 per hour

Note: Time saved = Time allowed – Time taken

= 8 – 6 = 2 hours

Question 9

From the following information, calculate labour turnover rate and labour flux rate:

No. of workers as on April 1, 2015: 15400

No. of workers as on March 31, 2016:17300

During the year, 150 workers left while 720 workers were discharged 2770 workers were recruited during the year of these, 700 workers were recruited because of exits and the rest were recruited in accordance with expansion plans.

Answer

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) x 100/Average number of

workers

= (150 + 720) x 100/16350

= 87000/16350

= 5.32%

(ii) Replacement Method: = No. of workers replaced x 100/ Average number of workers

= 700 x 100/ 16350

= 4.28%

61

(iii) New Recruitment: = No. of workers newly recruited x 100/Average number of workers

= 2070 x100/16350

= 12.66%

Flux Method:

= (No. of separations + No. of accessions) x100/Average number of workers

= (870 + 2770) x 100/16350

= 364000/16350

= 22.26%

Note : Average number of workers = (15400 + 17300)/2 = 16350 workers

Question 10

The existing incentive system of Shyama Limited is as under:

Normal working week- 5 days of 8 hours each plus 2 late shifts of 3 hours each

Rate of wages- Day work: Rs.90 per hour; Late shift: Rs.135 per hour

Average output per worker for 46 hours week (including 2 late shift): 210 units

In order to increase output and eliminate overtime, it was decided to switch on to a system of wages payment by results. The following information is obtained:

Time rate (as usual) : Rs. 90 per hour

Basic time allowed for 18 units : 4.5 hours

Piece-work rate : Add 20% to basic piece-rate

You are required to prepare a statement showing hours worked, weekly earnings, number of units produced and labour cost per unit for one worker under the following systems:

(a) Existing time-rate

(b) Straight piece-work

(c) Rowan system

(d) Halsey 50% premium system

Assume that 240 units are produced in a 40-hour week under straight piece work, Rowan system, and Halsey premium system above.

Answer

Working Notes:

1. Earnings under Existing Time Rate: 40 hours @ Rs. 90 + 6 hours @ Rs. 135

= Rs. 3600 + Rs. 810

= Rs. 4410

62

2. Earnings under Piece Rate System:

(i) Wages rate per piece(unit):

Labour cost of 18 units = 4.5 hours x Rs. 90 or 405 + 20% of 405

= 405 + 81 = Rs. 486

Rate per unit = 486/18 = Rs.27

(ii) Earnings for the week = 240 units x Rs. 27

= Rs. 6480

3. Earnings under Rowan Premium System:

= (Time taken x Rate per hour) + (Time saved x Time taken/Time allowed) x Rate per hour

= (40x90) + (20x40/60) x 90

= 3600 + 1200

= Rs. 4800

4. Earnings under Halsey Premium System:

Earnings = Normal wages + bonus

= (Time taken x Rate per hour) + (Time saved x Rate per hour x 50%)

= (40x90) + (20x90x50%)

= 3600 + 900

= Rs. 4500

Table Showing Labour Cost Per Unit

Method of Payment Hours Worked

Weekly (Rs.) Earnings

No. of Units produced

Labour Cost Per Unit (Rs.)

Existing Time Rate

Piece Rate System

Rowan System

Halsey System

46

40

40

40

4410

6480

4800

4500

210

240

240

240

21

27

20

18.75

Question 11

The following information is collected from the personnel department of Richa Limited for the year ending 31st March, 2016:

Number of workers at the beginning of the year : 8000

Number of workers left the company during the year : 500

Number of workers discharged during the year : 100

63

Number of workers replaced due to left and discharged : 700

Additional workers employed for expansion during the year : 1500

You are required to calculate labour turnover rate by using separation method, replacement method and flux method.

Answer

Calculation of Labour Turnover Rate

1. Separation method:

Labour turnover rate =

x 100

=

x 100

= 6.82%

No. of workers separated during the year = workers left + workers discharged

=500 +100 =600

2. Replacement method:


x 100

=

x 100 =7.95%

3. Flux method:


x 100

=

x 100 = 14.77%

Working Note:

1. No. of workers at end of the year =8000+700 +1500 -500 -100 = 9600 2. Average no. of workers on roll during the year = (8000+9600)/2 = 8800

Question 12

Using Taylor’s differential piece rate system, find the earnings of A from the following particulars:

Standard time per piece

Normal rate for a 8 hours day

A produced

15 minutes

Rs. 450

37 units in the day

Answer

Standard output per day = 8x60/15 = 32 units

Actual output of ‘A’ = 37 units

Efficiency percentage = 37 x100/32 =115.625

64

Under Taylor’s differential piece rate method higher rate is based on 125% of the normal day rate and an incentive of 50% of the day rate.

Hence, earnings of A = Rs.450 x 125% + 50% Rs.450 = Rs.562.50 + Rs.225 = Rs. 787.50

Question 13

The time allowed to job J-101 is 250 hours. The job has been completed by Gyani in 130 hours, Jeetu in 180 hours and Makku in 220 hours. The bonus scheme applicable to the job is as follows:

Percentage of time saved to time allowed Bonus

Saving up to 20%

From 21% to 40%

From 41% to 60%

From 61% to 100%

10% of time saved

15% of time saved

20% of time saved

25% of time saved

The normal rate of wages is Rs.40 per hour. Calculate the total earnings of each worker and also the effective hourly rate of earnings.

Answer

Statement of total earnings and effective hourly rate of earnings

Particulars Gyani Jeetu Makku

(i) Standard time of Job (hours)

(ii) Time taken on the Job (hours)

250 hours

130 hours

250 hours

180 hours

250 hours

220 hours

(iii) Time saved(i - ii)

Percentage of time saved to time allowed (iii/i)

120 hours

48%

70 hours

28%

30 hours

12%

(iv) Bonus hours (refer to W. N. 1.) 16.5 8 3

(v) Total hours to be paid(ii +iv) 146.5 188 223

(vi) Wages rate per hour Rs.40 Rs.40 Rs.40

(vii) Total earnings(v x vi) Rs.5860 Rs.7520 Rs.8920

Effective rate per hour (vii/ii) Rs.45.08 Rs.41.78 Rs.40.55

Working Notes

1. Bonus hours as percentage of time saved: Gyani: 50 hours x 10% + 50 hours x 15% + 20 hours x 20%

65

= 5 + 7.5 + 4 = 16.5 hours

Jeetu : 50 hours x 10% + 20 hours x 15%

= 5 + 3 = 8 hours

Makku: 30 hours x 10% = 3 hours

Question 14

You are given the following information of a worker:

Worker’s name

Ticket No.

Work started

Work finished

Work allotted

Work done and approved

Time allowed & taken

Wage rate

Worker Dholu worked 9 hours a day

Dholu

101

01.04.2016

05.04.2016

Production of 4320 units

5400 units

8 hours in a day

Rs. 75 per hour

You are required to calculate the remuneration of the worker on the following basis:

(i) Halsey 50% Premium Plan (ii) Rowan Premium Plan

Answer

No. of days work done: 01.04.2016 to 05.04.2016 = 5 days

Standard time:

Standard output of 4320 units for 5 day period of 8 hours in each day or 5x8 = 40 hours

Hence, Standard time for actual output of 5400 units = 40 x 5400/4320 = 50 hours

Actual time taken = 5 x 8 = 40 hours

Hourly wage rate = Rs. 75

Time saved = 50 – 40 = 10 hours

(i) Calculation of remuneration under Halsey plan: Normal wages : 40 x Rs.75 = Rs. 3000

Bonus : 10 hours x Rs.75 x 50% = Rs. 375

Total wages = Rs.3375

(ii) Calculation of remuneration under Rowan Plan: Normal wages: 40 x Rs. 75 = Rs. 3000

66

Bonus: 10 x 40 x 75/50 = Rs. 600

Total wages = Rs. 3600

Question 15

Beeru executes a piece of work in 240 hours as against 300 hours allowed to him. His hourly rate is Rs. 40 and he gets a dearness allowance @ Rs. 250 per day of 8 hours worked in addition to his wages. You are required to calculate total wages received by Beeru under the following bonus schemes and state which of the following scheme is more beneficial to Beeru:

(i) Rowan Premium Plan, and (ii) Emerson’s Efficiency Plan.

Answer

Working Notes

1. Actual no. of days of work done = 240/8 = 30 days

2. Time saved = 300 – 240 = 60 hours

3. Efficiency percentage = (300/240)x100 = 125%

(i) Calculation of total wages under Rowan Plan :

Rs.

Normal wages : (240 x 40) 9600

Dearness Allowance :(30 days x Rs.250) 7500

Bonus : (Time saved x Time taken/Time allowed) x wage rate

(60x240/300)x 40 1920

Total wages 19020

(ii) Calculation of total wages under Emerson’s Efficiency Plan:

Rs.

Normal wages : (240 x 40) 9600

Dearness Allowance : (30 days x Rs.250) 7500

Bonus: 20%bonus up to 100% efficiency & 25% bonus for from 101% to 125% efficiency

Hence, total bonus = 45% of normal wages Rs. 9600 4320

Total wages 21420

Beeru has earned more money under Emerson’s Efficiency Plan in comparison of Rowan Plan. Hence, Emerson’s Efficiency Plan is more beneficial.

67

Question 16

Personnel Department of Dhoora Limited had computed labour turnover rates for the year ended 31st March, 2016 as 14%, 8% and 6% under Flux Method, Replacement Method and Separation Method respectively. If the number of workers replaced during the year 2015-16 is 900, find the following:

(i) The number of workers recruited and joined; and

(ii) The number of workers left and discharged.

Answer

Labour Turnover Rate (Replacement method) =

x 100 = 8%

Average No. of workers = 900 x 100/8 = 11250

Labour Turnover Rate (Separation method) =

x 100 = 6%

No. of workers separated x 100 = 6 x 11250

No. of workers separated = 67500/100 = 675

Labour Turnover Rate (Flux method) =

x 100 = 14%

675 + No. of accession = 14 x 11250/100

No. of accession = 1575 – 675 = 900

Hence,

(i) The number of workers recruited and joined = 900

(ii) The number of workers left and discharged = 675

Question 17

‘Under the Rowan Premium System, a less efficient worker can obtain same amount of bonus as a highly efficient worker.’ Discuss with suitable examples.

Answer

Bonus under Rowan System =

x Rate per hour

For example let time allowed for a job is 10 hours and wages rate is Rs. 60 per hour. If time taken by the less efficient worker-A is 6 hours and by the highly efficient worker-B is 4 hours then;

Bonus of worker-A = {(10 - 6) x 6/10} x Rs. 60 = Rs. 144

Bonus of worker-B = {(10 – 4) x 4/10} x Rs. 60 = Rs. 144

68

Question 18

Two workers A and B produce the same product using the same material. Their normal wage rate is also same. A is paid bonus according to Rowan Scheme while B is paid bonus according to Halsey Scheme. The time allowed to make the product is 10 days. A takes 6 days while B takes 8 days to complete the product. Factory overhead rate is Rs. 200 per person-day actually worked. The factory cost of product manufactured by B is Rs. 12000 and effective daily rate of earnings for A is Rs. 560.


(i) Compute the normal rate of wages.

(ii) Compute the cost of material.

(iii) Prepare a statement showing the factory coat of the product as made by two workers.

Answer

(i) Computation of the normal rate of wages:

Let x be the cost of material and y be the normal rate of wages per day.

Time saved by A = 10 – 6 = 4 days and time saved by B = 10 – 8 = 2 days

Total earnings for A = Time taken x effective daily rate of earnings

= 6 days x Rs. 560 = Rs. 3360

Total wages of worker-A under Rowan Scheme

= (Time taken x wage rate) + (Time saved x time taken/ time allowed) x wage rate

= 6y + (4 x6/10)y

= 6y + 2.4y

or 8.4y = 3360

y = 400

Hence, normal rate of wages is Rs. 400

(ii) Computation of the material cost

Factory cost of the product for B = material + labour cost + factory overhead

Material cost = x

Labour cost (under Halsey Scheme)

= (Time taken x wage rate) + (Time saved x wage rate x 50/100)

= (8 x 400) + (2 x 400 x50/100)

= 3200 + 400 = Rs. 3600

Factory overhead @ Rs. 200 per day for 8 days = Rs. 1600

Factory cost = x + 3600 + 1600 = 12000

X = 12000 – 5200 = 6800

Hence, Material cost (x) = Rs. 6800

69

(iii) Statement of factory cost

Particulars Worker-A (Rs.) Worker-B (Rs.)

Material cost

Labour cost

Factory overhead @ Rs. 200 per day

6800

3360

1200

6800

3600

1600

11360 12000

Question 19

A, B and C are three workers working in Goru manufacturing Limited and their output during a particular 40 hours week was 192; 222 and 252 units respectively. The guaranteed rate per hour is Rs. 40 per hour, low piece rate is Rs. 8 per unit, and high piece rate is Rs. 12 per unit. High task is 200 units per week. Compute the total earnings and labour cost per unit under Taylor, Merrick and Gantt Task Bonus Plan.

Answer

(a) Taylor Plan:

High task is 200 units

Worker A = Actual output is 192 units, which is less than the standard. This means he is inefficient and will get 80% of the normal piece rate Rs.12 per unit i.e.@ Rs.9.60 per unit. His wages will be Rs. 9.60 x 192 units = Rs.1843.20.

Worker B = Actual output is 222 units which is more than the standard. This means he is efficient and will get 120% of the normal piece rate Rs.12 ie. Rs.14.40 per unit. His wages will be 14.40 x 222 = Rs. 3196.80.

Worker C = Actual output is 252 units, more than the standard. This means his wages will be = Rs. 14.40 ×252 units = Rs.3628.80

(b) Merrick Plan:

Worker A = High task is 200 units, actual output is 192, this means that the efficiency level is 96%. As per Merrick Plan, wages of A will be 110% of normal piece rate which is Rs.13.20 per unit = Rs. 13.20 ×192 units = Rs. 2534.40

Worker B= High task is 200 units, actual output is 222 units, efficiency level is 111%. Y will be entitled for wages @ 120% of normal piece rate i.e. @ Rs.14.40 per unit. His wages will be, Rs.14.40 × 222 units = Rs.3196.80

Worker C = High task is 200 units, actual output is 252 units, efficiency level is 126%. C will get at higher piece rate @ Rs.14.40per unit. His wages will be Rs.14.40×252 units = Rs.3628.80

70

(c) Gantt Task and Bonus Plan:

Worker A = Rs.40× 40 hours = Rs.1600 [A will get guaranteed time rate as his output is below the high task]

Worker B = 12 ×222 units = Rs.2664 [High piece rate as output is above standard]

Worker C= 12 ×252 units = Rs.3024 [High piece rate as output is above standard]

Question 20

Calculate the total earnings and effective rate of earnings per hour of three workers under Rowan System and Halsey System from the following particulars. The standard time fixed for producing 100 units is 50 hours. The rate of wages is Rs.60 per hour. The actual time taken by three are as follows:-

A 45 hours

B 40 hours

C 30 hours.

Answer

Computation of Total Earnings of workers under Halsey Plan

Earnings under Halsey Plan = Hours worked × Rate per hour + (Time saved × Rate per hour x 50)

Worker Earnings(E) Effective Rate (Ef. R)

A E = (45 x 60) +(50-45) x 60x50/100 =Rs.2850 Ef. R =2850/45 = Rs.63.33

B E = (40 x60) + (50-40) x60 x 50/100 =Rs.2700 Ef. R =2700/40 = Rs.67.50

C E = (30 x 60) + (50-30) x60 x50/100 = Rs.2400 Ef. R =2400/30 =Rs.80

Computation of Total Earnings of workers under Rowan Plan

Earnings under Rowan Plan = Hours worked × Rate per hour + (Time allowed x Hours worked/ Time saved) x Rate per hour

Worker Earnings (E) Ef. R

A E= (45 x 60) + [50-45 / 50] 45 x 6 0 = 2700 + 270 = Rs.2970 Ef. R = Rs.2970/45

= Rs.66

B E = (40 x 60) + [50-40 / 50] 40 x 60 = 2400 +480 = Rs.2880 Ef. R =Rs.2880/40

= Rs.72

C E = (30 x 60) + [50-30 / 50] 30 x 60 = 1800 + 720 = Rs.2520 Ef. R =Rs.2520/30

= Rs.84

Question 21

A workman takes 20 hours to complete a job on daily wages and 14 hours on a scheme of payment by results. His wage rate is Rs. 45 per hour. The material cost of the product is Rs.

71

750 and factory overheads are recovered at 150% of the total direct wages. Calculate the factory cost of the product under following methods:-

(a) Time rate system (b) Halsey Plan (c) Rowan Plan.

Answer

Computation of factory cost under three systems

Time Rate Halsey Rowan System (Rs.) Plan(Rs.) Plan (Rs.)

(i) Material 750 750 750

(ii) Labour (working notes) 900 765 819

(iii) Overheads @ 150% of Labour cost 1350 1148 1229

Factory Cost (i+ii+iii) 3000 2663 2798

Working Notes

Calculation of labour cost under different plans

Time Rate Halsey Rowan System (Rs.) Plan(Rs.) Plan (Rs.)

Normal wages 20x45=900 14x45=630 14x45=630

Add : Bonus Nil (20-14) x 45 x 50% (20-14) x 14 x 45/20

_____ =135 =189

Labour cost 900 765 819

Question 22

A worker under the Halsey Premium Plan of remuneration has a wage rate of Rs. 2880 per week of 48 hours, plus a cost of living bonus of Rs.25 per hour worked. He is given 15 hours task to perform, which he performs in 10 hours, he is allowed 50% of the time saved as premium bonus. What would be his earnings under Halsey Plan and Rowan Plan?

Answer

Time saved= 15-10=5 hours

Normal wages rate per hour= 2880/48=Rs.60 per hour

Computation of earnings of worker under Halsey Plan:

Earnings under Halsey Plan = Normal wages+ Bonus

(Hours worked × Rate per hour)+ (50% × Time Saved × Rate per hour)

= (10 x 60) + 5 x 60x50% = Rs.750

(+) Cost of Living Bonus (10 x 25) = Rs.250

Total earnings under Halsey Plan = Rs.1000

72

Computation of earnings of worker under Rowan Plan:

Earnings under Rowan Plan= Normal wages+ Bonus

= (Hours worked × Rate per hour) + (Time saved x Hours worked/Time allowed) x Rate per hour

= (10x60) + (5 /15) × 10 ×60 = Rs. 800

(+) Cost of Living Bonus (10x25) = Rs. 250

Total earnings under Rowan Plan = Rs. 1050

Question 23

In a factory guaranteed wages at the rate of Rs.72 per hour are paid in a 48 hour week. Time allowed to manufacture one unit of a particular product is 20 minutes. During the week operator-P produced 180 units of the product. Calculate his wages under the following methods:

(a) Time Rate.

(b) Piece Rate with a guaranteed weekly wage.

(c) Halsey premium Bonus.

(d) Rowan Premium Bonus.

Answer

(a) Calculation of wages under Time Rate System

Total earnings = TR = 48 × 72 = Rs.3456

(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate

Time allowed for one unit = 20 minutes

No. of pieces per hour = 60/20 pieces. =3 pieces

Piece Rate = Hourly Rate / No. of pieces per hour

= 72/3=Rs.24

Earnings under Piece Rate = 180 x 24 = Rs.4320

(c) Calculation of wages under Halsey Premium Bonus

Standard time for actual production = 180 x 20 / 60 = 60 hours

Earnings under Halsey Plan = (48 x 72)+(60-48 )x 72x50%

= 3456+432 = Rs.3888

(d) Calculation of wages under Rowan Premium Bonus

Earnings under Rowan Plan = (48 x 72) + (60-48 / 60) x 48 x 72

= 3456 + 691.20

= Rs. 4147.20

73

Question 24

In a manufacturing concern the daily wage rate is Rs.300. The standard output in a 6 day week is 200 units. Bonus structure is payable on a graded scale as below:-

Up to 66

% efficiency : No Bonus

66

% to 82% efficiency : 5% Bonus

83 % to 90% efficiency : 9% Bonus

91 % to 100% efficiency : 20% Bonus

Further increase of 1% for every 1% further rise in efficiency. In a 6 day week A produced 120 units; B-160 units; C-200 units; D-230 units and E-176 units.

Calculate the earnings of these workers.

Answer

A’s efficiency = (120 / 200) x 100 = 60%

A’s Earnings = (6 x 300) = Rs. 1800

B’s efficiency = (160 / 200) x 100 = 80%

B’s Earnings = 1800 + 5% of 1800 = Rs. 1890

C’s efficiency = (200 / 200) x 100 = 100%

C’s Earnings =1800 + 20% of 1800 = Rs. 2160

D’s efficiency = (230 / 200) x 100 = 115%

D’s Earnings = 1800 + 35% of 1800 = Rs. 2430

E’s efficiency = (176 / 200) ×100 = 88%

E’s Earnings = 1800+9% of 1800 = Rs. 1962

Working Note : Normal wages for the week = 6 days x Rs.300 = Rs. 1800

Question 25

Milling section of a factory engages 21 direct workers during the month of April,2016 they were paid for 4,000 attendance hours at an average rate of Rs. 45 per hour. In addition they also worked for 400 overtime hours at double pay. The overtime was necessitated by abnormal circumstances in April, 2016. For the purpose of reckoning labour 30% for fringe benefits is to be added to gross wages.

From the following particulars:

(a) Work out the total labour cost and

(b) Allocate it to different cost elements etc.

i) Hours booked to jobs 3,500

ii) Allowed idle time 12½ %

74

iii) There was no incidence of abnormal idle time. Actual idle time was exactly in accordance with standard for the purpose.

Answer

(a) Basic wages (4000 x 45) = Rs.1, 80,000

Payment for Over Time (400 x 90) = Rs. 36,000

= Rs. 2,16,000

(+) 30% towards fringe benefits = Rs. 64,800

Total Labour Cost = Rs. 2,80,800

(b)

i) Time worked on jobs is charged to jobs and treated as direct wages.

Wages (3500 x 45) = Rs.1,57,500

(+) 30% Fringe benefits = Rs. 47,250

Rs.2,04,750

ii) Wages for idle time is included in indirect wages & included in fixed overheads:

Wages for idle time 4000 x 12.5% = 500 hours x 45 = Rs. 22500

(+) 30% towards fringe benefits = Rs. 6750

Total = Rs. 29250

iii) Cost for overtime occurred due to abnormal circumstances and therefore debited to Costing P & L A/c.

Overtime Wages (400 x 90) = Rs.36000

(+) 30% Fringe Benefits = Rs.10800

Total = Rs.46800

Question 26

In a factory two workmen W-I and W-II produce the same product using the same material. They are paid bonus according to Rowan System. The time allotted to the product is 40 hours. W-I takes 25 hours and W-II takes 30 hours to finish the product. The factory cost of the product for W-I is Rs. 7750 and for W-II Rs.8200. The factory overhead rate is Rs.40 per man-hour. Find the normal rate of wages and the cost of materials used for the product.

Answer

Let ‘M’ be the material cost and ‘R’ be the rate of wage per hour.

W-I — Earnings = (25 x R) + [(40-25) / 40] x 25R

= 25R + 9.375 R = 34.375 R

75

W-II — Earnings = (30 x R) + [(40-30) / 40] x 30R

= 30R + 7.5 R = 37.5 R

Factory cost= Material cost (M)+ Labour cost+ Factory overheads.

W-I = M + 34.375 R + 1000 = 7750

W-II = M + 37.5 R + 1200 = 8200

M + 34.375 R = 6750 .... (i)

M + 37.500 R = 7000 .... (ii)

Solving (i) & (ii) we get,

3.125 R = 250

R = 80

Normal rate of wage = Rs.80 per hour

M + 37.5 R + 1200 = 8200

M + 3000 + 1200 = 8200

M = 4000

Material cost = Rs.4000

Working Note

Factory overheads in case of W-I : 25 x 40 = Rs. 1000 and W-II 30 x 40=Rs. 1200

Question 27

Two workmen, Vikram and Viram, produce the same product using the same material. Their normal wage rate is also the same. Vikram is paid bonus according to the Rowan System, while Viram is paid bonus according to Halsey System. The time allowed to make the product is 40 hours. Vikram takes 24 hours while Viram takes 32 hours to complete the product. The factory overhead rate is 50% of direct labour cost. The factory cost for the product for Vikram is Rs.18200 and for Viram it is Rs. 18470.

You are required:-to

(a) Find the normal rate of wages;

(b) Find the cost of materials;

(c) Prepare a statement comparing the factory cost of the products as made by the two workmen.

Answer

Let ‘R’ be the wage rate and ‘M’ be the material cost.

Earnings of Vikram = 24 R + [(40-24) / 40] x [24R]

= 24R + 9.6R = 33.6R

Factory overhead= 50% of 33.6R= 16.8R

76

Material + Wages + Factory Overheads = Factory Cost.

M + 33.6R + 16.8R = 18200

⇒ M + 50.4 R = 18200 → (i)

Earnings of Viram = 32 R + 50% of (40-32) x R

= 32 R + 4 R

= 36 R

Factory overhead= 50% of 36R= 18R

Material + Wages + Factory Overheads = Factory Cost.

M + 36R + 18R = 18470

⇒ M + 54 R = 18470 → (ii)

By subtracting equation (i) & (ii):

M + 54 R = 18470 (ii)

M + 50.4R = 18200(i)

- - -

3.6R = 270

R = 75

Substitute the value of ‘R’ in Equation (ii), we get

M + 54 R = 18470

⇒ M + 54x75 = 18470

⇒ M + 4050 = 18470

⇒ M = 14420

Wages of Vikram = (24 x 75) + [(40-24) / 40] x [24 x 75]

= 1800 + 720 = Rs.2520

Wages of Viram = (32 x 75) + 50% (40 – 32) x 75

= 2400 + 300 = Rs.2700

(a) Normal Rate of wages =Rs.75

(b) Material Cost = Rs.14420

(c) Statement comparing the factory cost of the products as made by the two worksmen.

Particulars Vikram Viram

Rs. Rs.

Material 14420 14420

Labour 2520 2700

Overhead(@ 50% of labour) 1260 1350

Factory Cost 18200 18470

77

Question 28

From the particulars given below, calculate the earnings of two workers X and Y under Straight Piece Rate System and Taylor’s Differential Piece Rates System.

Standard time per unit: 2.5 minutes

Normal wages rate: Rs. 48 per hour

Differential rates to be applied: 80% of piece rate when below standard.

120% of piece rate when at, or above, standard.

The workers X and Y have produced on a day of 8 hours as follows:

X – 170 units; Y – 205 units

Answer

Standard Output per Hour = (

) units

Wages Rate per Unit = (

) (

)

Earnings under Straight Piece Rate System

Earnings = (Actual Output x Piece Rate)

Earnings of X = (170 units x Rs. 2) = Rs. 340

Y = (205 units x Rs. 2) = Rs. 410

Earnings under Taylor’s Differential Piece Rate System

1. Standard Output for Actual Hours = 24 x 8 = 192 units

2. Efficiency of Employee =

Efficiency of X = (

) = 88.54%;

Efficiency of Y = (

) = 106.77%;

3. Piece Rate, X = (Rs. 2 x 80%) = Rs. 1.60 [since the efficiency of X is less-than standard

(i.e., 88.54%), he is eligible for only 80% of piece rate].

Y = (Rs. 2 x 120%) = Rs. 2.40 [as the efficiency is above standard

i.e., 106.77%), he is eligible for 120% of piece rate]

4. Earnings = (Actual Output x Piece Rate)

Earnings of X = (170 x 1.60) = Rs. 272

Y = (205 x 2.40) = Rs. 492

78

Question 29

Shekhar Engineering Ltd., are thinking of introducing either Halsey Scheme or Rowan Scheme for the payment of premium bonus to the labour in addition to their normal time rate earnings. The standard time for a particular job A is 10 hours. The wages for this job are paid at Rs. 60 per hour. Calculate the wages and the effective rate of earnings per hour under both the schemes if the job is completed in (a) 8 hours, and (b) 6 hours.

Answer

Particulars If the Job is completed in

(a) 8 hours

(b) 6 hours

Halsey Scheme

Wages: (Hours Worked x Hourly Rate)

(8 hours x Rs. 60) and (6 hours x Rs. 60)

Bonus: (Hours Saved x Hourly Rate x 50%)

(2 hours x Rs. 60 x 50%) and (4 hours x Rs. 60 x 50%)

Total Wages

Effective Hourly Earnings = (Rs. 540 ÷ 8 hours) and (Rs. 480 ÷ 6 hours)

Rs.

480

60

Rs.

360

120

540

67.50

480

80

Rowan Scheme

Wages (as calculated above)

Bonus = (Time saved x Time taken / Time allowed) x Rate per hour

[(2 x 8/10) x 60] and [(4 x 6/10) x 60]

Total Wages

Effective Hourly Earnings = (Rs. 576 ÷ 8 hours) and (Rs. 504 ÷ 6 hours)

Rs.

480

96

Rs.

360

144

576

72

504

84

Question 30

Both direct and indirect labourers of steel furniture department in Tolli Ltd. are entitled to production bonus in accordance with a group incentive scheme, the outlines of which are as follows:

a. For any production in excess of the standard rate fixed at 20000 articles per month (of 25 days), a general incentive of Rs. 15 per article is paid in aggregate. The total amount payable to each separate group is determined on the basis of an assumed percentage of such excess production being contributed by it, viz., at 60% by Direct Labour, at 15% by Inspection Staff, at 15% by Maintenance Staff, and at 10% by Supervisory Staff,

79

b. Moreover, if the excess production is more than 20% above the standard, Direct Labour also gets a special bonus at Rs. 10 per article for all production in excess of 120% of standard,

c. Inspection Staff are penalized at Rs. 30 per article for any rejection by customers in excess of 1% of production, and

d. Maintenance Staff are also penalized at Rs. 40 per hour of machine breakdown.

From the above particulars for a month, work out the production bonus earned by each group. Other details are, (a) Actual working days = 21, (b) Production = 23000 articles, (c) Rejection by customers = 350 articles, and (d) Machine breakdown = 40 hours.

Answer

a. General Incentive Actual production (in 21 days) 23000 articles

Less : Standard Production [(20000 articles ÷ 25 days) x 21 days] 16800 articles

Excess Production 6200 articles

General Incentive = (6200 articles x Rs. 15 per article) = Rs. 93000. Of this Rs. 93000, the share of:

Rs.

Direct Workers = 60% = 55800

Inspection Staff = 15% = 13950

Maintenance Staff = 15% = 13950

Supervisory Staff = 10% = 9300

b. Special Bonus (to Direct Workers) = [(23000 – 120% of 16800) x 10] = (23000 – 20160) x 10 = 2840 articles x Rs. 10

= Rs. 28400

c. Penalty to Inspection Staff: = (350 articles – 1% of 23000 articles) x Rs. 30

= 350 – 230 = 120 x Rs. 30 = Rs. 3600

d. Penalty to Maintenance Staff:

= 40 hours x Rs. 40 = Rs. 1600

Production Bonus Earned by Each Group

Particulars Direct Labour

Rs.

Supervisory Staff Rs.

Inspection Staff Rs.

Maintenance Staff Rs.

General Incentive

Add : Special Bonus

Less : Penalty

55800

28400

---

13950

---

---

13950

---

(3600)

9300

---

(1600)

Net Bonus 84200 13950 10350 7700

80

Question 31

In Madhu Udyog Ltd., a category of workers is paid an average of Rs. 40 per hour with D. A. of Rs. 3600 p.m. Additional payments are: (a) Contribution to Employees State

Insurance (E.S.I.) 2%; (b) Contribution to Provident Fund (P.F.) 8

% (workers contribute

equal amount to both P.F. and E.S.I.); (c) Overtime according to Statutory Provisions. In addition, the factory maintains a subsidized canteen on which, on an average, Rs. 1865000 per month is spent. 2500 workers make use of the canteen. There are 300 working days of 8 hours each in a year but each worker is entitled to leave with pay for 15 days. Calculate hourly cost of per worker for the company.

Answer

Annual Wage Payments (Rs. in thousands)

Particulars Total Amount Per Worker (Total Amount/2500)

Basic Wage paid:

(300 days x 8 hours x Rs. 40 x 2500 employees)

Dearness Allowance:

(3600 per month x 12 months x 2500 employees)

Employer’s contribution towards:

a. ESI: (2% of Rs. 240000000)

b. PF: (8

% of 240000000)

Canteen Subsidy:(Rs.1865000 x 12 months)

Rs.

240000

108000

4800

20000

22380

Rs.

96

43.2

1.92

8

8.952

395180 158.072

1. Annual working hours per employee = [(300 days – 15 days leave) X 8 hours a day]

= 2280 hours per worker

Annual working hours for 2500 employees = (2280 hours per worker X 2500 workers)

= 5700000 hours

2. Hourly cost of per worker = (Annual Wages of an employee Rs. 158072 ÷ Annual Working hours per worker 2280) = Rs. 69.33

or

= (Rs. 395180000 ÷ 5700000 hours) = Rs. 69.33

81

Question 32

Compute the direct labour cost of job J-105 from the following data.

Time employed in hours

Worker A Worker B

Monday 10 8

Tuesday 9 10

Wednesday 10 11

Thursday 11 10

Friday 6 5

Saturday 6 4

a. Normal working hours on week days are 8 hours and on Saturdays 4 hours.

b. Overtime is paid for at double the normal rates.

c. Normal daily wages: A - Rs. 320 and B - Rs. 360

d. Four hours work on Saturdays is paid at fully day’s wage. Work on Saturday in

excess of 4 hours is treated as overtime and is paid for at 1 2

1 of normal wages up

to a total of 8 hours work and beyond that at double the normal rate.

e. Dearness allowances is to be paid to the total wages including overtime at 50% of wages.

Answer

Classification of Hours Worked into Normal and Overtime

Day Worker

A B

Hours Worked

Normal (hours)

Overtime Hours Worked

Normal (hours)

Overtime

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

10

9

10

11

6

6

8

8

8

8

6

2

1

2

3

-

8

10

11

10

5

4

8

8

8

8

5

-

2

3

2

-

-

Total 52 46 8 + 2 48 45 7

82

1. For four hours work on Saturday, full day’s wage is paid; and 2 hours worked in excess

of normal hours of 4 hours on Saturday, is paid at 1

times.

Calculation of total wages of worker A and worker B

Particulars A

Rs.

B

Rs. Basic Wages (W.N.2)

Add : Overtime Wages (W.N.3)

Add: Dearness Allowance (at 50%)

Therefore, Total Direct Labour Cost of Job J-105 = (3900 + 3983) = Rs. 7883

1840

760

2025

630

2600

1300

2655

1328

3900 3983

1. [46 hours x (Rs. 320 ÷ 8 hours)] and [45 hours x (Rs. 4 ÷ 8 hours)]

2. [8 hours x (Rs. 320 ÷ 8 hours) x 2] + [2 hours x (Rs. 3 ÷ 8 hours) x 1.5]

3. [7 hours x (Rs. 4 ÷ 8 hours) x 2]

Working Notes:

1. Hourly wages rate: For A – 320/8 = Rs. 40 per hour

For B – 360/8 = Rs. 45 per hour

2. Basic wages of A: 46 hours @ 40 = Rs. 1840

Basic wages of B:

45 hours @ 45 = Rs. 2025

3. Overtime wages of A: Double rate:- 8 hours @ 80 = Rs. 640

One & half (1

) Rate:- 2 hours @ 60 = Rs. 120

Rs. 760

Overtime wages of B:

Double rate : 7 hours @ 90 = Rs. 630

Question 33

The following are the particulars of work done by a worker during a certain week.

Time Allowed (hours) Time Taken (hours)

Job No. J-111 25 20

Job No. J-121 30 20

General duties - 8

Total 55 48

His time rate is Rs. 400 per day of 8 hours with D. A. @ 60% of wages including bonus. Calculate his earnings and labour cost of each job under: (a) Time Rate system (b) Piece Rate system (c) Halsey Premium system and (d) Rowan Premium system.

83

Answer

Wages per hour (Rs. 400 for 8 hours) = Rs. 50

Earnings of a Worker and the Labour Costs of Different Jobs

Particulars Job J-111 (Rs.)

Job J-121 (Rs.)

General (Rs.)

Total (Rs.)

Time Rate System

Wages (Hours Worked X Hourly Wages Rate Rs. 50)

DA @ 60% of wages

Total Earnings

Piece Rate System

Wages [Work Completed (i.e., Number of Standard Hours’ Work Completed) x Piece Rate (i.e., hourly rate)]

DA @ 60% of wages

Total Earnings

Halsey Premium System

Wages [Hours Worked x Hourly wage Rate]

Bonus [(Hours Saved x Hourly Wage and DA Rate) x 50%]

Wages including Bonus

DA @ 60% wages & bonus

Total Earnings

Rowan Premium System

Wages (Hours Worked x Rate )

Bonus

Wages + Bonus

DA @ 60% of Wages & Bonus

Total Earnings

1000

600

1000

600

400

240

2400

1440

1600 1600 640 3840

1250

750

1500

900

400

240

3150

1890

2000 2400 640 5040

1000

125

1000

250

400

-

2400

375

1125

675

1250

750

400

240

2775

1665

1800 2000 640 4440

1000

200

1000

333

400

-

2400

533

1200

720

1333

800

400

240

2933

1760

1920 2133 640 4693

Working Notes:

1. Assumed to be 8 hours (i.e., time allowed)

84

2. Piece rate = Rate per hour Rs. 50

3. Bonus under Halsey system:

[(5 hours x Rs. 50) x 50%]; [(10 hours x Rs. 50) x 50%];nil

For Job J-111 Rs. 125; Job J-121 Rs. 250 ; General - nil

4. Bonus under Rowan system:

5. [(Time Taken ÷ Time Allowed) x Time Saved x Time Rate]

(5 x 20 x 50/25); (10 x 20 x 50/30)

For Job J-111 Rs.200; Job J-121 Rs.333; General – nil

Question 34

Following particulars are given :

Workers engaged – WM and WN

Standard time allowed for Job. – 40 hours to each worker

Actual time taken – 32 hours by WM and 30 hours by WN

Wages rate - same for both

Wages payment system : Halsey 50% plan to WM and Rowan plan to WN,

Factory overhead recovered @ Rs. 120 per hour for time taken in both cases.

Factory cost for each of the worker is Rs. 41600.


(i) calculate the wages rate per hour and cost of material used, and

(ii) prepare the statement showing factory cost for each worker.

Answer

Factory Cost = Direct Material cost +Direct labour cost +works overhead

Let the material cost be ‘x’ and labour rate per hour be ‘y’

Thus , material cost for each of WM & WN = x

Labour cost for WM (under Halsey 50% plan)

= Normal wages +Bonus= 32y + (40-32) x y x

= 32y+4y =36y

Labour cost for WN (under Rowan plan)

= Normal wages : 30y+bonus = 30y + *

+

=> 30y+7.5y=37.5 y

Factory overhead for WM = 32 x 120 = 3840

Factory overhead for WN= 30 x 120 = 3600

Factory Cost :

For WM=x+36y+3840 =41600 or x+36y = 37760

For WN=x+37.5y+3600 =41600 or x+37.5y=38000

85

On Subtracting equation (ii) form (i) -1.5y= - 240

Or y =160

X+36 x 160=37760

Or x = 37760-5760 =32000

Therefore, Material cost (x) = Rs. 32000 and

Wage rate per hour (y) = Rs. 160 per hour.

Statement Showing Factory Cost

Particular In case of

WM (Rs.) WN (Rs.)

Direct Material Cost

Direct Labour Cost

WM : (32 x 160) + (40-32) x 160 x 50% = 5120 + 640

WN : (30 x 160) + (30 x 10/40) x 160 = 4800 + 1200

Factory overheads @ 120/- per hour – WM (32 x 120) :

WN - (30 x 120)

Factory Cost

32000

5760

-

3840

32000

-

6000

3600

41600 41600

Question 35

Calculate the total earnings and effective rate of earnings per hour of the following two workers under Rowan Premium Plan:

Worker A B

Time Allowed 50 hours 50 hours

Time Taken 40 hours 37 hours

Hourly wages rate per hour Rs.30 Rs.30

Answer A B

Normal wages: 40 x Rs. 30 =

Rs. 1200 37 x Rs.30 = Rs. 1110

Bonus *

+

= Rs. 240

Rs. 288.60

Total earnings Rs. 1440 Rs. 1398.60

Effective Hourly Rate

Rs.36

Rs. 37.80

***

86

Question 1

Question 1

Distinguish between fixed and variable overheads.

Answer

Fixed overhead expenses do not vary with the volume of production within certain limits. In other words, the amount of fixed overhead tends to remain constant for volumes of production within the installed capacity of plant. For example, rent of office, salary of works manger, etc.

Variable overhead cost varies in direct proportion to the volume of production. It increases or decreases in direct relation to any increase or decrease in output.

Question 2

Discuss the difference between allocation and apportionment of overhead.

Answer

The following are the differences between allocation and apportionment:

1. Allocation costs are directly allocated to cost centre. Overhead which cannot be directly allocated are apportioned on some suitable basis.

2. Allocation allots whole amount of cost to cost centre or cost unit where as apportionment allots part of cost to cost centre or cost unit.

3. No basis required for allocation. Apportionment is made on the basis of area, assets value, number of workers etc.

Question 3

What do you mean by re-distribution of service department overheads? Briefly explain the methods of re-distribution.

Answer

Normally products do not pass through service departments, but service departments do benefit the manufacturing of products. Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution.

4

Direct Expenses and Overheads

87

Methods of Re-apportionment or Re-distribution

At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department.

Following are the methods of re-distribution of service department costs to production departments:

(i) Direct distribution method : Under this method, the cost of service department are directly apportioned to production departments, without taking into consideration any service from one service departments to another service department.

(ii) Step method : In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.

(iii) Reciprocal service method : This method gives cognizance to the fact that where there are two or more service departments, they may render service to each other and therefore these inter-departmental services are to be given due weight in distributing the expenses of service departments. There are three methods available for dealing with inter service department transfer:

(a) Simultaneous equation method : Under this method, the true cost of service departments are ascertained first with the help of simultaneous equations. These are then distributed among the production departments on the basis of given percentages.

(b) Repeated distribution method : According to this method service department costs are apportioned over other departments, production as well as service according to the agreed percentages and this process is repeated until the total costs of the service departments are exhausted or the figures become to small to be considered for further apportionment.

(c) Trial and error method : In this method the cost of one service department is apportioned to another service department. The cost of another service department plus the share received from the first service department is again apportioned to first service department and this process is continued until the balancing figure becomes nil.

88

Question 4

Explain the treatment of over and under absorption of Overheads in Cost accounting.

Answer

Treatment of over and under absorption of overheads are:

(i) Writing off to costing P&L A/c : Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss shall be transferred to costing P&L A/c.

(ii) Use of supplementary Rate : Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.

(iii) Carrying of overheads : The balance of under/over-absorbed overheads at the end of the year is transferred to an overhead reserve or suspense account and is carried forward to the next year account for absorption. This method is preferably applied when the normal business cycle is more than one year and in the case of new projects and schemes when the output is low in the initial stages of production and cannot bear the entire share of overhead.

Question 5

Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution expenses.

Answer

Selling expenses: Expenses incurred for the purpose of promoting, marketing and sales of different products.

Distribution expenses: Expenses relating to delivery and dispatch of goods/products to customers.

Accounting treatment for selling and distribution expenses.

Selling and distribution expenses are usually collected under separate cost account numbers.

These expenses may be recovered by using any one of following method of recovery.

1. Percentage on cost of production / cost of goods sold.

2. Percentage on selling price.

3. Rate per unit sold.

Question 6

Explain briefly the functional classification categories of overheads.

89

Answer

Functional Classification of Overheads:

Overheads can be divided in the following categories on functional basis:

(a) Manufacturing/production/factory overheads : Manufacturing overheads includes all indirect costs (indirect material, indirect labour and indirect expenses) incurred for operation of manufacturing or production division in a factory. It is also known as factory overheads, works overheads, factory cost or works cost etc.

(b) Administration overheads : It is the sum of those costs of general management, secretarial, accounting and administrative services, which cannot be directly related to the production, marketing, research or development functions of the enterprise. Administration overheads include the cost of formulating the policy, directing the organization and controlling the operations of an undertaking which is not related directly to production, selling, distribution, research or development activity or function.

(c) Selling and Distribution overheads : Selling overheads is the cost of seeking to create and stimulate demand and of securing orders. It comprises the cost to products of distributors for soliciting and recurring orders for the articles or commodities dealt in and of efforts to find and retain customers. Distribution overhead is the expenditure incurred in the process which begins with making the packed product available for dispatch and ends with the making the reconditioned returned empty package, if any, available for re-use. It includes expenditure incurred in transporting articles to central or local storage. It also comprises expenditure incurred in moving articles to and from prospective customer as in the case of goods on sale or return basis.

(d) Research and development overheads : Research overhead is incurred for the new product, new process of manufacturing any product. The development overhead is incurred for putting research result on commercial basis.

Question 7

What do you understand by direct expenses? Give some examples of direct expenses.

Answer

Direct expenses are those expenses which are directly chargeable to a job account. Direct expenses may be defined as those expenses which are easily identifiable and attributable to the individual units or jobs. All expenses other than the direct material or direct labour which are incurred for a particular product or process are termed as direct expenses. Expenses which can be identified with a territory, a customer or product can be considered as direct expenses. Expenses in relation to a department may be direct but are indirect in relation to the product.

90

Direct expenses are defined as “costs, other than materials or wages, which are incurred for a specific product or salable service.”

Some examples of Direct Expenses are as under:

(i) Royalties if it is charged as a rate per unit.

(ii) Hire charges of plant if used for a specific job.

(iii) Sub-contract or outside work, if jobs are sent out for special processing.

(iv) Salesman’s commission if it is based on the value of units sold.

(v) Freight, if the goods are handled by an outside carrier whose charges can be related to individual units.

(vi) Travelling, hotel and other incidental expenses incurred on a particular contract.

(vii) Cost of making a design, pattern for a specific job.

(viii) Cost of any special process not forming part of the normal manufacture like water proofing for canvas cloth.

Question 8

What do you understand by semi-variable overhead costs? Listed the methods of segregating semi-variable overhead costs into fixed and variable costs.

Answer

Semi-variable Overhead Costs

These overhead costs are partly fixed and partly variable. They are known as semi-variable overheads because they contain both fixed and variable element. Semi-variable overheads do not fluctuate in direct proportion to volume. They are also called Step Costs. It may remain fixed within a certain activity level, but once that level is exceeded, they vary without having direct relationship with volume changes. Examples are depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc.

Methods of segregating semi-variable costs into fixed and variable costs:

(i) Graphical presentation method

(ii) Least square method

(iii) High and low points method

(iv) Analytical method

(v) Comparison by period or level of activity method

91

Question 9

Arti Limited produces two products P-I and P-II. The following information is furnished:

Particulars Product P-I Product P-II

Opening Stock (Tonnes)

Sales (Tonnes)

Closing Stock (Tonnes)

Machine Hours Utilised (Hours)

Design Charges (Rs.)

Software development charges (Rs.)

25000

415000

32000

10000

1080000

1650000

21000

310000

28000

6000

650000

900000

Royalty paid on units produced @ Rs. 15 per tonne produced, for both the products. Wages paid to machine operators @ Rs. 75 per machine hour. Hire charges of equipment used in manufacturing process of product P-II only Rs. 510000.

You are required to calculate the direct expenses.

Answer

Computation of Direct Expenses

Particulars Product P-I Product P-II

Sales (Tonnes)

Add : Closing Stock (Tonnes)

Less : Opening Stock (Tonnes)

Production (Tonnes)

Royalty paid on production @ Rs. 15 per tonne

Design Charges

Software development charges

Hire charges of equipment

32000

415000

28000

310000

447000

25000

338000

21000

422000 317000

Rs.

6330000

1080000

1650000

-

Rs.

4755000

650000

900000

510000

Direct Expenses 9060000 6815000

Note : Machine Operators wages will be included in direct wages.

92

Question 10

The following information relates to the activities of a production department of Pooja offsets Limited for the month of April, 2016:

Raw Material Consumed Rs. 750000

Direct Wages Rs. 336000

Direct Expenses Rs. 21000

Production Overheads Rs. 420000

Direct Labour hours 10500 hours

Hours of machinery operation 2000 hours

On one order carried out in the department during April, 2016 the relevant data were:

Material used Rs. 15000; Direct wages Rs. 12500; Labour hours worked 163 hours; and Machine hours 51 hours.

You are required to prepare a statement showing factory cost of the order by five commonly used methods of absorption of factory overheads.

Answer

Statement Showing Factory Cost of the Order

Particulars % on Direct

Material Method

(Rs.)

% on Direct Labour

Method (Rs.)

% on Prime Cost

Method (Rs.)

Direct Labour

Hour Rate Method

(Rs.)

Machine Hour Rate

Method (Rs.)

Raw Material

Direct Wages

Prime Cost

Factory Overheads

Factory Cost

15000

12500

15000

12500

15000

12500

15000

12500

15000

12500

27500

8400

27500

15625

27500

10434

27500

6530

27500

10710

35900 43125 37934 34020 38210

Working Notes: Calculation of Chargeable Overheads:

1. % of production overhead on Direct Material = 100 x 750000

420000= 56%

Chargeable overheads to order = 15000 x 56% = Rs. 8400

2. % of production overhead on Direct Labour Cost = 100 x 336000

420000 = 125%

93

Chargeable overhead to the order = 12500 x 125% = Rs. 15625

3. % of production overhead on Prime Cost

= 100 x 21000) 336000 (750000

420000

= 100 x 1107000

420000 = 37.94%

Chargeable overhead to the order = 27500 x 37.94% = Rs. 10434

4. Direct Labour Hour Rate = hours 10500

420000 Rs. = Rs. 40 per labour hour

Chargeable overhead to the order = 163 hours x Rs. 40 = Rs. 6520

5. Machine Hour Rate = hours 2000

420000 Rs. = Rs. 210 per machine hour

Chargeable overhead to the order = 51 x Rs. 210 = Rs. 10710

Question 11

In Gunnu Limited the factory overheads are charged on a fixed percentage basis on direct wages and administrative overheads are calculated on the basis of percentage of factory cost. Find the rates of factory overheads and administrative overheads by using the following information (Assume there are no selling expenses):

Job – 121 Job – 141

(Rs.) (Rs.)

Direct Material 25000 28000

Direct Wages 30000 45000

Selling Price 96250 126060

Percentage of Profit on Cost 25% 20%

Answer

Let ‘x’ and ‘y’ be the % of factory overheads on direct wages and administrative overheads on factory cost respectively.

Particulars Job – 121 (Rs.) Job – 141 (Rs.)

Direct Material

Direct Wages

Prime Cost

Factory Overheads @ x% on

25000

30000

28000

45000

55000

300 x

73000

450x

94

Direct Wages

Factory Cost

Administrative Overheads @ y% on factory cost

Total Cost

100

x x 30000

100

x x 28000

55000 + 300x

550y + 3xy

73000 + 450x

730 y + 4.5xy

55000 + 300x + 3xy + 550y

73000 + 450x + 4.5xy + 730y

Actual total cost 96250 x 125

100 = 77000 126060 x

120

100 = 105050

So, 55000 + 300x + 3xy + 550y = 77000

Or 300x + 3xy + 550y = 22000 ------ (i)

73000 + 450x + 4.5xy + 730y = 105050

450x + 4.5xy + 730y = 32050 ------- (ii)

Equation (i) multiply by 1.5 and subtract from Equation (ii)

Or 450x + 4.5xy + 730y = 32050 ------- (ii)

450x ± 4.5xy ± 825y =33000 ------- (iii)

- 95y = - 950

Therefore, y = 95-

-950= 10

Substituting the value of y in Equation (i)

300x + 10 x 3x + 550 x 10 = 22000

Or 300x + 30x = 22000 – 5500

Or 330x = 16500

Or x = 330

16500= 50

Hence, The percentage of factory overheads on direct wages = 50%,

The percentage of administrative overhead on Factory Cost = 10%

Question 12

Following information relates to a particular production department of Kachari Limited:

Production Level (Units) Production overheads (Rs.) (Both Fixed and Variable)

5000 400000

95

11000 580000

16000 730000


(i) Variable Overhead per unit.

(ii) Total Variable Overheads at the level of production of 16000 units.

(iii) Fixed Overheads.

(iv) Total production overheads at the level of production of 20000 units.

Answer

(i) Variable Overheads per unit = output levelLow - output level High

overhead levelLow - overhead level High

= 5000 - 16000

400000 - 730000

= 11000

330000 = Rs. 30 per unit

(ii) Total Variable Overhead for the level of 16000 units = 16000 X 30 = Rs. 480000

(iii) Fixed Overheads = Total Overheads at a particular level – Total Variable Overhead at that level

= Rs. 730000 - Rs. 480000 = Rs. 250000

(iv) Total Overheads at the level of 20000 units:

Rs.

Variable Overheads (20000 x 30) = 600000

Add : Fixed Overhead 250000

Total Overheads at 20000 units 850000

Question 13

Guddu Limited 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 Rs.1824000 and budgeted machine hours are 96000.

For the six months ending 30th September, 2015, following information extracted from the books:

Actual production overheads

Amount included in the production overheads:

Paid to workers as per court’s order

Rs.

1225000

155000

96

Expenses of previous year booked in current year

Paid to workers for strike period under an award

20000

45000

Production and sales data of the concern for the first six months are as under:

Production:

Finished goods

Works-in-progress

(60% complete in every respect)

Sale:

Finished goods

42800 units

16000 units

32000 units

The actual machine hours worked during the period were 46000 hours. It is revealed from the analysis of information that 30% of the under-absorption due to defective production planning 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.

Answer

(i) Amount of under absorption of production overheads during the period of first six months ending 30th Sept. 2015:

Amount (Rs.)

Total production overheads actually incurred during the period

Less : Amount paid to worker as per Court’s order

Expenses of previous year booked

Wages paid for the strike period

155000

20000

45000

1225000

220000

1005000

Less : Production overheads absorbed: 46000 hours @ Rs. 19 per hour

Amount of under absorbed production overheads

874000

131000

97

Budgeted Machine hour rate = hours 96000

1824000 Rs.= Rs. 19 per hour

(ii) Accounting treatment of under absorbed production overheads:

As, 30% of the under absorbed overheads were due to defective production planning, this being abnormal, hence should be debited to Profit and Loss Account.

Amount to be debited to Profit and Loss Account = 131000 x 30% = Rs. 39300.

Balance of under absorbed production overheads should be distributed over Work in progress, finished goods and cost of sales by applying supplementary rate.

Amount to be distributed = 131000 – 39300 = Rs. 91700

Supplementary rate = units 52400

91400 Rs.= Rs. 1.75 per unit

(iii) Apportionment of under absorbed production overheads over WIP, finished goods and cost of sales:

Particulars

(1)

Equivalent completed units

(2)

Amount

(Rs.)

(3) = 2 x Rs. 1.75

Work-in-Progress (16000 units x 60%)

Finished goods (42800 – 32000) = 10800 units

Cost of sales (32000 units)

Total

9600

10800

32000

16800

18900

56000

52400 91700

Question 14

The cost of producing 5000 units of a commodity consists of: Rs.

Material 330000

Wages 220000

Overhead Charges (Fixed and Variable) 131000

The company produces 20000 units, sells it at Rs. 165 each and makes profit of Rs. 759000.

Find out the amount of fixed and variable overheads respectively.

98

Answer

Cost of 20000 Units Rs.

Sales Price of 20000 units @ Rs. 165 per unit 3300000

Less: Profit 759000

Total Cost for 20000 units 2541000

Less : Cost of Material & Labour

Material 20000 x 5000

330000= 1320000

Labour 20000 x 5000

220000 = 880000 200000

Total Overhead 341000

Fixed and Variable Overheads

Suppose fixed overhead is Rs. ‘a’ and variable overhead is Rs. ‘b’ per unit.

(i) a + 5000b = Rs. 131000

(ii) a + 20000b = Rs. 341000

Subtracting eq. (i) from eq. (ii) we get

15000b = Rs. 210000

Or b = Rs. 14

Variable overhead = Rs. 14 per unit

and fixed overhead = Rs. 131000 – 70000 (14 x 5000) = Rs. 61000

Question 15

The Kovid Limited has the following account balances and distribution of indirect charges on 31st March, 2016:

Particulars Total Production Depts.

Service Depts.

Machine Shop

Packing General Plant

Stores & Maintenance

Allocated Overheads: Rs. Rs. Rs. Rs. Rs.

Indirect Labour 1465000 400000 300000 200000 565000

Maintenance 502000 180000 70000 102000 150000

99

Material Misc. Supplies 175000 40000 100000 15000 20000

Superintendent’s Salary 400000 400000

Cost of Payroll Salaries 1000000 1000000

Unallocated Overheads:

Power 800000

Rent 1200000

Fuel and Heat 600000

Insurance 100000

Municipal Taxes 300000

Depreciation 5000000

Total 11542000 620000 470000 171700 735000

The following data were compiled by means of a factory survey made in the previous year:

Particulars Floor Space Radiator

Section

No. of Employees

Investments (Rs. in Lakhs)

Horse Power Hours

Machine shop

Packing

General plant


40000 sq.ft.

16000 sq.ft.

8000 sq.ft.

32000 sq.ft.

120

240

80

160

100

50

15

25

160

50

2.5

37.5

3500

500

----

1000

Total 96000 sq.ft. 600 190 250 5000

Expenses charged to the stores and maintenance departments are to be re-distributed to other departments by the following percentage:

Machine Shop 50% ; Packing 20%; General Plant 30%.

General Plant overheads are to be re-distributed on the basis of number of employees.

100


(i) Prepare an overhead distribution sheet with showing basis of apportionment of each item of expense to departments.

(ii) Show the allocation of Service department overheads to production departments by the method of continued distribution. Carry through 3 cycles show all calculations to the nearest rupee.

Answer

Overhead Distribution Sheet

Items Basis of Distribution

Production Departments

Service Departments

Machine Shop Rs.

Packing Rs.

General Plant

Rs.


Rs.

Allocated Overheads:

Indirect labour Allocation 400000 300000 200000 565000

Maintenance Allocation 180000 70000 102000 150000

Material Misc. Supplies

Allocation 40000 100000 15000 20000

Superintendent’s salary

Allocation ---- ---- 400000 ----

Cost and Payroll salaries

Allocation ---- ---- 1000000 ----

Unallocated Overheads:

Power Horse power (7:1:0:2)

560000 80000 ---- 160000

Rent Floor space

(5:2:1:4)

500000 200000 100000 400000

Fuel and Heat Radiator

(3:6:2:4)

120000 240000 80000 160000

101

Insurance Investment

(64:20:1:15)

64000 20000 1000 15000

Municipal Taxes Floor space

(5:2:1:4)

125000

50000 25000 100000

Depreciation Investment

(64:20:1:15)

3200000 1000000 50000 750000

Total 5189000 2060000 1973000 2320000

Distribution of Service Overheads:

I. Cycle:

Distribution of General Plant (4:2:1)

+1127429 +563714 -1973000 +281857

Distribution of Stores & Maintenance

(50:20:30)

---

+1300929

---

+520371

---

+780557

2601857

-2601857

II Cycle


---

+446033

---

+223016

780557

-780557

---

+111508

Distribution of Stores and Maintenance

(50:20:30)

---

+55754

---

+22302

---

+33452

111508

-111508

III Cycle:


---

+19115

---

+9558

33452

-33452

111508

-111508

Final Distribution of Stores & Maintenance (50:20)

----

+3414

----

+1365

----

----

4779

-4779

Grand Total 8141674 3400326 ---- ----

Question 16

A company has three production departments viz. P-1, P-2 & P-3. Besides, it has two service departments, viz. S-1 and S-2. Overheads are allocated as follows:

Production Departments: P-1 Rs. 150000; P-2 Rs. 75000; P-3 Rs. 60000

102

Service Departments: S-1 Rs. 210600; S-2 Rs. 270000

The expenses of service departments are charged as follows:

P-1 P-2 P-3 S-1 S-2

S-1 20% 40% 30% ---- 10%

S-2 40% 20% 20% 20% ----

Apportion the expenses of service departments among production departments by simultaneous equation method.

Answer

Let the total overhead of service department S-1 be X and Total overhead of service department S-2 be Y.

Then we get the equations

X = 210600 + 0.2Y …….. (i)

and Y = 270000 + 0.1X …….. (ii)

On multiplying both the equations by 10 to remove decimal

10X = 2106000 + 2Y ….... (iii)

and 10Y = 2700000 + X …….. (iv)

or 10X – 2Y = 2106000 …… (v)

and - X + 10Y = 2700000 ….. (vi)

on multiplying eq. (v) by 5 50X – 10Y = 10530000 …….. (vii)

Add eq. (vi) and (vii)

Then 49X = 13230000 or X = 270000

Put the value of X in eq. (ii)

Then Y = 270000 + 27000 = 297000

Thus, total overhead of department S-1 is Rs. 270000 and that of S-2 is Rs. 297000 including their charges on each other. On apportionment to production departments, total overhead of the departments will be as follows:

P-1

Rs.

P-2

Rs.

P-3

Rs.

S-1: 90% of Rs. 270000 = Rs. 243000 in 2:4:3

S-2: 80% of Rs. 297000 = Rs. 237600 in 4:2:2

Allocated overheads

Total overheads

54000

118800

150000

108000

59400

75000

81000

59400

60000

322800 242400 200400

103

Question 17

In a factory department a machine costs Rs. 565000. It is expected that it will work for about 20000 hours and its scrap value is estimated at Rs. 25000. The rent of the factory department is Rs. 25000 p.m. and 25% of the area of the department is utilized for conducting the operation of the machine. One foreman & one attendant are employed on a salary of Rs. 20000 & Rs. 6000 p.m. respectively, to work on one more machine of a similar type. The expenses of a particular month incurred in the department are as follows:

Light charges for the department Rs. 7200, having 16 points in all, out of which only 4 points are used at this machine. Total power used for two machines of equal horse-power Rs. 28000; indirect labour for the machine Rs. 3600 and repairs and renewals Rs. 1600.

You are required to find out the Machine Hour Rate for one month when it is expected to work for 40 hours a week.

Answer

Computation of Machine Hour Rate Running Hours: 160

Particulars Amount Amount

Standing Charges:

Rent

4

1 x 25000 Rs.

Lighting

16

1 x 7200 Rs.

Indirect Labour

Foreman’s Salary

2

1 x 20000 Rs.

Attendant’s Salary

Total Standing Charges

Rate per hour (Rs. 24650 ÷ 160)

Machine Expenses : (per hour)

Repairs and Renewals (Rs. 1600 ÷ 160)

Power [Rs. 28000 x (1/160 x ½)]

Depreciation (Rs. 565000 - Rs. 25000) ÷ 20000 hrs.

Machine Hour Rate

Rs.

6250

1800

3600

10000

3000

Rs.

154.0625

10.00

87.50

27.00

24650

278.5625

Working Note : It is assumed that there are 4 weeks in this month. Machine works for 40 hours in a week. Therefore total machine working hours in the month will be 40 x 4 = 160.

104

Question 18

Calculate Machine Hour Rate from the following particulars:

Cost of Machine Rs. 1960000

Expenditure on Installation of Machine Rs. 18000

Estimated Life 15000 hours

Estimated scrap value Rs. 103000

Estimated working hours per annum 2000

Estimated hours required for maintenance etc. 200

Setting-up time 5% to be treated as productive time

Power per hour 20 units @ Rs. 6.85 per unit. No Power is consumed during maintenance and setting-up time.

Cost of repairs and maintenance per annum Rs. 30000

No. of operators (looking after 3 other machines also) 2

Wages per operator per month Rs. 15000

Chemicals required for operating the machine Rs. 2000 (per month)

Overhead chargeable to the machine (per month) Rs. 3000

Insurance premium (per annum) 1% of the cost of machine.

Answer

Computation of Machine Hour Rate

Running Hours : 2000 – 200 = 1800

Items of Expenditure Amount

Rs.

Amount

Rs.

Standing Charges: (per annum)

Overhead Rs.3000 x 12

Insurance (1% of Rs. 1960000)

Wages of operators (2 x 15000 x 12/4)

Total

36000

19600

90000

145600

105

Hourly Rate of Standing Charges (Rs. 145600 ÷ 1800)

Machine Expenses:

Depreciation =

15000

103000 - 18000 1960000

Repairs = 1800

30000

Power = 1800

1710 x 6.85 x 20

Chemicals = 1800

12 x 2000

Machine Hour Rate

80.89

125.00

16.67

130.15

13.33

366.04

Working Notes :

(i) Time required for maintenance of machine is not a part of production time.

(ii) Setting up time (5% of 1800 = 90 hours) is a part of productive time.

(iii) Wages of operators has been treated as indirect labour.

(iv) Power is not consumed during the setting up time, so power will be used during 1710 hours only.

Question 19

Calculate Machine Hour Rate to recover the overhead expenses indicated below relating to a particular machine:

Per annum

Rs.

Rent of the department (Space occupied by the machine being 187500 one-fifth of the department)

Lighting (number of light points in the department 65, out of 29900 which 13 light points used for this machine)

Insurance etc. 18400

Cotton waste, oil etc. 13000

Salary of Foreman (one-fourth of his time is occupied by this 250000 machine and the remainder equally upon the other two machines.)

The cost of machine is Rs. 920000 and it has an estimated scrap value of Rs. 50000. It is assumed from past experience:

(a) That the machine will work 1800 hours per annum;

106

(b) That it will require expenditure of Rs. 115000 for repairs and maintenance during the whole working life;

(c) That it consumes 8 units of power per hour at the cost of Rs. 7.50 per unit; and

(d) That the working life of the machine will be 8 years.

Answer

Computation of Machine Hour Rate for the year

Machine Working Hours 1800

Items of Expenditure Amount (Rs.)

Rate per hour (Rs.)

(a) Standing Charges:

Rent = 5

187500

Lighting = 65

13 x 29900

Foreman’s salary = 4

250000

Cotton waste, Oil etc.

Insurance etc.

Total annual standing charges

Hourly rate for standing charges

(b) Machine Expenses:

Depreciation : 1800 x 8

50000 - 920000

14400

870000

Repairs and Maintenance: 1800) x (8

115000

Power (8 Units @ Rs. 7.50 per unit)

Machine Hour Rate

37500

5980

62500

13000

18400

76.32

60.42

7.99

60.00

137380

204.73

Question 20

Chandu Metals Limited uses 4 identical big and 6 identical small machines. The working hours of each of the machine are 1800 hours per year while the effective working life is taken to be 25000 hours for each big machine and 20000 hours for each small machine. The cost of each big machine is Rs. 1030000 and each small machine is Rs. 320000. Scrap values are Rs. 50000 and Rs. 20000 respectively.

Each big machine occupies 1/8th of the workshop area and small machine 1/12th of the workshop area. Each big machine employs 3 workers and small machine 2 workers. Big

107

Machine consumes 10 units of electric power per hour and small machine 3 units per hour, cost per unit being Rs. 7.50. Repairs and maintenance are estimated at Rs. 240000 and Rs. 55000 for each big and small machine respectively for the whole life. The works manager is paid Rs. 45000 per month. Half of his time is devoted to machine supervision, which is to be divided equally on all 10 machines.

Other expenses incurred during a particular month are as under:

Rent of the workshop Rs. 60000

Lighting (to be divided in the ratio of workers employed.) Rs. 6240

Insurance – Big Machine (each) Rs. 1720

- Small Machine (each) Rs. 540

Taking a period of one month as basis, calculate the machine hour rates for a big and a small machine separately.

Answer


Running hour = 1800 ÷ 12 = 150 per month

Items of Expenditure Per Big Machine Per Small Machine

Amount

(Rs.)

Per hour Rate (Rs.)

Amount

Rs.

Per hour Rate (Rs.)

(A) Standing Charges:

Manager’s Salary Rs. 45000 x ½ x 1/10

Rent

Lighting Expenses

Insurance


Standing Charges per hour

(B) Machine Expenses:

Depreciation:

Big

25000

50000 - 1030000

Small

20000

20000 - 320000

2250

7500

780

1720

2250

5000

520

540

12250 8310

81.67

39.20

55.40

15.00

108

Power:

Big (10 x 7.50)

Small (3 x 7.50)

Repairs:

Big

25000

240000

Small

20000

55000

Machine Hour Rate

75

9.60

22.50

2.75

205.47 95.65

Working Notes

(i) Lighting expenses have been divided in the ratio of workers employed. There are in all 24 workers in the factory (12 on the 4 big machines and 12 on the 6 small machines). 3 workers at a time operate the big machine and 2 workers operate

the small machine. So lighting expenses will be charged Rs.

6240 of 24

3 i.e. Rs.

780 to the big machine, and Rs.

6240 of 24

2 i.e. Rs. 520 to the small machine.

(ii) Share in Rent of a big machine = 60000 x 8

1 = Rs. 7500 and

a small machine = 60000 x 12

1 = Rs. 5000

Question 21

The following particulars have been obtained from the cost records of Babali Tubes Ltd. for a machine installed in its factory. The number of effective hours is 1740 per annum. The machine was purchased on the Hire-purchase system and the work of the factory has been mostly carried on with the help of the machine:

Year of Running – Second

Cash down price Rs. 500000

Scrap value Rs. 40000

Cash down payment Rs. 78700

Number of Instalments for remaining Amount 3

Amount of each Instalment Rs. 200000

Annual rate of Interest 20 percent

Working Life of Machine 30000 hours

Other annual fixed overhead charges relating to the machine Rs. 38950

109

Power: 6 units per hour Rs. 6.75 per unit

Repairs and maintenance Rs. 12500 per annum

Calculate the machine hour rate. Interest included in instalment is to be treated as recoverable overhead.

Answer


Machine Working Hour: 1740

Particulars Total Amount

Rate per Hour


Annual Interest included in hire purchase instalment

Other Overhead charges


Rate per hour (Rs. 99862 ÷ 1740)

(b) Machine Expenses:

Power: 6 x 6.75

Depreciation:

Cost Price of Machine 500000

Less : Scrap Value 40000

Net Value to be written off 460000

Hourly rate of Depreciation (Rs. 460000 ÷ 30000)

Repairs and maintenance 12500/1740

Machine Hour Rate

Rs.

61112

38750

Rs.

57.39

40.50

15.33

7.18

99862

120.40

110

Working Note

Interest (for the second year) included in the Hire Purchase instalment has been calculated as follows:

Analytical Table

Instalment Opening Balance of Cash Price

Rs.

Total Payment

Rs.

Interest

Rs.

Payment of Cash Price

Rs.

Closing Balance of Cash Price

Rs.

Down Payment

I

II

500000

421300

305560

78700

200000

200000

NIL

421300 x 20% = 84260

305560 x 20% = 61112

78700

115740

138888

421300

305560

166672

Question 22

Compute machine hour rate from the following information:

Expenses per annum:

Power Rs. 394800

Light Rs. 28800

Supervision Rs. 324000

Repair & Maintenance Rs. 135650

Rent and Rates Rs. 210000

Insurance Rs. 111800

Depreciation Rs. 235500

There are 12 holidays other than Sundays in a year. Two of these are Saturdays. The factory normally works 8 hours a day except Saturdays which are half days. There are five machines of identical type in the shop and all work at 90% capacity throughout the year and normal breakdown is 10%.

Answer

Computation of Machine-Hour Rate for the year

Machine Working Hours: 8942

Particulars Amount (Rs.) Rate per Hour (Rs.)


Rent & Rates

Lighting etc.

210000

28800

111

Supervision

Insurance

Total amount of standing charges

(b) Machine Expenses :

Power (394800/8942)

Depreciation (235500/8942)

Repairs & Maintenance (135650/8942)

Machine Hour Rate

324000

111800

75.44

44.15

26.34

15.17

674600

161.11

Working Notes:

Days

Working days in a year 365

Less : Sundays in a year 52

Holidays in the year (Including 2 Saturdays) 12

301

Less :

50 Saturdays in the year (which are half working days) 50

Number of whole working days 251

Total working hours (251 x 8) 2008

Working hours on 50 Saturdays (50 x 4) 200

Total working hours for one machine 2208

Total working hours for 5 machines (2208 x 5) 11040

Total working hours according to the capacity of machines

100

90 x 11040 = 9936

Less : 10% Provision for wear & tear

100

10 x 9936 = 994

Actual Working Hours 8942

Question 23

In a Factory, the following particulars have been extracted for the quarter ended 31st March, 2016. Compute the departmental overhead rate for each of the production departments, assuming that overheads are recovered as a percentage of direct wages.

Production Depts. Service Depts.

A B C X Y

Direct Wages (Rs.) 300000 450000 600000 150000 300000

Direct Material (Rs.) 150000 300000 300000 225000 225000

112

No. of workers 150 225 225 75 75

Electricity KWH 6000 4500 3000 1500 1500

Assets Value (Rs.) 600000 400000 300000 100000 100000

No. of Light points 20 32 8 12 8

Area Sq. Yards 300 500 100 100 100

The expenses for the period were: Rs.

Power 264000

Lighting 10000

Stores Expenses 8000

Staff Welfare Expenses 18000

Depreciation 270000

Insurance 36000

Canteen Expenses 23400

Rent and Taxes 60500

Apportion the expenses of Service Dept. Y according to direct wages and those of Service Department X in the ratio of 5:3:2 to the production departments.

Answer:

Statement Showing Apportionment of Overheads and calculation of overhead rates


(Rs.)

Basis

Production Depts. Service Depts.

A

Rs.

B

Rs.

C

Rs.

X

Rs.

Y

Rs.

Power 264000

KHW (4:3:2:1:1) 96000 72000 48000 24000 24000

Lighting

10000 Light Points (5:8:2:3:2)

2500

4000

1000

1500

1000

Stores Expenses

8000

Direct Material (2:4:4:3:3)

1000

2000

2000 1500

1500

Staff Welfare Exp.

18000

No. of workers (2:3:3:1:1)

3600

5400

5400

1800

1800

Depreciation 270000 Assets value (6:4:3:1:1)

108000

72000

54000

18000

18000

Insurance 36000 Assets value (6:4:3:1:1)

14400 9600

7200 2400

2400

Canteen Exp. 23400 No. of workers (2:3:3:1:1)

4680

7020

7020

2340

2340

Rent & Rates 60500 Area (3:5:1:1:1) 16500 27500 5500 5500 5500

113

Wages 450000 Actual ---- ---- ---- 150000 300000

Material 450000 Actual ---- ---- ---- 225000 225000

Distribution of Service

Departments Overheads:

1589900 246680 199520 130120 432040 581540

X 5:3:2 216020 129612 86408 -432040 ----

Y Direct Wages (2:3:4) 129231 193847 258462 -----

-581540

Total Departmental Overheads 591931 522979 474990 ---- ----

Departmental Direct Wages 300000 450000 600000

Overhead Rates as % on Direct Wages

= 100 x Wages Direct tal Departmen

Overhead tal Departmen

197.31% 116.22% 79.17%

Question 24

The Poova Industrial Corporation Ltd. has three producing departments A,B and C, two service Departments D and E. The following figures are extracted from the records of the Corporation:

Rs.

Rent and Rates 500000

General Lighting 60000

Indirect Wages 150000

Material Handling Expenses 240000

Power 150000

Depreciation on Machinery 1000000

Sundries 1000000

The following further details are available:

A B C D E

Floor Space (Sq.Mts.) 2,000 2,500 3,000 2,000 500

Light Points 10 15 20 10 5

Direct Wages (Rs.) 300000 200000 300000 150000 50000

H.P. of machines 60 30 50 10 --

Working hours 62260 40280 40660 -- --

Value of Material (Rs.) 600000 800000 1000000 -- --

114

Value of Assets (Rs.) 1200000 1600000 2000000 100000 100000

Service departments overheads are re-distributed as follows:

A B C D E

D 20% 30% 40% -- 10%

E 40% 20% 30% 10% --

Simultaneous Equation Method can be used for re-distribution of service department overheads.

What is the factory cost of an article if its raw material cost is Rs. 6500, labour cost Rs. 2200 and it passes through Departments A, B and C for 40, 50 & 30 hours respectively.

Answer

Statement showing apportionment of overheads to departments

Particulars Basis Total (Rs.)

A (Rs.) B (Rs.) C (Rs.) D (Rs.) E (Rs.)

Rent & Rates Floor Space (4:5:6:4:1)

500000 100000 125000 150000 100000 25000

Lighting Light Points (2:3:4:2:1)

60000 10000 15000 20000 10000 5000

Indirect wages

Direct wages (6:4:6:3:1)

150000 45000 30000 45000 22500 7500

Material Handing Exp.

Value of material (3:4:5)

240000 60000 80000 100000 ---- ----

Power Horse Power (6:3:5:1)

150000 60000 30000 50000 10000 ----

Depreciation Value of Assets (12:16:20:1:1)

1000000 240000 320000 400000 20000 20000

Sundries Direct wages (6:4:6:3:1)

1000000 300000 200000 300000 150000 50000

Wages Actual 200000 ---- ---- ---- 150000 50000

3300000 815000 800000 1065000 462500 157500

Re-distribution of service departments’ overheads by using simultaneous Equation Method:

Let total overhead cost of Service Department D be Rs.‘d’.

Let total overhead cost of Service Department E be Rs.’e’.

d = 462500 + 10/100 e

e = 157500 + 10/100 d

115

=> 100 d = 46250000 + 10 e

=> 100 d – 10e = 46250000 ……. (1)

=> 100 e = 15750000 + 10 d

-10 d + 100 e = 15750000 …….. (2)

Equ. (1) 100 d – 10e = 46250000

Equ. (2) x 10 -100 d + 1000e = 157500000

990e = 203750000

e = 203750000/990

= 205808

Substituting the value of ‘e’ in Equation (1), we get

100 d – 10 (205808) = 46250000

d = 48308080/100

d = 483081

Particulars A (Rs.) B (Rs.) C (Rs.) D (Rs.) E (Rs.)

Totals 815000 800000 1065000 462500 157500

Costs of D (2:3:4:1) (483081) 96616 144924 193233 (483081) 48308

Costs of E (4:2:3:1) (205808) 82323 41162 61742 20581 (205808)

Total Departmental Overheads

993939 986086 1319975 ---- ----

Working Hours 62260 40280 40660 ---- ----

Rate per hour 15.9643 24.4808 32.4637 ---- ----

Computation of Factory Cost of the Article

Particulars Amount (Rs.)

Material

Labour

Overheads

Dept. A (40 X 15.9643)

Dept. B (50 X 24.4808)

Dept. C (30 X 32.4637)

638.57

1224.04

973.91

6500

2200

2836.52

Factory Cost 11536.52

116

Question 25

Following information is collected from the records of Krishana Ltd. for the quarter ending 31st March, 2016:

Dept.1 Dept.2 Dept.3 Total

Direct labour cost (Rs.) 600000 200000 1000000 1800000

Direct labour hours 20000 5000 40000 65000

Machine hours 2000 6000 2000 10000

Indirect labour (Basis on direct wages) 720000

Overtime penalty (2% of indirect and direct labour for all departments)

Supervision — One supervisor for each department @ Rs. 100000 per supervisor

Dept.1 Dept.2 Dept.3 Total

Floor Space (Sq.ft) 2000 4000 4000 10000

Machinery value (Rs.) 200000 1500000 100000 1800000

Rent, Rates and Taxes (Rs.) 100000

Power usage (KWH) 1000 15000 500 16500

Power cost (Rs.) 330000

Sundries 40% 50% 10% 50000

Depreciation rate 10% of machinery value

Bonus (20% on total direct and indirect wages)

You are required to prepare a departmental factory expenses (to jobs distribution) showing the rate which would computed as per the following methods:-

a. Percentage of Direct Labour Method

b. Labour Hour Method

c. Machine Hour Method

Answer

Statement showing apportionment of overheads to departments and computation of overhead rates under different methods:

Particulars Basis Total Dept. 1 Dept. 2 Dept. 3

Direct wages Actual 1800000 600000 200000 1000000

Indirect wages Direct wages (3:1:5)

720000 240000 80000 400000

Total wages 2520000 840000 280000 1400000

117

Overheads :

Overtime Penalty (2% of total wages)

50400 16800 5600 28000

Indirect wages 720000 240000 80000 400000

Supervision (1:1:1) 300000 100000 100000 100000

Rent, Rates Floor space (1:2:2)

100000 20000 40000 40000

Power KWH (2:30:1) 330000 20000 300000 10000

Sundries (4:5:1) 50000 20000 25000 5000

Depreciation (10% of machinery value)

180000 20000 150000 10000

Bonus (20% of direct & indirect wages)

504000 168000 56000 280000

Departmental Overheads

2234400 604800 756600 873000

Particulars Dept. 1 Dept. 2 Dept. 3

1. % of overheads on direct wages

100 x 600000

604800 =

100.80%

100 x 200000

756600=

378.30%

100 x 1000000

873000 =

87.30%

2. Overhead rate per labour hour

(604800/20000) = Rs. 30.24

(756600/5000) = Rs. 151.32

(873000/40000) = Rs. 218.25

3. Overhead rate per machine hour

(604800/2000) = Rs. 302.40

(756600/6000) = Rs. 126.10

(873000/2000) = Rs. 436.50

Question 26

Anukulam Fans Ltd. is recovered to factory overheads at a predetermined rate of Rs. 15per man-hour. The total factory overhead incurred and the man-hours actually worked were Rs.4150000 and 255000 respectively. Out of the 60000 units produced during a period 45000 units were sold. There were also 10000 uncompleted units which may be reckoned at 50% complete.

118

On analyzing the reasons, it was found that 30% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase overhead costs.

How would unabsorbed overhead be treated in Cost Accounts?

Answer

Rs.

Overheads incurred = 4150000

Overheads absorbed (Actual man-hours x Rate or 255000 x Rs. 15) = 3825000

Under absorption = 325000

Treatment of under absorbed overheads in Cost Accounts:

(i) Out of above under-absorbed overheads Rs. 325000 X 30% = Rs. 97500 were due to defective planning. It to be treated as abnormal and thus be charged to Costing Profit and Loss Account.

(ii) The balance of under-absorbed overheads = 325000 – 97500 = Rs. 227500 were attributable to increase in overhead costs. These to be charged as below on the basis of supplementary overhead absorption rate:

Supplementary Rate = 227500/(45000 + 15000 + 10000 X 50%)

= 65000

227500= Rs. 3.50 per unit

Rs.

(a) To Cost of sales account = 45000 units x Rs. 3.50 = 157500

(b) To Finished stock account (60000 – 45000) = 15000 x Rs. 3.50 = 52500

(c) To Work-in-Progress account (50% of 10000) = 5000 x Rs. 3.50 = 17500 227500

Question 27

During the quarter ending 31st March, 2016, Nakul Ltd. has undertaken two jobs. The data relating to these jobs. The data relating to these jobs are as under:

Job 102 Job 108

Selling price

Profit as percentage on cost

Direct Material

Direct Wages

Rs. 205500

25%

Rs. 65000

Rs. 45000

Rs. 317400

15%

Rs. 102000

Rs. 80000

It is the policy of the company to charge Factory overheads as percentage on direct wages and Selling and Administration overheads as percentage on Factory cost.

119

The company has received a new order for manufacturing of a similar Job No. 121. The estimate of direct materials and direct wages relating to the new order are Rs. 48000 and Rs. 36000 respectively. A profit of 20% on sales is required.

You are required to compute

(i) The rates of Factory overheads and Selling and Administration overheads to be charged.

(ii) The Selling price of the new order.

Answer

Working Notes

1. Computation of total cost of jobs

Total cost of Job 102 when 25% is the profit on cost = 100 x 125

205500 Rs. = Rs. 164400

Total cost of Job 108 when 15% is the profit on cost = 100 x 125

205500 Rs. = Rs. 276000

2. Let Factory overheads be F% of direct wages

Selling & Administrative overheads be A% of factory cost

(i) Computation of rates of factory overheads and selling and administration overheads to be charged.

Jobs Cost Sheet

Particulars Job 102 Job 108

Direct materials

Direct wages

Prime cost

Add: Factory overheads

Factory cost

(Refer to Working note 2)

Add : Selling and Administration Overheads

(Refer to Working note 2)

Total cost

(Rs.)

65000

45000

110000

45000F

(110000 + 45000F)

(110000 + 45000F) A

(110000+45000F)(1+A)

(Rs.)

102000

80000

182000

80000F

(182000 + 80000F)

(182000 + 80000F) A

(182000+80000F)(1+A)

Since the total cost of jobs 102 and 108 are equal to Rs. 164400 and Rs. 276000 respectively, therefore we have the following equations (Refer to working note 1)

(110000 + 45000F) (1 + A) = 164400 (1)

120

(182000 + 80000F) (1 + A) = 276000 (2)

Or 110000 + 45000F + 110000A + 45000FA = 164400

182000 + 80000F + 182000A + 80000FA = 276000

Or 45000F + 110000A + 45000FA = 54400 (3)

80000F + 182000A + 80000FA = 94000 (4)

Equ. (3) multiply by 0.8 and Equ. (4) by 0.45 and later subtract

36000F + 88000A + 36000FA = 43520 (5)

36000F ± 81900A ± 36000FA = 42300 (6)

6100A = 1220

A = 0.2

45000F + 110000 x 0.2 + 45000 x 0.2F = 54400

Or 45000F + 22000 + 9000F = 54400

Or 54000F = 32400

Or F = 0.6

Hence, Factory overheads (F) = 0.6 or 60% of Direct wages and Selling & Adm. Overhead

(A) = 0.2 or 20% of Factory Cost

(ii) Selling price of the new order:

(Rs.)

Direct materials

Direct wages

Prime cost

Factory overheads:60% of Direct wages

Factory cost

Selling & Admn. Overheads: 20% of Factory Cost

Total cost

Profit : @ 20% on sales or 25% on Cost

Selling of the new order

48000

36000

84000

21600

105600

21120

126720

31680

158400

Question 28

Gyani Limited manufactures a single product and absorbs the factory overheads at a pre-determined rate of Rs. 45 per machine hour.

121

At the end of financial year 2015-16, it has been found that actual factory overheads incurred were Rs. 3050000. It included Rs. 260000 on account of ‘written off’ obsolete stores and Rs. 150000 being the wages paid for the strike period under an award.

The production and sales data for the year 2015-16 is as under:

Production:

Finished goods 54000 units

Work-in-progress 10000 units

(60% complete in all respects)

Sales:

Finished goods 42000 units

The actual machine hours worked during the period were 48000. It has been found that one-fourth of the under-absorption of factory overheads was due to lack of production planning and the rest was attributable to normal increase in costs.


(i) Calculate the amount of under-absorption of factory overheads during the year 2015-16; and

(ii) Show the accounting treatment of under-absorption of factory overheads.

(iii) Give journal entry of the above stated accounting treatment.

Answer

(i) Amount of under-absorption of factory overheads during the year 2015-16

(Rs.)

Total factory overheads actually incurred during the year 2015-16

Less : ‘Written off’ obsolete stores Rs. 260000

Wages paid for strike period Rs. 150000

Net factory overheads actually incurred: (A)

Factory overheads absorbed by 48000 machines hours @ Rs. 45 per hour: (B)

Amount of under-absorption of factory overheads: [(A) – (B)]

3050000

410000

2640000

2160000

480000

(ii) Accounting treatment of under absorption of factory overheads

It is given in the statement of the question that one-fourth of the under-absorbed overheads were due to lack of production planning and the rest were attributable to normal increase in costs.

122

(Rs.)

1. One-fourth of under-absorbed overheads were due to lack of production planning. This being abnormal, should be debited to the Profit and Loss A/c (480000 x 1/4)

2. Balance of under-absorbed overheads should be distributed over work-in-progress, finished goods and cost of sales by using supplementary rate (480000 – 120000)

Total under-absorbed overheads

120000

360000

480000

Apportionment of unabsorbed overheads of Rs. 360000 over, work-in-progress, finished goods and cost of sales.

(Rs.)

Work-in-progress (6000 units x Rs. 6)

Finished goods (12000 units x Rs. 6)

Cost of sales (42000 units x Rs. 6)

36000

72000

252000

360000

(iii) Journal entry of accounting treatment

Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Work-in-progress control A/c Dr.

Finished goods control A/c Dr.

Cost of Sales A/c Dr.

Profit & Loss A/c Dr.

To Overhead control A/c

36000

72000

252000

120000

480000

Working note :

1. Calculation of Equivalent Completed Units:

Units

Units sold 42000

Stock of finished goods (54000 – 42000) = 12000

WIP 10000 units x 60% = 6000

60000

123

2. Supplementary overheads absorption rate = units 60000

360000 Rs.= Rs. 6 per unit

Question 29

In a factory, normal working hours of a machine was 216 hours in the month of May, 2016. Out of which maintenance time and setting up time were 12 hours and 20 hours respectively.

The expense data relating to the machine are as under:

(Rs.)

- Cost of the Machine

- Estimated Scrap value

- Repairs and maintenance per annum

- Consumable stores per annum

- Rent of building per annum (The machine under reference occupies 1/6 of the area)

- Supervisor’s salary per month (Common to four machines) Wages of operator per month per machine (Treated as machine expenses)

- General lighting charges per month allocated to the machine

- Life of the machine

- Power 15 units per hour at Rs. 7.50 per unit

1830000

180000

106800

92400

210000

35000

18000

4500

10 years

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) setting up time, and (b) running time, assuming the annual costs are allocated equal on the all months.

Answer

Working Notes

Calculation of effective hours: Hours

Normal working hours in the May, 2016 216

Less: Maintenance time 12

Effective hours for standing charges, depreciation and operators Wages 204

Less: Setting up time 20

Effective hours for power, repairs & maintenance and consumable stores 184

124

Computation of Two-tier Machine Hour Rate for the month of May, 2016


Rs.

Setting up time rate per hour for 20 setting up hours (Rs.)

Running time rate per hour

for 184 running hours (Rs.)

Standing Charges:

Supervisor’s Salary (35000/4)

General Lighting

Rent of building (210000 x 6

1 x

12

1)


Hourly rate for standing charges (16167/204)

Machine Expenses:

Depreciation 12

1 x

10

180000) - (1830000

= 13750/204

Power (15 x Rs. 7.50)

Repairs & Maintenance : 106800/12 = 8900/184

Consumable Stores: 92400/12 = 7700/184

Operator’s Wages : 18000/204

Machine Hour Rate

8750

4500

2917

79.2484

67.4020

----

----

----

88.2353

79.2484

67.4020

112.50

48.3696

41.8478

88.2353

16167

234.8857 437.6031

Question 30

On April 1, 2016, Shiva Udyog Ltd. has purchased and installed a new machine of Rs. 1570000 to its fleet of 5 existing machines. The new machine has an estimated life of 10 years and is expected to realize Rs. 70000 as scrap at the end of its working life. Other relevant data are as follows:

(i) Budgeted working hours are 2504 based on 8 hours per day for 313 days. This includes 300 hours for plant maintenance and 104 hours for setting up of plant.

(ii) Estimated cost of maintenance of the machine is Rs. 65000 per annum.

125

(iii) 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 Rs. 400 each time. Assume 52 weeks in whole year.

(iv) Three operators control operation of 6 machines and the average wages per person amounts to Rs. 420 per day plus 15% fringe benefits.

(v) Electricity used by the machine during the production is 16 units per hour at a cost of Rs. 6.30 per unit. No power is used during maintenance and setting up.

(vi) Departmental and general works overhead allocated to the operation during last year 2015-16 was Rs. 115000. During the current year it is estimated to increase 10% of this amount.

Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.

Answer

Computation of Machine hour Rate

Per Annum Per hour

If setting up time is

(unproductive)

Per hour

If setting up time is

(productive)

Running Hours

Standing charges

Operators wages

3 x 420 x 365

Add: Fringe Benefits 15%

Departmental and general overhead

(115000 + 11500)

Total Std. Charging for 6 machines

Std. Charges per Machine 655385/6

Std. Charges per Machine hour 109231/2100; and 109231/2204

Machine expenses

Depreciation (1570000 – 70000)/(10 x 2100)

459900

68985

2100 hrs.

52.01

71.43

2204 hrs.

49.56

528885

126500

655385

109231

126

(1570000 – 70000)/(10 x 2204)

Electricity Power (16 x 6.30) (16 x 6.30 x 2100)/2204

Special chemical solution 400 x 52/2100; and 400 x 52/2204

Maintenance (65000/2100);

(65000/2204)

Machine Hour Rate

100.80

9.90

30.95

265.09

68.06

96.04

9.44

29.49

252.59

Working Notes:

(i) Running hours if setting up time is unproductive = 2504 – 300 – 104 = 2100 hours

(ii) Running hours if setting up time is productive = 2504 – 300 = 2204 or 2100 + 104 = 2204

Question 31

Pooja Limited 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 April, 2016:

Rs.

Rent and rates 625000

General lighting 75000

Indirect Wages 187500

Power 250000

Depreciation on machinery 500000

Insurance of machinery 200000

Other Information:

P1 P2 P3 S1 S2

Direct wages (Rs.)

Horse Power of Machines used

Cost of machinery (Rs.)

Floor space (Sq. ft)

Number of light points

Production hours worked

375000

60

3000000

2000

10

5750

250000

30

4000000

2500

15

4150

375000

50

5000000

3000

20

5600

187500

10

250000

2000

10

--

62500

--

250000

500

5

--

127

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

P1 P2 P3 S1 S2

S1

S2

20%

40%

30%

20%

40%

30%

--

10%

10%

--

Required:

(i) Compute overhead absorption rate per production hour of each production department by using simultaneous equation method for redistribution of service department overheads.

(ii) Determine the total cost of product X which is processed for manufacture in department P1, P2 and P3 for 15 hours, 13 hours and 14 hours respectively, given that its direct material cost is Rs. 5650 and direct labour cost is Rs. 4350.

Answer

Primary Distribution Summary

Item of cost Basis of apportionment

Total (Rs.)

P1 (Rs.) P2 (Rs.) P3 (Rs.) S1 (Rs.) S2 (Rs.)

Rent and Rates

General lighting

Indirect wages

Power

Depreciation of machinery

Insurance of machinery

Floor area 4:5:6:4:1

Light points 2:3:4:2:1

Direct wages 6:4:6:3:1

Horse Power of machines used 6:3:5:1

Value of machinery 12:16:20:1:1

Value of machinery 12:16:20:1:1

625000

75000

187500

250000

500000

200000

125000

12500

56250

100000

120000

48000

156250

18750

37500

50000

160000

64000

187500

25000

56250

83330

200000

80000

125000

12500

28125

16670

10000

4000

31250

6250

9375

--

10000

4000

1837500 461750 486500 632080 196295 60875

128

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 = 196295 + 0.10 S2

S2 = 60875 + 0.10 S1

Substituting the value of S2 in S1 we get

S1 = 196295 + 0.10 (60875 + 0.10 S1)

S1 = 196295 + 6088 + 0.01 S1

0.99 S1 = 202383

S1 = Rs. 204427

S2 = 60875 + 0.10 x 204427

= Rs. 81318

Secondary Distribution Summary

Particulars Total (Rs.) P1 (Rs.) P2 (Rs.) P3 (Rs.)

Allocated and Apportioned overheads as per primary distribution

S1: 90% of 204427(2:3:4)

S2: 90% of 813218(4:2:3)

1580330

183984

73186

461750

40885

32527

486500

61328

16264

632080

81771

24395

535162 564092 738246

Overhead rate per hour

P1 P2 P3

Total overheads cost

Production hours worked

Rate per hour (Rs.)

Rs. 535162

5750

Rs. 93.07

Rs. 564092

4150

Rs. 135.93

Rs. 738246

5600

Rs. 131.83

129

Cost of Product X

Direct material

Direct Labour

Prime cost

Production on overheads

P1 15 hours x Rs. 93.07 = 1396.05

P2 13 hours x Rs. 135.93 = 1767.09

P3 14 hours x Rs. 131.83 = 1845.62

Factory cost

Rs.

5650

4350

10000

5008.76

15008.76

Question 32

Kovid Ltd. has three production departments viz. A, B and C. Besides, it has two service departments viz.

X and Y. Allocated overheads are follows:

A B C X Y

Allocated overheads (Rs.) 250000 85000 175000 135000 165000

Direct Labour Hours (Hours) 25000 18000 13000 - -

The expenses of service departments are charged as follows:

A B C X Y

Service Department: X 20% 40% 30% - 10%

Y 30% 25% 25% 20% -


(1) Find the total overhead for each production department after apportionment of

service department overheads among them by using simultaneous equation

method.

(2) Calculate the Direct Labour Hour Rate for absorption of overheads for each

production department.

(3) Calculate the overhead to be charged to the Job No. 211 on the basis of following

details:

Production Departments A B C

Hours worked on Job No. 211 25 32 15

130

Answer

Let total overhead of department X be ‘a’ and department Y be ‘b’:

Then, a = 135000 + 0.2b

Or

10a – 2b = 1350000 ……. (i)

b = 165000 + 0.1a

-a + 10b = 1650000 …..(ii)

After solving equation (i) & (ii)

-a + 10b = 1650000 …….. (ii)

50a – 10b = 6750000 ….. (iii)

49a = 8400000

Or a = 171428.6

10 X 171428.6 – 2b = 1350000

Or -2b = 1350000 – 1714286

Or b = 2

364286

Or b = 182143

(1) Departmental overhead after apportionment of service Dept. overheads.

Particulars Production Departments Service Departments

A

Rs.

B

Rs.

C

Rs.

X

Rs.

Y

Rs.

Allocated Overheads

Distribution of Service

Dept. overheads:

X(a) Rs.171428.6 (20:40:30: :10)

Y(b) Rs.182143 (30:25:25:20:-)

Total Departmental Overhead

250000

34285

54643

85000

68572

45536

175000

51429

45536

135000

(-) 171428.6

+36428.6

165000

+17143

(-)182143

338928 199108 271965 NIL NIL

131

(2) Calculation of Direct Labour Hour Rate

Production Department A B C

Total Departmental Overhead (Rs.) 338928 199108 271965

Direct Labour Hours (Hours) 25000 18000 13000

Direct Labour Hour Rate

Hours Labour Direct

Overhead Dept. Rs.13.557; Rs.11.062; Rs.20.920

(3) Calculation of overhead charged to Job No. 211

Rs.

Dept. A: Rs.13.557 x 25 hours = 338.925

Dept. B: Rs.11.062 x 32 hours = 353.984

Dept. C: Rs.20.920 x 15 hour = 313.800

Chargeable overhead to Job No. 211 1006.709

***

132

Question 1

What is activity based costing? State its features.

Answer

Activity based costing is an accounting methodology that assigns costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & services that consume them.

CIMA defines “Activity Based Costing’ as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final products. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.”

The features of activity based costing are as under:

(i) Activity based costing is a two- stage product costing method that first assigns cost to activities and then allocates them to products based on the each product’s consumption of activities.

(ii) The cost pools in two-stage approach now accumulate activity-related costs.

(iii) An activity is any discrete task that an organization undertakes to make or driver a product or service.

(iv) Activity based costing is based on the concept that products consume activities and activities consume resources.

(v) Activity based costing can be used by any organization that wants a better understanding of the costs of the goods and services it provides, including manufacturing , service, and even non-profit organizations.

Question 2

Distinguish between ‘Activity Based Costing’ and ‘Traditional Absorption Costing’.

Answer

S. No. Activity Based Costing Traditional Absorption Costing

1. Overheads are first related to activities or grouped into cost pools

Overheads are first related to departments/ cost centres

5

Activity Based Costing

133

2. All levels of activities in the manufacturing cost hierarchy viz. Unit level, Batch level, Production level and facility level are identified.

Only two types of activities viz. Unit level activities and Facility level activities are identified.

3. This method relates overheads to the casual factor i. e. Driver. Thus, it is more realistic of cost behaviour.

This method relates to cost centres i. e. Locations. It is not realistic of the behaviour of costs.

4. Activity cost driver rates can be used to ascertain cost of products and also cost of other cost objects such as customer segments, distribution channels, etc.

Overheads rates can be used to ascertain cost of products only.

Question 3

State main objectives of activity based costing.

Answer

The main objectives of activity based costing are as under:

1. To improve product costing

2. To identify non-value adding activities in the production process which might be a suitable focus for attention or elimination

3. To provide required information for decision making

4. To reduce the frivolous (non-essential) use of common resources

5. To encourage managers to evaluate the efficiency of internally provided services

6. To calculate the full cost of products for financial reporting purposes and for determining cost-based prices.

Question 4

Discuss the deficiencies of traditional costing systems which lead to the discovery of the activity based costing.

Answer

The following are the deficiencies of traditional costing systems, which lead to the discovery of the activity based costing:

1. The present costing system has developed convenient overhead recovery basis and blanket overhead recovery are acceptable when valuing stocks for financial reporting, but they are inappropriate when used for decision making and typical product strategy decisions. Such decisions have implications over 3-5 years and over this period many fixed costs becomes variable.

134

2. It is easy to determine accurate costs of products or services when a company has only a few products. When companies expand their product offerings and these products use different amount of resources such as supervision, quality control, it is more difficult to determine accurate costs of products. This situation is the main reason why companies use activity based costing.

3. Traditional costing fails to capture cause and effect relationships, if focused on the cost incurred.

4. Traditional costing was confined merely to furnish information at product level. The new manufacturing technology demands the feedback of performance while production is still in progress rather than history.

Therefore, in order to overcome the inadequacies of traditional methods of overhead absorption, activity based costing has been devised.

Question 5

Write the importance of activity based costing.

Answer

The importance of activity based costing is as under:

(i) To link the cost to its casual factor-i.e. the cost driver.

(ii) To identify costs of activities rather than cost centers.

(iii) To ascertain product costs with greater accuracy by relating overheads to activities.

(iv) To overcome the inherent limitations of traditional absorption costing and use of blanket overhead rates.

(v) To assist managers in budgeting and performance measurement.

(vi) To provide the links between the activities, the organizational acts and the resources consumed, and illustrate the differences between resource consumption and resource provision.

(vii) To help in cost control and cost reduction, as well as improved profitability.

(viii) To provide valuable economic information to support a company’s operational improvement and customer satisfaction programs.

Question 6

Briefly explain each of the following categories in activity based costing by giving there examples:

(i) Unit level activities

(ii) Batch level Activities

(iii) Product level activities

(iv) Facility level activities

135

Answer

Types of Activity Examples

Unit level activities: These are activities for which the consumption of resources can be identified with the number of units produced. It is performed each time a unit is produced.

Use of indirect materials

Inspection or testing of every item produced

Indirect consumables

Batch level activities: The costs of some activities are driven by the number of batches of units produced. These are activities related to setting up of a batch or a production run. It is performed each time a batch is processed.

Material ordering

Inspection of products.

Machine set up costs

Product level activities: The cost of some activities are driven by the creation of a new product line and its maintenance.

Designing the product

Producing parts to a certain specifications and keeping technical drawing of products.

Advertisement cost, if it is for individual products

Facility level Activities: It must be carried out regardless of which produced. These are activities necessary for sustaining the manufacturing process and cannot be directly attributed to individual products

Plant Security,

Production Manager’s salary

Maintenance of buildings

Question 7

State the limitations of Activity based costing.

Answer

Limitations or disadvantages of Activity based costing are:

1. Implementing an ABC system requires substantial resources, which is costly to maintain.

2. Activity Based Costing is a complex system which need lot of record for calculations.

3. In small organization, mangers are accustomed to use traditional costing systems to run their operations and traditional costing system are often used in performance evaluations.

4. Activity based costing data can be easily misinterpreted and must be used with care when used in decision making. Managers must identify which costs are really relevant for the decisions at hand.

5. Reports generated by this systems do not conform to generally accepted accounting principles (GAAP).Consequently, an organization involved in activity based costing

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should have two cost systems – one for internal use and one for preparing external reports.

Question 8

What is a cost driver? State its role in tracing cost to products.

Answer

A cost driver is a variable, which determines the work volume or work load of a particular activity. In other words, in an activity based costing system, the allocation basis that are used for applying costs to services or procedures are called cost drivers. It is a factor that causes a change in the cost of an activity. This is based on the factor that drives the consumption of the activity. In tracing the cost of the activities to products according to products demand for these activities during the production process. This requires calculating cost driver rate for each activity, just as an overhead absorption rate would be calculated in the traditional system.

Activity cost driver rate= Total cost activity/Activity driver

The activity driver rate can be used to cost products, as in traditional absorption costing, but it can also cost other cost objects such as customer/customer segments and distribution channels. The possibility of costing objects other than products is part of the benefit of activity based costing. The activity cost driver rates will be multiplied by the different amounts of each activity that each product/other cost object consumes.

Question 9

What are the benefits of activity based costing over traditional costing techniques?

Answer

Some significant benefits of Activity based costing over traditional costing techniques, are under:

(a) Most accurate data about product cost;

(b) More comprehensive cost information for performance measurement;

(c) Relevant data for management’s decision-making;

(d) More potential for sensitivity analysis;

(e) Providing a model prospect on value-adding organizational transactions and activities.

Question 10

Explain briefly the stages in developing activity based costing.

Answer

The following are the stages in developing activity based costing system:

Step 1. Identify resources:

Resources represent the expenditure of an organization. These are the same costs that are represented in a traditional accounting, activity based costing links these costs to products, customers or services.

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Step 2. Identify activities:

Activities represent the work performed in an organization. Activity based costing accounts for the costs based on what activities caused them to occur. By determining the actual activities that occur in various departments it is then possible to more accurately relate these costs to customers, products and services.

Step 3. Identify cost objects:

Activity based costing provides profitability by one or more cost object. Cost object profitability is utilized to identify money-losing customers to validate separate divisions or business units. Defining outputs to be reviewed is an important step in a successful activity based costing implement action.

Step 4. Determine resource drivers:

Resource drivers provide the link between the expenditure of an organization and activities performed within the organization.

Step 5. Determine cost (activity) drivers:

Determination of cost drivers completes the last stage of the model. Cost drivers trace or links the cost of performing certain activities to cost objects.

Activity cost driver rate = Total cost of activity (cost pool)/No. of activity cost driver

Step 6. Assign costs to the cost objects:

We can use following formula for assigning costs to the cost objects:-

Costs = Resources consumed x Activity cost driver rate

Question 11

Why are conventional product costing system more likely to distort product costs in highly automated plants? How does Activity based costing system deals with such a situation?

Answer

The conventional product costing system was in vague when companies manufactured narrow range of products, overhead costs were relatively small and distortions arising from inappropriate overhead allocations were not significant. It used volume measures like direct labour hours or machine hours for charging overhead costs to products. In the case of a company using highly automated plant, direct labour is a small fraction of cost when compared with overheads (because of higher amount of depreciation). In case where such a company is multi product, overheads which are large in proportion to direct labour are influenced by number of set up, inspection, number of purchases etc. In these circumstances, the volume based method of recovery of overheads is no longer appropriate and such a measure will report inaccurate product costs. Hence, the traditional system of costing was found to cover cost high volume products and under cost low volume products. Activity based costing system aims at refining the cost system used in automated plants in the following manner:

(i) Activity based costing systems trace more costs as direct costs.

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(ii) Activity based costing systems create homogeneous cost pools linked to different activities.

(iii) For each activity cost pool, ABC systems seek a cost allocation base that has a cause and-effect relationship with costs in the cost pool.

Question 12

Rukmani Limited uses activity based costing and accumulated overhead costs in the following cost pools:

(i) Shores receiving

(ii) Machine set up

(iii) Training employees

(iv) Designing product

(v) Testing of products

(vi) Material ordering

(vii) Parts management

(viii) Assembly department

(ix) Plant security

(x) Indirect material

You are to find out for each cost pool whether the cost pool would be unit level, batch level, product level or facility level activity.

Answer

Activity cost pool Type of activity

(i) Shores receiving Batch level activity

(ii) Machine set up Batch level activity

(iii) Training employees Facility level activity

(iv) Designing product Product level activity

(v) Testing of products Unit level activity

(vi) Material ordering Batch level activity

(vii) Parts management Product level activity

(viii) Assembly department Unit level activity

(ix) Plant security Facility level activity

(x) Indirect material Unit level activities

Question 13

Sukku Limited manufactures three products X, Y and Z which are similar in nature and are usually produced in production runs of 100 units. The overheads incurred during the year ended 31st March, 2016 are as under:

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Rs.

Machine Shop expenses 8250000

Assembly Shop expenses 1344000

Setup costs 180000

Material handling costs 540000

Order processing and dispatch costs 413000

Inspection and Quality control costs 72000

The data related to the three products during the period are as under:

X Y Z

Units produced and sold 20000 16000 24000

Machine hours worked 15000 hrs. 24000 hrs. 27000 hrs.

Assembly hours worked (direct labour hours)

24000 hrs. 32000 hrs. NIL

Customers order executed (in numbers) 4500 4600 2700

Number of requisitions raised on the stores 220 180 140


Prepare a statement showing details of overhead costs allocated to each product type using activity based costing.

Answer

Calculation of Cost Driver Rates

Cost Pool Cost (Rs.)

[A]

Cost Driver

[B]

Cost Driver Rate (Rs.) [C] = [A]÷[B]

Machine Shop Expenses 8250000 Machine Hours (66000 hrs.) 125

Assembly Shop Expenses 1344000 Assembly Hours

(56000 hrs.)

24

Setup Cost 180000 No. of Production Runs (600) 300

Material handling Cost 540000 No. of Requisitions Raised on the Stores (540)

1000

Order Processing and Dispatch Cost

413000 No. of Customers Orders Executed (11800)

35

Inspection and Quality Control Cost

72000 No. of Production Runs (600) 120

Total (Rs.) 10799000

Number of Production Run is 600(200+160+240)

140

Statement Showing “Overheads Allocation”

Particulars of Cost Cost Driver X Y Z Total

Machine Shop Expenses

Machine Hours 1875000

(15000 x Rs.125)

3000000

(24000 x Rs.125)

3375000

(27000 x Rs.125)

8250000

Assembly Shop Expenses

Assembly Hours

576000

(24000 x Rs.24)

768000

(32000 x Rs.24)

NIL

1344000

Setup Cost No. of Production Runs

60000

(200 x Rs.300)

48000

(160 x Rs.300)

72000

(240 x Rs.300)

180000

Material handling Cost

No. of Requisitions Raised on the Stores

220000

(220 x Rs.1000)

180000

(180 x Rs.1000)

140000

(140 x Rs.1000)

540000

Order Processing and Dispatch Cost

No. of Customers Orders Executed

157500

(4500 x Rs.35)

161000

(4600 x Rs.35)

94500

(2700 x Rs.35)

413000

Inspection and Quality Control Cost

No. of Production Runs

24000

(200 x Rs.120)

19200

(160 x Rs.120)

28800

(240 x Rs.120)

72000

Overhead (Rs.) 2912500 4176200 3710300 10799000

Question 14

Following is the output and per unit direct cost structure of Pauru Limited of its different products:

Particulars Products

A B C

Output and Sales (Units) 10000 20000 30000

Direct Material

Direct Labour @ Rs. 30 per hour

Rs.

150

90

Rs.

140

120

Rs.

140

150

141

Total Production overheads were Rs. 5460000 which was charged to the output on the basis of direct labour hours. A newly appointed management accountant has suggested that the company should introduce Activity Based Costing System and identify cost drivers and cost pools as follows:

Activity Cost Pool Cost Driver Associated Cost (Rs.)

Stores Receiving

Inspection

Machine Setup

Dispatch

Purchase Requisitions


No. of Setups

Orders Executed

294000

1356000

3600000

210000

The following information is also supplied:

Particulars Product-A Product-B Product-C

No. of Purchase Requisitions


No. of orders Executed

No. of Setups

300

750

180

360

450

1050

270

390

500

1200

300

450


(i) Calculate direct labour rate for absorbing the production overheads.

(ii) Calculate product wise production cost per unit according to above (i).

(iii) Calculate different cost driver rates by using activity based costing

(iv) Ascertain the product wise production cost per unit by using activity based costing system.

Answer

(i) Calculation of Direct Labour Rate:

Direct Labour Hours Required:

For Product A: 10000 x 90/30 = 30000 hours

For Product B: 20000 x 120/30 = 80000 hours

For Product C: 30000 x 150/30 = 150000 hours

Total 260000 hours

Direct Labour Hour Rate = Rs. 5460000/260000 = Rs. 21 per hour

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(ii) Calculation of Product wise cost on the basis of Direct Labour Hour Rate:

Labour hours required per unit

Direct Material

Direct Labour

Production Overhead @ Rs. 21 per Labour hour

Production Cost per unit

A

90/30 = 3

B

120/30 = 4

C

150/30 = 5

Rs.

150

90

63

Rs.

140

120

84

Rs.

140

150

105

303 344 395

(iii) Calculation of Cost Driver Rates:

Activity Cost Pool

Associated Cost (Rs.)

Cost Driver Cost Driver Rate (Rs.)

Stores Receiving

294000 300+450+500=1250 Requisition

294000/1250=235.20 per Requisition

Inspection 1356000 750+1050+1200=3000 Runs

1356000/3000=452 per run

Machine setup

3600000 360+390+450=1200 Setups

3600000/1200=3000 per setup

Despatch 210000 180+270+300=750 Orders

210000/750=280 per order

(iv) Calculation of Product wise cost on the basis of Activity Based Costing

Activity Product A (Rs.) Product B (Rs.) Product C (Rs.)

(a) Stores Receiving

300 x 235.20 = 70560

450 x 235.20 = 105840

500 x 235.20 = 117600

(b) Inspection 750 x 452=339000 1050 x 452=474600

1200 x 452=542400

(c) Machine setup 360 x 3000 = 1080000

390 x 3000 = 1170000

450 x 3000 = 1350000

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(d) Dispatch 180 x 280=50400 270 x 280=75600 300 x 280=84000

(e) Total Activity Cost (a+b+c+d)

1539960

1826040 2094000

(f) Output (units) 10000 20000 30000

Rs. Rs. Rs.

Production overhead per unit (e÷f)

154 91.30 69.80

Add : Material Cost 150

140

140

Labour Cost 90 120 150

Production Cost per unit

394 351.30 359.80

Question 15

Gauru Limited manufactures several products and it uses a single overhead recovery rate based on direct labour cost. The overheads incurred by the Company for the year ending 31st March, 2016:

Rs.

Machine operation expenses 2025000

Machine maintenance expenses 375000

Salaries of technical staff 1275000

Wages and salaries of stores staff 525000

During this period, Gauru Ltd. introduced activity based costing system and the following significant activities were identified:

- receiving materials

- set up of machines for production runs

- quality inspection

It is determined that:

- The machine operation and machine maintenance expenses should be apportioned between stores and production activity in 30:70 ratio.

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- The technical staff salaries should be apportioned between machine maintenance, set up and quality inspection in 20:50:30 ratio.

The consumption of activities during the period under review are as under:

- Direct labour hours worked 40000

- Direct wage rate Rs. 60 per hour

- Production set-ups 4992

- Material and component consignments received from suppliers 1500

- Number of quality inspections carried out 2500

The data relating to two products manufactured by the Gauru Ltd. during the year are as under:

Product P-1 Product P-2

Direct material costs (Rs.) 45000 3200

Direct labour hours 960 100

Direct material consignments received 48 52

Production runs 36 24

Number of quality inspections done 30 10

Quantity produced (units) 12000 4000


(i) Calculate the cost of product P-1 and P-2 based on the existing system of single overhead recovery rate.

(ii) Determine the cost of product P-1 and P-2 using activity based costing system.

Answer

(i) Computation of Cost of Product ‘P-1’ and ‘P-2’

(Based on the Existing System of ‘Single Overhead Recovery Rate’)


Units 12000 4000

Direct Material Cost

Rs.

45000

Rs.

3200

145

Direct Labour Cost 57600

(960 hours x Rs. 60)

6000

(100 hours x Rs. 60)

Overheads @ 175% of Direct Labour Cost

100800

10500

Total Cost of Products 203400 19700

Cost per unit 16.95 4.925

(ii) Statement Showing Computation of Cost of Products P-1 and P-2

(Using ‘Activity Based Costing System’)


Units 12000 4000

Direct Materials Cost (Rs.) 45000 3200

Direct Labour Cost (Rs.) 57600 6000

Receiving Cost (Rs.)

(Refer to W.N.4)

42288

(48 x 881)

45812

(52 x 881)

Setup Cost (Rs.)

(Refer to W.N.4)

18000

(36 x 500)

12000

(24 x 500)

Inspection Cost

(Refer to W.N.4)

4590

(30 x 153)

1530

(10 x 153)

Total Cost of Products (Rs.) 167478 68542

Cost per unit (Rs.) 13.9565 17.1355

Working Notes

1. Overhead Rate basis on Direct Labour Cost

= 100 x Cost Labour Direct Total

Company the by Incurred Overhead Total

= 100 x 60) Rs. x hrs (40000

4200000 Rs. = 175% on direct labour cost

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2. Apportionment of ‘Technical Staff Salaries’ Over ‘Machine Maintenance’, ’Setup’ and ‘Quality Inspection’ in the Ratio of 20:50:30

Total Salaries

(Rs.)

Machine Maintenance

(Rs.)

Setup

(Rs.)

Quality Inspection

(Rs.)

Technical Staff Salaries

1275000 255000 637500 382500

3. Apportionment of ‘Machine Operation’ and ‘Machine Maintenance’ Between ‘Stores’ and ‘Production Activity (Setup)’

Total Expenses

(Rs.)

Stores/Receiving

(Rs.)

Setup

(Rs.)

Machine Operation (30:70) 2025000 607500 1417500

Machine Maintenance (30:70)

(375000+255000) (Refer to W.N.2)

630000 189000 441000

Wages and Salaries of Stores Staff

525000 525000 ---

Component of Setup Cost

(Refer to W.N.2)

637500 --- 637500

Total 3817500 1321500 2496000

4. Calculation of Activity Based Cost Driver Rates

Stores/ Receiving

(Rs.)

Setup

(Rs.)

Quality Inspection

(Rs.)

Total Overheads (Rs.) ---(A) 1321500 2496000 382500

Units of Activities Carried out ---(B) 1500 4992 2500

Rate per activity Cost Driver – A/B 881 500 153

Question 16

Dhoora Ltd. produces and sells four products P, Q, R and S. These products are similar and usually produced in production runs of 100 units and sold in a batch of 50 units. The

147

production & cost details of these products for the quarter ending 31st March, 2016 are as follows:

Products P Q R S

Production (units) 1000 1100 1200 1500

Cost per unit:

Direct material (Rs.) 300 400 350 450

Direct labour (Rs.) 250 300 300 400

Machine hours (per unit) 0.5 0.4 0.3 0.4

The manufacturing overheads during the period are as follows:

Rs.

Factory works expenses 900000

Stores receiving costs 324000

Machine set up costs 488000

Quality control costs 184000

Material handling costs 384000

2280000

The cost drivers for these overheads are detailed below:

Cost drivers

Factory works expenses Machine hours

Stores receiving costs Requisitions raised

Machine set up costs No. of production runs

Quality control costs No. of production runs

Material handling costs No. of orders executed

The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96, each order was in a batch of 50 units.


(i) Calculate total cost and per unit cost of each product assuming the absorption of overhead on machine hour rate basis.

(ii) Calculate total cost and per unit cost of each product assuming the absorption of overhead by using activity based costing; and

(iii) Show the difference of per unit costs between (i) and (ii).

148

Answer

(i) Calculation of Total Product Costs by using Machine Hour Rate for recovery of overheads

Particulars P Q R S

Output (Units)

Material Cost per unit

Labour Cost per unit

Manufacturing overheads @ Rs. 1200 per machine hour

(For 0.5; 0.4; 0.3 and 0.4 hours)

Total Cost per unit

Total Cost (Per unit cost x Units)

1000 1100 1200 1500

Rs.

300

250

600

Rs.

400

300

480

Rs.

350

300

360

Rs.

450

400

480

1150 1180 1010 1330

1150000 1298000 1212000 1995000

Working Note: Overhead recovery rate

= Hours Machine Total

Overhead Total

= 1900

2280000 Rs.

= Rs. 1200 per machine hour

(ii) Calculation of Cost Driver Rates under Activity Based Costing

Activity Activity cost

(Rs.)

Cost Driver Cost Driver Rate (Rs.)

Factory Works Exp.

Stores Receiving Costs

Machine Setup Costs

Quality Control Costs

Material Handling Cost

900000

324000

488000

184000

384000

Machine Hours

Requisitions raised

No. of Production runs

No. of Production runs

No. of orders executed

900000/1900=473.68 PMH

324000/100=3240 per Req.

488000/48=10166.67 per run

184000/48=3833.33 per run

384000/96=4000 per order

149

Calculation of Total Product Costs by using Activity Based Costing

Particulars P Q R S Total

(a) Output (units)

Machine hours per unit

1000

0.5

1100

0.4

1200

0.3

1500

0.4

4800

(b) Machine hours (Total) 500 440 360 600 1900

(c) No. of Production runs of 100 units each

10

11

12

15

48

(d) No. of Stores requisition 25

25

25 25

100

(e) No. of orders executed of 50 units each

20

22

24

30

96

(f) Direct Material per unit (Rs.)

300

400

350

450

(g) Direct Labour per unit (Rs.) 250 300 300 400

Rs. Rs. Rs. Rs.

Total Direct Material (a x f) 300000 440000 420000 675000

Total Direct Labour (a x g) 250000 330000 360000 600000

Manufacturing Overheads:

Factory works exp. (b x Rs.473.68)

236840

208419

170525

284208

Stores Receiving Costs (d x Rs.3240)

81000

81000

81000

81000

Machine Setup Costs (c x Rs.10166.67)

101667

111833

122000

152500

Quality Control Costs (c x Rs.3833.33)

38333

42167

46000 57500

150

Material Handling Costs (e x Rs.4000)

80000

88000 96000 120000

Total Cost 1087840 1301419 1295525 1970208

Cost per unit 1087.84 1183.11 1079.60 1313.47

(iii) Calculation of differences of per unit costs

P

(Rs.)

Q

(Rs.)

R

(Rs.)

S

(Rs.)

(i) Per Unit Cost under MHR

(ii) Per Unit Cost under ABC

Cost difference (i) – (ii)

1150

1087.84

1180

1183.11

1010

1079.60

1330

1313.47

62.16 -3.11 -69.60 16.53

Question 17

Jaggu Limited’s manufacturing operation has become increasingly automated with Computer-controlled robots replacing operators. The Company currently manufactures many products of varying levels of design complexity. A single plant wise overhead absorption rate, based on direct labour hours, is used to absorb overhead costs.

Company’s production overheads for the quarter ended 31st March, 2016 are as follows:

(Rs.”000)

Equipment operation Expenses 125

Equipment Maintenance Expense 25

Wages Paid to Technicians 85

Wages Paid to Store Men 35

Wages Paid to Dispatch Staff 40

During the quarter, the company reviewed the Overhead Absorbing System and concluded that absorbing overhead costs to individual products on a labour hour absorption basis is meaningless. Overhead costs should be attributed to products using an Activity Based Costing (ABC) system and the following was identified as the most significant activities:

(i) Receiving component consignments from suppliers

(ii) Setting up equipment for production runs

(iii) Quality inspections

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(iv) Dispatching goods as per customer’s orders.

During the quarter:

(i) A total of 2000 direct labour hours were worked (paid at Rs. 60 per hr.)

(ii) 980 components consignments were received from suppliers

(iii) 1020 production runs were set up

(iv) 640 quality inspections were carried out

(v) 420 orders were dispatched to customers.

Equipment operation and maintenance expenses are apportioned as:

- Component stores 15%, manufacturing 70% and goods dispatch 15%.

Technician’s wages are apportioned as:

Equipment maintenance 30%, set up equipment for production runs 40% and quality inspections 30%.

Company’s production during the quarter included components X, Y and Z. The following information is available:

Component X

Component Y

Component Z

Direct Material Rs. 2400 Rs. 5800 Rs. 3600

Direct Labour hrs. worked 25 480 50

Component Consignments Recd. 42 24 28

Production Runs 16 18 12

Quality Inspections 10 8 18

Orders (goods) Dispatched 22 85 46

Quantity Produced 140 3200 600


(i) Calculate the unit of X, Y and Z components, using company’s existing cost accounting system.

(ii) Calculate the unit cost of components X, Y and Z using Activity Based System.

Answer

(i) Single Factory Direct Labour Hour Overhead Rate = 2000

310000 Rs.

= Rs. 155 per Direct Labour Hour

152

Computation of Unit Cost (Existing System)

X

(Rs.)

Y

(Rs.)

Z

(Rs.)

Direct Labour Cost @ Rs. 60 per hour 1500 28800 3000

Direct Material 2400 5800 3600

Overheads (Direct Labour Hours x Rs. 155 per Hour)

3875 74400 7750

Total Cost 7775 109000 14350

Quantity Produced (Nos.) 140 3200 600

Cost per unit 55.54 34.06 23.92

(ii) Apportionment of Equipment operation and maintenance expenses and technician’s wages:

(Rs. 000)

Particulars Receiving Supplies

(Rs.)

Setups

(Rs.)

Quality Inspection

(Rs.)

Dispatch

(Rs.)

Total

(Rs.)

Equipment Operation

Expenses (15%; 70%; NIL; 15%)

18.75 87.50 --- 18.75 125.00

Maintenance (15%; 70%; NIL; 15%)

3.75 17.50 --- 3.75 25.00

Technicians Wages [Share of Maintenance (30% of Rs. 85000 = Rs.25500)] (15%; 70%; NIL; 15%)

3.83 17.85 --- 3.82 25.50

Balance of Technicians

Wages of Rs. 59500 (Allocated to Setups and Quality Inspections; 4:3)

--- 34.00 25.50 --- 59.50

Stores Wages - Receiving 35.00 --- --- --- 35.00

Dispatch Wages - Dispatch --- --- --- 40.00 40.00

Total 61.33 156.85 25.50 66.32 310.00

153

Calculation of cost driver rates:

Receiving Supplies

tsConsignmen 980

61330 Rs. = Rs. 62.58 per Consignment

Performing Setups

Runs Production 1020

156850 Rs. = Rs. 153.77 per Setup

Dispatching Goods

Orders 420

66320 Rs. = Rs. 157.90 per Dispatch

Quality Inspection

sInspection 640

25500 Rs. = Rs. 39.84 per Quality Inspection

Statement showing product wise costs:

Particulars of Costs X

(Rs.)

Y

(Rs.)

Z

(Rs.)

Direct Labour 1500 28800 3000

Direct Materials 2400 5800 3600

Receiving Supplies 2628.36 1501.92 1752.24

Performing Setups 2460.32 2767.86 1845.24

Quality Inspections 398.40 318.72 717.12

Dispatching Goods 3473.80 13421.50 7263.40

Total Costs 12860.88 52610 18178

No. of Units Produced 140 3200 600

Cost per unit 91.86 16.44 30.30

Calculation of Components wise activity cost:

Particulars Component X Component Y Component Z

Receiving Supplies

Rs. 2628.36

(42 Receipts at Rs. 62.58)

Rs. 1501.92


Rs. 1752.24


Performing Setups

Rs. 2460.32

(16 Production Runs at Rs. 153.77)

Rs. 2767.86


Rs. 1845.24


154

Quality Inspections

Rs. 398.40

(10 Inspections at Rs. 39.84)

Rs. 318.72


Rs. 717.12


Dispatching Goods

Rs. 3473.80

(22 Orders at Rs. 157.90)

Rs. 13421.50


Rs. 7263.40


Question 18

Kovid Bank 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 (Rs.)

Activity Driver Activity Capacity

Providing ATM service 1000000 No. of transactions 500000

Computer processing 6000000 No. of transactions 4000000

Issuing Statements 1500000 No. of statements 1000000

Customer inquiries 960000 Telephone minutes 1200000

The following annual information on three services was also made available:

Checking Accounts

Loans Gold Visa

Units of service 80000 12000 30000

ATM transactions 380000 0 120000

Computer transactions 3000000 400000 600000

Number of statements 600000 100000 300000

Telephone minutes 650000 180000 370000

Required:

(i) Calculate rate for each activity.

(ii) Using the rates computed in requirement (i), calculate the cost of each service.

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Answer

Calculation of Activity Rates

Activity Activity Cost [a] (Rs.)

Activity Driver No. of Units of Activity Driver [b]

Activity Rate [a]/[b]

(Rs.)

Providing ATM Service 1000000 No. of ATM Transactions 500000 2.00

Computer Processing 6000000 No. of Computer Transactions

4000000 1.50

Issuing Statements 1800000 No. of Statements 1000000 1.80

Customer Inquiries 960000 Telephone Minutes 1200000 0.80

Calculation of Cost of each Service

Activity Checking Accounts

(Rs.)

Loans (Rs.) Gold Visa

(Rs.)

Providing ATM Service

Computer Processing

Issuing Statements

Customer Inquiries

Total Cost Rs. [a]

Units of Service [b]

Cost of each unit of service [a]/[b]

760000

(380000 tr. x 2)

4500000

(3000000 tr. x 1.50)

1080000

(600000 tr. x 1.80)

520000

(650000 tr. x 0.80)

---

600000

(400000 tr. x 1.50)

180000

(100000 tr. x 1.80)

144000

(180000 tr. x 0.80)

240000

(120000 x 2)

900000

(600000 tr. x 1.50)

540000

(300000 x 1.80)

296000

(370000 tr. x 0.80)

6860000 924000 1976000

80000 12000 30000

Rs. 85.75 Rs. 77 Rs. 65.87

156

Question 19

S. Kumar Limited specializes in the distribution of superfine wheel bearings. It buys from manufactures and resells to each of the three different markets:

(i) General Supermarket chains

(ii) Whole Sellers

(iii) Retailers

The company plans to use activity based costing for analyzing the profitability of its distribution channels. The following data for the quarter ending 30th June, 2016 is given:

General supermarket

chains

Whole Sellers Retailers

Average sales per delivery

Average cost of goods sold per delivery

Number of deliveries

Total number of orders

Average number of cartons shipped per delivery

Average number of hours of shelf stocking per delivery

Rs. 80500

Rs. 78000

460

480

250

2

Rs. 32000

Rs. 31000

1650

1820

75

0.5

Rs. 8000

Rs. 7500

3890

4500

24

0.1

The following information is available in respect of operating costs (other than cost of goods sold) for the quarter ending 30th June, 2016:

Activity Area Cost driver Total cost

(Rs.)

Customer purchase order processing

Purchase order by customers 510000

Customer store delivery Number of deliveries 960000

Cartons dispatched to customer stores

Number of Cartons dispatched to customer stores

830275

Shelf stocking at customer store

Hours of shelf stocking 64020

Compute the operating income of each distribution channel for the quarter ending 30th June, 2016 using activity based costing.

157

Answer

Statement Showing Operating Income of Distribution Channels of S. Kumar Limited

Particulars General Supermarket Chains (Rs.)

Whole Sellers

(Rs.)

Retailers

(Rs.)

Total

(Rs.)

Sales

(Number of Deliveries x Average Sales per delivery)

37030000

(460 x 80500)

52800000

(1650 x 32000)

31120000

(3890 x 8000)

120950000

Less:

Cost of Goods Sold (Number of Deliveries x Average Cost of Goods Sold per delivery)

35880000

(460 x 78000)

51150000

(1650 x 31000)

29175000

(3890 x 7500)

116205000

Gross Margin 1150000 1650000 1945000 4745000

Less :

Operating Costs

424700

734625

1204970

2364295

Operating Income 725300 915375 740030 2380705

Workings:

Statement Showing Operating Cost of Distribution Channels of S. Kumar Limited

Particulars General Supermarket Chains (Rs.)

Whole Sellers

(Rs.)

Retailers

(Rs.)

Total

(Rs.)

Customer Purchase Order Processing

36000

(75 x 480)

136500

(75 x 1820)

337500

(75 x 4500)

510000

Customer Store Delivery

73600

(160 x 460)

264000

(160 x 1650)

622400

(160 x 3890)

960000

Cartons Dispatched to Customer Stores

287500

(2.50 x 115000)

309375

(2.50 x 123750)

233400

(2.50 x 93360)

830275

Shelf Stocking at Customer Store

27600

(30 x 920)

24750

(30 x 825)

11670

(30 x 389)

64020

424700 734625 1204970 2364295

158


Activity Activity Cost [a]

(Rs.)

Activity Driver No. of Units of Activity Driver [b]

Cost Driver Rate [a]/[b]

(Rs.)

Customer Purchase Order Processing

510000 Purchase Order by Customers

6800 75.00

Customer Store Delivery

960000 Number of Deliveries 6000 160.00

Cartons Dispatched to Customer Stores

830275 Number of Cartons Dispatched to Customer Stores

332110 2.50

Shelf Stocking at Customer Store

64020 Hours of Shelf Stocking

2134 30.00

No. of Units of Activity Driver

Purchase Order by Customers = 480 + 1820 + 4500

= 6800

Number of Deliveries = 460 + 1650 + 3890

= 6000

Number of Cartons

Dispatched to Customer Stores = Number of Deliveries x Average Number of Cartons Shipped per delivery

= (460 x 250) + (1650 x 75) + (3890 x 24)

= 115000 + 123750 + 93360

= 332110

Hours of Shelf Stocking = Number of Deliveries x Average Number of Hours of Shelf Stocking per delivery

= (460 x 2) + (1650 x 0.5) + (3890 x 0.1)

= 920 + 825 + 389

= 2134

159

Question 20

The following information is provided by Jatin Limited for the quarter ending 31st March, 2016:

Activity Cost Driver Cost Driver Volume/Year

Cost Pool (Rs.)

Purchasing Purchase orders 3000 1500000

Setting Batches produced 14000 5600000

Materials handling Materials movements 12000 1440000

Inspection Batches produced 14000 3500000

Machining costs Machine hours 40000 1200000

During the period the company was produced Product ‘Nirmal’. The following particulars were related to the product:

Purchase orders 25

Output 15000 units

Production batch size 100 units

Materials movements per batch 6

Machine hours per unit 0.1


(i) Calculate the overhead costs for product Nirmal using absorption costing (absorb overhead using machine hours).

(ii) Calculate the overhead costs for product Nirmal using activity based costing principles.

(iii) How can the company reduce the ABC for Product Nirmal ?

Answer

(i) Calculation of Overheads Costs using Absorption Costing

Total Overheads = Rs. 13240000

(1500000 + 5600000 + 1440000 + 3500000 + 1200000)

Budgeted Absorption Cost per Machine Hour = Rs. 331

(13240000/40000 hours)

Machining Hours for Product Nirmal = 1500 hrs.

Absorbed Overhead (1500 hrs. X Rs. 331) = Rs. 496500

160

(ii) Computation of Cost driver rates

Activity Pool Cost Driver Cost [a]

(Rs.)

Cost Driver Volume/Year [b]

Cost/Unit of Cost Driver [a]/[b]

(Rs.)

Purchasing Purchase Orders

1500000 3000 500 per Purchase Order

Setting Batches Produced

5600000 14000 400 per Batch

Materials Handling

Material Movements

1440000 12000 120 per Movement

Inspection Batches Produced

3500000 14000 250 per Batch

Machining Machine Hours

1200000 40000 30 per Machine Hour

Computation of the ‘Volume of Cost Drivers’ consumed by ‘Product Nirmal’

Purchase Orders (given) = 25

Batches (15000/100) = 150

Materials Movement (150 batches x 6) = 900

Machine Hours (15000 units x 0.1) = 1500

Computation of the Overheads Cost for Product Nirmal using ABC

Activity Cost Driver Costing Rate/Cost Driver Rate

(Rs.)

Overhead Cost

(Rs.)

Purchasing Purchase Orders 500 12500

(25 Order X Rs. 500)

Setting Batches Produced

400 60000

(150 Batches X Rs. 400)

Material Handling Material Movements

120 108000

(900 Movement X Rs. 120)

Inspection Batches Produced

250 37500

(150 Batches X Rs. 250)

Machining Machine Hours 30 45000

(1500 Hours X Rs. 30)

Total 263000

161

(iii) Ways in which the company can reduce the ABC for ‘Product Nirmal’

- 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 21

Nikku Bearings Limited manufactures three types of products namely A, B and C. The data relating to the month of April, 2016 are as under:

Particulars A B C

Machine hours per unit 1 3 2

Direct Labour hours per unit @ Rs. 50 2 6 4

Direct Material per unit (Rs.) 190 180 120

Production (units) 3000 5000 20000

Currently the company uses traditional costing method and absorbs all production overheads @ Rs. 120 per machine hour.

The company proposes to use activity based costing system and the activity analysis is as under:

Particulars A B C

Batch size (units) 150 500 1000

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 40%

Machine operation costs 30%

Inspection costs 20%

Material procurement related costs 10%


(i) Calculate the cost per unit of each product using traditional method of absorbing all production overheads on the basis of machine hour rate.

(ii) Calculate the cost per unit of each product using activity based costing system.

162

Answer

(i) Calculation of cost per unit by using Machine Hour Rate:

Particulars A

(Rs.)

B

(Rs.)

C

(Rs.)

Direct Materials 190 180 120

Direct Labour [(2, 6, 4 hours) x Rs. 50] 100 300 200

Production Overheads [(1, 3, 2 hours) x Rs. 120] 120 360 240

Cost per unit 410 840 560

(ii) Calculation of Cost per unit by using Activity Based Costing:

Products A B C

Production (units) 3000 5000 20000

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

Direct Materials (Rs. 190, Rs. 180, Rs. 120 per unit)

570000 900000 2400000

Direct Labour (Rs. 100, Rs. 300, Rs. 200 per unit)

300000 1500000 4000000

Machine Related Costs @ Rs. 36 per hour

Machine hours :-

(3000, 15000, 40000)

108000 540000 1440000

Setup Costs @ Rs. 6960 per inspection

Batches : (20, 10, 20)

1113600 556800 1113600

Inspection Costs @ Rs. 6960 per inspection

Inspections : (100, 40, 60)

696000 278400 417600

Purchase Related Costs @ Rs. 2175 per purchase

(60, 100, 160)

130500 217500 348000

Total Costs 2918100 3992700 9719200

Cost per unit (Total Cost ÷Units) 972.70 798.54 485.96

163

Working Notes

1. Calculation of Number of Batches, Purchase Orders, and Inspections:

Particulars A B C Total

A. Production (units) 3000 5000 20000

B. Batch Size (units) 150 500 1000

C. Number of Batches [A÷B] 20 10 20 50

D. Number of Purchase Order per batch

3 10 8

E. Total Purchase Orders [C x D] 60 100 160 320

F. Number of Inspections per batch 5 4 3

G. Total Inspections [C x F] 100 40 60 200

2. Calculation of Total Machine Hours Worked:

Particulars A B C

A. Machine Hours per unit 1 3 2

B. Production (units) 3000 5000 20000

C. Total Machine Hours [A x B] 3000 15000 40000

Total Machine Hours = 3000 + 15000 + 40000 = 58000

Total Production Overheads

= 58000 x Rs. 120

= Rs. 6960000

3. Calculation of Cost Driver Rates:

Cost Pool % Overheads (Rs.)

Cost Driver (Units)

Cost Driver Rate (Rs.)

Setup 40% 2784000 50 55680 per Setup

Inspection 20% 1392000 200 6960 per Inspection

Purchases 10% 696000 320 2175 per Purchase order

Machine Hours 30% 2088000 58000 36 per Machine Hour

Total 6960000

164

Question 22

Shobha Limited manufactures four products, namely A, B, C and D using the same plant and process. The following information relates to a production period:

Product A Product B Product C Product D

Output in units 720 600 480 504

Cost per unit: Rs. Rs. Rs. Rs.

Direct Material 420 450 400 480

Direct Labour @ Rs. 20 per hour

100 90 70 80


4 hrs. 3 hrs. 2 hrs. 1hr.

The four products are similar and are usually produced in production runs of 24 units and sold in batches of 12 units. Using direct labour hour rate currently absorbs the production overheads. The total overheads incurred by the company for the period is as follows:

Rs.

Machine operation cost 460800

Setup costs 201600

Store receiving cost 150000

Inspection cost 98400

Material handling and dispatch cost 25920

During the period the following cost drivers are to be used for the production overhead cost:

Activity Cost Pool Cost Driver

Setup No. of production runs

Store receiving Requisition raised

Inspection No. of production runs

Material handling and dispatch Orders executed

Machine operation No. of Machine hours

165

It is also determined that:

- Number of requisition raised on store is 50 for each product and the no. of order executed is 192, each order being for a batch of 12 units of a product.

Required

(i) Calculate the total cost of each product, if all overhead costs are absorbed on direct hour rate basis.

(ii) Calculate the total cost of each product using activity base costing.

(iii) Comment briefly on differences disclosed between overhead traced by present system and those traced by activity based costing.

Answer

(i) Calculation of Cost of each product by using Direct Labour Hour Rate:

Particulars A

(Rs.)

B

(Rs.)

C

(Rs.)

D

(Rs.)

Direct Material 420 450 400 480

Direct Labour 100 90 70 80

Production Overheads @ Rs. 93.71 per labour hour for 5, 4.5, 3.5 or 4

468.55 421.70 327.99 374.84

Cost of Production per unit 988.55 961.70 797.99 934.84


Total Cost 711756 577020 383035 471159

Working Note

Calculation of Direct Labour Hour Rate

Total Labour hours:

A: 100/20 or 5 x 720 = 3600

B: 90/20 or 4.5 x 600 = 2700

C: 70/20 or 3.5 x 480 = 1680

D: 80/20 or 4 x 504 = 2016

9996

Total production overheads = 460800 + 201600 + 150000 + 98400 + 25920= Rs. 936720

166

Direct Labour Hour Rate = Rs. 936720/9996 = Rs. 93.71

(ii)

Working Notes:

1. Cost Driver Rates

Activity Cost

(Rs.)

Drivers Nos Cost per unit of Driver (Rs.)

Setup 201600 Production Runs 96 2100

Store Receiving 150000 Requisitions Raised 200 750

Inspection 98400 Production Runs 96 1025

Material Handling and Disp.

25920 Orders 192 135

Machine operation 460800 Machine Hours 6144 75

2. No. of Production Runs: A (720/24) = 30

B (600/24) = 25

C (480/24) = 20

D (504/24) = 21

96

3. Machine Hours: A- 4 x 720 = 2880

B- 3 x 600 = 1800

C- 2 x 480 = 960

D- 1 x 504 = 504

6144

4. No. of orders executed:

A: 720/12 = 60

B: 600/12 = 50

C: 480/12 = 40

D: 504/12 = 42

192

167

5. Material Cost:

A: 420 x 720 = Rs. 302400

B: 450 x 600 = Rs. 270000

C: 400 x 480 = Rs. 192000

D: 480 x 504 = Rs. 241920

6. Labour Cost:

A: 100 x 720 = Rs. 72000

B: 90 x 600 = Rs. 54000

C: 70 x 480 = Rs. 33600

D: 80 x 504 = Rs. 40320

Calculation of cost of each product by using Activity Based Costing

Particulars A B C D


Direct Material

Direct Labour

Rs.

302400

72000

Rs.

270000

54000

Rs.

192000

33600

Rs.

241920

40320

Production Overheads:

- Machine operation cost @ Rs. 75 per hour (2880; 1800; 960 & 504)

216000

135000

72000

37800

- Setup cost @ Rs. 2100 per run

(30; 25; 20 & 21)

63000 52500 42000 44100

- Store receiving @ Rs. 750 per requisition (50; 50; 50 & 50)

37500 37500 37500 37500

- Inspection @ Rs. 1025 per run (30; 25; 20 & 21)

30750 25625 20500 21525

- Material handling etc. @ Rs. 135 per order (60; 50; 40 & 42)

8100 6750 5400 5670

168

Total Cost 729750 581375 403000 428835

Cost per unit 1013.54 968.96 839.58 850.86

(ii)

Particulars A B C D

(a) Cost per unit (Traditional system)

(b) Cost per unit (ABC)

988.55

1013.54

961.70

968.96

797.99

839.58

934.84

850.86

Difference (b – a) 24.99 7.26 41.59 (83.98)

Maximum per unit cost difference is 83.98 in case of product D.

Question 23

Sevda Bank offers three services, viz., deposits, Loans and Credit Cards. The bank has selected 4 activities. Activity wise cost details for the year ending 31st March, 2016 were as follows:

Activity Pool Total Cost (Rs.)

Nature of Cost Cost Driver

1. ATM Services:

(a) Rent & Machine maintenance cost

(b) Currency Replenishment Cost

1200000

400000

Fixed

Semi variable

No. of ATM transactions

2. Computer Processing 2000000 Half of this amount is fixed and remaining semi variable

No. of computer transactions

3. Issuing Statements 2700000 Semi variable No. of statements

4. Customer Inquiries 500000 Semi variable Telephone minutes

169

Following estimations are made for the budget of next year 2016-17, in respect of utilization of different activities:

1. Currency Replenishment cost will be to double during the next year.

2. Semi-variable computer processing cost will be to increase to three times the current level.

3. For above mentioned statements, issuing cost will remain constant upto 500000 statements, after that it will be increased to Rs. 200000 for every increase of one lakh statements.

4. Customer inquiries costs will increase by 80%.

The Expected volumes of activity drivers for the year 2016-17 are as follows:

Activity Driver Deposits Loans Credit Cards

- No. of ATM Transaction

- No. of Computer Processing Transactions

- No. of Statement to be issued

- Telephone Minutes

420000

3500000

600000

580000

---

600000

50000

210000

80000

900000

150000

210000

The bank budgets a volume of 59816 deposit accounts, 17505 Loan accounts, and 29564 Credit Card accounts.


(i) Calculate the budgeted activity cost driver rates.

(ii) Find the budgeted cost per account for each service using activity based costing.

Answer

(i) Computation of Cost driver rates for the Budgeted Period

Activity Activity Driver

Budgeted No. of units of Activity Driver

Budgeted Activity Cost (Rs.)

Cost driver rate (Rs.)

ATM Service

No. of ATM Transactions

420000+NIL+

80000

500000 Rent etc.

+ Currency

400000 x 2

Total

1200000

800000

2000000

2000000/ 500000

= Rs. 4 per ATM

Transaction

Computer Processing

No. of Computer Transaction

3500000+600000+900000

5000000 Fixed

2000000 x ½

Semi-variable

1000000

4000000/ 5000000

= Rs. 0.80 per

transaction

170

1000000 x 3

Total 3000000

4000000

Issuing Statements

No. of Statements

600000+50000+ 150000

800000 Upto 500000 Statements

For Additional 3 lakh Statement

2 lakhs x 3 lakhs

Total

2700000

600000

3300000

3300000/ 800000

= Rs. 4.125 per

statement

Customer Inquiries

Telephone Minutes

580000+210000+

210000

1000000 500000 x 180%

900000 900000/1000000

= Rs. 0.90 per minutes

Total Budgeted Cost for 2016-17 10200000

(ii) Statement Showing Budgeted cost per account for each Service

Activity No. of Activity drivers Cost Driver Rate (Rs.)

Deposits

(Rs.)

Loans

(Rs.)

Credit Cards

(Rs.) Dep. Loans Credit

Cards

ATM Service

Computer Processing

Issuing Statements

Customer Inquiries

420000

3500000

600000

580000

---

600000

50000

210000

80000

900000

150000

210000

4.00

0.80

4.125

0.90

1680000

2800000

2475000

522000

---

480000

206250

189000

320000

720000

618750

189000

Total Cost 7477000 875250 1847750

Budgeted Units of Service (Units) 59816 17505 29564

Budgeted Cost per unit of service (Rs.) 125 50 62.50

171

Question 24

Krishna Food Ltd. Manufactures 4 types of biscuits, Super, Fine, Gold and Silver in a fully mechanized factory. The company has been following traditional method of costing and wishes to shift to Activity Based Costing System and therefore wishes to have the following data presented under both the systems for the quarter ended 31st March, 2016.

Rs.

Inspection Cost 771680

Machine-Repairs & Maintenance 1671750

Dye Cost 51500

Selling Overheads 1506800

Particulars Super Fine Gold Silver

Selling Priceper unit (Rs.) 50 40 30 20

Material Cost (Rs. per unit) 12 9 8 5

Labour Cost (Rs. per unit) 18 14 12 8

Gross Production units (per production run)

2520 2810 3010 4280

No. of Defective units (per production run)

20 10 10 40

Inspection:

No. of Hours per production run

3 4 4 3

Dye Cost per production run (Rs.) 200 300 250 300

No. of Machine Hours per production run

20 12 30 25

Sales-No. of units for the quarter 100000 224000 108000 148400

The following additional information is given:

(i) All manufacturing and selling overheads are conventionally allocated on the basis of units sold.

172

(ii) Only product Super needs advertisement. Advertisement costs included in the total selling overhead isRs. 225000.

(iii) Product Fine needs to be specially packed before being sold, so that it meets competition. Rs. 121000 was the amount spent for the quarter in specially packing ‘Fine’, and this has been included in the total selling overhead cost given.


Present product wise profitability under the traditional system and the activity based costing system and accordingly rank the products.

Answer

Statement Showing Product wise profitability and Rank by using traditional system

Particulars Super Fine Gold Silver Total

Sales (Units) 100000 224000 108000 148400 580400

Gross Margin (a)

Rs.

1976000

Rs.

3789600

Rs.

1072800

Rs.

1020600

Rs.

7859000

Manufacturing Overheads

(2494930/580400 = 4.2986 per unit)

Selling Overheads

(1506800/580400 = 2.59614 per unit)

429864

259614

962895

581536

464253

280383

637918

385267

2494930

1506800

Total Overheads (b) 689478 1544431 744636 1023185 4001730

Net Profit (a – b) 1286522 2245169 328164 (2585) 3857270

Ranking II I III IV

Statement Showing Product wise Profitability and Rank by using Activity Based Costing


Sales (Units) 100000 224000 108000 148400 580400

173

Gross Margin (a)

Rs.

1976000

Rs.

3789600

Rs.

1072800

Rs.

1020600

Rs.

7859000

Manufacturing overheads (W.N.5)

Selling overheads (W.N.5)

502400

425000

814400

569000

656280

216000

521850

296800

2494930

1506800

Total Overheads (b) 927400 1383400 872280 818650 4001730

Net Profit (a – b) 1048600 2406200 200520 201950 3857270

Ranking II I IV III

Working Notes:

1. Calculation of Different Cost Driver Numbers

Serial No.


(i) Gross production units per run

Less : Defective units per run

2520

20

2810

10

3010

10

4280

40

(ii) Good units per run 2500 2800 3000 4240

(iii) Sales (good units) 100000 224000 108000 148400 580400

(iv) No. of Production Runs (iii ÷ ii)

40 80 36 35 191

(v) Gross Production units [(i) x (iv)]

100800 224800 108360 149800

Material Cost per unit (Rs.)

Add: Labour cost per unit (Rs.)

12

18

9

14

8

12

5

8

(vi) Prime Cost per unit (Rs.)

30 23 20 13

(vii) Total Prime Cost (Rs.) ÷ (v) x (vi)

3024000 5170400 2167200 1947400 12309000

174

(viii) Inspection hours per run

3 4 4 3

(ix) Inspection hours: (iv) x (viii)

120 320 144 105 689

(x) Machine hours per run 20 12 30 25

(xi) Total machine hours: (iv) x (x)

800 960 1080 875 3715

(xii) Dye cost per run (Rs.) 200 300 250 300

(xiii) Total Dye Cost (Rs.): (iv) x (xii)

8000 24000 9000 10500 51500

2. Calculation of Product wise Gross Margin


(i) Sales (units)

(ii) Selling Price per unit (Rs.)

100000

50

224000

40

108000

30

148400

20

(iii) Sales Value (Rs.) (i) x (ii)

5000000 8960000 3240000 2968000 20168000

(iv) Price Cost (Rs.) [as above (vii)]

3024000 5170400 2167200 1947400 12309000

(v) Gross Margin (Rs.) (iii) – (iv)

197 6000 3789600 1072800 1020600 7859000

3. Total manufacturing overheads: Rs.

Inspection Cost 771680

Machine Exp. 1671750

Dye Cost 51500

2494930

4. Selling overhead according to activities Rs.

Advertisement cost associated only with Super 225000

Special Packing cost associated only with Fine 121000

Remaining selling overheads (1506800 – 225000 – 121000)

allocated on the basis of sold units 1160800

1506800

175

5. Statement Showing Allocation of Overheads on the Basis of Cost Drivers

Activity Super Fine Gold Silver Total

Inspection Cost:

(Inspection hours-120;320;144;105)

Machine-Repairs & Maintenance

(Machine Hours-800;960;1080;875)

Dye Cost (Refer W.N.1- xiii)

Rs.

134400

360000

8000

Rs.

358400

432000

24000

Rs.

161280

486000

9000

Rs.

117600

393750

10500

Rs.

771680

1671750

51500

Manufacturing overheads 502400 814400 656280 521850 2494930

Advertisement cost to Super

Special Packing Cost to Fine

Remaining (Sales Units basis)

225000

---

200000

---

121000

448000

---

---

216000

---

---

296800

225000

121000

1160800

Selling Overheads 425000 569000 216000 296800 1506800

Question 25

Mahi Cold Drinks Limited produces three product lines viz., Mango Fresh, Orange Malt and Lemon Test. It provides the following data for the quarter ended 31st March, 2016 for each product line:

Particulars Mango Fresh Orange Malt Lemon Test

Sales Revenue (Rs.)

Cost of goods sold (Rs.)

Cost of bottles returned (Rs.)

793500

600000

2100600

1500000

1209900

900000

12000

The Company also provides the following information about the store support costs for the period:

Activity Activity Cost Cost Driver No. of Cost Drivers

Mango Fresh

Orange Malt

Lemon Test

Placing of orders

Dispatching

Shelf Stocking

Customer Support

156000

252000

172800

307200

No. of purchase orders

No. of deliveries

Hours of shelf stocking

Items sold

36

30

54

12600

84

219

540

110400

36

66

270

30600

176

You are required:

(a) Calculate the product wise net operating income and find their percentage on product’s revenue. If the all support costs (including cost of bottles returned) are allocated to the product lines

(b) On the basis of the cost of goods sold of each product.

(c) On the activity based costing system.

(d) Compared the operating income percentage shown as above (a) (i) and (ii)

Answer

(a)(i) Traditional Costing System

Operating Income Statement:

Particulars Mango Fresh

Orange Malt

Lemon Test

Total

Revenue 793500 2100600 1209900 4104000

Less : Cost of Goods Sold 600000 1500000 900000 3000000

Less : Store Support Cost 180000 450000 270000 900000


Operating Income (%) 1.70 7.17 3.30 4.97

(i) ABC System


Activity Total Costs (Rs.)

Quantity of Cost Allocation Base

Overhead Allocation Rate (Rs.)

Ordering 156000 156 Purchase Orders 1000

Delivery 252000 315 Delivering Orders 800

Shelf Stocking 172800 864 Self Stocking Hours

200

Customer Support 307200 153600 Items Sold 2.00

Calculation of Product-wise Store Support Costs

Particulars Cost Driver Mango Fresh

Orange Malt

Lemon Test

Total

Bottle Returns Direct 0 0 12000 12000

Ordering Purchase Orders

36000 84000 36000 156000

177

Delivery Deliveries 24000 175200 52800 252000

Self-Stocking Hours of time 10800 108000 54000 172800

Customer Support

Items Sold 25200 220800 61200 307200

Grand Total 96000 588000 216000 900000

Operating Income


Orange Malt

Lemon Test

Total

Revenue 793500 2100600 1209900 4104000

Less: Cost of Goods Sold 600000 1500000 900000 3000000

Less: Store Support Cost 96000 588000 216000 900000


Operating Income (%) 12.29 0.60 7.76 4.97

(b) Comparison


Orange Malt

Lemon Test

Total

Under Traditional Costing System

1.70% 7.17% 3.30% 4.97%

Under ABC System 12.29% 0.60% 7.76% 4.97%

The Orange Malt line drops sizeably when ABC is used. Although it constitutes 50% of ‘Cost of Goods Sold (COGS)’, it uses a higher percentage of total resources in each activity.

Question 26

Arti Chocolates Ltd. is engaged in production of a range of many types of chocolate products out of which three main products are Coco, Cream and Goldy. The following details are provided by the company for the year ending 31st March, 2016:

178

Particulars Coco Cream Goldy Other products

Direct material per unit (Rs.)

Direct labour per unit (Rs.)


No. of deliveries

Shelf stocking hours

No. of items sold

Rs.

4

5

25

2000

1100

200000

Rs.

3

3

20

1500

1050

165000

Rs.

2

3

15

1100

1650

215000

Rs.

---

---

1650

98600

67400

2000000


(i) Calculate the cost of each of above mentioned three products if the company under traditional costing system, store support costs are charged @ 30% of prime cost.

(ii) Calculate the cost of each of the above mentioned three products by using activity based costing system if the activity costs are identified as follows:

Rs.

Order placing cost 1282500

Dispatching cost 25800000

Shelf stocking cost 8900000

Answer

(i) Statement showing cost of products under traditional costing system.

Particulars Coco Cream Goldy

Per Unit Cost:

Direct Material

Direct Labour

Prime Cost

Overheads @ 30% of Prime Cost

Cost of Production per unit

No. of items sold (Units)

Total Cost of each product (Rs.)

Rs.

4

5

Rs.

3

3

Rs.

2

3

9

2.70

6

1.80

5

1.50

11.70

200000

7.80

165000

6.50

215000

2340000 1287000 1397500

179

(ii) Statement showing cost of products under Activity Based Costing.

Product Items Sold Coco

200000

Cream

165000

Goldy

215000

Direct Material (@Rs. 4, 3 & 2)

Direct Labour (@Rs. 5, 3 & 3)

Store Support Costs:

Order placing cost

Despatching cost

Shelf stocking cost

Total Cost

Cost per Unit

Rs.

800000

1000000

18750

500000

137500

Rs.

495000

495000

15000

375000

131250

Rs.

430000

645000

11250

275000

206250

2456250 1511250 1567500

12.28 9.16 7.29

Working Note:

1. Calculation of activity costs driver rates

Activity Activity cost

Total No. of cost Drivers Cost Driver Rate(Rs.)

Ordering cost

Dispatching cost

Shelf stocking cost

1282500

25800000

8900000

25+20+15+1650=1710 Orders

2000+1500+1100+98600=103200 deliveries

1100+1050+1650+67400=71200 hours

1282500/1710 = 750 per order

25800000/103200 = 250 per delivery

8900000/71200 = 125 per hour

2. Calculation of Product wise activity costs

Particulars Coco Cream Goldy


Orders placing cost @ Rs. 750 per order (Rs.)

No. of deliveries

Dispatching cost @ Rs. 250 per delivery (Rs.)

25

18750

2000

500000

20

15000

1500

375000

15

11250

1100

275000

180

Shelf stocking hours

Shelf stocking cost @ Rs. 125 per hour (Rs.)

1100

137500

1050

131250

1650

206250

Question 27

The overheads incurred and cost driver volumes of Bhalu Limited for the year ended 31st March, 2016 were as follows:

Cost Pool Overheads (Rs.)

Cost Driver Cost Driver Volume

Material procurement

Material handling

Set-up

Maintenance

Quality control

Machinery

1159500

500480

829920

1932000

352800

720000

No. of orders

No. of movements

No. of set ups

Maintenance hours

No. of inspection

No. of machine hours

2200

1360

1040

16800

1800

24000

During the period the company had produced a lot of 5200 components of CP-21, its material cost was Rs. 260000 and Labour cost Rs. 250000. The usage activities of the said batch were as follows.

Material orders-52, maintenance hours-690, material movements-36, set ups-50, machine hours-1800.

Calculate cost driver rates that are used for tracing appropriate amount of overheads to the said batch and ascertain the cost of batch of components using Activity Based Costing.

Answer

Computation of Cost Driver Rates


1. Material procurement 1159500/2200 527

2. Material handling 500480/1360 368

3. Set-up 829920/1040 798

181

4. Maintenance 1932000/16800 115

5. Quality control 352800/1800 196

6. Machinery 720000/24000 30

Computation of Cost of Component CP-21 (5200 Units)

Particulars Rs.

Material Cost 260000

Labour Cost 250000

Prime Cost 510000

Add : Overheads

Material orders 52 x 527 27404

Material handling 36 x 368 13248

Set-up 50 x 798 39900

Maintenance 690 x 115 79350

Quality Control 52 x 196 10192

Machinery 1800 x 30 54000 224094

Total Cost 734094

Question 28

Baidhnath Limited produces three types of products viz., A, B and C. The following data related to a period are as follows:

Particulars A B C

Production and Sales (Units)

Direct Material per unit (Rs.)

60000

500

40000

400

80000

220

182

Direct Labour (@ Rs. 60 per hour) per unit (Rs.)


Size of one production run (Units)

No. of deliveries

No. of Receipts

No. of Production orders

150

2

600

500

20

60

240

1.5

800

300

10

20

120

1

1000

400

25

40

The company provides activity pool wise overhead costs for the period as under:

Rs.

Setup Cost (relating to production runs) 402500

Machine repairs and maintenance cost 10920000

Material receiving cost 137500

Dispatching cost 420000

Engineering cost (relating to production orders) 676800

Labour force related cost 2350000

Required:

(i) Calculate the per unit cost of each product based on direct labour hour recovery rate of overheads.

(ii) Calculate the per unit cost of each product using activity based costing.

Answer

(i) Calculate of cost of each product based on Direct Labour Hour Rate

Particulars A B C

Direct Material

Direct Labour

Overheads @ Rs. 31.72 per Labour hour for 2.5, 4 & 2 hours

Rs.

500

150

79.30

Rs.

400

240

126.88

Rs.

220

120

63.44

Per Unit Cost of each Product 729.30 766.88 403.44

Working Notes:

1. Total Overheads = 402500+10920000+137500+420000+676800+2350000

= Rs. 14906800

183

2. Total Direct Labour hours:

Product Per unit hours Output (Units) Total hours

A

B

C

150/60=2.5

240/60=4

120/60=2

60000

40000

80000

150000

160000

160000

Total Direct Labour hours 470000

3. Overhead recovery rate per Labour hour

= Rs. 14906800/470000

= Rs. 31.72 (approx.)

(ii) Calculation of Cost of each Product using Activity Based Costing.

Particulars A B C

Direct Material

Direct Labour

Overheads:

Setup Cost

Machines Cost

Material receiving cost

Dispatching cost

Engineering cost

Labour force cost

500 x 60000

150 x 60000

1750 x 100

42 x 120000

2500 x 20

350 x 500

5640 x 60

5 x 150000

Rs.

30000000

9000000

175000

5040000

50000

175000

338400

750000

400 x 40000

240 x 40000

1750 x 50

42 x 60000

2500 x 10

350 x 300

5640 x 20

5 x 160000

Rs.

16000000

9600000

87500

2520000

25000

105000

112800

800000

220 x 80000

120 x 80000

1750 x 80

42 x 80000

2500 x 25

350 x 400

5640 x 40

5 x 160000

Rs.

17600000

9600000

140000

3360000

62500

140000

225600

800000

Total Cost 45528400 29250300 31928100

Output (Units) 60000 40000 80000

Cost per unit (Rs.) 758.81 731.26 399.10

Working Note:

1. Calculation of Cost Driver Rates

Activity Activity Cost (Rs.) Cost Driver Cost Driver Rate

(Rs.)

Setup Cost 402500 No. of Production runs

402500/230=Rs. 1750 per run

Machines Cost 10920000 Machine hours 10920000/260000= 42 per M.H.

184

Material Receiving 137500 No. of Receipts 137500/55= 2500 per receipts

Dispatching 420000 No. of Deliveries 420000/1200= 350 per delivery

Engineering 676800 No. of Production orders

676800/120= 5640 per order

Labour force 2350000 Direct Labour

Hours

2350000/470000=

5.00 per DLH

2. Calculation of Total Nos. of Cost Drivers:

- No. of Production Runs: A: 60000/600 = 100

B: 40000/800 = 50

C: 80000/1000 = 80

230 Runs

- Machine Hours: A: 2 x 60000 = 120000

B: 1.5 x 40000 = 60000

C: 1 x 80000 = 80000

260000 hours

- No. of Receipts = 20+10+25= 55 Receipts

- No. of Deliveries = 500+300+400= 1200 Deliveries

- No. of Production Orders = 60+20+40= 120 Orders

- Direct Labour Hours [Refer to W.N.2 of (i)]

A: 150000; B: 160000 & C: 160000= 470000 hours

Question 29

Bajju Limited produces three types of products Viz., X, Y and Z. The following data related a period are as follows:

Production and sales (units)

Raw material costs (Rs.)

Machine hours

Products

X Y Z Total

60000 per unit

50

2.5

40000 per unit

40

2

16000 per unit

22

4

294000

185

Direct labour costs (Rs.)

No. of production runs

No. of deliveries

No. of receipts

No. of production orders

160

6

180

60

75

240

14

60

140

50

120

40

400

880

125

60

640

1080

250

Overheads: Rs.

Setup Cost 60000

Machines Cost 1520000

Stores Receiving Cost 870000

Dispatching Cost 500000

Engineering Cost 746000

The company operates a JIT inventory policy and receives each component once per production run.


i) Compute the per unit product cost based on Machine hour recovery rate of overheads.

ii) Compute the per unit product cost using activity based costing.

Answer

(i) Traditional Method of absorption of overhead i.e. on the basis of Machine Hour Rate

Machine Hour Rate = Hours Machine Total

Overheads Total

= 294000

3696000 = Rs.12.57 per machine hour

Calculation of cost of the products under Traditional Method of apportioning overheads:

X Y Z

Rs. Rs. Rs.

Raw Material 50.00 40.00 22.00

Direct Labour 160.00 240.00 120.00

Overheads(@Rs.12.57 per machine hour for 2.5,2 and 4)

31.43 25.14 50.28

Product cost per unit (Total) 241.43 305.14 192.28

186

(ii) Calculation of per unit product cost using ABC system

Particulars X Y Z

Raw material Cost

Direct Labour Cost

Overheads (refer to W.N.)

Rs.

50

160

19.91

Rs.

40

240

18.41

Rs.

22

120

110.33

Product Cost per unit 229.91 298.41 252.33

Working Note:

Calculation of Cost Driver Rates, Product wise cost

Activity Cost Driver Rate (Rs.)

X Y Z

Total (Rs.)

Per Unit (Rs.)

Total (Rs.) Per Unit (Rs.)

Total (Rs.)

Per Unit (Rs.)

Setup

60000/60= Rs. 1000 per production run

6000

0.10

14000 0.35

40000 2.50

Machines

1520000/ 294000 = Rs. 5.17 per hour

(5.17 x 2.50 x 60000)

12.93

(5.17 x 2 x 40000)

10.34

(5.17 x 4 x 16000)

20.68

Stores receiving

870000/1080 = Rs. 805.56 per receipt

(805.56 x 60)

0.81

(805.56 x 140)

2.82

805.56 x 880)

44.31

Despatching

500000/640= Rs. 781.25 per delivery

(781.25 x 180)

2.34

(781.25 x 60)

1.17

(781.25 x 400)

19.53

Engineering 746000/250= Rs. 2984 per production order

(2984 x 75)

3.73 (2984 x 50) 3.73 (2984 x 125)

23.31

Total per unit overheads using ABC

19.91 18.41 110.33

187

Question 30

Priya Udyog produces three products, viz., R, S and T. The data relating to these products for the year ended 31st March, 2016 are as follows:

R S T

Output (units)

Material cost per unit (Rs.)

Direct Labour Cost per unit (Rs.)


No. of material receipts

No. of times materials handled

No. of Setup

No. of Spare parts

20,000

35

40

0.5

15

42

12

8

30,000

40

50

1.00

12

35

18

10

40,000

80

60

2.00

18

40

20

12

During the period manufacturing overheads are as under:

Rs.

Machines-operation cost

Material ordering cost

Material handling cost

Setup Cost

Cost relating to spare parts

2350000

81450

210600

32250

49200


(i) Select a suitable cost driver for each item of overhead cost and calculate the cost driver rates.

(ii) Compute the per unit cost of production of each product using activity based costing.

Answer

(i) Statement Showing Selection of Cost Drivers and Computation of Cost Driver Rates

Activity Pool Activity Cost (Rs.)

Cost Driver Nos. of Cost Driver

Cost Driver Rates (Rs.)

Machine Operation

2350000 Machine hours 100000

2350000/100000= 23.50 per hour

188

Material Ordering

81450 No. of Material receipts

45 81450/45= 1810 per receipt

Material handling

210600 No. of material handled

117 210600/117= 1800 per time

Setup 32250 No. of Set up 50 32250/50= 645 per setup

Spare parts 49200 No. of Spare parts

30 49200/30= 1640 per spare part

(ii) Statement Showing Cost of Production

Particulars R S T

1. Output (Units) 20000 30000 40000

Material Cost per Unit

Direct Labour

Rs.

35

40

Rs.

40

50

Rs.

80

60

2. Prime Cost per Unit 75 90 140

3. Total Prime Cost (1 x 2) 1500000 2700000 5600000

Overheads:

Machine operation @ Rs. 23.50 per hour for 10000; 30000 & 60000 hrs.

Ordering Cost @ Rs. 1810 for 15, 12 & 18 Receipts

Handling Cost @ Rs. 1800 for 42, 35 & 40 times

Setup @ Rs. 645 for 12, 18 & 20 Setups

Spare parts @ Rs. 1640 for 8, 10 & 12 parts

235000

27150

75600

7740

13120

705000

21720

63000

11610

16400

1410000

32580

72000

12900

19680

4. Total Overhead Cost 358610 817730 1547160

Total Cost of Production (3+4) 1858610 3517730 7147160

Cost of Production per Unit (4÷1) 92.9305 117.2577 178.679

189

Working Notes:

Machine hours:

Product R: 0.5 x 20000 = 10000 hrs.

Product S: 1.00 x 30000 = 30000 hrs.

Product T: 1.50 x 40000 =60000 hrs.

Total Machine hours 100000

Question 31

Mogari Limited produces a range of products and out of these, three products are named as ‘KC’, ‘JP’ and ‘ML’. Details of the three products for a period are as follows:

Output (Units)

Raw Material Cost per unit (Rs.)

Direct Labour hours per unit


KC

11200

105

2

0.5

JP

18200

140

2.4

1.5

ML

31500

85

1.6

1.00

Direct wages @ Rs. 45 per labour hour and factory overheads are absorbed @ Rs. 180 per machine hour rate basis on total 257600 Machine hours for all products.

Further analysis shows that the total factory overheads can be divided into following manner:

Relating to machines 40%

Relating to material handling 20%

Relating to inspection 15%

Relating to setup 25%

Total Factory Overheads 100%

The following activities are identified relating to products for the period:

KC JP ML Other Products

No. of movements of material

No. of inspections

No. of setups

12

145

115

18

208

160

35

310

210

2511

16725

25275

190


(i) Calculate the cost per unit for each of the three products based on machine hour rate.

(ii) Calculate the cost per unit for each of the three products using activity based costing.

Answer

(i) Computation the per unit cost of three products based on M.H.R.

Particulars KC JP ML

Raw Material

Direct Labour @ Rs. 45 per hour for 2, 2.4 & 1.6 hours

Factory Overheads @ Rs. 180 per machine hour for 0.5, 1.5 & 1.00 hours

Rs.

105

90

90

Rs.

140

108

270

Rs.

85

72

180

Per Unit Cost of Products 285 518 337

(ii) Computation the per Unit Cost of the product using Activity Based Costing

Particulars KC JP ML

Raw Material

Direct Labour [as above (i)]

Factory Overheads (refer W.N. 6)

Rs.

105

90

49.66

Rs.

140

108

120.09

Rs.

85

72

82.94

244.66 368.09 239.94

Working Notes:

1. Total Factory Overheads = 257600 Machine hours @ Rs. 180 per hour = Rs. 46368000

2. Total Product wise machine hours:-

Relating to product ‘KC’= 11200 x 0.5 = 5600

Relating to product ‘JP’= 18200 x 1.5 = 27300

Relating to Product ‘ML’=31500 x 1.00 = 31500

64400

3. Allocation of factory overheads over different activities are:

Machines 46368000 x 40% = 18547200

191

Material handling 20% = 9273600

Inspection 15% = 6955200

Setup 25% = 11592000

4. Total No. of material movements = 12+18+35+2511 = 2576

Total No. of Inspections =145+208+310+16725 = 17388

Total No. of setup = 115+160+210+25275 = 25760

5. Calculation of Cost Driver Rates

Activity

(1)

Cost

Rs. (2)

Nos. of Cost

Driver (3)

Cost Driver Rate (Rs.)

(4)=(2)/(3)

Machines

Material Handling

Inspection

Setup

18547200

9273600

6955200

11592000

257600 Machine hour

2576 Movements

17388 Inspections

25760 Setups

72 per machine hour

3600 per movement

400 per inspection

450 per setup

6. Calculation of product wise factory overheads using ABC

Particular KC JP ML

-Machine relating [email protected] per hour for 5600, 27300 & 31500 hours

-Material handling [email protected] per movement for 12,18 & 35 movements

-Inspection Cost @ Rs. 400 per inspection for 145,208 & 310 inspection.

-Set up [email protected] per set up for 115,160 & 210 setups.

Rs.

403200

43200

58000

51750

Rs.

1965600

64800

83200

72000

Rs.

2268000

126000

124000

94500

Product wise total overhead 556150 2185600 2612500

Output (Units) 11200 18200 31500

Product wise overhead cost per unit 49.66 120.09 82.94

***

192

Question 1

What is Non-Integrated Accounting system? Write down the list of principal ledger maintained under Non-Integrated Accounting system?

Answer

It is a system of accounting under which separate ledgers are maintained for cost and financial accounts by Accountants. Under such a system the cost accounts restricts itself to recording only those transactions which relate to the product or service being provided. Hence items of expenses which have a bearing with sales or, production or for that matter any other items which are under the factory management are the ones dealt with in such accounts.

A special feature of the non-integrated system of accounts is its ability to deal with notional expenses like rent or interest on capital tied up in the stock. The accounting of notional rent facilitates comparisons amongst factories (some owned and some rented). Similarly, recognition of interest on capital tied up in stock could help make the stores and works managers aware of the money being blocked because of holding stock.

Non Integrated Accounting Systems contain fewer accounts when compared with financial accounting because of the exclusion of purchases, expenses and also Balance Sheet items like fixed assets, debtors and creditors. Items of accounts which are excluded are represented by an account known as cost ledger control account.

These are the list of principal ledger accounts maintained under Non-Integrated accounting systems:

(1) Stores ledger : It is used to record both the quantity and amount of receipts, issues and balance of materials and supplies. It consists of all store accounts.

(2) Payroll and wage analysis book : It is used to record the wages. The basis for recording the transactions are (a) clock cards,(b) time tickets, and (c) piece work tickets.

(3) Job ledger : It is used to record the material cost, wages, and overheads incurred in respect of a job.

(4) Finished goods stock ledger : It is used to record the receipt of finished goods from production department, the sale and stock of finished goods both in terms of quantity and value.

6

Cost Records

193

(5) Standing order ledger : It is used to record overheads incurred.

(6) Debtors’ Ledger : It contains personal accounts of all trade debtors.

(7) Creditors’ Ledger : It contains personal accounts of all trade creditors.

Question 2

What is integrated (integral) Accounting system ? Write down the essential characteristics of Integral Accounting?

Answer

Integrated Accounting is a system in which the accounts are integrated and only a single set of accounts are maintained for Cost & Financial records. It avoids maintenance of Accounts under cost accounting & financial accounting. This enables a firm to eliminate separate Profit & Loss Accounts under financial accounting and cost accounting system & only one Profit & Loss Accounts are prepared. It provides entire information for the ascertainment of cost of each unit as well as preparation of a balance sheet as per the legal requirement of the organization. It also provides necessary information as required by the costing and financial department. There is general Ledger Control A/c is prepared in this system.

Characteristics of Integral Accounting

The following are the important characteristics of an integral accounting system:

1. It records financial transactions not normally required for cost accounting be sided recording internal costing transactions prepayments and accruals are opened.

2. Stores transactions are recorded in the stores control accounts. This account is debited with the cost of stores purchased corresponding credit being given to cash or sundry creditors depending whether the purchase is made for cash or on credit.

3. Wages control account is debited with the wages paid, contra credit is taken in cash or bank accounts.

4. Overhead expenses are debited to the overhead control account, corresponding credit being given to cash or bank account or the sundry creditors.

5. Transactions relating to materials, labour cost overheads are posted in the stores wages and overhead control account after making suitable cost analysis and that the end of the period transfer of the totals is made to the work-in-progress accounts by crediting various control accounts. The day to day cost analysis made for this purpose is known as making third etc. These entries do not mean entries in the same sense a entry of transaction in the ledger but such entries are simply a sort of cash analysis.

6. All advances payments are credited and accruals debited to the respective control account by contra entries in the prepayments and accrual accounts.

7. Capital asset account is debited and respective control accounts are credited in the process of cost analysis of expenditure.

194

Question 3

Write short notes on:

(a) Cost Control Accounts

(b) Integral system of accounting

(c) Costing Profit and Loss Account

(d) Memorandum reconciliation account

(e) Reconciliation

Answer

(a) Cost Control Account : These are accounts maintained for the purpose of exercising control over the costing ledgers and also to complete the double entry in cost accounts.

(b) Integral System of Accounting : A system of accounting where both costing and financial transactions are recorded in the same set of books.

(c) Costing Profit and Loss Account : This account records the transfer of under or over recovered overheads, abnormal losses or gains and profit or loss transferred from sales account. The closing balance represents net profit or loss and transferred to General Ledger Adjustment Account.

(d) Memorandum reconciliation account : Reconciliation can be done by preparing a memorandum reconciliation account. This account is a memorandum account only and does not form part of double entry. When reconciliation is attempted through Memorandum Reconciliation Account, Profit to be taken as “base profit” is shown like opening balance in this account. All items of difference required to be deducted are debited and those to be added are credited to this account, the balancing figure of this account is the profit shown by other set of accounts.

(e) Reconciliation : In the non-integrated system of accounting, since the cost and financial accounts are kept separately, it is imperative that those should be reconciled; otherwise the cost accounts would not be reliable. The reason for differences in the cost and financial accounts can be purely of financial nature (Income and expenses) and notional nature.

Question 4

Write down the merit & limitations of Non-Integrated Accounting systems ?

Answer

The following are the main advantages of this accounting system:

1. This system tends to coordinate the functions of different selections of the accounts department since all efforts are integrated and directed towards achievement of one aim that is providing a high level of efficiency.

2. The accounting procedures can be simplified and the system can be centralised with the object of achieving a greater control over the organization.

195

3. The system creates conditions which are eminently suitable for the introduction of mechanized accounting.

4. There is no possibility of overlooking any expense under the system.

5. As cost accounts are posted straight from the books of original entry, there is no delay in obtaining the data.

6. There is automatic check on the correctness of the cost data. It ensures that all legitimate expenditure is included in Cost accounts and reliable and proved data is provided to the management for its decisions’.

7. Integrated accounting widens the outlook of the accountant.

8. It can be maintained according to convenience as it need not be statutorily maintained.

Limitations of Non-Integrated Accounting

The following are some of the limitations of this accounting system:

1. The Financial transactions other than cost incurred are not recorded in the system.

2. Transactions involving payment other than that of cost are not included in the system e.g: loss on fixed assets.

3. There is always a diff between the profits reported as per the Cost accounting system and the Financial Accounting System.

Question 5

What are the needs for Reconciliation of costing and financial profit?

Answer

In those concerns where there are no separate cost and financial accounts, the problem of reconciliation does not arises. But where cost and financial accounts are maintained independent of each other, it is imperative that periodically two accounts are reconciled. Though both sets of books are concerned with the same basic transactions but the figure of profit disclosed by the former does not agree with the disclosed by the later. Thus, reconciliation between the two sets of books is necessary due to the following reasons:

1. To find out the reason of the difference in the profit or loss in the cost and financial accounts to indicate the position clearly and to be sure that no mistakes pertaining to the accounts have been committed.

2. To ensure the mathematical accuracy and reliability of cost accounts in order to have cost ascertainment, cost control and to have a check on the financial accounts.

3. To contribute to the standardization of policies regarding stock valuation, depreciation and overheads.

196

4. To facilitate coordination and promote better cooperation between the activities of financial and cost sections of accounting department.

5. To place management in a better position to acquaint itself with the reasons for the variation in profits paving the way to more accurate internal control.

Question 6

A manufacturing company disclosed a Net Loss of Rs. 3,43,200 as per their Cost Accounts for the year ended March 31, 2015. The Financial Accounts however disclosed a Net Loss of Rs. 5,30,400 for the same period. The following information was revealed as a result of scrutiny of the figures of both the set of Books.

Rs

(i) Factory Overheads Over-absorbed 9,600

(ii) Administration Overheads under absorbed 14,400

(iii) Depreciation charged in Financial Accounts 1,32,000

(iv) Depreciation charged in Cost Accounts 1,47,000

(v) Interest on Investments not included in Cost Accounts. 38,400

(vi) Income Tax Provided 92,400

(vii) Interest on loan funds in Financial Accounts 1,57,800

(viii) Transfer fees (Credits in financial books) 9,600

(ix) Stores adjustment (Credit in financial books) 4,800

Prepare a Memorandum Reconciliation Statement.

Answer

Memorandum Reconciliation Account

Particulars Rs. Rs.

Net Loss as per Financial Books 5,30,400

Add: Factory overheads over absorbed in Cost Accounts 9,600

Interest on Investment not included in Cost Accounts 38,400

Depreciation over charged in Cost Accounts 15,000

Transfer fees in financial books 9,600

Stores Adjustment in financial books 4,800 77,400

6,07,800

Less: Administration overheads under recovered in Cost Accounts 14,400

197

Income Tax not provided in Cost Accounts 92,400

Interest on loan fund not included in Cost Accounts 1,57,800 2,64,600

Net Loss as per Cost Accounts 3,43,200

Question7

PQR Ltd., made a Net Profit of Rs. 3,99,700 during the year 2015 as per the their financial system. Whereas their cost accounts disclosed a profit of Rs. 5,44,040. On reconciliation, the following differences were noticed :

(1) Directors fees charged in financial account, but not in cost account Rs. 9,100.

(2) Bank interest credited in financial account, but not in cost account Rs. 420.

(3) Income Tax charged in financial account, but not in cost account Rs. 1,16,200.

(4) Bad and doubtful debts written off Rs. 7,980 in financial accounts.

(5) Overheads charged in costing books Rs. 1,19,000 but actual were Rs. 1,16,480.

(6) Loss on sale of old machinery Rs.14,000 charged in financial accounts.

Prepare a reconciliation Statement.

Answer

Reconciliation Statement

Particulars Amount (Rs.) Amount (Rs.)

Profits as per Financial Account 3,99,700

Add: Director fees charged in financial account but not in Cost account 9,100

Income Tax charged in financial account

but not in Cost Account 1,16,200

Bad and doubtful debts written off 7,980

Loss on sale of old machinery 14,000 1,47,280

5,46,980

Less : Bank interest credited in financial account

but not in Cost Account 420

Overheads over absorbed in Cost A/c (1,19,000 – 1,16,480) 2,520 2,940

Profit as per Cost Accounts 5,44,040

198

Question 8

ABC Ltd., has furnished you the following information from the financial books for the year ended 30th June, 2015 :

Profit and Loss Account (ended 30th June)

Particulars Amount Particulars Amount

Rs. Rs.

To Purchases 88,235 By Sales (25000 units at Rs.10.5) 2,62,500

Direct wages 36,750

Factory Overheads 42,455 Rent Received 910

Office & Administrative} Profit on sale of investment 8,190

Overheads 18,690 Closing Stock 14,280

Depreciation 3,850

Selling Expenses 24,850

Net Profit 71,050 ________

2,85,880 2,85,880

The cost sheet shows the costing profit of Rs. 69,195 and closing stock of Rs. 14,980. The factory overheads are absorbed at 100% of direct wages and Office and Administrative overheads are charged at Re. 0.70 per unit. Selling expenses are charged at 10% of Gross of sales. Depreciation in cost account absorbed was Rs. 2,800.

You are required to prepare:

(1) A statement showing as per cost account for the year ended 30th June, 2015.

(2) Statement showing the reconciliation of profit disclosed in cost accounts with the profit shown in the financial accounts.

Answer

Profit as per Cost Accounts


Purchases 88,235

Add: Direct Wages 36,750

Prime Cost 1,24,985

Add: Factory overhead at 100% on direct wages 36,750

1,61,735

Add: Depreciation 2,800

Factory cost or Works cost 1,64,535

Add: Office & Administrative overhead at Re. 0.70 Per unit 17,500

Cost of Production 1,82,035

Less: Closing stock of finished goods 14,980

Cost of goods sold 1,67,055

199

Add: Selling expenses at 10% of Rs. 2,62,500 26,250

Cost of Sales 1,93,305

Costing Profit 69,195

Sales 2,62,500


Particulars Amount Rs. Amount Rs.

Profits as Financial Account 71,050

Add: Over valuation of closing stock in Cost a/c 700

Under absorption of Factory overhead in Cost A/c 5,705

Under absorption of Office & Adm. Overhead in Cost A/c 1,190

Depreciation under absorbed in Cost A/c 1,050 8,645

79,695

Less: Over absorption of selling expenses in Cost A/c 1,400

Rent received charged in Financial A/c 910

Profit on sale of investment charged in Financial A/c 8,190 10,500

Profit as per Cost A/c 69,195

Question 9

XYZ & Co. operates separate Cost & Financial systems. The following is the list of Opening balances as on 01.04.2014 in the Cost Ledger :

Debit Credit

Rs. Rs.

Store Ledger Control Account 56,044

WIP Control Account 1, 09,825

Finished Goods Control Account 32,319

General Ledger Adjustment Account - 1, 98,188

Transactions for the quarter ended 30/06/2014 are given below:

Rs

Materials Purchased 28,035

Materials issued to Production 42,000

Materials issued for factory repairs 945

Factory wages paid 81,375

Production overhead incurred 99,960

Production overhead Under-absorbed and Written-off 3,360

Sales 2, 68,800

The company’s Gross Profit is 25% on Factory cost.

Prepare the relevant control accounts, Costing Profit & Loss Account and General Ledger Adjustment Account to record the above transactions for the quarter ended 30/06/2014.

200

Answer

General Ledger Adjustment Account

To Sales

To Balance c/d

Rs.

2,68,800

1,89,158

4,57,958

By Balance b/d

By Stores Ledger Control Account

By Wages Control Account

By Factory Overhead Control Account

By Costing Profit & Loss Account

Rs.

1,98,188

28,035

81,375

99,960

50,400

4,57,958

Stores Ledger Control Account

To Balance b/d

To General Ledger Adjustment Account

Rs.

56,044

28,035

_________ 84,079

By WIP Control Account

By Factory Overhead Control Account

By Balance c/d (Bal. Fig.)

Rs.

42,000

945

41,134

__________84,079

Wages Control Account


Rs.

81,375

81,375

Factory overhead control a/c

By WIP Control Account

Rs.

3875

77,500

81,375

Factory Overhead Control Account

To Stores Ledger Control Account

Wage control a/c


Rs.

945

3875

99,960

1,04,780

By WIP Control Account (Bal. Fig.)

By Costing Profit & Loss A/c

Rs.

1,01,420

3,360

1,04,780

201

Wip Control Account

To Balance b/d

To Stores Ledger Control Account

To Wages Control Account

To Factory Overhead Control Account

Rs.

1,09,825

42,000

77,500

1,01,420

3,30,745

By Finished Goods Control Account (Bal. Fig.)

By Balance c/d

Rs.

2,17,045

1,13,700

3,30,745

Finished Goods Control Account

To Balance b/d

To WIP Control Account

Rs.

32,319

2,17,045

2,49,364

By Cost of Sales A/c

(2,68,800-20% of 2,68,800)

By Balance c/d (Bal. Fig.)

Rs.

2,15,040

34,324

2,49,364

Cost of Sales Account

To Finished Goods Control A/c

Rs.

2,15,040

By Costing Profit & Loss A/c

Rs.

2,15,040

Sales Account

To Costing Profit & Loss A/c

Rs.

2,68,800

By General Ledger Adjustment A/c

Rs.

2,68,800

Costing Profit & Loss Account

To Factory Overhead Control Account

To Cost of Sales A/c

To General Ledger Adjustment A/c

Rs.

3,360

2,15,040

50,400

2,68,800

By Sales A/c

Rs.

2,68,800

2,68,800

202

Trial Balance

Stores Ledger Control Account

WIP Control Account

Finished Goods Control A/c

General Ledger Adjustment A/c

Rs.

41,134

1,13,700

34,324

1,89,158

Rs.

1,89,158

1,89,158

Question 10

The following is the Trading and Profit & Loss Account of RST Limited :

Dr. Cr.

Particulars Rs. Particulars Rs.

To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000

To Direct Wages 12,05,750 By Finished Goods Stock

To Production Overheads 6,92,250 (1,000 units) 1,30,000

To Administration Overheads 3,10,375 By Work-in-Progress :

To Selling & Distribution Overheads 3,68,875 Materials 55,250

To Preliminary Expenses written off 22,750 Wages 26,000

To Goodwill written off 45,500 Production

To Fines 3,250 Overheads 16,250 97,500

To Loss on Sale of Machine 16,250 By Dividends received 3,90,000

To Taxation 1,95,000 By Interest on Bank Deposits 65,000

To Net Profit for the year 3,96,500 ___________

55,57,500 55,57,500

RST Limited manufactures a standard unit.

The cost Accounting records of RST Ltd. Shows the following :

(i) Production overheads have been charged to work-in-progress at 20% on prime cost.

(ii) Administrative overheads have been recorded at Rs. 9.75 per finished unit.

(iii) Selling & Distribution overheads have been recorded at Rs. 13 per unit sold.

(iv) The under or Over absorption of Overheads has not been transferred to Costing P/L A/c.

203

Required :

(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 cost records with that shown in Financial Accounts.

Answer

Statement of Cost and Profit

Rs.

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 year 41,10,600

Add : Administrative Overheads (Rs. 9.75 * 31,000) 3,02,250

- Cost of Production 44,12,850

Less : Closing Stock of Finished Goods [(44,12,850/31,000)*1,000] 1,42,350

Cost of Goods Sold 42,70,500

Add: Selling & Distribution Overheads (Rs. 13 * 30,000) 3,90,000


Profit 2,14,500

Sales 48,75,000

(ii) Production Overheads Account

Dr. Cr.


To General Ledger Adjustment A/c 6,92,250 By Work-in-Progress 7,01,350

To Balance c/d 9,100

7,01,350 7,01,350

204

Administrative Overheads Account Dr. Cr.


To General Ledger Adjustment A/c 3,10,375 By Finished Goods A/c 3,02,250

By Balance c/d 8,125

3,10,375 3,10,375

Selling & Distribution Overheads Account Dr. Cr.


To General Ledger Adjustment A/c 3,68,875 By Cost of Sales A/c 3,90,000


3,90,000 3,90,000

(iii) Reconciliation Statement

Rs. Rs.


Add: Production overheads over recovered 9,100 Selling and distribution overheads over recovered 21,125

Dividend received 3,90,000

Interest on Bank Deposits 65,000 4,85,225 6,99,725

Less: Administrative overheads under recovered 8,125 Preliminary Expenses written off 22,750

Goodwill written off 45,500 Fines 3,250

Loss on sale of machine 16250

Taxation 1,95,000

Overvaluation of Finished Stock in cost accounts

(1,42,350-1,30,000) 12,350 3,03,225

Profit as per Financial Accounts 3,96,500

Question 11

The following information is available from the financial books of ABC LTD. having a normal production capacity of 60,000 units for the year ended 31st March, 2015:

(c) Sales Rs. 10,00,000 (50,000 units).

(ii) There was no opening and closing stock of finished units.

205

(iii) Direct material and direct wages cost were Rs. 5,00,000 and Rs. 2,50,000 respectively.

(iv) Actual factory expenses were Rs. 1,50,000 of which 60% are fixed.

(v) Actual administrative expenses were Rs. 47,000 which are completely fixed.

(vi) Actual selling and distribution expenses were Rs. 30,000 of which 40% are fixed.

(vii) Interest and dividends received Rs. 15,000.


(a) Find out profit as per financial books for the year ended 31st March, 2015;

(b) Prepare the cost sheet and ascertain the profit as per the cost accounts for the year ended 31st March,2015 assuming that the indirect expenses are absorbed on the basis of normal production capacity; and

© Prepare a statement reconciling profits shown by financial and cost books.

Answer

Working notes

Profit & Loss Account

Dr. (For the year ended 31st March, 2015) Cr.

Rs. Rs.

To Direct material 5,00,000 By Sales (50,000 units) 10,00,000

To Direct wages 2,50,000 By Interest and dividends 15,000

To Actual factory expenses 1,50,000

To Actual administrative expenses 47,000

To Actual selling and distribution

Expenses 30,000

To Profit 38,000

10,15,000 10,15,000

(a) Profit as per financial books for the year ended 31st March, 2015 is Rs. 38,000 .

(b) Cost Sheet

(For the year ended 31st March, 2015)

Rs.

Direct material 5,00,000

Direct wages 2,50,000

Prime cost 7,50,000

206

Factory expenses:

Variable - Rs. 60,000

Fixed - Rs. 75,000 1,35,000

Works cost 8,85,000

Administrative expenses: 37,500

Cost of production 9,22,500

Selling & distribution expenses:

Variable Rs. 18,000

Fixed Rs. 10,000 28,000


Profit 49,500

Sales Revenue 10,00,000

(c) Statement of Reconciliation

(Reconciling Profit shown by Financial and Cost Accounts)

Rs. Rs.

Profit as per cost account 49,500

Add : Income from interest and dividends 15,000 64,500

Less: Factory expenses under-charged in cost accounts 15,000

(Rs. 1,50,000 - Rs. 1,35,000)

Administrative expenses under-charged in cost accounts 9,500

(Rs. 47,000 – Rs. 37,500)

Selling & distribution expenses under-charged in cost accounts 2,000 26,500

(Rs. 30,000 – Rs. 28,000)

Profit as per Financial accounts 38,000

Question 12

The following figures, have been extracted from the financial accounts of a Devankit textiles for the first year of its operation:

Rs.

Direct material consumption 5,00,000


Factory overhead 1,60,000

Administrative overheads 70,000

207

Selling & distribution overheads 96,000

Bad debts 8,000

Preliminary expenses written off 4,000

Legal charges 1,000

Dividends received 10,000

Interest received on deposits 2,000

Sales (12,000 units) 12,00,000

Closing stock:

Finished goods (400 units) 32,000

Work-in-progress 24,000

The cost accounts for the same period reveals that the direct material consumption was Rs. 54,60,000. Factory overhead is recovered at 20% on prime cost. Administrative overhead is recovered at Rs. 6 per unit of production. Selling and distribution overheads are recovered at Rs. 8 per unit sold.

Prepare the Profit and Loss Account both as per financial records and as per cost records. Reconcile the profits as per the two records.

Answer

Profit and Loss Account

Dr. (As per financial records) Cr.

Rs. Rs.

To Direct material 5,00,000 By Sales (12,000 units) 12,00,000

To Direct wages 3,00,000 By Closing stock:

To Factory overheads 1,60,000 WIP 24,000

To Gross profit c/d 2,96,000 Finished goods (400 units) 32,000

12,56,000 12,56,000

To Administrative overheads 70,000 By Gross profit b/d 2,96,000

To Selling & Distribution overheads 96,000 By Dividend 10,000

To Bad debts 8,000 By Interest 2,000

To Preliminary expenses written off 4,000

To Legal charges 1,000

To Net Profit 1,29,000

3,08,000 3,08,000

208

Statement of Cost and Profit (As per Cost Records)

Total Rs.

Direct Material 5,60,000


Prime Cost 8,60,000

Factory Overhead 1,72,000

10,32,000

Less : Closing Stock (WIP) 24,000

Works Cost (12,400 unit) 10,08,000

Administration Overhead (12,400 units @ Rs. 6 p.u.) 74,400

Cost of Production (12,400 units) 10,82,400

Less : Finished goods (400 units @ Rs. 87.29) 34,916

Cost of goods sold (12,000 units) 10,47,484

Selling and distribution overhead (12,000 @ Rs. 8 p.u.) 96,000


Net profit 56,516

Sales Revenue 12,00,000

Statement of Reconciliation of Profit as Obtained Under Cost and Financial Accounts

Rs. Rs.

Profit as per Cost records 56,516

Add : Excess of material consumption 60,000

Excess factory overhead 12,000

Excess Administration overhead 4,400

Dividend Received 10,000

Interest Received 2,000 88,400

1,44,916

Less : Bad debts

Preliminary expenses written off 8000

Legal Charges 4000

Over-valuation of stock in cost book 1000

(Rs. 3,49,16–Rs. 3,20,00) 2916 15,916

Profit as per Financial records 1,29,000

209

Question 13

On 31st March, 2015 the following balances were extracted from the books of a Manufacturing Company

Dr. Cr.

Rs. Rs.

Stores Ledger Control A/c 35,000

Work-in-progress 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, 2015:

Rs. Raw materials:

Purchased 95,000

Return to suppliers 3,000

Issued to production 98,000

Return to stores 3,000

Productive wages 40,000

Indirect labour 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 cost and charged off to the Profit & Loss A/c of the month in which they are incurred.

Show the following accounts:

(a) Cost ledger control A/c

(b) Stores ledger control A/c

(c) Work-in-progress 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, 2015.

210

Answer

(a) Cost Ledger Control A/c

Dr. Cr.

Rs. Rs.

To costing profit and loss A/c 3,00,000 By balance b/d 98,000

To stores ledger control A/c 3,000 By stores ledger control A/c 95,000

To balance c/d 95,000 By wages control A/c 65,000

(Productive + Indirect)

By Factory overhead control A/c 50,000

By selling & administrative

Overhead expenses A/c 40,000

______ By costing profit and loss A/c 50,000

3,98,000 3,98,000

(b) Stores Ledger Control A/c

Dr. Cr.

Rs. Rs.

To balance b/d 35,000 By cost ledger control A/c 3,000

To cost ledger control A/c 95,000 By Work-in-progress A/c 98,000

To Work-in-progress A/c 3,000 By balance c/d 32,000

1,33,000 1,33,000

(c) Work-in-Progress Control A/c

Dr. Cr.

Rs. Rs.

To balance b/d 38,000 By stores ledger control A/c 3,000

To stores ledger control A/c 98,000 By Finished goods A/c 2,13,000

To wages control A/c 40,000 By balance c/d 20,000

To Factory overhead control A/c 60,000 ______

2,36,000 2,36,000

211

(d) Finished Goods Control A/c

Dr. Cr.

Rs. Rs.

To balance b/d 25,000 By cost of goods sold A/c 2,10,000

To Work-in-progress control A/c 2,13,000 By balance c/d 28,000

2,38,000 2,38,000

(e) Factory overhead control A/c

Dr. Cr.

Rs. Rs.

To wages control A/c 25,000 By Work-in-progress A/c 60,000

To cost ledger control A/c 50,000 By balance c/d 15,000

75,000 75,000

(f) Costing Profit and Loss A/c

Dr. Cr.

Rs. Rs.

To cost of goods sold A/c 2,10,000 By cost ledger control A/c

(sales) 3,00,000

To selling and administrative overhead A/c 40,000

To cost ledger control A/c (costing profit) 50,000 _______

3,00,000 3,00,000

(g) Trial Balance (as at 30th April, 2015)

Dr. Cr.

Rs. Rs.

Stores ledger control A/c 32,000

Work-in-progress control A/c 20,000

Finished goods control A/c 28,000

Factory overhead control A/c 15,000

Cost ledger control A/c ______ 95,000

95,000 95,000

212

Working notes:

(1) Wages control A/c

Dr. Cr.

Rs. Rs.

To cost ledger control A/c 65,000 By Work-in-progress control A/c 40,000


65,000 65,000

(2) Cost of goods Sold A/c

Dr. Cr.

Rs. Rs.

To Finished goods control A/c 2,10,000 By costing profit and loss A/c 2,10,000

2,10,000 2,10,000

(3) Selling & Administrative Expenses A/c

Dr. Cr.

Rs. Rs.

To cost ledger control A/c 40,000 By costing profit and loss A/c 40,000

40,000 40,000

Question 14

Journalise the following transaction assuming that the cost and financial transactions are integrated: Rs

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

213

Closing stock Nil

Receipts from debtors 69,000

Payments to creditors 1,10,000

Answer

Journal Entries

Dr. Cr.

Rs. Rs.

Stores ledger control A/c Dr. 2,00,000

To Creditors’ A/c 2,00,000

(Materials purchased)

Work-in-Progress control A/c Dr. 1,50,000

To Stores ledger control A/c 1,50,000

(Materials issued to production)

Wages control A/c Dr. 1,20,000

To Bank A/c 1,20,000

(Wages paid)

Factory Overhead control A/c Dr. 36,000

To Wages control A/c 36,000

(30% of wages paid being indirectly charged to overhead)

Work-in-Progress control A/c Dr. 84,000

To Wages control A/c 84,000

(Manufacturing overhead incurred)

Work-in-Progress control A/c Dr. 92,000

To Factory overhead control A/c 92,000

(Manufacturing overhead charged to production)

Selling and distribution overhead control A/c Dr. 20,000

To Bank A/c 20,000

(Selling and distribution costs incurred)

Finished goods ledger control A/c Dr. 2,00,000

To Work-in-Progress control A/c 2,00,000

(Cost of finished goods)

Cost of Sales A/c Dr. 2,20,000

214

To Finished stock ledger control A/c 2,00,000

To Selling and distribution control A/c 20,000

(Costs of goods sold)

Sundry Debtors’ A/c Dr. 2,90,000

To Sales A/c 2,90,000

(Finished stock sold)

Bank A/c Dr. 69,000

To Sundry Debtors’ A/c 69,000

(Receipts from debtors)

Sundry Creditors’ A/c Dr. 1,10,000

To Bank A/c 1,10,000

(Payment made to Creditors)

Question 15

The following balances were extracted from a company’s ledger as on 31st December, 2015:

Dr. Cr.

Rs. Rs.

Raw materials control A/c 48,836

Work-in-Progress control A/c 14,745

Finished stock control A/c 21,980

Nominal ledger control A/c 85,561

85,561 85,561

Further transactions took place during the following quarter as follows:

Rs.

Factory overhead-allocated to WIP 11,786

Goods finished-at cost 36,834

Raw materials purchased 22,422

Direct wages –allocated to WIP 18,370

Cost of goods sold 42,000

Raw materials-issued to production 17,000

Raw materials-Credited by suppliers 1,000

Inventory audit-raw material losses 1,300

WIP rejected (with no scrap value) 1,800

Customer’s return (at cost) of finished goods 3,000

215

Prepare all the ledger accounts in cost ledger.

Answer


Dr. Cr.

Rs. Rs.

To Raw material control A/c 1,000 By Balance b/d 85,561

To Raw materials control A/c 1,300 By Raw materials control A/c 22,422

To WIP control A/c 1,800 By wages control A/c 18,370

To Finished stock control A/c 42,000 By Factory overhead control A/c 11,786

To Balance c/d 95,039 By Finished stock control A/c 3,000

1,41,139 1,41,139

Raw Material Control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 48,836 By Work-in-Progress control A/c 17,000

To General Ledger Adjustment A/c 22,422 By General Ledger Adjustment A/c 1,000

(Purchase) (Returns)

By General Ledger Adjustment A/c 1,300

(Losses)

________ By Balance c/d 51,958

71,258 71,258

Work-in-Progress control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 14,745 By Finished stock control A/c 36,834

To Wages control A/c 18,370 By General Ledger Adjustment A/c 1,800

To Raw materials control A/c 17,000 (WIP Rejected)

To Factory overhead control A/c 11,786 By Balance c/d 23,267

61,901 61,901

216

Finished stock control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 21,980 By General Ledger Adjustment A/c 42,000

To WIP control A/c 36,834 (Cost of goods sold)

To General Ledger Adjustment A/c 3,000 By Balance c/d 19,814

(Returns at cost)

_____ _____

61,814 61,814

Question 16

Write down the advantages of Cost Ledger. Prepare a short note on Control Account.

Answer

The following are the advantages of maintaining a cost ledger:

(1) It helps the management in policy decisions as this ledger summarises all detailed information regarding cost in subsidiary records.

(2) It provides the basis for analysis of cost and preparation of accounts for each cost centre for cost ascertainment and control.

(3) It provides a proper control over materials and supplies, labour and overheads.

(4) Standards may be set to provide guidance for measuring and improving efficiency and cost ledger may furnish necessary accounts for submission to the management for control purposes.

(5) The maintenance of cost ledger helps in determining the values of closing stocks and work-in-progress without any delay and makes possible the prompt preparation of profit and loss account and balance sheet at regular intervals.

(6) It serves as a check on the transactions and records in financial accounts.

(7) It facilitates prompt preparation of costing profit and loss account helps management to know the results of operation of the firm.

(8) A system of internal check exists through the use of various control accounts. This helps in detecting errors and thus maintaining accuracy.

(9) When cost accounts are separately maintained, It is possible to maintain confidentiality of cost data.

(10) Maintenance of cost ledger serves to provide elaborate information for planning, control, evaluation of performance and decision-making by facilitating generation of internal reports.

217

Control Accounts

In order to facilitate handling of numerous transactions instead of being posted in general ledger are recorded in subsidiary ledgers. Transactions kept in detail in one or more accounts of the subsidiary ledgers are posted in totals at the end of the period to control accounts. Control accounts are the total accounts maintained in the cost ledger. Each total account represents a subsidiary ledger in which individual accounts are maintained. Stores ledger control account, for instance, represents the stores ledger in which individual stores card are maintained. Individual debits and credits in stock cards are abstracted, totaled and taken into control account in the cost ledger. At any time, the total balance in control account and aggregate of individual balances in subsidiary ledger accounts should agree. Such control accounts:

(i) facilitate compilation of final accounts and reconciliation with financial accounts;

(ii) give a summary of thousands of individual accounts; and

(iii) furnish the total position i.e., to know the value of pending jobs or of materials in hand, one need not list individual balances.

Question 17

A company operates separate cost accounting and financial accounting system. The following is the list of opening balances as on 1st April, 2015 in cost ledger:

Dr. Cr. Rs. Rs.

Stores ledger control A/c 53,375

WIP Control A/c 1,04,595


General ledger adjustment A/c 1,88,750

Transactions for the quarter ended 30th June, 2015 are as under:

Rs.

Materials purchased 26,700

Materials issued to production 40,000

Materials issued for factory repairs 900

Factory wages paid (including indirect wages Rs. 23,000) 77,500

Production overhead incurred 95,200

Production overheads under-absorbed and written off 3,200

Sales 2,56,000

The company’s gross profit is 25% on Factory Cost. At the end of the quarter, WIP stocks increased by Rs. 7,500.

Prepare the relevant control accounts, costing P & L A/c and General Ledger Adjustment A/c to record the above transactions for the quarter ended 30th June, 2015.

218

Answer


Dr. Cr.

Rs. Rs.

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

By wages control A/c 77,500


By Costing Profit & Loss A/c 48,000

4,36,150 4,36,150

Stores Ledger Control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 53,375 By WIP Control A/c 40,000

To General ledger adjustment A/c 26,700 By Factory overhead control A/c 900

By Balance c/d (Bal. Fig.) 39,175

80,075 80,075

Wages control A/c Dr. Cr.

Rs. Rs.

To General ledger adjustment A/c 77,500 By WIP Control A/c(Direct) 54,500


(Indirect)

77,500 77,500

Factory overhead control A/c Dr. Cr.

Rs. Rs.

To Stores ledger control A/c 900 By WIP Control A/c(Bal. Fig.) 1,15,900

To Wages control A/c 23,000 By Costing profit and loss A/c 3,200

To General ledger adjustment A/c 95,200

1,19,100 1,19,100

219

WIP Control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 1,04,595 By Finished goods control A/c 2,02,900

To stores ledger control A/c 40,000 (Bal. Fig.)

To wages control A/c 54,500 By Balance c/d 1,12,095

To Factory overhead control A/c 1,15,900 (Rs. 1,04,595 +Rs. 7,500)

3,14,995 3,14,995

Finished goods control A/c

Dr. Cr.

Rs. Rs.

To Balance b/d 30,780 By Cost of sales A/c 2,04,800

To WIP Control A/c 2,02,900 (Rs.2,56,000 -20% of Rs.2,56,000)

By Balance c/d(bal. fig.) 28,880

2,33,680 2,33,680

Cost of Sales A/c

Dr. Cr.

Rs. Rs.

To Finished goods control A/c 2,04,800 By Costing Profit and Loss A/c 2,04,800

Sales A/c

Dr. Cr.

Rs. Rs.

To costing Profit and Loss A/c 2,56,000 By General ledger adjustment A/c 2,56,000

Costing Profit and Loss A/c

Dr. Cr.

Rs. Rs.

To Factory overhead control A/c 3,200 By Sales 2,56,000

To cost of sales A/c 2,04,800

To General ledger adjustment A/c 48,000 ______

2,56,000 2,56,000

220

Trial Balance

As on 30th June, 2015

Dr. Cr.

Rs. Rs.

Stores Ledger Control A/c 39,175

WIP Control A/c 1,12,095


General ledger adjustment A/c 1,80,150

TOTAL 1,80,150 1,80,150

Question 18

A company operate on historic job cost accounting system, which is not integrated with the financial accounts. At the beginning of a month, the opening balance in cost ledger were:

Rs.(in ‘lakhs)

Stores ledger control A/c 80

WIP Control A/c 20

Finished goods control A/c 430

Building Construction A/c 10

Cost ledger control A/c 540

During the month the following transactions took place :

Materials-Purchased 40

Issued to production 50

Issued to general maintenance 6

Issued to Building construction 4

Wages-Gross wages paid 150

Indirect wages 40

For building construction 10

Works overheads-Actual amount incurred (excluding items shown above) 160

Absorbed in building construction 20

Under absorbed 8

Royalty paid 5

Selling, distribution and administration overheads 25

Sales 450

At the end of the month, the stock of raw material and work-in-progress was Rs. 55 lakhs and Rs. 25 lakhs respectively. The loss arising in the raw material account is treated as

221

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.

Answer Cost Ledger

Dr. General Ledger Adjustment A/c Cr.

Rs. Rs.

To Sales A/c 450 By Balance b/d 540

To Balance c/d 527 By Stores ledger control A/c 40

By Wages control A/c 150

By Royalty A/c 5

By Production overhead control A/c 160

By Selling distribution and administration

overhead control A/c 25

By costing Profit & Loss A/c 57

977 977

Dr. Stores Ledger Control A/c Cr.

Rs. Rs.

To Balance b/d 80 By Work-in-progress control A/c 50

To General ledger adjustment A/c 40 By Production overhead control A/c 6

By Building construction A/c 4

By Production overhead control

A/c (Loss) 5

(Bal. Fig.)

By Balance c/d 55

120 120

Dr. Wages Control A/c Cr.

Rs. Rs.

To General ledger adjustment A/c 150 By Production overhead control A/c 40

By Building Construction A/c 10

By WIP Control A/c 100

150 150

222

Dr. Royalty Account Cr.

Rs. Rs.

To General ledger adjustment A/c 5 By WIP Control A/c 5

Dr. Production Overhead Control A/c Cr.

Rs. Rs.

To General ledger adjustment A/c 160 By WIP Control A/c (Bal. Fig. 183

To Stores ledger control A/c 6 By Building construction A/c 20

To Stores ledger control A/c (Loss) 5 By costing profit and loss A/c 8

To Wages control A/c 40 (Under Absorption)

211 211

Dr. Work-In-Progress Control A/c Cr.

Rs. Rs.

To Balance b/d 20 By Finished goods control A/c 333

To Stores ledger control A/c 50 (Bal. Fig)

To Wages control A/c 100 By Balance c/d 25

To Production overhead control A/c 183

To Royalty A/c 5

358 358

Dr. Finished Goods Control A/c Cr.

Rs. Rs.

To Balance b/d 430 By Cost of Sales A/c

To WIP Control A/c 333 (Rs. 450 – 1/2of Rs. 450) 360

By Balance c/d 403

763 763

Dr. Selling Distribution & Administration Overhead Control Account Cr.

Rs. Rs.

To General ledger adjustment A/c 25 By Cost of sales A/c 25

223

Dr. Cost of Sales Account Cr.

Rs. Rs.

To Finished goods control A/c 360 By Sales A/c 385

To Selling distribution & administration

Overhead control A/c 25

385 385

Dr. Sales Account Cr.

Rs. Rs.

To Cost of Sales A/c 385 By General ledger adjustment A/c 450

To Costing Profit and Loss A/c

(Gross Profit) 65 __

450 450

Dr. Costing Profit and Loss A/C Cr.

Rs. Rs.

To Production overhead control A/c 8 By Sales 65

To General ledger adjustment A/c 57 __

65 65

Dr. Building Construction A/c Cr.

Rs. Rs.

To Balance b/d 10 By Balance c/d 44

To Stores ledger control A/c 4

To Wages Control A/c 10

To Production overhead control A/c 20 __

44 44

Working Notes : Trial Balance

Dr.(Rs.) Cr.(Rs.)

Stores ledger control A/c 55 WIP Control A/c 25

Finished goods control A/c 403 Building Construction A/c 44

General ledger adjustment A/c __ 527

527 527

224

Question 19

A manufacturing company disclosed a net loss of Rs. 5,72,000 as per their cost accounts for the year ended 31st March, 2015. The following information was revealed as a result of scrutiny of the figures of both the sets of books:

Rs.

i) Factory overheads over-absorbed 16,000

ii) Administration overheads under-absorbed 24,000

iii) Depreciation charged in financial accounts 2,20,000

iv) Depreciation charged in cost accounts 2,45,000

iv) Interest on investments not included in cost accounts 64,000

v) Income tax provided 1,54,000

vii) Interest on loan funds in financial accounts 2,63,000

viii) Transfer fees (credit in financial books) 16,000

ix) Stores adjustment (Credit in financial books) 8,000

Prepare a Memorandum Reconciliation Account.

Answer

Dr. Memorandum Reconciliation Account Cr.

Rs. Rs.

To Net loss as per costing books 5,72,000 By Factory overheads over absorbed

To Administration overheads under- in cost accounts 16,000

Recovered in cost accounts 24,000 By Interest on investments not

To income tax no provided in included in cost accounts 64,000

cost accounts 1,54,000 By Depreciation over-charged in

To Interest on loan funds not included cost accounts 25,000

In cost accounts 2,63,000 By Transfer fees in financial

Accounts 16,000

By Stores adjustments in

financial books 8,000

By Net Loss as per financial books

Bal. Fig.) 8,84,000

10,13,000 10,13,000

225

Question 20

The net profit of Fatty Co. Ltd. Appeared at Rs. 41,800 as per financial records for the year ending 31st March, 2015. The cost books, however, showed a net profit of Rs. 1,11,900 for the same period. A scrutiny of the figures from both the sets of accounts revealed the following facts :

Rs.

Works overhead under-recovered in costs 1,500

Administrative overheads over-recovered in costs 850

Depreciation charged in financial accounts 5,600

Depreciation recovered in costs 6,250

Interest on investments not included in costs 3,000

Loss due to obsolescence charged in financial accounts 2,850

Income tax reserve made in financial accounts 20,150

Bank interest and transfer fees credited in financial books 370

Stores adjustment (credit) in financial books 230

Value of opening stock in : Cost accounts 24,800

Financial accounts 26,300

Value of closing stock in : Cost accounts 25,000

Financial accounts 23,000

Interest charged in cost accounts 2,000

Imputed rent charged in cost accounts 1,000

Goodwill written off 5,000

Loss on sale of furniture 600

Selling and distribution expenses not charged to cost accounts 10,000

Donations to Prime Minister’s Relief Fund 5,100

Transfer to Debenture Redemption Fund 9,000

Transfer to Dividend Equalization Fund 20,500

Prepare (i) a statement showing the reconciliation a Memorandum of net profit as per cost accounts and net profit as shown in the financial books; (ii) Memorandum Reconciliation Account.

226

Answer

(a) Reconciliation Statement

Rs. Rs. Rs.

Profit as per cost accounts 1,11,900

Add : (i) Administration overheads over-recovered in cost accounts 850

(ii) Depreciation overcharged in cost books:

Cost books 6,250

Financial books 5,600 650

(iii) Receipts and gains credited in financial books but not

Shown in cost books :

1. Interest on investments 3,000

2. Bank interest and transfer fees 370

3. Stores adjustments 230

(iv) Imputed rent charged in cost accounts 1,000

(v) Interest charged in cost accounts 2,000 8,100

1,20,000

Less : (i) Works overheads under-recovered in cost accounts 1,500

(ii) Expenses and Losses debited in Financial books

but excluded from cost books :

1. Income tax 20,150

2. Loss due to obsolescence 2,850

3. Goodwill written off 5,000

4. Loss on sale of furniture 600

5. Selling and distribution expenses not

charged in cost accounts 10,000

6. Donation to Prime Minister’s Relief Fund 5,100

7. Transfer to Debenture Redemption Fund 9,000

8. Transfer to Dividend Equalization Fund 20,500

(iii) Under-valuation of opening stock in cost accounts 1,500

(iv) Over-valuation of closing stock in cost accounts 2,000 78,200

Profit as per Financial Accounts 41,800

227

(b) Memorandum Reconciliation Statement

Rs. Rs. Rs. Rs.

To Work overhead under-recovered in cost books

1,500 By Profit as per Cost Accounts

1,11,900

To Expenses and losses debited in

By Administration overheads over-recovered in cost accounts

850

Financial books but excluded from cost books :

Income tax

20,150

By Depreciation overcharged in cost accounts (6,250 – 5,600)

650

By Receipts and gains credited in F.A but not in C.A Interest on investment

3,000

Loss due to Obsolescence

2,850

Goodwill written off 5,000 Bank Interest and transfer fees

370

Loss on sale of furniture 600 Stores adjustments 230 3,600

Selling & distribution exp.

10,000 By Imputed rent charged in cost accounts

1,000

Donation to Prime Minister’s Relief Fund

5,100 By Interest charged in cost accounts

2,000

Debenture Redemption Fund

9,000

Dividend Equalisation Fund

20,500 73,200

To under-valuation of opening stock

In cost accounts

1,500

To Over-valuation of closing stock

228

In cost accounts 2,000

To Profit as per Financial Accounts

41,800

1,20,000 1,20,000

Question 21

The financial records by Modern Manufacturers Ltd reveal the following data for the year ended 31st March, 2015:

(Rs. In thousands)

Sales (20,000 units) 4,000

Materials 1,600

Wages 800

Factory overheads 720

Office and Administration overheads 416

Selling and distribution overheads 288

Closing stock of Finished goods (1,230 units) 240

Work in Progress : (Closing) Rs.

Materials 48

Labour 32

Overheads (Factory) 32 112

Goodwill written off 320

Interest on capital 32

Dividend Received 10

Interest Received 5

In the costing records, factory overhead is charged at 100% of wages, administration overheads at 10% of works cost and selling and distribution overheads at Rs. 16 per unit sold.

Prepare statement of reconciling the profit as per cost records with the profit as per financial records of the company. All working should form part of your answer.

229

Answer


Rs.

Materials 16,00,000

Wages 8,00,000


Add : Factory overheads (100% of Wages) 8,00,000

32,00,000

Less : Closing work-in-progress 1,12,000

Works Cost 30,88,000

Add : Administration overheads (10% of works cost) 3,08,800


Less : Closing stock of Finished goods 1,96,800

[(1,230/21,230)*Rs. 33,96,800]


Selling and Distribution overheads (Rs. 16 * 20,000) 3,20,000


Profit 4,80,000

Sales 40,00,000

Dr. Profit and Loss Account Cr.

Rs. Rs.

To Materials 16,00,000 By Sales 40,00,000

To Wages 8,00,000 By Finished Stocks 2,40,000

To Factory overheads 7,20,000 By Work-in-Progress 1,12,000

To Administration overheads 4,16,000 By Dividend Received 10,000

To Selling & distribution overheads 2,88,000 By Interest Received 5,000

To Goodwill 3,20,000

To Interest on Capital 32,000

To Net Profit 1,91,000 _

43,67,000 43,67,000

230


Rs. Rs.

Profit as per cost accounts 4,80,000

Add : Over-recovery of Factory overheads 80,000

Over-recovery of selling and distribution overheads 32,000

Under valuation of Finished goods in Cost accounts 43,200

Interest and dividend received (Rs. 10,000 + Rs. 5,000) 15,000 1,70,200

6,50,200

Less : Under-recovery of Administration overheads 1,07,200

Goodwill written off 3,20,000

Interest on Capital 32,000 459,200


Question 22

The summarized Profit and Loss Account of a Company for the year ended 31st March, 2015 are given below :


To Materials Consumed 44,00,000 By Sales (2,00,000 units) 1,00,00,000

To Wages 24,00,000 By Finished goods stock

To Factory overheads 14,00,000 C.B. (12,000 units) 5,00,000

To Administration overheads 5,20,000 By WIP : C.B.

To Selling and Distribution

Overheads 4,80,000 Materials 1,20,000

To Bad debts written off 40,000 Labour 80,000

To Preliminary Expenses written off 60,000 Factory overheads 40,000 2,40,000

To Net Profit 16,00,000 By Agricultural Income 32,000

____________ By Miscellaneous Receipts 1,28,000

1,09,00,000 1,09,00,000

The following additional information is also furnished :

(i) In cost accounts, factory overheads have been absorbed at 22% of prime cost.

(ii) In cost accounts, Administration overheads have been absorbed at a flat rate of Rs. 3 per unit.

(iii) In cost accounts, selling and distribution overheads have been absorbed at Rs. 2.50 per unit.

231

(iv) Closing WIP valued by the cost department has been incorporated in financial accounts.

(v) Valuation of finished goods (C.B.) has been independently made by the financial accounts branch.

You are required to prepare cost Profit and Loss Account and reconcile the profit as per cost profit and loss account with the profit as per financial accounts.

Answer

Dr. Costing Profit and Loss Account Cr.

Rs. Rs.

To Materials Consumed 44,00,000 By Sales (2,00,000 units) 1,00,00,000

To Wages 24,00,000 By Closing Stock :

To Factory overheads (1) 14,96,000 Finished Goods (2) 4,92,000

To Administrative overheads (1) 6,36,000 Work-in-Progress 2,40,000

To Selling and Distribution overheads

(Rs. 2.50 * 2,00,000) 5,00,000


1,07,32,000 1,07,32,000


Rs. Rs. Rs.


Add : Items of income not included in cost accounts :

Agricultural income 32,000

Miscellaneous Receipts 1,28,000 1,60,000

Under valuation of Closing stock in cost accounts (Rs. 5,00,000 – Rs. 4,92,000)

8,000

Over absorption in Cost Accounts :

Factory Overheads 96,000

Administration overheads 1,16,000

Selling and Distribution overheads 20,000 4,00,000

17,00,000

232

Less : Expenses not included in Cost Accounts :

Bad debts written off 40,000

Preliminary expenses written off 60,000 1,00,000


Working Notes :

(1) Cost Sheet

Rs.

Materials Consumed 44,00,000

Wages 24,00,000


Factory Overheads (22% of Prime Cost) 14,96,000

82,96,000

Less : Cost of Work-in-Progress (given) 2,40,000


Add : Administrative overheads @ Rs. 3 for 2,12,000 units 6,36,000


Cost of Production per unit Rs. 86,92,000/2,12,000 = Rs. 41

(2) Value of Finished Goods Stock = 12,000 units * Rs. 41 = Rs. 4,92,000

Question 23

The following figures have been extracted from the cost records of a manufacturing unit :

Rs.

Stores : Opening Balance 32,000

Purchase of Materials 1,58,000

Transfer from Work-in-Progress 80,000

Issues to Work-in-Progress 1,60,000

Issues to Repair and Maintenance 20,000

Deficiencies found in stock taking 6,000

Work-in-Progress : Opening Balance 60,000

Direct wages applied 65,000

Works overheads applied 2,40,000

Closing Balance of WIP 45,000

233

Finished Products : Entire output is sold at a profit of 10% on actual cost Work-in-Progress. Wages incurred Rs. 70,000, works overheads incurred Rs. 2,50,000.

Items not included in cost records : Income from investment Rs. 10,000, Loss on sale of capital assets Rs. 20,000.

Draw up Store Control Account, Works overhead control Account, Work-in-Progress Control Account, Costing Profit and Loss Account, Profit and Loss Account and Reconciliation Statement.

Answer

In Cost Books

Stores Control Account

Rs. Rs.

To Balance b/d 32,000 By Work-in-Progress Control A/c

1,60,000

To General ledger adjustment A/c (Purchase)

1,58,000 By Works overheads Control A/c (Repairs and Maintenance)

20,000

To Work-in-Progress control A/c(Transfer)

80,000 By Costing Profit and Loss A/c (Shortage)

6,000

By Balance c/d (Balancing Figure)

84,000

2,70,000 2,70,000

Works Overhead Control Account

Dr. Cr.

Rs. Rs.

To General ledger adjustment A/c 2,50,000 By Work-in-Progress control A/c

2,40,000

To Stores Control A/c 20,000 By Costing Profit and Loss A/c (Under absorption)

30,000

2,70,000 2,70,000

234

Dr. Work-In-Progress Control Account Cr.

Rs. Rs.

To Balance b/d 60,000 By Stores control A/c 80,000

To Stores control A/c 1,60,000 By Costing P & L A/c (Cost of Sales)

4,00,000

To Wages control A/c (Direct) 65,000 By Balance c/d 45,000

To Works overhead control A/c 2,40,000

5,25,000 5,25,000

Dr. Costing Profit And Loss Account Cr.

Rs. Rs.

To Work-in-Progress Control A/c (Cost of Sales)

4,00,000 By General ledger adjustment A/c (Sales)

To Works overhead control A/c (Under Absorption)

30,000 Cost of Sales 4,00,000 Add : 10% Profit 40,000

4,40,000

To Stores control A/c (Shortage) 6,000

To Profit 4,000

4,40,000 4,40,000

Dr. Profit and Loss Account (In Financial Books) Cr.

Rs. Rs.

To Opening Stock : By Sales 4,40,000

Stores 32,000 By Closing Stock :

WIP 60,000 92,000 Stores 84,000

WIP 45,000

1,29,000

To Purchases 1,58,000 By Income from investment 10,000

235

To Wages Incurred 70,000 By Loss 11,000

To Overhead Incurred 2,50,000

To Loss on Sale of Capital Assets 20,000

5,90,000 5,90,000


Rs. Rs.

Profit as per Cost Accounts (See Costing P&L A/c) 4,000

Add : Income from Investments 10,000

14,000

Less : Under absorption of Wages in Cost Accounts 5,000

Loss on Sale of Capital Assets only included in Financial Accounts 20,000 (25,000)

Loss as per Financial Accounts (11,000)

Question 24

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, 2015 :

(i) Sales Rs. 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 Rs. 5,00,000 and Rs. 2,50,000 respectively.

(iv) Actual Factory expenses were Rs. 1,50,000 of which 60% are fixed.

(vi) Actual Administrative expenses were Rs.45,000 which are completely fixed.

(vii) Actual Selling and distribution expenses were Rs. 30,000 of which 40% are fixed.

(viii) Interest and Dividends Received Rs.15,000.

You are required to :

(a) Find out Profit as per financial books for the year ended 31st March, 2015 ;

(b) Prepare a statement of cost and profit to ascertain the profit as per cost accounts for the year ended 31st March, 2015 assuming that the indirect expenses are absorbed on the basis of normal production capacity ; and

(c) Prepare a statement reconciling profits shown by financial and cost books.

236

Answer


Dr. For the year ended 31st March, 2015 Cr.

Rs. Rs.

To Direct Materials 5,00,000 By Sales 10,00,000

To Direct Wages 2,50,000 By Interest & Dividends 15,000

To Factory Expenses 1,50,000

To Administrative Expenses 45,000

To Selling & Distribution Expenses

30,000

To Net Profit 40,000

10,15,000 10,15,000


(Normal output 60,000 units)

Rs.

Direct Materials 5,00,000

Direct Wages 2,50,000

Prime Cost 7,50,000

Factory Expenses : Variable (40% of Rs. 1,50,000) Rs.60,000

Fixed (Rs. 90,000 * 5/6) Rs.75,000 1,35,000

Works Cost 8,85,000

Administration Expenses (Rs. 45,000 *5/6) 37,500


Selling and Distribution Expenses :

Variable Rs.18,000

Fixed (Rs. 12,000 * 5/6) Rs.10,000 28,000


Profit 49,500

Sales 10,00,000

237


Rs. Rs.

Profit as per Cost Accounts 49,500

Add : Interest and Dividends not recorded in Cost Accounts 15,000

64,500

Less : Expenses under-absorbed in Cost Accounts :

Factory Expenses 15,000

Administration Expenses 7,500

Selling and Distribution Expenses 2,000 24,500


Question 25

The following is the Trading and Profit & Loss Account of Octagon Limited :

Dr. Cr.


To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000

To Direct Wages 12,05,750 By Finished Goods Stocks (1,000 units)

1,30,000

To Production Overheads 6,92,250

To Administration overheads 3,10,375 By Work-in-Progress : Rs.

To Selling & Distribution overheads

3,68,875 Materials 55,250

To Preliminary Expenses written off

22,750 Wages 26,000

To Goodwill written off 45,500 Production

Overheads 16,250

97,500

238

To Fines 3,250 By Dividend 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

Octagon Limited manufactures a standard unit.

The cost accounting record of Octagon Limited 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 Rs. 9.75 per finished unit.

(iii) Selling & Distribution overheads have been recovered at Rs. 13 per unit sold.

(iv) The under or Over-absorption of Overheads has not been transferred to Costing P&L A/c.

Required :

(a) Prepare a Proforma Costing Profit and Loss Account, indicating net Profit.

(b) Prepare control accounts for production overheads, administration overheads and selling and distribution overheads.

(c) Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial Accounts.

Answer


Rs.

Materials 23,01,000

Wages 12,05,750


Production overheads (20% of Prime Cost) 7,01,350

42,08,100

239

Less : Work-in-Progress 97,500

Manufacturing cost incurred during the year 41,10,600

Add : Administrative overheads (Rs. 9.75 * 31,500) 3,02,250


Less : Closing Stock of Finished Goods [(Rs. 44,12,850/31,000)*1,000] 1,42,350


Add : Selling and distribution overheads (Rs. 13*30,000) 3,90,000

Profit 2,14,500

Sales 48,75,000

Dr. Production Overheads Account Cr.

Rs. Rs.

To General ledger adjustment A/c

6,92,250 By Work-in-Progress A/c 7,01,350


7,01,350 7,01,350

Dr. Administrative Overheads Account Cr.

Rs. Rs.


3,10,375 By Finished Goods A/c 3,02,250


3,10,375 3,10,375

Dr. Selling and Distribution Overheads Account Cr.

Rs. Rs.


3,68,875 By Cost of Sales A/c 3,90,000


3,90,000 3,90,000

240


Rs. Rs.


Add : Production overheads over-recovered 9,100

Selling and distribution overheads over-recovered 21,125

Dividend Received 3,90,000

Interest on Bank Deposits 65,000 4,85,225

6,99,725

Less : Administrative Overheads under-recovered 8,125

Preliminary Expenses written off 22,750

Goodwill written off 45,500

Fines 3,250

Interest on Mortgage 13,000

Taxation 1,95,000

Loss on sale of machine 16250

Overvaluation of Finished stock in Cost Accounts (Rs. 1,42,350 – Rs. 1,30,000)

12,350 3,16,225


Question 26

26. Jain Road Concern has. two sizes of Machine components, Size X and Size Y. The following data refer to the year ended 31st March, 2015 :

Size X Size Y

Production 125 units 400 units

Sales 120 units 360 units

Wages cost per unit Rs. 40 Rs. 30

Material cost per unit Rs. 15 Rs. 12

241

Sales Price per unit Rs. 125 Rs. 90

All expenses other than wages and materials are analysed under ‘works overheads’ which during the year amounted to Rs. 9,000 and ‘office overheads’ which amounted to Rs. 10,000.

In fixing the selling price it was estimated that works overheads should be taken at 50% on wages and office overhead expenses at 33.33% on works cost.

You are required to compute the following :

(a) The total cost of each unit on the basis of the above overhead percentages ;

(b) The net profit for the year shown by the financial accounts, valuing unsold stocks at actual material and wages cost plus works overheads at 50% on wages ; and

(c) The reconciliation of net profit in (b) above with estimated total net profit based on cost figures.

Answer

Statement of Cost And Profit

Size 'X' (125 units) Size 'Y' (400 units)

Total of 'X' + 'Y'(Rs.)

Per unit (Rs.)

Total Cost (Rs.)

Per unit (Rs.)

Total Cost (Rs.)

Materials

15.00

1,875.00

12.00

4,800.00

6,675.00

Wages

40.00

5,000.00

30.00

12,000.00

17,000.00

Prime Cost

55.00

6,875.00

42.00

16,800.00

23,675.00

Works Overheads (50% on wages)

20.00

2,500.00

15.00

6,000.00

8,500.00

Works Cost

75.00

9,375.00

57.00

22,800.00

32,175.00

Office Overheads (33.33% of works cost)

25.00

3,125.00

19.00

7,600.00

10,725.00

Cost of Production

242

100.00 12,500.00 76.00 30,400.00 42,900.00

Less : Closing stock on Current Cost Basis -

500.00

-

3,040.00

3,540.00

Cost of Goods Sold

100.00

12,000.00

76.00

27,360.00

39,360.00

Profit

25.00

3,000.00

14.00

5,040.00

8,040.00

Sales

125.00

15,000.00

90.00

32,400.00

47,400.00

Profit as per Cost books =Rs. 8,040.



To Materials : Rs. By Sales : Rs.

X 1875 X 15000

Y 4800

6,675.00 Y 32400

47,400.00

To Wages : By Closing Stock :

X 5000 X 375

Y 12000

17,000.00 Y 2280

2,655.00

To Works Expenses

9,000.00

To office Expenses

10,000.00

To Net Profit

7,380.00

50,055.00 50,055.00

243


Particulars Rs. Amount

(Rs.)

Profit as per Cost Accounts

8,040.00

Add: Office overheads over-recovered in cost books

725.00

Cost books 10,725.00

Financial books 10,000.00

8,765.00

Less : Under recovery of works overheads in cost books

500.00

Cost books 8,500.00


8,265.00

Less : Over-valuation of closing stock in cost books

885.00

Cost books 3,540.00


Profit as per Financial Accounts

7,380.00

Question 27

As at 31st March 2015, the following balances existed in a company’s cost ledger :

Dr. Cr.

Stores Ledger Control A/c 6,02,870

Work-in-Progress Ledger Control A/c 2,44,730

Finished Stock Ledger Control A/c 5,03,890

Manufacturing Overhead Control A/c 21,050

Cost Ledger Control A/c ____________ 13,30,440

13,51,490 13,51,490

244

During the next three months the following items arose : Rs. 4Rs

(1) Raw materials purchased 2,46,000

(2) Materials returned to suppliers 5,800

(3) Materials issued to production 2,54,630

(4) Factory wages 1,01,060

(5) Manufacturing overheads incurred 1,83,020

(6) Indirect labour 43,330

(7) Manufacturing overheads charged to production 1,54,400

(8) Cost of Sales 3,71,780

(9) Sales returns at cost 10,760

(10) Finished product at cost 4,21,670

Pass the necessary entries, open ledger accounts and prepare trial balance.

Answer

Journal Entries

Dr.(Rs.) Cr.(Rs.)

Stores ledger Control A/c Dr. 2,46,000

To General Ledger Adjustment A/c 2,46,000

(Being materials purchased)

General Ledger Adjustment A/c Dr. 5,800

To Stores Ledger Control A/c 5,800

(Being entry for material returned to suppliers)

Work-in-Progress Ledger Control A/c Dr. 2,54,630

To Stores Ledger Control A/c 2,54,630

(Entry for issue of materials for production)

Wages Control A/c Dr. 1,01,060

To General Ledger Adjustment A/c 1,01,060

(Entry for direct wages incurred)

245


To Wages Control A/c 1,01,060

(Entry for wages charged to production)

Works Overhead Control A/c Dr. 1,83,020

To General Ledger Adjustment A/ c 1,83,020

(Entry for works overhead incurred)

Works Overhead Control A/c Dr. 43,330

To General Ledger Adjustment A/c 43,330

(Entry for indirect wages incurred)


To Works Overhead Control A/c 1,54,400

(Entry for overhead charged to production)

General Ledger Adjustment A/c Dr. 3,71,780

To Finished Stock Ledger Control A/c

(Entry for Cost of Sales)

3,71,780

Finished Stock Ledger Control A/c Dr. 10,760


(Entry for Sales returns)

10,760

Finished Stock Ledger Control A/c Dr. 4,21,670

To Work-in-Progress Ledger Control A/c

(Entry for finished goods transferred)

4,21,670

246

Dr. General Ledger Adjustment Account Cr.

Rs. Rs.

To Stores Ledger Control A/c 5,800 By Balance b/d 13,30,440

To Finished Stock Ledger Control A/c

3,71,780 By Stores Ledger Control A/c

2,46,000

To Balance c/d 15,37,030 By Wages Control A/c 1,01,060

By Works Overhead Control A/c

1,83,020

By Works Overhead Control A/c

43,330

By Finished Stock Ledger Control A/c

10,760

19,14,610 19,14,610

Dr. Stores Ledger Control Account Cr.

Rs. Rs.

To Balance b/d 6,02,870 By General Ledger Control A/c

5,800


2,46,000 By Work-in-Progress Ledger

Control A/c

2,54,630

By Balance c/d 5,88,440

8,48,870 8,48,870

247

Dr. Works Overhead Control Account Cr.

Rs. Rs.


1,83,020 By Balance b/d 21,050


43,330 By Work-in-Progress Ledger Control A/c

1,54,400


2,26,350 2,26,350

Dr. Work-In-Progress Ledger Control Account Cr.

Rs. Rs.

To Balance b/d 2,44,730 By Finished Stock Ledger Control A/c

4,21,670

To Stores Ledger Control A/c 2,54,630 By Balance c/d 3,33,150

To Wages Control A/c 1,01,060

To Works Overhead Control A/c 1,54,400

7,54,820 7,54,820

Dr. Finished Stock Ledger Control Account Cr.

Rs. Rs.

To Balance b/d 5,03,890 By Cost Ledger Control A/c

3,71,780

To Work-in-Progress Ledger Control A/c

4,21,670 By Balance c/d 5,64,540


10,760

9,36,320 9,36,320

248

Trial Balance

Dr. Cr.

Stores Ledger Control A/c 5,88,440

Work-in-Progress Ledger Control A/c 3,33,150

Finished Stock Ledger Control A/c 5,64,540

Manufacturing Overhead Control A/c 50,900

Cost Ledger Control A/c 15,37,030

TOTAL 15,37,030 15,37,030

Question 28

The following is a summary of the Trading and profit and loss account of a manufacturing company for the year ending 31st March, 2015 :

(Rs. In Thousands)

Dr. Cr.

Rs. Rs.

To Material Consumed 27,400 By Sales (1,20,000 units)

60,000

To Wages 15,100 By Finished Stock (4,000 units)

1600

To Factory Expenses 8300 By Work-in-Progress :

To Administration expenses 3820 Materials 640

To Selling and distribution expenses

4500 Wages 360

To Preliminary expenses written off

400 Factory expenses 200 1200

To Goodwill written off 200 By Dividend Received 180

To Net Profit 3260

62,980 62,980

249

In the cost accounts, the following allocations have been made:

i) Factory expenses at 20% on Prime Cost.

ii) Administration expenses at Rs. 30 per unit of Production.

iii) Selling and distribution expenses at Rs. 40 per unit of Sales.

You are required to prepare a costing profit and loss account of the company and to reconcile the profit disclosed with that shown in the financial account.

Answer

Costing Profit and Loss Account As on 31st March, 2015

(Rs. ‘000)

Materials Consumed 27,400

Wages 15,100

Prime Cost 42,500

Factory expenses (20% of Prime Cost) 8,500

Total works cost 51,000

Less : Closing work-in-progress

Materials 640

Wages 360

Factory expenses 200 1,200

Works Cost (Completed units) 49,800

Add : Administration expenses @ Rs. 3 (for sales and closing stock)

i.e. Rs. 30 (1,20,000 +4,000) 3720

Cost of Production 53,520

Less : Closing Finished Stock [(Rs. 5,3520/1,24,000)*4,000] 1730

Cost of Goods Sold 51790

Add : Selling and distribution expenses (1,20,000 @Rs. 40 per unit) 4800

Cost of Sales 56,590

Net Profit 3,410

Sales (1,20,000 units @ Rs. 500) 60,000

Note : Figures are rounded off to the nearest thousands.

250


(Rs. ‘000)

Profit as per Cost Accounts 3410

Add : Over absorption of factory expenses (Rs. 8500 – Rs. 8300) 200

Over absorption of selling expenses (Rs. 4800 – Rs. 4500) 300

Dividend Received 180 680

4090

Less : Under absorption of administration overheads (Rs. 3820 – Rs. 3720) 100

Preliminary expenses written off 400

Goodwill written off 200

Difference in valuation of finished stock 130 830

Profit as per Financial Accounts 3260

Question 29

The audited final accounts showed a profit of Rs. 1,00,500 whereas costing records showed a profit of Rs. 1,02,500. From the following additional information, reconcile the two accounts.


For the year ended 31st March, 2015

Dr. Cr.

Rs. Rs.

To Opening Stock 5,05,000 By Sales 7,80,000

To Purchase 1,75,000 By Closing Stock 1,80,000

To Direct Wages 80,000

To Factory Overheads 45,000

To Gross Profit c/d 1,55,000

9,60,000 9,60,000

To Administration Expenses 20,300 By Gross Profit b/d 1,55,000

To Selling Expenses 24,500 By Interest Received 1,000

To Distribution Expenses 11,200 By Dividend Received 500


1,56,500 1,56,500

251

The cost accounts showed the following :

1. Stock balance of Rs. 1,85,000

2. Direct wages absorbed Rs. 82,500

3. Factory overheads absorbed Rs. 42,000

4. Administration expenses charged @ 3% of sales value

5. Selling expenses charged @ 3% of sales value.

Answer

Reconciliation of Profit Between Cost and Financial Accounts

Particulars Rs. Rs. Rs.


Add : Difference in valuation of Closing stock 1,85,000

1,80,000 5,000

Factory overheads under absorbed in cost accounts 45,000

42,000 3,000

Selling expenses under charged in Cost Accounts 24,500

(3% on Rs. 7,80,000) 23,400 1,100 9,100

1,09,600

Less : Direct wages over absorbed in cost accounts 82,500

80,000 2,500

Administration overheads over-absorbed in cost accounts

23,400

(3% on Rs. 7,80,000) 20,300 3,100

Interest and Dividend received but not included in Cost Accounts

1,500 7,100


252

Question 30

M/s JRC Ltd. have furnished the following information from financial books for the year ended 31st March, 2015 :

Trading and Profit & Loss Account for the year ended 31st March, 2015

Rs. Rs.

To Opening Stock (500 units at Rs. 35 each)

17,500 By Sales (10,250 units) 7,17,500

To Materials Consumed 2,60,000 By Closing Stock

(250 units at Rs. 50 each)

12,500

To Wages 1,40,000

To Gross Profit 3,12,500 _________

7,30,000 7,30,000

To Factory Overheads 94,700 By Gross Profit 3,12,500

To Office overheads 1,06,000 By Interest 250

To Selling expenses 55,000 By Rent 10,000

To Bad debts 4,000

To Goodwill written off 5,000

To Net Profit 58,050

3,22,750 3,22,750

The cost sheet shows the following :

a) Cost of materials at Rs. 26 per unit and labour cost Rs. 15 per unit produced.

b) Factory overheads are absorbed at 60% of labour cost.

c) Office overheads are absorbed at 20% of factory cost.

d) Selling expenses are charged at Rs. 6 per unit.

e) Opening stock of finished goods is valued at Rs. 45 per unit and closing stock as in financial books.


i) A statement showing cost and profit as per cost accounts for the year ended 31st March, 2015 and

253

ii) Statement showing the reconciliation of profit disclosed in cost accounts with the profits shown in financial accounts.

Answer

i) Cost Statement for the year ending 31st March, 2015

Rs.

Cost of materials (10,000 units @ Rs. 26 per unit) 2,60,000

Labour cost (10,000 units @ Rs. 15 per unit) 1,50,000

Prime Cost 4,10,000

Factory overheads (60% of labour cost) 90,000

Factory Cost 5,00,000

Office overheads (20% of factory cost) 1,00,000


Add : Opening Stock : 500 units at Rs. 45 each 22,500

6,03,300

Less : Closing Stock : 250 units at Rs. 50 each 12,500


Selling overheads (Rs. 6 unit on 10,250 units) 61,500


Sales 7,17,500

Profit 46,000

ii) Reconciliation Statement

Rs. Rs.


Add : i) Income items, i.e. interest and rent not included in cost accounts

10,250

ii) Over-valuation of opening stock in cost accounts (500 x 10)

5,000

iii) Over-recovery of selling overheads in cost accounts (61500 – 55000)

6,500 21,750

67,750

254

Less : i) Loss items i.e. bad debts and goodwill written off not included in cost accounts

9,000

ii) Under - recovery of factory over heads in cost accounts

4,700

iii) Under-recovery of office overheads in cost accounts

6,000 19,700


Question 31

During the year ended 31st March, 2015, the profit of a company stood at Rs. 3645 as per financial records. The cost books, however, showed a profit of Rs. 5195 for the same period. You are required to reconcile the profit as shown by two sets of accounts:

Rs.

i) Opening stock overstated in cost accounts 350

ii) Closing stock understated in cost accounts 460

iii) Factory overheads under recovered in cost accounts 250

iv) Administration expenses over recovered in cost accounts 75

v) Selling and distribution expenses under-recovered in cost accounts 165

vi) Depreciation over-recovered in cost accounts 150

vii) Interest on investment not included in cost accounts 500

viii) Obsolescence loss in respect of machineries charged in financial accounts 245

ix) Income tax provided in financial accounts 2500

x) Bank interest credited in financial accounts 150

xi) Stores adjustments (Debit in financial book) 70

Answer


Particulars Rs. Rs.

Net Profit as per Financial Accounts 3,645

Add : Items not debited in cost accounts :

i) Obsolescence loss 245

255

ii) Income tax provisions 2,500

iii) Stores adjustments 75

2,820

Under recovery of factory overheads in cost accounts 250

Under recovery of Selling and distribution expenses in cost accounts

165 3,235

6,880

Less : Items not credited in cost accounts :

i) Interest on investment 500

ii) Bank interest in financial accounts 150 650

Over recovery of administration expenses 75

Over recovery of Depreciation 150

875

Difference in value of stock :

i) Opening stock overstated in cost accounts 350

iii) Closing stock understated in cost accounts 460 1685

Net Profit as per Cost Accounts 5195

The same solution is presented in memorandum from:

Dr. Memorandum Reconciliation Account Cr.


To Interest on investment 500 By Net profit as per financial accounts

3,645

To Bank interest 150 By Obsolescence loss 245

To Over-recovery of Administration exp.

75 By Income tax provisions 2,500

To Over-recovery of depreciation 150 By Stores adjustments 75

256

To Over-statement of opening stock 350 By Under-recovery of factory overhead

250

To Under-statement of closing stock 460 By Under-recovery of selling and distribution expenses

165

To Net Profit as per cost accounts 5,195

6,880 6,880

Question 32

A manufacturing, trading, profit and loss and profit and loss appropriation accounts of Rhizonix Limited for the year ending 31st March, 2015 are as follows :

Rs. Rs. Rs. Rs.

To Raw Materials : By Cost of goods

Opening stock 5,680 Manufactured 64,600

Add : Purchases 27,080

32,760

Less : Closing stock 5,960 26,800

To Wages 23,200

To Factory overheads :

Indirect wages 2,800

Rent and Rates 1,200

Power and fuel 2,400

Depreciation 4,400

Other expenses 4,160 14,960

Works cost 64,960

Less : Work-in-Progress

Closing stock 4,280

Less : Opening stock 3,920 360

64,600 64,600

257

To Finished Goods : By Sales 96,000

Opening stock 4,160

Manufactured 64,600

68,760

Less : Closing stock 4,600 64,160

To Gross Profit c/d 31,840 ________

96,000 96,000

To Administration overheads : By Gross Profit b/d

31,840

Office Salaries 6,200 By Dividend Received

400

Office expenses 1,600 7,800

To Selling and Distribution

Overheads :

Salesman’s salaries 2,400

Selling expenses 400

Distribution expenses 1,200 4,000

To Loss on sale of machinery 320

To Fines 120

To Net Profit for the year 20,000

32,240 32,240

To Income tax 4,000 By Balance b/d 12,080

To General reserve 2,000 By Net Profit for the year

20,000

To Dividend 4,800

To Goodwill written off 1,200


32,080 32,080

258

The cost accounts revealed a profit of Rs. 27,830. In preparing this figure stocks have been valued in cost accounts as follow :

Opening stock Closing stock

Raw materials 5,640 5,980

Work-in-Progress 3,950 4,240

Administration overhead has been ignored in cost accounts. Prepare a reconciliation statement.

Answer


Particulars Rs. Rs.


Add : Dividend Received not credited in cost accounts 400

Difference in stock :

Work-in-Progress – Opening 30

Work-in-Progress – Closing 40 470

28,300

Less : Administration expenses not charged in cost accounts

7,800

Loss on sale of machinery 320

Fines 120

Difference in stock :

a) Raw materials – Opening 40

b) Raw materials – Closing 20 8,300


***

259

Question 1

What is Cost Sheet? In what respect it differs from production account?

Answer

Cost sheet is a document which provides for the assembly of the detailed cost of a cost centre or cost unit. It is a periodical statement of cost designed to show in detail the various components of cost of goods produced like prime cost, factory cost, cost of production, total cost and cost per unit.

The following are the points of distinction between cost sheet and production account:

Cost Sheet Production Account

It is prepared as a statement. It is prepared as an account.

Expenses are classified to ascertain prime cost,

factory cost, total cost, etc. Expenses are not classified.

To enable comparison, figures of previous

period are provided. No figures of previous period are provided.

Hence no comparison is possible.

It is based on actual and estimated figures of

expenses. It is based on actual figures.

It is prepared for each job and sometimes

for the whole factory.

It is prepared for each production department.

Question 2

What are the uses of the Cost sheet? Which items are excluded from the preparation of the

cost sheet? Give at least five examples.

Answer

The following are the uses of Cost sheet:

1. It gives total cost and cost per unit for a particular period.

2. It gives information to management for cost control.

7

Costing Systems

260

3. It provides comparative study of actual current costs with the cost of corresponding periods, thus causes of inefficiencies and wastage can be known and suitably corrected by management.

4. It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the selling price.

The following items are of financial nature and thus not included while preparing a cost sheet.

(i) Cash discount

(ii) Interest paid

(iii) Preliminary expenses written off

(iv) Goodwill written off

(v) Provision for taxation

(vi) Provision for bad debts

(vii) Transfer to reserves

(viii) Donations

(ix) Income tax and dividend paid

(x) Profit/loss on sale of assets.

Question 3

What do you mean by job costing? Give five advantages of job costing ?

Answer

Job costing may be defined as a system of costing in which the elements of cost are accumulated separately for each job or work order undertaken by an organization. Industries which manufacture products or render services against specific orders use job costing or job order method of cost accounting. In the job costing system, an order or a unit, lot or batch of product may be taken as a cost unit, i.e. a job. Job costing is a method of costing in which cost units can be separately identified and need to be separately costed. The primary purpose of job costing is to bring together all the costs incurred for completing a job.

Advantages of job costing :

(i) It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs.

(ii) The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison, to control the efficiency of operations, materials and machines

(iii) The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages

261

(iv) Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals

(v) Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs

Question 4

What is batch Costing and in which industries the batch costing system is being used? Give

three differences between batch costing and job costing.

Answer

Batch Costing is a form of job costing which is adopted in case of manufacturing of a large number of components of machines or of other articles. Since a large number of them are manufactured together and pass through the same process of manufacture, it is convenient to collect their cost of manufacture together. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batch wise, the direct labour is engaged batch wise and the overheads are also recovered batch wise. Cost of each component in the batch is then determined by dividing the total cost by the number of articles manufactured.

It is generally used in manufacturing industries like. Readymade garment, toys, tyre & tube etc.

Differences between batch costing and job costing:

Job Costing Batch Costing

1. It is carried out or a product is produced by specific orders.

2. It is determined for each job.

3. Each job is separate and independent of other jobs.

1. The process of producing the product has a continuous flow and product is homogeneous.

2. It is compiled on time basis.

3. Product loses their individuality as they are manufactured in a continuous flow.

Question 5

What is cost plus contract? Explain few advantages of cost plus contract.

Answer

Cost plus contract is a contract in which the value of the contract is ascertained by adding a certain percentage of profit over the total cost of the work. This is used in case of those contracts whose exact cost cannot be correctly estimated at the time of undertaking a work. The profit to be paid to the contractor may be a fixed amount or it may be a particular percentage of cost or capital employed. These types of contracts are undertaken for production of special articles not usually manufactured and is generally employed, when Government happens to be a contractee. Generally, in such contract, contractor and

262

contractee have clear agreement about the items of cost to be included, type of material to be used, labour rates for different grades, normal wastages to be permitted and the rate or amount of profit.

Advantage of cost plus contract:

(i) Cost plus contract ensures that a reasonable profit accrues to the contractor even in risky projects.

(ii) It simplifies the work offering tenders and quotations. (iii) It provides escalation clauses and thus covers the contractor from fluctuations in

price and utilization of elements of production. (iv) The customer is assured of paying only reasonable amount of profit. (v) The customer has the right to conduct cost audit so that he can ensure that he is

not being cheated by the contractor.

Question 6

Differentiate between job costing and process costing?

Answer

The main points of distinction between job costing and process costing may be summarized

below :

Job Costing Process Costing

1. Goods are manufactured only against

specific orders. Production is of like units in continuous

flow.

2. Costs are accumulated and applied to

specific jobs. Costs are accumulated and applied process-

wise or department-wise

3. Costs are computed after every job is

completed. Costs are computed after the expiry of a

particular cost period.

4. Different jobs are independent of each

other. Productions being in a continuous flow,

products are intermingled in such a manner

that lots are not distinguishable.

5. Products are normally not transferred

from one job to another except in the

case of surplus work or excess

production.

Costs are normally transferred from one

process to another. Generally the finished

product of the process becomes the raw

material of the next process until the goods

are completely manufactured.

6. From the point of view of managerial

control, more attention is needed

because production is not in continuous

flow and each job is different.

Because of the standard, mass and

continuous production, managerial control

is easier.

7. Different jobs may or may not have

opening or closing work-in-progress. As the production is in continuous flow

there is always an opening and closing

balance of work-in progress.

263

Question 7

Explain the below given terms used in process costing?

a) Normal Loss

b) Abnormal Loss

c) Abnormal Gain.

Answer

a) Normal Loss

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. If the normal loss units can be sold as a scrap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then the cost of rectification is debited in the process account. The cost per unit of a process is calculated after adjusting the normal loss.

b) Abnormal Loss

Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal (or) unexpected conditions. Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.

c) Abnormal Gain

The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain calculated in the similar manner of abnormal loss. The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real gain.

Question 8

Explain the term service costing and its uses in industries?

Answer

Service Costing or operation costing is normally used in service sector. Public utility services like transport, water supply, electricity supply, hospitals are the best example for

264

service costing. Thus Service costing is a method of cost accumulation which is designed to determine the cost of services. Service costing is a method of ascertaining the cost of providing or services a service. It is also known as operation costing CIMA London, defines Service Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking”.

Service costing is very useful in determining the cost of providing services which becomes a base for ascertaining the price of services. Service costing is extensively used in Transport industries. Hotel industries, electricity company etc. Service costing helps an organization in ascertaining Inter-departmental service prices, Service cost to be charged from outside clients, benchmarking the processes/operations, Tracking and controlling the excess cost.

Question 9

Explain the term cost unit and give few examples of units which are used in hospital costing?

Answer

Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing.

Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In certain cases a composite unit is used i.e. Passenger –Kilometer in a transport company.

Following units are used in hospital costing:

i) Out-patient department - per out patient

ii) Casualty - per patient

iii) Wards - per patient - bed per day

iv) Radiotherapy - per course of treatment per day or per person.

v) Laundry - per 100 articles laundered.

Question 10

Explain the different non-cost or sale value method of accounting for by-product ?

Answer

Following are the non-cost or sale value method of accounting for by-product:

a. Other income method: In this method the sales value of by-products is credited to profit and loss account, treating it as other miscellaneous income.

b. By-products sales deducted from total cost: Under this method the sale proceeds of the by-products are treated as deductions from total costs. The sales value is deducted either from the production costs or cost of sales.

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c. By-product sales added to the main product sales: In this case all costs incurred on main and byproducts are deducted from the combined sales of the main product and by-products.

d. Crediting sales value less administration, selling and distribution expenses: In this method, a portion of the administration, selling and distribution overhead incurred for disposing of the by-product is deducted from the sale value for credit to process account.

e. Crediting sales value less the costs incurred on by-products after split off point: In certain cases it becomes necessary to perform some further operations on by-products after the split off point, in order to make it saleable. Credit is given to the process account for sale value less the cost after split off point.

f. Reverse cost method: Under this method, an estimated profit from the sale of by-products, selling and distribution expenses and further processing cost, after the split off points are deducted from the sale value of by-products and the net amount is credited to the main product.

Question 11

Explain the different cost method of accounting for by-product ?

Answer

Following are the cost method of accounting for by-product:

a. Opportunity or replacement cost method: This method is adopted where by-products are utilized by the factory itself as input material for some other process. The opportunity cost or replacement cost which otherwise would have been incurred if the by-products were to be purchased from outside suppliers is taken as the basis for costing by-products. The process account is credited with the value of by-products so ascertained.

b. Standard cost method: A standard cost is set on the basis of technical assessment for each byproduct and credit is given to the process account on this basis. Because of the stability of this method, effective control would be exercised on the cost of the main product.

c. Apportionment on suitable basis: Where by-products are of major significance, cost should be apportioned on the most suitable basis, i.e. physical measurement, market value etc.

Question 12

Explain the Contribution margin method and Market value method of accounting for joint-product?

Answer

Accounting of joint products implies the assignment of a portion of the joint cost to each of the joint product. Unless the joint costs are properly and reasonably apportioned to

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different joint products produced, the cost of joint products will vary considerably and this will affect valuation of inventory, pricing of products and profit or loss on sale of different products.

Contribution margin method

According to this method, joint costs are segregated into two parts-variable and fixed. The variable costs are apportioned over the joint products on the basis of units produced (average method) or physical quantities. In case the products are further processed after the point of separation, then all variable costs incurred be added to the variable costs determined earlier. In this way total variable cost is arrived at which is deducted from their respective sales values to ascertain their contribution. The fixed costs are then apportioned over the joint products on the basis of the contribution ratios.

Market value method

This is the most popular and convenient method because it makes use of a realistic basis for apportioning joint costs. Under this method joint costs are apportioned after ascertaining “what the traffic can bear”. In other words, the products are made to bear a proportion of the joint costs on the basis of their ability to absorb the same. Market value means weighted market value i.e. units produced x price of a unit of joint product. This consists of three sub methods like. Market value at the point of separation or relative market value method,

Market value after further processing, net realizable value method.

Question 13

Meaning of the term process costing? Give advantages and limitations of process costing.

Answer

Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.

Advantages of Process Costing

i. Costs are computed periodically at the end of a particular period.

ii. It is simple and involves less clerical work than job costing

iii. It is easy to allocate the expenses to processes in order to have accurate costs.

iv. Use of standard costing systems in very effective in process costing situations.

v. Process costing helps in preparation of tender, quotations

vi. Since cost data is available for each process, operation and department, good managerial control is possible.

Limitations of Process Costing:

i. Cost obtained at each process is only historical cost and are not very useful for effective control.

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ii. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.

iii. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.

iv. The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.

v. Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.

Question 14

What are the features of process costing and in which industries the process costing

system is being used?

Answer

Following are the features of process costing

i. The production is continuous

ii. The product is homogeneous

iii. The process is standardized

iv. Output of one process become raw material of another process

v. The output of the last process is transferred to finished stock

vi. Costs are collected process-wise

vii. Both direct and indirect costs are accumulated in each process

viii. If there is a stock of semi-finished goods, it is expressed in terms of equivalent units

ix. The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.

Process costing is being used by following Industries as under:

i. Identical Products Industries

ii. Industries with Multiple Departments

iii. Industries with Interchangeable Parts

iv. Industries with Varying Product Features

v. Innovative Industries

Question 15

How are profits from incomplete contract computed?

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Answer

It is always desirable to take into account a reasonable proportion of the notional profit on uncompleted contracts depending upon the completion stage subject to the following principles:

i. Profit should be considered in respect of work certified only; work uncertified

should always be valued at cost.

ii. No profit should be taken into consideration if the amount of work certified is

less than 1/4th of the contract price because in such a case it is not possible to

foresee the future clearly.

iii. If the amount of work certified is 1/4th or more but less than 1/2 of the contract

price, 1/3rd of the profit disclosed as reduced by the percentage of cash received

from the contractee, should be taken to the profit and loss account or Profit

=1/3 x Notional Profit x {Cash received / Work certified}. The balance is

allowed to remain as a reserve.

iv. If the amount of work certified is 1/2 or more of the contract price, 2/3rd of the

profit disclosed, as reduced by the percentage of cash received from the

contractee, should be taken to the profit and loss account. Profit = 2/3 x

Notional Profit x {Cash received / Work certified}. The balance should be

treated as reserve.

v. In case the contract is very much near to completion, if possible the total cost of

completing the contract should be estimated. The estimated total profit on the

contract then can be calculated by deducting the estimated cost from the

contract price. The profit and loss account should be credited with that

proportion of total estimated profit on cash basis, which the work certified bears

to the total contract price. Profit=Estimated total profit x {Work certified /

Contract price}.

vi. The whole of loss, if any, should be transferred to the profit and loss account.

Question 16

ALFA LTD. which generates its own power for the purpose of using the same for running the factory gives the following information:

a. Coal-consumed 600 quintals @ Rs. 20 per quintal.

Oil-25 quintals @ Rs. 1,000 per quintal.

Water - 50,000 litres @ Rs. 2.00 per 1,000 lts.

Cost of steam boiler Rs. 1,20,000, which has a residual value of Rs. 12,000 and a life of 10 years.

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b. Salaries and wages for generating plant:

3 skilled workers @ Rs. 1,000 p.m.

3 unskilled workers @ Rs. 500 p.m.

c. Generating plant cost Rs. 2, 50,000 and Depreciation @ 10%.

d. Share of administrative charges Rs. 2,050 per month

e. Allocation of expenses other than administrative charges for this department Rs. 5,000 per month.

f. Salaries and wages for the Boiler House:

5 men @ Rs. 500 p.m.

4 women @ Rs. 600 p.m.

g. Repairs and maintenance of steam boiler and generating plant Rs. 60,000 p.a.

h. No. of units generated 4,00,000 p.m.

i. 1/10 of units generated were used by Generating Department itself.

Calculate cost per unit of electricity generated.

Answer

Cost Sheet of Generating Electricity

Rs. Per month

Coal used 600 quintals @ Rs. 20 per quintal 12,000

Oil 25 quintals @ Rs.1,000 per quintal 25,000

Water 50,000 Lts. @ Rs. 2.0 per 1,000 Lts. 100

37,100

Depreciation of steam boiler

12 * 10

12,000 - 1,20,000 900

38,000

Salaries and wages for generating plant

3 skilled workers @ Rs. 1,000 p.m. 3,000

3 unskilled workers @ Rs. 500 p.m. 1,500 4,500

Salaries and wages for the Boiler House

5 men @ Rs. 500 p.m. 2,500

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4 women @ Rs. 600 p.m. 2,400 4,900

Repairs and maintenance

(60,000/12) 5,000

Depreciation on generating plant

12 * 10

2,50,000 2,083

Share of administrative charges 2,050

Other Allocation of expenses 5,000

61,533

Add : Cost of electricity used in generation 6,837 *

Consumed by ALFA LTD. = 4, 00,000 units 68,370

Cost per unit 0.17 paise

Working Notes:

*Calculation of Cost of Electricity used in Generation.

Let A be cost of Electricity used and B the total cost of Generation:

B = 61,533 +0 .10(61,533+A)

A=0 .10B

A= 0.10 [61,533 +0 .10(61,533+A)]

100A= 6, 15,330 + 61,533A

99A= 6, 76,863

A= 6, 76,863/99

A= Rs. 6,837

Question 17

Following are the information given by Star hotel. You are requested to advice him that what rent should be charged from his customers per day so that he is able to earn 20 % on cost other than interest.

1. Staff salaries Rs.50,000 per annum

2. Room attendant’s salary Rs.10 per day. The salary is paid on daily basis and services of room attendant are needed only when the room is occupied. There is one room attendant for one room.

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3. Lighting, heating and power. The normal lighting expenses for a room if it is occupied for the whole month is Rs.80. Power is used only in winter and normal charge per month if occupied for a room is Rs. 120.

4. Room Cleaning charges Rs. 1 per room day weather the room is occupied or not.

5. Repairs to building Rs.2,000 per month

6. Sundries Rs. 5,000 per annum

7. Interior decoration and furnishing Rs.20,000 annually

8. Cost of building Rs. 5,00,000; rate of depreciation 10 %

9. Other equipments Rs.4,00,000; rate of depreciation 15 %

10. Interest @ 5% may be charged on its investment of Rs. 9, 00,000 in the building and equipment.

11. There are 100 rooms in the hotel and 80 % of the rooms are normally occupied in summer and 30% of the rooms are busy in winter. You may assume that period of summer and winter is six month each. Normal days in a month may be assumed to be 30.

Answer

Operating Cost Statement

Particulars Amount in Rs. Total in Rs.

Staff salaries

Room attendant’s salary (Working note # 1)

Lighting, heating and power (Working note # 2)

Room Cleaning charges (100*30*12*1)

Repairs to building (2,000*12)

Sundries

Interior decoration and furnishing

Depreciation (Working note # 3)

Interest on investment (9,00,000*5%)

Add. 20% profit on cost other than interest

(5,62,400-45,000)*20%

50,000

1,98,000

74,400

36,000

24,000

5,000

20,000

1,10,000

45,000

5,62,400

1,03,480

Total Cost 6,65,880

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Working note # 1

For summers - 100×80%×30×6×10 = Rs. 1,44,000

For winter – 100 ×30%×30×6×10 = Rs. 54,000

Total = Rs. 1,98,000

Working note # 2

Lighting

Summer - 80×6×100×80% = Rs.38,400

Winter - 80×6×100×30% = Rs.14,400

Power - 120×6×100×30% = 21,600

Total = Rs.74,400

Working note # 3

Depreciation

Building - 5, 00,000* 10%=50,000

Other Equipments – 4, 00,000*15%=60,000

Total Depreciation= 1, 10,000

Question 18

The quantity specified on a production order was 2,000 units of an article in the manufacture of which three operations were involved. The piece-rates for these four operations were in sequence. Rs. 20, 25 and 30 per unit. The company recovered factory overhead expenses on the basis of direct labour cost and the current overhead rate is 80%. The entire quantity of material authorized for the order, viz. 1,000 kgs. @ Rs. 100 per kg. was issued to the shop.

At the year end, the order was incomplete; only 200 units were fully completed and transferred to finished stock. Stock-taking of the work-in-progress revealed the following position:

Materials in process 650 kgs.

Material in hand, in shop (unprocessed) 250 kgs.

Production in partly completed stage 1,300 units

Extent of work performed:

Upto the first operation 600 units

Upto the second operation stage 400 units

Upto the third operation stage 300 units

Calculate the cost of the work-in-progress at the year end.

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Answer

Cost sheet showing cost of work-in progress Amount in Rs. Total in Rs.

Material Cost:

Material in hand (250 k.g. @ Rs.100)

Material in process (650 k.g. @ Rs.100 )

Labour Cost

Operation I - 600 units @ Rs. 20

Operation II - 400 units @ Rs.45

Operation III - 300 units @ Rs.75

Factory overhead 80% on direct labour

25,000

65,000

12,000

18,000

22,500

90,000

52,500

42,000

Total cost of work-in-progress 1,84,500

Question 19

From the following particulars belongs to Astor Ltd. compute estimated profit on contract

and profit to be transferred to contract profit and loss A/C.

Total expenditure till date Rs. 5,00,000

Estimated further expenditure to complete the contract Rs. 1,50,000

Contract price Rs. 8,50,000

Work certified Rs. 6,00,000

Work uncertified Rs. 1,50,000

Cash received Rs. 6,50,000

Answer

Calculation of estimated profit:

Total expenditure till date Rs. 5,00,000

Add : Estimated further expenditure to complete the contract Rs. 1,50,000

Rs. 6,50,000

Estimated profit Rs. 2,00,000

Contract price Rs. 8,50,000

Profit to be transferred to contract profit and loss A/C:

= Estimated profit*(Cash Received/ Contract Price)

= 2,00,000*(6,50,000/8,50,000)

= Rs. 1,52,941

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Question 20

From the following particulars of M/S. Jyoti Associates prepare contract account.

Following are the expenditure made on the contract till date:

(Figures in Rs.)

Material Purchased 1,20,000

Material issued from store 80,000


Direct expenses 1,70,000

Apportioned expenses 2,00,000

Plant value at the beginning of the period 5,00,000

Depreciation for the period @ 10%

Additional information:

Contract Value: 15,00,000

Work completed and certified: 10,00,000

Cash received: 9,00,000

Work uncertified: 1,00,000

Material on site: 40,000

Answer

Contract Accounts of M/S. Jyoti Associates (Figures in Rs.)

Dr. Cr.


To. Material purchased

Material (store)

Direct wages

Direct expenses

Apportioned

expenses

Depreciation

Notional profit c/d.

Profit & loss A/C.*

WIP Reserve

1,20,000

80,000

1,40,000

1,70,000

2,00,000

50,000

3,80,000

By. Work in Progress:

Work certified

Work uncertified

Material in hand

Notional profit b/d.

10,00,000

1,00,000

40,000

11,40,000 11,40,000

2,28,000

1,52,000

3,80,000

3,80,000 3,80,000

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Profit & loss A/C.*

= 3,80,000*(2/3)*(9,00,000/10,00,000)

= 2,28,000

Question 21

From the following particulars of M/S. Maa Shakti private limited prepare contract A/C.

for the period 1st April 2015 to 31st March 2016.

Following are the information as on 31st March 2016 :

(Figures in Rs.)

Material Purchased 5,00,000

Salary to Foreman 90,000




Plant value at the beginning of the period 4,50,000

Depreciation for the period @ 10%


Contract Value: 22, 00,000

Work completed: 2/3 of contract value

Work certified: 50% of contract value

Cash received: 10, 00,000

Material on site as on 31st March 2016: 90,000

The plant has been used for the contract for a period of 150 days and one supervisor devote 1/4th of his time for this contract who has taken a salary of Rs. 10,000 pm during the period of the contract. You may assume 360 days as one year.

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Answer

Contract Accounts of M/S. Maa Shakti private limited

(Figures in Rs.)

Dr. Cr.


To. Material purchased

Salary to Foreman

Direct wages

Direct expenses

Apportioned expenses

Depreciation

Supervisor Salary

Work cost

Notional profit

5,00,000

90,000

2,40,000

2,70,000

4,00,000

18,750

30,000

By. Material in hand

Works cost

Work certified

Work

uncertified@

90,000

14,58,750

15,48,750 15,48,750

14,58,750

6,010

11,00,000

3,64,760

14,64,760 14,64,760

Work uncertified@

= Cost of 66.67 % (2/3) of the contract is Rs.14, 58,750

= Cost of 100% is [14, 58,750*(100/66.67)] = Rs.21, 88,125

= Cost of 16.67% (work uncertified) is Rs. 21, 88,125*(16.67/100)

= Rs. 3, 64,760

Question 22

JK Transporter obtained a permit to run a bus on a route of 10 k.m long.

From the following information calculate the bus fare to be charged from each passenger.

Bus cost Rs. 5, 00,000. Insurance cost @ 2% of cost of bus p.a., road tax Rs. 12,000 p.a,

Garage rent Rs. 4,800 p.a. and annual maintenance cost Rs.12,000. The life of the Bus is 5

years and the residual value is Rs. 20,000. Driver salary Rs.4,000 p.m. and cleaner salary

Rs.2,000 p.m. and 10% of total collection as commission which will share equally by both.

Other administrative charges Rs.500 p.m.

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Fuel and lubricant cost Rs.400 per hundred kilometers. The bus will make 2 rounds trips,

40 passengers per trip. Assume 25 working days in a month and 10% profit on taking from

customer.

Answer

Working Note No. 1

Calculation of Depreciation:

= (Cost of Bus – Residual Value )/life

= (5,00,000 -20,000)/5

= 96,000 p.a.

= 96,000/12

= 8,000 p.m.

Working Note No. 2

Calculation distance travelled and passenger-k.m. per Month

Total Distance= 2 trips x 2 x 10.k.m x 25 days = 1,000 k.m.

Total passenger- k.m= 1000 k.m. x 40 per each trip= 40,000 passenger k.m.

Statement showing the operating cost per passenger -km

Particulars Amounts in Rs. Amounts in Rs.

Depreciation

Insurance (5,00,000 *2%)/12

Road tax (12,000/12)

Garage rent (4,800/12)

Annual maintenance (12,000/12)

Driver salary

Cleaner Salary

Other administrative charges

Fuel and lubricant cost

(40,000 Passenger-k.m./100)*400

Total Cost before Commission

Driver Commission

Cleaner Commission

Total Cost

Add. Profit

8,000

833

1,000

400

1,000

4,000

2,000

500

1,60,000

1,77,733

11,108

11,108

1,99,949

22,216

Total Collection 2,22,165

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Working Note No. 3

Calculation of commission

Total Cost before Commission = 1,77,733

Commission 10% and profit 10% means

100%-(10% + 10%)= 80%=1,77,733

TOTAL COLLECTION = 1,77,733*(100/80)= 2,22,166

Commission = 2,22,166*10%=22,216

Driver share= 22,216*50%= 11,108

Cleaner share= 22,216*50%= 11,108

Profit = 2,22,166*10%= 22,216

Working Note No.4

Calculation of Fare per passenger-k.m.

=Total Collection/Total passenger-K.m

=2, 22,165/40,000

=Rs.5.55

Question 23

In an Iron manufacturing unit, raw material passes through four processes, I, II, III, and IV and the output of each process is the input for the subsequent process. The losses in the four processes are respectively 20%, 15%, 5% and 5% respectively for I, II, III and IV processes of the input. At the end of the process IV 20,000 kg of Iron being produced. What is the quantity of raw material required to be fed at the beginning of Process I and the cost of the same at Rs. 10 per kg?

Answer

Suppose the output in Process I is 100 kg.

Statement of Production in Different Processes

Particulars Process I Process II Process III Process IV

Input in kg 100 80 68 61.2

Loss % 20 15 10 5

Loss in kg 20 12 6.8 3.06

Output in kg 80 68 61.2 58.14

If output in process IV is 58.14 kg, input in process I = 100 kg

If output in process IV is 20,000kg, input in process I

= (20,000 X 100)/58.14 = 34,399.72 kg

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Cost of raw material required = 34,399.72 kg X Rs. 10 = Rs. 3,43,997 Approx.

Question 24

The raw material processed in three stages and is produced in three grades in Mehta

Processing Ltd. The information relating to processes are available as below.

Particulars Process I Process II Process III

Raw material

2000 tons

Rs. 2,00,000

Wages Rs. 50,000 Rs. 40,000 Rs.30,000

Direct expenses Rs. 60,000 Rs.20,000 Rs.60,000

Weight lost [% of input] 5% 10% 20%

Scrap [sales price of Rs.100 per

ton]

50 ton 40 ton 20 ton

Sale price/ton finished goods Rs.300 Rs.500 Rs.700

Management expenses were Rs. 20,500 and selling expenses Rs.20,000. 90% of output of process I and 50% of the output of process II is passed to the next process and remaining is sold. The entire output of process III is sold. Prepare Process Accounts and Statement of Profit.

Answer Process I Account

Dr. Cr.

Particulars Units Amount Rs. Particulars Units Amount

Rs.

Materials 2000 2,00,000 Loss in weight 100

Wages 50,000 Sales (Scrap) 50 5000

Direct Expenses 60,000 Sales of output* 185 55,500

Profit 24,992 Transfer to Process II @

Rs.164.86 per unit **

1665 2,74,492

Total 2000 3,34,992 Total 2000 3,34,992

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*Output in Process I is 2,000 – [100 + 50] = 1850 tons, 10% sold i.e. 185 sold

**Cost of output = Rs.2, 00,000 [material] + Rs. 50, 000 [labour]

+ Rs.60, 000[Labour] – Rs. 5,000 [scrap sale]/1850 units

=Rs. 164.86 per unit

Process II Account

Dr. Cr.

Particulars Units Amount

(Rs.)


(Rs.)

From Process I 1665 2,74,492 Loss in weight 166.5

Wages 40,000 Sales (Scrap) 40 4,000

Direct

Expenses

20,000 Sales of output* 729.25 3,64,625

Profit 1,99,381 Transfer to Process III

@ Rs.226.60 per unit **

729.25 1,65,248

Total 1665 5,33,873 Total 1665 5,33,873

*Output in Process II is 1665 – [166.5 + 40] = 1458.5 tons, 50% sold i.e. 729.25 sold

**Cost of output = Rs.2, 74,492 [material] + Rs. 40, 000 [labour]

+ Rs.20, 000[Labour] – Rs. 4,000 [scrap sale]/1458.5 units

=Rs. 226.60 per unit

Process III Account

Dr. Cr.

Particulars Units Amount (Rs.) Particulars Units Amount

(Rs.)

From Process II 729.25 1,65,248 Loss in weight 145.85

Wages 30,000 Sales (Scrap) 20 2,000

Direct Expenses 60,000 Sales of output* 583.4 4,08,380

Profit 1,55,132

Total 729.25 4,10,380 Total 729.25 4,10,380

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Statement of Profit:

Profit from Process I: Rs. 24,992

Profit from Process II: Rs. 1, 99,381

Profit from Process III: Rs. 1, 55,132

Total profits: Rs. 3, 79,505

Less:

Mgt. expenses: Rs. 20,500

Selling expenses: Rs. 20,000

Total expenses: Rs. 40,500

Profit: Rs. 3,39,005

Question 25

From the following particulars, prepare the following in the books of Meghna Private Ltd.

I. Statement of equivalent production

II. Statement of apportionment of cost

III. Process Account

Opening stock as on 1st April: 300 units @ Rs. 5 per unit,

Degree of completion: Materials 100%, Labour and Overheads: 50%

Units introduced during the Month: 1,000 units

Output transferred to the next process: 1,100 units

Closing stock: 300 units

Degree of completion: Materials 100%, Labour and Overheads: 80%

Other information regarding the process:

Materials: Rs.4, 400

Labour: Rs.5, 950

Overheads: Rs.7, 140

Answer

Statement of equivalent production

Input Units Particulars Output

Units

Material

E.Units

% of

Completion

Labour &

Overheads

E.Units

% of

Completion

300 Opening

Stock

282

1000 Units

introduced

Output

Completion of work on opening stock

300 150 50

Units introduced and completed

800 800 100 800 100

Closing stock

300 300 100 240 80

1300 1400 1100 1190

Statement of Cost of Each Element

Element of Cost Cost in Rs. Equivalent

Production

Cost Per Unit in Rs.

Material 4400 1100 4

Labour 5950 1190 5

Overheads 7140 1190 6

Total 17,490 15

Statement of Apportionment of Cost

Particulars Elements Equivalent

Production

Cost Per

Unit Rs.

Cost Rs. Total Rs.

Cost incurred to

complete the work on

Opening Stock

Material

Labour

Overheads

-

150

150

-

5

6

-

750

900

1650

Units introduced and

completed

Material

Labour

Overheads

800

800

800

4

5

6

3200

4000

4800

12000

283

Closing Stock Material

Labour

Overheads

300

240

240

4

5

6

1200

1200

1440

3840

17,490

Process Account

Dr. Cr.


(Rs.)

Particulars Units Amount (Rs.)

Opening Stock 300 1,500 Transfer to next

Process #

1100 15,150

Unit

Introduced

1000 Closing Stock WIP 300 3,840

Materials 4,400

Labour 5,950

Overheads 7,140

Total 1400 18,990 Total 1400 18,990

Transfer to next process is calculated as shown under:

Cost incurred on opening stock already: Rs. 1, 500

Add. Cost incurred to complete the opening WIP: Rs. 1, 650

Add. Cost of completion of units introduced in this process: Rs. 12, 000

Total Cost Rs.15, 150

Question 26

Fortune Ltd. uses a job costing system. The following data are available from the books at the year ending on 31st March 2015.


Direct Materials 10,00,000

Direct Wages 8,00,000

Profit 5,00,000

Selling and Distribution Overheads 4,00,000

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Administrative Overheads 3,00,000

Factory Overheads 2,00,000

a. Prepare a job cost sheet showing the prime cost, works cost, production cost, cost of sales and sales value.

b. In the year 2015-16, the factory has received an order for a number of jobs. It is estimated that the direct materials would be Rs. 2,40,000 and direct labour would cost Rs.1, 50,000. What would be charge for the price for these jobs if the factory intends to earn the same rate of profit on sales, assuming that the selling and distribution overheads have gone up by 10%. The factory recovers factory overhead as a percentage of direct wages and administrative and selling and distribution overhead as a percentage of works cost, based on the cost rates prevalent in the previous year.

Answer

Job Cost Sheet of Fortune Ltd.


Particulars Amount in Rs. Amount in Rs.

Direct Materials

Add. Direct Wages

Prime Cost

10,00,000

8,00,000

18,00,000

Add. Factory Overheads 2,00,000


Add. Administrative Overheads 3,00,000


Add. Selling and Distribution Overheads 4,00,000


Add. Profit 5,00,000

Sale 32,00,000

% of Factory Overheads to Direct Wages:

285

(Rs.2, 00,000/8,00,000)*100 = 25%

% of Administrative Overheads to Works Cost:

(Rs.3, 00,000/20,00,000)*100 = 15%

% of Selling and Distribution Overheads to Works Cost:

(Rs.4, 00,000/20,00,000)*100 =20%

Statement showing Price Quotation for a Job


Direct Materials

Add. Direct Wages

Prime Cost

2,40,000

1,50,000

3,90,000

Add. Factory Overheads 25% of D. Wages 37,500

Works Cost 4,27,500

Add. Administrative Overheads

15% of work cost

64,125


Add. Selling and Distribution Overheads

30% of work cost

1,28,250


Add. Profit ( 18.52% on cost) 1,14,801

Sale 7,34,676

Question 27

Creative Builders have entered into a contract to build an office building complex for Rs.550 lakhs. The work started in April 2015 and it is estimated that the contract will take 15 months to be completed. Work has progressed as per schedule and the actual costs charged till March 2016 was as follows.

Particulars Amount Rs.(in Lakhs)

Materials 120

Labour 100

Hire charges and other expenses 50

Establishment charges 20

286

The following information is available:

Particulars Amount Rs. (in Lakhs)

Material in hand 31st March 2016 20

Work certified [of which Rs.400 lakhs have

been paid] as on 31st March 2016

450

Work not certified as on 31st March 2016 50

As per Management estimates, the following further expenditure will be incurred to complete the work.

Materials: Rs.10 lakhs

Labour: Rs.12 lakhs

Sub-contractor: Rs.10 lakhs

Equipments hire and other charges: Rs.3 lakhs

Establishment charges: Rs.6 lakhs

You are required to compute the value of work-in-progress as on March 31st, 2016 after considering a reasonable margin of profit and show the appropriate accounts. Make a provision for contingencies amounting to 5% of the total costs.

Answer

Contract A/C

Dr. Cr.

Particulars Amount in Rs. Particulars Amount in Rs.

To. By.

Materials 1,20,00,000 Stock of materials 20,00,000

Labour 1,00,00,000 Work-in-progress

Work certified:

Work uncertified:

4,50,00,000

50,00,000

Hire charges 50,00,000

Establishment

charges

20,00,000

287

Profit c/d 2,30,00,000 ______________

Total 5,20,00,000 Total 5,20,00,000

Profit & Loss A/c * 65,07,177 Profit b/d 2,30,00,000

Reserve (Transfer) 1,15,07,177

Total 2,30,00,000 Total 2,30,00,000

Contractee’s A/C Dr. Cr.


To By

Contract A/c 4,50,00,000 Bank A/c 4,00,00,000

Balance c/d 50,00,000

Total 4,50,00,000 Total 4,50,00,000

Amount of profit to be taken to the Profit and Loss A/c has been computed as shown below*


Expenditure up to 31st March 2016

(2,90,00,000-20,00,000)

2,70,00,000

Add: Estimated expenditure to complete

Materials:

30,00,000

Labour 12,00,000

Sub-contractor 10,00,000

Hire charges on equipment 3,00,000

Establishment charges 6,00,000

Total 61,00,000

Add: 5% on total cost for contingencies 17,42,105

288

=3,31,00,000*5/95

Total cost – estimated 3,48,42,105

Total profit – estimated 2,01,57,895

Contract price 5,50,00,000

Profit to be taken to the Profit and Loss A/c = Total Estimated Profits * Work Certified/Contract

= Rs. 2,01,57,895 * Rs.4,50,00,000 /Rs.5,50,00,000

= Rs.1,64,92,823

Question 28

Apex Ltd. undertook a contract for Rs.6,00,000 as on 1st July 2014. On 30th June 2015, when the accounts were closed, the following details about the contract were gathered.

Particulars Amount in Rs.

Materials purchased 1,10,000

Wages 55,000

General expenses 12,000

Plant purchased 60,000

Materials on hand on 30th June 2015 30,000

Wages accrued on 30th June 2015 8,000

Work certified 3,50,000

Cash received 2,50,000

Work uncertified 50,000

Depreciation of plant 10%

As per the escalation clause ‘In the event of materials and rates of wages increase by more than 4% the contract price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case’.

It was found that since the date of signing the agreement, the prices of materials and wage rates increased by 25%. The value of work certified does not take into account the effects of the above clause. Prepare Contract Account.

289

Answer

Contract A/c for the Year Ended 30th June 2015

Dr. Cr.


To. By.

Materials 1,10,000 Work-in-progress:

Wages 55,000 Work certified 3,50,000

Wages outstanding 8,000 Work uncertified 50,000

General Expenses 12,000 Materials on hand 30,000

Depreciation of Plant 6,000 Contract escalation * 22,880

Balance c/d (Notional

profit)

2,61,880

Total 4,02,880 Total 4,52,880

Profit & Loss A/c # 1,24,705 Balance b/d 2,61,880

Reserve (Transfer) 1,37,175

Total 2,61,880 Total 2,61,880

* Escalation:

Materials /wages increased by 25%

Increase in material price [Rs.110000 – Rs.30000] *25/125 = Rs.16, 000

Increase in wages Rs.63, 000 *25/125 = Rs.12, 600

Total Increase = [a] + [b] = Rs.28, 600

This increase is more than 4% of the contract price.

Hence, as per escalation clause added amount of Escalation

= 28600 - 25% of [Rs.28, 600 – Rs.5, 720] = Rs.22, 880

# Amount of profit to be credited to Profit and Loss A/c:

= 2/3 * Cash Received/Work Certified *Notional Profit

2/3 * Rs.2, 50, 000/3, 50,000 * Rs. 2, 61,880 = Rs.1, 24,705

Question 29

BBSL Ltd. undertook a contract for construction of a Complex. The construction work commenced on 1st April 2014 and the following data are available for the year ended on 31st March 2015.

290

Particulars Amount in Rs.

Contract price 3,40,00,000

Work certified 2,10,00,000

Progress payment received 2,00,00,000

Materials issued 74,00,000

Administration Cost 10,00,000


Materials returned 5,00,000


Site costs 4,00,000



Work not certified 30,00,000

The contractors own a plant which originally cost Rs.30 lakhs has been continuously in use in many contract throughout the year. The residual value of the plant after 5 years of life is expected to be Rs.5 lakhs. Straight-line method of depreciation is in use. Only 1/3rd of the time has been allotted to this contract as per site supervisor estimate. As on 31st March 2015, the direct wages due and payable amounted to Rs. 2,50, 000 and the materials at site were estimated at Rs. 3 00,000.

Prepare:

Prepare the contract account for the year ended 31st March 2015

Show the calculation of profits to be taken to the Profit and Loss A/c of the year

Answer

Contract A/C for the year ended 31st March 2015

Dr. Cr.


To. By.

Materials 74,00,000 Stock of materials 3,00,000

Direct wages 50,00,000 Materials returned 5,00,000

Administration Cost 10,00,000 Work-in-progress

291

Work certified:

Work uncertified:

2,10,00,000

30,00,000


Site costs 4,00,000



Depreciation 1/3rd of

total depreciation #

1,66,667

Profit c/d 73,83,333

Total 2,38,00,000 Total 2,38,00,000

Profit & Loss A/c * 46,87,830 Profit b/d 73,83,333

Reserve (Transfer) 26,95,503

Total 73,83,333 Total 73,83,333

# Depreciation Calculation:

=[ (30,00,000-5,00,000)/5]*1/3

=1, 66,667

Since the contract completion is between 50% and 90%, 2/3rd of the notional profit subject to the proportion of cash received and work certified will be taken into consideration with the help of the following formula.

= Notional Profit *2/3 *Cash Received/Work Certified

Rs. 73,83,333 *2/3 * Rs. 2,00,00, 000/Rs. 2,10,00,000 = Rs. 46,87,830

Question 30

ABC Ltd. manufactures Product A, which yields two by-products B and C. The actual joint expenses of manufacture for a period were Rs.10, 000. It was estimated that the profits on each product as a percentage of sales would be 20%, 25% and 10% respectively. Subsequent expenses were as follows:

Amount in Rs.

Particulars Product A Product B Product C

Materials 120 90 85

Wages 300 70 75

Overheads 150 85 60

Total 570 245 220

Sales 8000 7000 5000

292

Prepare a statement showing the apportionment of the joint expenses of manufacture over the different products. Also presume that selling expenses are apportioned over the products as a percentage to sales.

Answer

Statement showing the Apportionment of Cost


Sales 8000 7000 5000

Less : Profit [20%, 25%, 10%

respectively]

1600 1750 1500

Cost of Sales 6400 5250 3500

Less : Selling Expenses * 1647 1440 1029

Cost of Production 4754 3810 2472

Less: Subsequent Expenses [As given] 570 245 220

Apportionment of Joint Costs 4184 3565 2252

Selling expenses are apportioned in the following manner

Total cost of sales:

= 6400+5250+3500=15,150

Total cost of production

[Total joint cost Rs. 10,000 + subsequent expenses Rs. 1035] =11,035

Selling Expenses= 15,150-11,035= 1,115

Apportioned in the ratio of sales= 8:7:5

Question 31

In the course of manufacture of the main product A, B and C also emerge. The joint expenses of manufacture amount to Rs.2,00,000. All the products are processed further after separation and sold as per details given below.


Sales 1,20,000 90,000 70,000

Cost after split off point 8,000 7,000 5,000

Profit as percentage of sales 25% 20% 15%

293

Selling and administration overheads Rs. 10,000 which are absorbed as a percentage of cost

of sales. Prepare a statement showing the apportionment of joint cost to the main product

and by-products.

Answer

Statement showing the Apportionment of Joint Costs

Particulars Product A Product B Product C Total

Sales 1,20,000 90,000 70,000 2,80,000

Less : Profit [25%, 20%, 15%

respectively]

30,000 18,000 10,500 58,500

Cost of Sales 90,000 72,000 59,500 2,21,500

Less: Selling Expenses as % of Cost of

Sale

4,063 3251 2686 10,000

Cost of Production 85,937 68,749 56,814 2,11,500

Less: Subsequent Expenses [As given] 8,000 7,000 5,000 20,000

Value at split off point 77,937 61,749 51,814 1,91,500

Question 32

The accounts of the Archana Engineering Company Ltd. show the following cost figures for

2015: Materials consumed Rs. 70,000

Direct wages Rs.54,000

Works overhead expenses Rs. 16,200

General overhead expenses Rs.11,216

Show the work cost and the total cost of manufacture, the percentages that the works overheads bear to the direct labour cost and the percentage that the general overheads bear to the works cost.

What price should the company quote to manufacture a refrigerator which is estimated to require on expenditure of Rs. 1,440 in materials and Rs. 1,200 in wages so that it will yield a profit of 20% on the selling price?

Answer

Job Cost Sheet

Expenses Amount (Rs.) Amount (Rs.)

Materials consumed 70,000

Direct labour cost 54,000

294

Direct expenses ---

Prime cost (1) --- 1,24,000

Add : Factory or work overhead 16,200

Works cost (2) 1,40,200

Add : General overhead expenses 11,216

Total cost of production (3) 1,51,416

Percentage of works overhead on Direct Manual & Machine

Labour Cost =16,200 / 54,000 x 100 = 30%

Percentage of general overhead on works cost = 11,216 /1,40,200 x 100 = 8%

Statement showing the quotation price for the refrigerator

Expenses Amount (Rs.) Amount (Rs.)

Materials Wages 1,440

Direct Expenses 1,200

Prime Cost (1) 2,640

Add : Works overheads 30% on wages [1,200 x 30% ] 360

Factory or works Cost (2) 3,000

Add : General overheads 8% on works cost [3,000 x 30% ] 900

Total cost of production 3,900

Profit 20% on selling price i.e., 25% on total cost 975

Sales price 4,875

Question 33

Following information relates to the manufacturing of a component A in a cost centre :

Cost of materials 5 paise per component

Operator's wages 75 paise an hour

Machine hour Rs. 1.50

Setting up time of the machine 2 hours and 20 minutes

Manufacturing time 10 minutes per component

Prepare cost sheets showing both production and setting up costs-total and per unit when a batch consists of 1,000 components.

295

Answer

Cost Sheet for a Batch of 1000 Components

Particulars Amount Amount

Rs. Rs.

Setting up Costs :

Operator's wages for 2 hrs and 20 mts @ 75 Paise an hour 1.75

Machine overheads for 2 hrs and 20 mts @ Rs.I.50 an hour 3.50

Total Setting up costs 0.005 5.25

Add : Production Costs :

Material cost for 1,000 units @ 5 paise per unit 0.05 50

Operator's wages for 10,000 Minutes (1000 x 10) @0.75/hr. 0.125 125

Machine Overheads for 10,000 minutes @ Rs.1.50 an hour 0.250 250

Total Production Costs 0.425 425

Total Costs (Setting up Costs + Production Cost) 0.430 430.25

Question 34

Product A is obtained after it passes through three distinct processes. You are required to

prepare Process accounts from the following information:

Process Total X Y Z

Rs. Rs. Rs. Rs.

Material 12,067 4,160 3,168 4739

Direct Wages 14,400 3,200 4,800 6,400

Production Overheads 14,400

1,000 Units @ Rs. 4.8 Per Unit were introduced in Process X. Production overhead to be distributed as 100% on Direct Wages.

Actual Output

Unit Normal Loss Value of Scrap per unit Rs.

Process X 950 5% 3.2

Process Y 840 10% 6.4

Process Z 750 15% 8

296

Answer

Dr. Process X Account Cr.

Units Amount Units Amount Rs. Rs.

Material Introduced Normal Loss 50 160

@ Rs. 4.8 per unit 1,000 4,800 Transferred to

Material 4,160 Process Y @ Rs. 16 per unit 950 15,200

Direct Wages 3,200

Production Overheads 3,200 -

1,000 15,360 1,000 15,360

Dr. Process Y Account Cr.


Transferred from Normal Loss 95 608

Process X 950 15,200 Abnormal Loss 15 480

Material 3,168 Transferred to

Direct Wages 4,800 next Process@

Production Overheads 4,800 Rs. 32 per unit 840 26,880

950 27,968 950 27,968

Dr. Process Z Account Cr.


Transferred from Process Y 840 26,880 Normal Loss 126 1,008

Material 4,739 Transferred to

Direct Wages 6,400 next Process@

Production Overheads 6,400 Rs. 32 per unit 750 45,600

Abnormal Gain

@ Rs.60.8 per unit 36 2,189

876 46,608 876 46,608

297

Dr. Abnormal Loss Account Cr.

Rs. Rs.

To Process Y 480 By Cash (sale of Scrap of Abnormal 96

Loss units)

By Costing Profit And Loss A/c 384

480 480

Dr. Abnormal Gain Account Czr.

Rs. Rs.

To Process Z a/c 288 By Process Z a/c 2,189

To Costing Profit & Loss Account 1,901 ____

2,189 2,189

Working Note :

Process Y:

(a) Normal Loss =950*10% =95 Units

Scrap Value =95 x 6.4 = Rs. 608

(b) Abnormal Loss Units

Normal Production (950 – 95) 855

Actual Production 840

Abnormal Loss 15

(c) Cost of Normal Production. = 27,968 - 608 = 27,360

Cost of Normal Production per unit = 27,360/845= Rs. 32 per unit

Cost of Abnormal Loss = 32 x 15 = 480

Abnormal Loss has been credited with Rs.96 being the amount realised from the sale of scrap and Abnormal Loss.

Process Z:

(a) Normal Process. 15% of 840 units.

=840 x 15/ 100 = 126 units

Sale of scrap = 126 x Rs. 8 = Rs. 1,008

(b) Abnormal Gain. Units

Actual Production 750

Estimated Production 714

36

298

Abnormal Gain A/c has been debited with Rs.288 being less amount, recovered on the sale

of loss of units which were 90 units instead of normal 126 units. i.e., 36 x 8 = Rs. 288.

Question 35

How much profit. if any, you would allow to be considered in the following case?

Contract cost Rs. 28,000

Contract value Rs. 50,000

Cash received Rs. 27,000

Uncertified work Rs. 3,000

Deduction from bills by way of security deposit is 10%?

Answer

Cash Received = 100 - 10% = 90% of work certified

Work Certified = Cash Received x 100/90

= 27,000 x 100/90

= Rs. 30,000

Value of work certified = 30,000

Notional Profit = Work in progress - Contract cost

= (30,000 + 3,000) - 28,000

= 5,000

Calculation of % of Work Certified

= 30,000 /50,000 x 100 = 60%

60% of work certified is more than 50% of the contract value.

= Notional Profit x 2/3 x cash received /work certified

= 5,000 x 2/3 x27,000/30,000

= Rs.3,000

Question 36

The following is the ledger balance of ABC Construction Company engaged on the

execution of A1 Apartments for the year ending 31st March 2015.

Direct Wages 12,500

Bank Balances 6,650

299

Rates and Taxes 750

Direct Expenses incurred 250

General overhead allocated 600

Fuel and power expenses 6,250

Materials issued to contract 70,000

Furniture 3,000

Plant and Machinery (60% at site) 1,25,000

Land and Building 1,15,000

The A1 Apartments was commenced on 1st April 2014. ABC paid up capital of Rs. 2,50,000.

The contract price was Rs. 3,00,000. Cash received on account of contract up to 31 st

March 2015 was Rs. 90,000 (being 90% of the work certified). Work completed but not

certified was estimated at Rs. 5,000. As on 31st March 2015 materials at site was

estimated at Rs. 1,500. Machinery at site costing Rs. 10,000 was returned to stores and

wages outstanding were Rs. 250. Plant and machinery at site is to be depreciated at 5%.

Prepare the Contract Account and Balance sheet.

Answer

ABC Construction Ltd.

Contract Account

(For the year ended 31st March 2015)


Rs. Rs.

To Materials 70,000 By Materials at site 1,500

To Direct wages 12,500 By Machine returned

To Wages outstanding 250 (Rs.1,00,000 - 5 % of 9,500

To Plant & Machinery 1,00,000)

as site (60%) 75,000 By Plant & Machinery as site

To Fuel and Power 6,250 (65,000 – 5% of 65,000) 61,750

To Direct expenses 250 By work in progress 600

To General Overheads 600 Rs. 90,000 x 100/90

To Rates & Taxes 750 = 1,00,000

To Notional profit c/d 12,150 Uncertified 5,000 1,05,000

1,77,750 1,77,750

300

To Profit and Loss By National Profit bid 12,150

[12,150 x 1/3x90/100 ] 3,645

To Work in Progress (Reserve) 8,505 ________

12,150 12,150

Balance Sheet

Liabilities Amount Assets Amount

Rs. Rs.

Share Capital 2,50,000 Land and Building 1,15,000

Profit and Loss a/c 3,645 Plant and Machinery at site 61,750

Wages Outstanding 250 Plant and Machinery (store) 59,500

Furniture 3,000

Bank Balances 6,650

Work in Progress:

Work Certified 1,00,000

Work Uncertified 5,000

1,05,000

Less: Cash Received 90,000

15,000

Less : Reserve 8,505 6,495

Materials at site 1,500

2,53,895 2,53,895

Question 37

The finished product of a factory passes through two processes. The entire material being

placed in process at the beginning of the first process. From the following production and

last data relating to the first process, work out the value of the closing inventory and the

value of the materials transferred to the second process.

Process I Rs.

Opening inventory 8,000

Material 22,000

Labour 40,000

Manufacturing Overheads 32,000

(Units)

Opening inventory (25 percent complete) 3,200

Put into Process 9,600

301

Transferred to II Process 8,000

Closing inventory (20 percent completed) 4,000

Spoilage during process 800

Answer

Process-1 a/c

Particulars UNITS Amount

Rs.

Particulars UNITS Amount

Rs.

To Opening stock 3200 8,000 BY process 2 a/c 8,000

92,600

To Material 9600 22,000

To Labour 40,000 By Normal Loss 800 -------

To Manufacturing

Overheads

32000

By Closing stock

4,000

9,400

12,800 1,02,000 12,800 1,02,000

Statement of Equivalent Production Units

Particulars Output Material Labour Overheads

Qty. % Qty. % Qty. %

Opening Stock process 3200 2400 75 2,400 75 2,400 75

Processed completely 4,800 4,800 100 4800 100 4800 100

Normal Loss 800 ---- ----- ------ ----- ------ ------

Closing Inventory 4000 800 20 800 20 800 20

12,800 8,000 8,000 8,000

Statement of Element of Cost on the basis of Equivalent Production

Particulars Cost Rs Equivalent

Units

Cost

per Unit Rs

Material 22,000 8,000 2.75

Labour 40,000 8,000 5.00

Overheads 32,000 8,000 4.00

Total 11.75

302

Statement of Apportionment of Cost

Particulars Elements Equivalent

Units

Cost Per

Unit Rs.

Cost

Rs.

Total cost

Rs.

Op. Stock

Processed

Material 2,400 2.75 6,600 28,200

Labour 2,400 5.00 12,000

Overheads 2,400 4.00 9,600

Completely

Processed

Material 4,800 2.75 13,200 56,400

Labour 4,800 5.00 24,000

Overheads 4,800 4.00 19,200

Closing

Inventory

Material 800 2.75 2,200 9,400

Labour 800 5.00 4,000

Overheads 800 4.00 3,200

Total 94,000

Value of goods transferred to next process

Units Rs.

Value of opening stock 8,000

Additional cost on opening stock 3,200 28,200

Value of completely processed units 4,800 56,400

8,000 92,600

***

303

Question 1

What is Marginal Costing? State its features.

Answer

Marginal costing is defined as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”. Marginal costing is not a separate costing. It is only a technique used by accountants to aid management decision.

Marginal cost is the cost of one unit of product or service which would be avoided if that unit were not produced or provided.

According to CIMA Terminology Marginal Costing is the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs in this technique of costing only variable costs are charged to operations, processes or products leaving all indirect costs to be written off against profits in the period in which they arise.

Thus marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making. It is a technique of applying the existing methods in a particular manner in order to bring out the relationship between profit and volume of output.

Features of Marginal Costing

(a) Costs are separated into the fixed and variable elements and semi-variable costs are also differentiated like wise.

(b) Only the variable costs are taken into account for computing the value of stocks of work-in-progress and finished products.

(c) Fixed costs are charged off to revenue wholly during the period in which they are incurred and are not taken into account for valuing product cost/inventories.

(d) Prices may be based on marginal costs and contribution but in normal circumstances prices would cover costs in total.

(e) It combines the techniques of cost recording and cost reporting.

(f) Profitability of departments or products is determined in terms of marginal contribution.

8

Marginal Costing

304

(g) The unit cost of a product means the average variable cost of manufacturing the product.

Question 2

Explain briefly the advantages of Marginal Costing.

Answer

Advantages of Marginal Costing

(1) Cost-volume-profit relationship data wanted for profit planning purposes is readily obtained from the regular accounting statements. Hence management does not have to work with two separate sets of data to relate one to the other.

(2) The profit for a period is not affected by changes in absorption of fixed expenses resulting from building or reducing inventory. Other things remaining equal (e.g. selling prices, costs, sales mix), profits move in the same direction as sales when direct costing is in use.

(3) Manufacturing cost and income statements in the direct cost form follow management’s thinking Lesson 8 Marginal Costing 323 more closely than does the absorption cost form for these statements. For this reason, management finds it easier to understand and use direct cost reports.

(4) The impact of fixed costs on profits is emphasised because the total amount of such cost for the period appears in the income statement.

(5) Marginal income figures facilitate relative appraisal of products, territories, classes of customers, and other segments of the business without having the results obscured by allocation of joint fixed costs.

(6) Marginal costing lies in with such effective plans for cost control as standard costs and flexible budgets.

(7) Marginal costing furnishes a better and more logical basis for the fixation of sales prices as well as tendering for contracts when business is at low ebb.

(8) Break-even point can be determined only on the basis of marginal costing.

Question 3

What do you understand by break-even-analysis or Cost-volume profit analysis? Explain briefly its objectives.

Answer

The differentiation of costs into “variable” and “fixed” elements and their relationship with sales and profits has been developed as “break-even analysis”. This break even analysis is also known as Cost–volume– profit (CVP) analysis. In break even analysis or CVP analysis an activity level is determined at which all relevant cost are recovered and there is a situation of no profit or no loss. This activity level is called breakeven point.

The break-even point in any business is that point at which the volume of sales or revenues exactly equals total expenses or the point at which there is neither a profit nor loss under

305

varying levels of activity. The break-even point tells the manager what level of output or activity is required before the firm can make a profit; reflects the relationship between costs, volume and profits. In another words breakeven point is the level of sales or production at which the total costs and total revenue of a business are equal.

Objectives of Break Even Anaysis/Cost-Volume-Profit Analysis

The objectives of cost-volume profit analysis are given below:

(1) In order to forecast profit accurately, it is essential to know the relationship between profits and costs on the one hand and volume on the other.

(2) Cost-volume-profit analysis is useful in setting up flexible budgets which indicate costs at various levels of activity.

(3) Cost-volume-profit analysis is of assistance in performance evaluation for the purposes of control. For reviewing profits achieved and cost incurred the effects on costs of changes in volume are required to be evaluated.

(4) Pricing plays an important part in stabilizing and fixing up volume. Analysis of cost-volume-profit relationship may assist in formulating price policies to suit particular circumstances by projecting the effect which different price structures have on costs and profits.

(5) As predetermined overhead rates are related to a selected volume of production, study of cost volume relationship is necessary in order to know the amount of overhead costs which could be charged to product costs at various level of operation.

Question 4

What are the different uses of cost-volume-profit analysis?

Answer

Uses of Cost-Volume-Profit Analysis

1. C.V.P. analysis helps in forecasting costs and profits as a result of change in volume.

2. It helps fixing a sales volume level to earn or cover a given revenue, return on capital employed, or rate of dividend.

3. It assists determination of effect of change in volume due to plant expansion or acceptance of an order, with or without increase in costs or in other words a quantum of profit to be obtained can be determined with change in volume of sales.

4. C.V.P. analysis helps in determining relative profitability of each product, line, project or profit plan.

5. Through cost volume-profit analysis inter-firm comparison of profitability can be done intelligently.

6. It helps in determining cash requirements at a desired volume of output, with the help of cash breakeven charts.

306

7. Break-even analysis emphasises the importance of capacity utilisation for achieving economy.

8. From break-even analysis during severe recession, the comparative effects of a shut down or continued operation at a loss is indicated.

9. The effect on total cost of a change in the fixed over-head is more clearly demonstrated through break-even analysis and cost- volume-profit charts.

10. The conditions of a business such as profit potentialities, requirements of capital, financial stability and incidence of fixed and variable costs can be gauged from a study of the position of the breakeven point and the angle of incidence in the break-even chart.

Question 5

What is ‘Profit-Volume Ratio’? State its significance.

Answer

Profit-Volume Ratio

The ratio or percentage of contribution margin to sales is known as P/V ratio. This ratio is also known as marginal income ratio, contribution to sales ratio, or variable profit ratio. P/V ratio, usually expressed as a percentage, is the rate at which profit increases with the increase in volume.

Significance of Profit-Volume (P/V) Ratio

Profit volume (or contribution-sales) ratio is a logical extension of marginal costing. It is the study of the interrelationships of cost behaviour patterns, levels of activity and the profit that results from each alternative combination. The significance of profit volume ratio may be enumerated from the following applications which are as under:

(a) Ascertainment of profit on a particular level of sales volume.

(b) Determination of break-even point.

(c) Calculation of sales required to earn a particular level of profit.

(d) Estimation of the volume of sales required to maintain the present level of profit in case selling prices are to be reduced by a stipulated margin.

(e) Useful in developing flexible budgets for cost control purposes.

(f) Identification of minimum volume of activity that the enterprise must achieve to avoid incurring losses.

(g) Provision of data on relevant costs for decisions relating to pricing, keeping or dropping product lines, accepting or rejecting particular orders, make or buy decision, sales mix planning, altering plant layout, channels of distribution specification, promotional activities etc.

(h) Guiding in fixation of selling price where the volume has a close relationship with the price level.

(i) Evaluation of the impact of cost factors on profit.

307

Question 6

Explain the concept of key factor.

Answer

Key Factor

The product giving the greatest contribution will be the most profitable. To maximise profit, resources should be mobilised towards that product which gives the maximum contribution. But contribution is not the only criterion for deciding profitability. In real life, there may be several factors which may put a limit on the number of units to be produced even if the products give a high contribution. These factors are equally important for arriving at managerial decisions because these factors limit the volume of output at a particular point of time or over a period. these are called key factors, scarce factors, limiting factors, principal budget factors or governing factors. The limiting factors may be sale, raw material, labour, plant capacity and availability of capital e.g., for a concern established in a relatively new town, labour may be a key factor or the concern may find it difficult to acquire an unlimited quantity of raw material because of scarcity or the quota system, etc. In the later case material will be the key factor. The extent of influence of these factors should be carefully examined before arriving at a particular decision. Contribution per unit of key factor should be considered and that course of action should be adopted which gives the highest contribution per unit of key factor.

Question 7

Distinguish between absorption costing and marginal costing.

Answer Difference between Absorption Costing and Marginal Costing

Absorption costing Marginal costing

(i) Fixed production overheads are charged to the product to be subsequently released as a part of goods sold i.e., it is included in cost per unit.

Fixed production costs are regarded as period cost and are charged to revenue along with the selling and administration expenses, i.e., they are not included while computing cost per unit.

(ii) Profit is the difference between sales and cost of goods sold.

Profit in marginal costing is ascertained by establishing the total contribution and then deducting therefrom the total fixed expenses. Contribution is the excess of sales over variable cost.

(iii) Costs are seldom classified into variable and fixed. Although such a classification is possible, it fails to establish a cost-volume profit relationship.

Cost-volume profit relationship is an integral part of marginal costing studies. Costs have to be classified into fixed costs and variable costs.

308

(iv) If inventories increase during a period, this method will reveal more profit than marginal costing. When inventories decrease, less profits are reported because under this method closing stock is valued at higher figures. Since inventories are valued at total cost, a portion of fixed overheads are also included in inventories.

If inventories increase during a period, this method generally reports less income than absorption costing; but when inventories decrease this method reports more net income. The difference in the net income is due to difference in accounting for fixed manufacturing costs as compared to inventory valuation

(v) Arbitrary apportionment of fixed costs may result in under or over recovery of overheads.

Since fixed costs are excluded, there is no question of arbitrary apportionment of fixed overheads and thus under or over absorption of overheads.

Question 8

Write down the assumptions regarding break-even chart.

Answer

Assumptions regarding Break-Even Charts are as under:

(i) Costs are bifurcated into variable and fixed components.

(ii) Fixed costs will remain constant and will not change with change in level of output.

(iii) Variable cost per unit will remain constant during the relevant volume range of graph.

(iv) Selling price will remain constant even though there may be competition or change in volume of production.

(v) The number of units produced and sold will be the same so that there is no operating or closing stock.

(vi) There will be no change in operating efficiency.

(vii) In case of multi-product companies, it is assumed that the sales mix remains constant. A break-even chart can be presented in different forms.

Question 9

Explain briefly profit-volume graph.

Answer

Profit-volume Graph

Profit volume graph is the graphical representation of the relationship between profit and volume. Separate lines for costs and revenues are eliminated from the P/V graph as only profit points are plotted. It is based on the same information as is required for the

309

traditional break-even chart and is characterised by the same limitations. The steps in the construction of profit volume graph are as follows:

(i) Profit and fixed costs are represented on the vertical axis.

(ii) Sales are shown on the horizontal axis.

(iii) The sale line divides the graph into two parts both horizontally and vertically. The area above the horizontal line is the ‘profit area’ and that below it is the ‘loss area’ at which fixed costs are represented on the vertical axis below the sale line and profits on the same axis above the sale line.

(iv) Profits and fixed costs are plotted for corresponding sales volume and the points are joined by a line which is the profit line.

Question 10

The following information is provided:

Sales Rs. 80 lakhs; Variable Costs Rs. 48 lakhs; Fixed Costs Rs. 16 lakhs.

The company is thinking of expanding the plant. The increase in fixed costs, with plant expansion will be Rs. 8 lakhs. It is estimated that the maximum production in the new plant will be, in sale value, worth Rs. 48 lakhs and the variable costs to sales ratio will be same as above. You are required to determine:

(i) BEP (in value) before expansion;

(ii) Sales required to earn additional profit of Rs. 1 lakh;

(iii) Sales needed to obtain net income of Rs. 1.4 lakh (after tax), tax rate is 30%.

(iv) BEP (in value) after expansion;

Answer

(i) BEP before expansion

P/V Ratio = S

VS x 100 =

lakhs 80 Rs.

lakhs 48 Rs. - lakhs 80 Rs. x 100 = 40%

BEP = F ÷ P/V Ratio = Rs. 16 lakhs ÷ 100

40 = Rs. 40 lakhs

(ii) Sales required to earn additional profit after tax of Rs. 1 lakhs

F = Rs. 16 lakhs; Desired profit = Rs. 16 lakhs + Rs. 1 lakhs = Rs. 17 lakhs

Required Sales = RatioP/V

Profits Desired Cost Fixed =40%

lakhs 17 Rs. lakhs 16 Rs. = Rs. 82.50 lakhs

(iii) Required Sales = Fixed Cost + RatioP/V

Rate) Tax - (1 Profit Desired

= 40%

.3)] -(1 / lakhs [1.4 lakhs 16 Rs. =

40

lakhs 2 lakhs 16 Rs. x 100 = Rs. 45 lakhs

310

(iv) BEP after expansion:

F (Fixed Costs) = Rs. 16 lakhs + 8 lakhs = Rs. 24 lakhs

BEP = F ÷ P/V Ratio = Rs. 24 lakhs ÷ 100

40 = Rs. 60 lakhs

Working Note:

Profit at given level = (Sales x P/V Ratio) – Fixed Cost

= (Rs. 80 lakhs x 40%) - Rs. 16 lakhs = Rs. 16 lakhs

Question 11

Nakul Limited provides the following data:

Product Selling Price per unit (Rs.)

Variable Cost in % of sales

Percentage of Sales Revenue

A

B

C

40

50

80

75

80

60

20

40

40

At 100 percent capacity: Total sales Rs. 35000000 and Fixed Cost Rs. 5800000.


(i) BEP in rupees

(ii) Profit or Loss at 80% capacity level sales.

Answer

(i) Statement showing contribution – Product wise and as a whole

Particulars A B C Total

i. Selling price per unit(Rs.)

ii. Variable cost ratio (%)

iii. P/V Ratio (100 – V.C. Ratio)

iv. Sales Revenue (%)

v. Sales Revenue (Rs.)

vi. Contribution on (Rs.) [(v) x (iii)]

40

75

25%

20

7000000

1750000

50

80

20%

40

14000000

2800000

80

60

40%

40

14000000

5600000

----

----

----

100

35000000

10150000

P/V Ratio as whole = Sales Total

onContributi Total x 100

= 35000000 Rs.

10150000 Rs. x 100

= 29%

311

BEP = RatioP/v

Cost Fixed

= 29%

5800000 Rs.

= Rs. 20000000

(ii) Profit or Loss at 80% capacity:

Sales revenue at 80% capacity = 35000000 x 80% = Rs. 28000000

Profit = (Sales x P/V Ratio) – Fixed Cost

= (Rs. 28000000 x 29%) – Rs. 5800000

= Rs. 8120000 – Rs. 5800000

= Rs. 2320000

Question 12

The following information is provided by Mogari Limited for the year ended 31st March, 2016:

Particulars First 6 Months (Rs.) Last 6 Months (Rs.)

Sales

Total Cost

5400000

4800000

6000000

5160000


(i) P/V Ratio

(ii) Fixed Cost for the year

(iii) Break-even Point for the year

(iv) Margin of Safety

(v) Profit earned when sales are Rs. 15000000

(vi) Sales required to earn a profit of Rs. 2000000.

Answer

(i) P/V Ratio = sales in Increase

profit in Increase x 100

= 5400000) - (6000000

600000) - (840000 x 100

= 600000

240000 x 100

= 40%

312

(ii) Fixed Cost = (Sales x P/V Ratio) – Profit

= (11400000 x 40%) – 1440000

= 4560000 – 1440000

= Rs. 3120000

(iii) BEP = RatioP/v

F

= 40%

3120000 Rs.

= Rs. 7800000

(iv) Margin of Safety = Sales – BEP

= Rs. 11400000 – Rs.7800000

= Rs. 3600000

Or M. S. = RatioP/V

Profit

= 40%

1440000

= Rs. 3600000

(v) Profit earned at sales Rs. 15000000

= (Sales x P/V Ratio) – Fixed Cost

= (15000000 x 40%) – 3120000

= 6000000 – 3120000

= Rs. 2880000

(vi) Required Sales = RatioP/V

D.P.) (F

= 40%

2000000) (3120000

= 40%

5120000

= Rs. 12800000

Working Note:

1. Profit for first 6 months = 5400000 – 4800000 = Rs. 600000

Profit for last 6 months = 6000000 – 5160000 = Rs. 840000

Profit for the year = 600000 + 840000 = Rs. 1440000

2. Sales for the year = 5400000 + 6000000 = Rs. 11400000

313

Question 13

The following data are given by S. Kumar Limited:

Sales (32000 Units) Rs. 9600000; Variable Cost Rs. 6720000; Profit Rs. 1080000.


(i) P/V Ratio

(ii) BEP in units

(iii) Profit at sales volume of Rs. 7200000

(iv) Required sales to achieve same contribution if P/V Ratio is 40%.

(v) If the selling price is reduced by 20%, the new BEP in units will be.

Answer

Working Note:

Calculation of Contribution and Fixed Cost

Particulars 32000 Units (Rs.) Per Unit (Rs.)

Sales

Less : Variable Cost

Contribution

Less : Profit

Fixed Cost

9600000

6720000

300

210

2880000

1080000

90

---

1800000 ---

(i) P/V Ratio = s

C x 100

= 100

90 x 100

= 30%

(ii) BEP in Units = unit per -C

F

= 90 Rs.

1800000 Rs.

= 20000 Units

(iii) Profit at Sales Volume of Rs. 7200000


= (7200000 x 30%) – 1800000

314

= 2160000 – 1800000

= Rs. 360000

(iv) Required sales to same contribution (Rs. 2880000) if P/V Ratio is 40%:

Required Sales = RatioP/V

C

= 40%

2880000 Rs.

= Rs. 7200000

(v) BEP at reduced price:

Reduced Price = 300 – 20% of 300 = 300 – 60 = Rs. 240 per unit

Contribution per unit = 240 – 210 = Rs. 30

BEP in Units at reduced price

= Fixed Cost/new C-per unit

= Rs. 1800000/Rs.30

= 60000 units

Question 14

Following figures are related to MD Limited for the year ended 31st March, 2016:

Rs.

Selling price per unit 50

Variable cost per unit 30

Fixed factory overheads 4500000

Fixed administrative overheads 2500000

Fixed selling and distribution overheads 2000000


(i) Break-even point in Units

(ii) Units to be sold to earn a target net income of Rs. 175000 per month during a year.

(iii) Number of units to be sold to earn a net income of 25% on cost.

(iv) New selling price per unit if break-even point is to be brought down by 20% of present BEP.

(v) New selling price to earn a profit of 20% on sales by selling only 330000 units.

Answer

(i) BEP in units =units per onContributi

cost Fixed

315

= 20 Rs.

9000000 Rs.

= 450000 units

Fixed Cost (F) = 4500000+2500000+2000000

= Rs. 9000000

Contribution (C) per unit = Selling price – Variable cost

= Rs. 50 – 30

= Rs. 20 per unit

(ii) Units to be sold for a net income of Rs. 175000 x 12 = Rs. 2100000 per annum:

Sales (Units) = unit per - C

Profit Desired F

= 20 Rs.

2100000 9000000 Rs.

= 20 Rs.

11100000 Rs.

= 555000 Units

(iii) No. of units to be sold to earn a net income of 25% on cost or 20% on sales

Let sales be S and desired profit be 0.2S

S = RatioP/V

Profit Desired F

S =40%

0.2S 9000000 Rs.

0.4S – 0.2S = Rs. 9000000

S = 9000000/0.2 = 45000000

Required Sales Units = 45000000/50 = 900000 units

P/V Ratio = S

V) - (S x 100

=50

30) - (50 x 100

= 40%

(iv) New selling price if BEP is to be brought down by 20%. Hence, new BEP = 450000 units – 20% of 450000

= 450000 units – 90000 units

= 360000 units required C – per unit = BEPNew

F

= Rs.9000000/360000 units

316

= Rs.25 per unit

New selling price per unit = VC + C – per unit

= Rs. 30 + Rs. 25

= Rs. 55 per unit

(v) Required selling price to earn a profit of 20% on sales if sales quantity is 330000 units:

Rs.

Variable Cost: 330000 x Rs. 30 = 9900000

Add : Fixed Cost = 9000000

Total cost of 330000 units 18900000

Cost per unit: 18900000/330000 57.27

Add: Profit @ 20% on sales or 25% on cost 14.32

Required selling price per unit 71.59

Question 15

The following data are provided by Jaggu Limited:

Year ended 31st March

2015 2016

Rs. Rs.

Sales @ Rs. 20 per unit 60000000 95000000

Profit/(Loss) (4000000) 10000000


(i) Fixed cost

(ii) Variable cost of each year

(iii) Break-even point

(iv) Required sales to earn a profit of Rs. 16000000

Answer

(i) Fixed cost = (Sales x P/V Ratio) – Profit

= (Rs. 95000000 x 40%) - Rs. 10000000

= 38000000 – 10000000

= Rs. 28000000

317

P/V Ratio =Sales in Increase

Profit in Increasex 100

= 60000000) - (95000000

](-4000000) - [10000000 x 100

= 35000000

14000000 x 100

= 40%

(ii) Variable cost of each year:

P/V Ratio is 40%. Hence, V.C. Ratio = 100 – 40 = 60%

VC for 2014-15 = 60000000 x 60% = Rs. 36000000

VC for 2015-16 = 95000000 x 60% = Rs. 57000000

(iii) Break-even Point = RatioP/V

F

= 40%

28000000 Rs.

= Rs. 70000000

(iv) Required sales to earn a profit of Rs. 16000000

Req. sales = RatioP/V

Profit Desired F

= 40%

16000000 28000000 Rs.

=40%

44000000 Rs.

= Rs. 110000000

Question 16

The following figures are given: (Rs. in Lakhs)

Particulars Year ended 31st March

2015 (Rs.) 2016 (Rs.)

Profit/(Loss)

Cost

25

155

(15)

95


(i) P/V Ratio

(ii) Fixed Cost

318

(iii) Break-even Point in units if selling price is Rs. 250 per unit.

(iv) Required sales to earn a profit of 25% on cost.

Answer

Working Notes:

Sales = Cost + Profit or Cost-Loss

Sales for 2014-15 = Rs. 155 lakhs + 25 lakhs = Rs. 180 lakhs

Sales for 2015-16 = Rs. 95 lakhs – 15 lakhs (Loss) = Rs. 80 lakhs

(i) P/V Ratio = Sales in Change

Profit in Change x 100

= 80-180

(-15) - 25 x 100

= lakhs 100

lakhs 40 x 100

= 40%

(ii) Fixed Cost = (Sales x P/V Ratio) – Profit/+ loss

= (180 lakhs x 40%) – 25 lakhs

= 72 lakhs – 25 lakhs

= Rs. 47 lakhs

Alternatively

F. C. = (80 lakhs x 40%) + 15 lakhs (loss)

= 32 + 15 = Rs. 47 lakhs

(iii) BEP in units = unit per - C

F

= 100 Rs.

4700000 Rs.

= 47000 units

Contribution per unit = Selling price per unit x P/V Ratio

= Rs. 250 x 40%

= Rs. 100 per unit

(iv) Required Sales to earn a profit of 25% on cost or 20% on sales.

Let required sales be ‘x’ then desired profit be 0.2x

Required Sales (Rs.) = RatioP/V

Profit Desired FC

319

x = 40%

0.2x 4700000

0.4x – 0.2x = 4700000

x = 4700000/0.2

Required sales (x) = Rs. 23500000

Question 17

Jaiyesh Limited produces single product which sells 20000 units at Rs. 120 per unit. Variable cost is Rs. 90 per unit and margin of safety is Rs. 900000.


(i) Profit earned

(ii) Break-even Point in units

(iii) Selling price per unit to bring BEP down to 10000 units

(iv) Margin of safety if profit is Rs. 325000.

Answer

(i) Profit = Margin of Safety x P/V Ratio

= Rs. 900000 x 25%

= Rs. 225000

P/V Ratio = S

V)-(S x 100

= 120

90) - (120 x 100

=120

30 x 100

= 25%

(ii) BEP in Units = Total sales units – Margin of safety in units

= 20000 units – (Rs.900000/120)

= 20000 units – 7500 units

= 12500 units

(iii) Selling price to down BEP to 10000 units

S = V + BEPNew

F

= Rs. 90 + units 10000

375000 Rs.

= Rs. 90 + Rs. 37.50

320

New Selling price = Rs. 127.50 per unit

Fixed cost = (S x P/V Ratio) – Profit

= (20000 x 120 x 25%) – Rs.225000

= Rs. 600000 – Rs.225000

= Rs. 375000

(iv) Margin of Safety = RatioP/V

Profit

= 25%

325000 Rs.

= Rs. 1300000

Question 18

The Margin of Safety is 40 percent of sales and P/V Ratio is 30 percent. The firm sold 50000 units at a price of Rs. 450 per unit.


(i) Break-even Point in units.

(ii) Profit earned

(iii) Number of units to be sold to earn a profit of 10% on sales.

(iv) Break-even sales in units if selling price is reduced by 10 percent

Answer

(i) BEP:

Sales = 50000 units x Rs. 450 = Rs. 22500000

BEP = (100 – M. S. in %) = 100 – 40 = 60% of sales

= 60% of Rs. 22500000

= Rs. 13500000

BEP (Units) = 13500000/450 = 30000 units

(ii) Profit = Margin of Safety x P/V Ratio

= (40% of 22500000) x 30%

= Rs. 2700000

(iii) No. of units to be sold to earn a profit of 10% on sales:

Let sales = x and desired profit = 0.10x

x = RatioP/V

Profit Desired F

321

x = 30%

0.10x 4050000

0.3x – 0.1x = 4050000

x = 0.20

4050000

x = 20250000

Required sales units = 20250000/450 = 45000 units

(iv) Present Contribution (C)-per unit = 30% of 450 = Rs. 135; and VC = Rs. 450 – 135 = Rs. 315 per unit

Reduced selling price = 100 – 10 = 90% of 450 = Rs. 405

New C-per unit = 405 – 315 = Rs. 90

New BEP = unit per - CNew

F

= 90 Rs.

4050000 Rs.

= 45000 units

Working Notes:

1. Fixed Cost = (Sales x P/V Ratio) – Profit (M.S. x P/V Ratio)

= (22500000 x 30%) – [(40% of 22500000) x 30%]

= 6750000 – 2700000

= Rs. 4050000

Or FC = BEP x P/V Ratio

= 13500000 x 30%

= Rs. 4050000

Question 19

The following figures are provided by Geeta Limited for the year ending 31st March, 2016:

- P/V Ratio 40%

- Break-even Point at 60% of sales

- Sales @ Rs. 250 per unit for Rs. 15625000


(i) BEP in units

(ii) Fixed cost

(iii) Profit earned

322

(iv) Margin of safety in rupees

(v) Units to be sold to earn a net profit (after tax) of Rs. 2800000 if corporate tax rate is 30%.

(vi) Selling price per unit if BEP is to be brought down to 50% of sales units.

Answer

(i) BEP in units = 60% of sales units 15625000/250

= 60% of 62500 units

= 37500 units

(ii) Fixed cost (F) = BEP in units x C-per unit

= 37500 units x (40% of Rs. 250)

= 37500 x Rs. 100

= Rs. 3750000

(iii) Profit earned = (Sales x P/V Ratio) – F

= (15625000 x 40%) – Rs.3750000

= Rs. 6250000 – Rs.3750000

= Rs. 2500000

(iv) Margin of safety = Sales – BEP Sales

= Rs. 15625000 – (37500 x Rs. 250)

= Rs. 15625000 – 9375000

= Rs. 6250000

Or Margin of Safety = 100% - BEP 60% = 40% of sales Rs. 15625000

= Rs. 6250000

(v) Required sales (units) = Unit per - C

Profit Desired F

= 100 Rs.

.3) - (1 / 2800000 Rs. 3750000 Rs.

= 100

4000000 3750000

= 100

7750000

= 77500 Units

(vi) Selling price if BEP is to be brought down to 50% of sales units:

VC = Present SP – Present C-per Unit

= 250 – 100 = Rs. 150 per Unit

New BEP = 50% of 62500 Sales units

= 31250 Units

323

New selling price = VC + Units in BEPNew

FC

= Rs. 150 + Units 31250

3750000 Rs.

= Rs. 150 + Rs. 120

= Rs. 270 per Units

Question 20

Jatin Limited produces and sells 150000 units at Rs. 30 per unit. The variable cost per unit is Rs. 18 and fixed overheads are Rs. 65000 per month.

You are required:

(i) Calculate P/V Ratio; Profit and Break-even-Point in rupees for the year.

(ii) If selling price is reduced by 20 percent, Find out BEP and what additional sales would be needed to maintain the old level of profit.

(iii) If on account of reduction in selling price, sales increase to 210000 units, what profit would result?

Answer

(i) P/V Ratio =S

V - Sx 100

= 30

18 - 30 x 100

= 30

12 x 100

= 40%

Profit = (Sales x P/V Ratio) – F

= (150000 x 30 x 40%) – (Rs. 65000 x 12)

= 1800000 – 780000

= Rs.1020000

BEP = RatioP/V

F

= 40%

12 x 6500 Rs.

= 40%

780000 Rs.

= Rs. 1950000

(ii) Reduced selling price = 30 – 20% of 30

= 30 – 6 = Rs. 24 per unit

324

New P/V Ratio = S

V-Sx 100

= 24

18 - 24x 100

= 24

6 x 100

= 25%

New BEP = RatioP/V New

F

= 25%

780000 Rs.

= Rs. 3120000

Required sales to maintain the same level of profits Rs. 1020000:

Req. Sales (Units) =unit per - CNew

Profit Desired F

=18 Rs. - 24 Rs.

1020000 Rs. 780000 Rs.

= 6 Rs.

1800000 Rs.

= 300000 Units

Additional Sales = 300000 Units – 150000 Units

= 150000 Units

(iii) Profit if sales are 210000 units at reduced price:

Profit = (Sales Units x C-per Unit) – Fixed cost

= (210000 units x Rs. 6) – Rs.780000

= Rs. 1260000 – Rs.780000

= Rs. 480000

Question 21

Vikash Limited budgets for a production of 250000 units. Per unit variable cost and fixed costs are Rs. 24 and Rs. 6 respectively. The company fixes its selling price to fetch a profit of 20 percent on selling price.


(i) Ascertain P/V Ratio

(ii) Ascertain Break-even Point

325

(iii) If the selling price is reduced by 10 percent, how will it affect the P/V Ratio and the BEP?

(iv) If a profit desired 10% more than the budgeted total profit, what should be the sales at reduced price?

Answer

(i) P/V Ratio =S

C x 100

= 37.50

13.50 x 100

= 36%

(ii) BEP in units = unit per - C

F

= 13.50 Rs.

1500000 Rs.

= 111111 units approx.

Or BEP in Rupees = RatioP/V

F

= 36%

1500000 Rs.

= Rs. 4166667

(iii) P/V Ratio and BEP after reduction in selling price.

Reduction selling price = Rs. 37.50 – 10% of 37.50 = Rs. 33.75

Revised C-per unit = 33.75 – 24 = Rs. 9.75

Revised P/V Ratio = S

C x 100

= 33.75

9.75 x 100

= 28.89%

Revised BEP = C Revised

F

= 9.75 Rs.

1500000 Rs.


326

Or 28.89%

1500000 Rs. = Rs. 5192108

(iv) Sales at reduction price:

Desired profit = Rs. 1875000 x 110%

= Rs. 2062500

Required sales = price reduced at unit per - C

Profit Desired F

= 9.75 Rs.

2062500 Rs. 1500000 Rs.

= 9.75 Rs.

3562500 Rs.

= 365384.62 or 365385 units

Working Note

1. Budgeted selling price: Rs.

Variable Cost per unit 24

Add : Fixed Cost per unit 6

Total Cost 30

Add: Profit @ 20% on sales or 25% on Cost 7.50

Selling Price per unit 37.50

2. Budgeted Fixed Cost = 250000 units x Rs. 6

= Rs. 1500000

3. Contribution per unit = S – V = Rs. 37.50 – 24

= Rs. 13.50 per unit

4. Budgeted Profit = 250000 units x Rs. 7.50

= Rs. 1875000

Question 22

Gyani Limited has purchased a machine to produce a new product, the estimated cost data for which are given below:

Estimated annual sales

Estimated Cost:

Direct Material

120000 Units

26 per unit

327

Direct Labour

Variable Overheads:

Factory

Administrative

Selling and Distribution

Fixed overheads: Factory, Administrative and selling

Desired Profit @ 20% on sales

25 per unit

9.20 per unit

2.60 per unit

7% of sales

2100000


(i) Selling price per unit

(ii) P/V Ratio

(iii) BEP in units

(iv) Required sales units to earn a profit of Rs. 2100000.

Answer (i) Selling Price: let selling price be Rs. x per unit

Particulars Cost per unit (Rs.)

Direct Material

Direct Labour

Variable Factory Overheads

Variable Administrative Overheads

Variable Selling Overheads (7% of sales)

Fixed Overheads (2100000/120000)

Desired Profit @ 20% on sales

Selling Price

26

25

9.20

2.60

0.07x

17.50

0.20x

80.30+0.27x

x = 80.30 + 0.27x

x – 0.27x = 80.30

x = 0.73

80.30

x = 110

Hence, Selling price (x) = Rs. 110 per unit

(ii) Calculation of Contribution per unit:

Selling price per unit

Less: Variable costs per unit:

Direct Material

Rs.

26

Rs.

110

328

Direct Labour

Variable Factory Overheads

Variable Adm. Overheads

Variable Selling Overheads @ 7% of Selling price Rs. 110

Contribution per unit (S – V)

25

9.20

2.60

7.70

70.50

39.50

P/V Ratio = S

Cx 100

= 110

39.50 x 100

= 35.91%

(iii) BEP in units = unit per - C

F

= 39.50 Rs.

2100000 Rs.

= 53164.56 or 53165 units

(iv) Required sales units to earn a profit of Rs. 2100000

Req. sales = unit per - C

Profit Desired F

= 39.50 Rs.

2100000 2100000

= 39.50

4200000


Question 23

The following information is provided by Shyama Limited:


P-1 P-2 P-3

Unit selling price (Rs.) 500 400 250

329

Unit variable cost (Rs.)

Proportion of output quantity (%)

300

20

280

50

125

30

Total fixed costs are Rs. 8937500.

You are required to work out the overall break-even point quantity and the product wise break up of such quantity.

Answer

Suppose total quantity of all products produced is ‘x’


P-1 P-2 P-3

(i) Selling Price per unit (Rs.)

(ii) Variable Cost per unit (Rs.)

(iii) Contribution per unit (Rs.) [(i) – (ii)]

(iv) Production in units

(v) Total Contribution (Rs.) [(iii) x (iv)]

500

300

400

280

250

125

200

0.2x

40x

120

0.5x

60x

125

0.3x

37.50x

At the level of BEP, Total Contribution = Fixed Cost

40x + 60x + 37.50x = 8937500

137.50x = 8937500

x = 65000

Hence, Break-even Point quantity = 65000 units

Product wise break-up:

Product: P-1 = 65000 x 20% = 13000 units

P-2 = 65000 x 50% = 32500 units

P-3 = 65000 x 30% = 19500 units

Question 24

If margin of safety is Rs. 48 lakhs (30% of sales) and P/V Ratio is 40%.


(i) Break-even sales

(ii) Fixed cost

(iii) Profit earned

(iv) Amount of profit on sales of Rs. 240 lakhs.

330

Answer

(i) Break-even Sales:

Margin of safety at 30% of Sales = Rs. 48 lakhs

Then, Total Sales = 48 lakhs x 30

100

= Rs. 160 lakhs

BEP = 100 – 30 = 70% of Sales

= 160 lakhs x 70%

= Rs. 112 lakhs

(ii) Fixed Cost = BEP x P/V Ratio

= Rs. 112 lakhs x 40%

= Rs. 44.80 lakhs

(iii) Profit = Margin of safety x P/V Ratio

= Rs. 19.20 lakhs

Or Profit = (S x P/V Ratio) – Fixed Cost

= (Rs. 160 lakhs x 40%) – 44.80 lakhs

= Rs. 64 lakhs – 44.80 lakhs

= Rs. 19.20 lakhs

(iv) Profit on sales of Rs. 240 lakhs:


= (Rs. 240 lakhs x 40%) – Rs.44.80 lakhs

= Rs. 96 lakhs – Rs.44.80 lakhs

= Rs. 51.20 lakhs

Question 25

The following data are given:

Margin of safety (40000 units) Rs. 2400000

Total Cost of Production Rs. 7140000

No. of units produced and sold 140000 units


(i) Unit selling price

(ii) Profit earned

331

(iii) P/V Ratio

(iv) Fixed Cost

(v) Break-even Point in units

(vi) Sales units required to earn a target net profit of Rs. 2800000 after tax, assuming corporate tax rate to be 30%.

Answer

(i) Unit selling price =Units in safety of Margin

Rupees in safety of Margin

= Units 40000

2400000 Rs.

= Rs. 60 per Unit

(ii) Total sales = 140000 x Rs. 60

= Rs. 8400000

Profit = Sales – Total Cost

= Rs. 8400000 – 7140000

= Rs. 1260000

(iii) P/V Ratio =Safety of Margin

Profit x 100

= 2400000 Rs.

1260000 Rs. x 100

= 52.50%

(iv) Fixed Cost = (S x P/V Ratio) – Profit

= (Rs. 8400000 x 52.5%) – Rs.1260000

= Rs. 4410000 – Rs.1260000

= Rs. 3150000

Or FC = BEP x P/V Ratio

= Rs. 6000000 x 52.50%

= Rs. 3150000

(v) BEP (Units) = 140000 units – 40000 units (M.S.)

= 100000 units

BEP (in Rs.) = Rs. 8400000 (sales) – Rs. 2400000 (M.S.)

= Rs. 6000000

Or BEP (in Rs.) = RatioP/V

F

332

= 52.50%

3150000 Rs.

= Rs. 6000000

(vi) Required sales for desired profit after tax of Rs. 2800000:

Req. sales = unit per - C

T)-(1 / Profit Desired F

= 60 Rs. of 52.50%

0.3)-(1 / 2500000 Rs. 3150000 Rs.

= 31.50 Rs.

4000000 Rs. 3150000 Rs.


Question 26

The Babli Ltd. provides the following data relating to its single produced for a year

Selling Price

Variable Cost

Salesman’s Commission

Total Variable Cost

Annual Fixed Expenses are:

Production

Administration

Selling

Distribution

Per Unit (Rs.)

300

195

15

210

Rs.

600000

2000000

800000

200000

3600000

Required:

(a) Calculate the annual Break-even Point in units and in value. Also determine the profit or loss if 35000 units are sold.

(b) The sales commissions are proposed to be discontinued, but instead fixed amount of Rs. 900000 is to be incurred in fixed salaries. A reduction in selling price of 5% is also proposed. What will be the Break-even Point in units?

333

(c) It is proposed to pay the store’s manager Rs. 5 per unit as further commission. The selling price is also proposed to be increased by 5%. What will be the Break-even Point in units?

(d) Refer to the original data. If the store’s manager will be paid Rs. 3 commission on each unit sold in excess of the current Break-even sales, what will be the store’s net profit if 50000 units were sold?

Answer

Calculation of contribution per unit and P/V Ratio:

Contribution per unit = Rs. (300 – 210) = Rs. 90

P/V Ratio = 300

90 x 100 = 30%

Fixed Cost (Given) = Rs. 3600000

Situation (a) From Original Data:

(i) BEP (Units) = unit per onContributi

Cost Fixed =

90 Rs.

3600000 Rs. = 40000 units

(ii) BEP (Value) = RatioP/V

Cost Fixed =

30%

3600000 Rs. = Rs. 12000000

(iii) Profit or Loss on Sale of 35000 units:

Profit = (Contribution – Fixed Cost)

= (35000 x 90) – (3600000)

= Rs. 3150000 – 3600000

= (-)Rs. 450000 or Loss Rs. 450000

Situation (b) From Proposed Data: Rs.

Selling Price per Unit = (95% of Rs. 300) 285

Less : Variable Cost per Unit (Rs. 210 – Rs. 15) 195

Contribution per unit 90

Fixed Cost = (Rs. 3600000 + Rs. 900000) = Rs. 4500000

So, BEP (in Units) = (Rs. 4500000 ÷ Rs. 90) = 50000 Units

Hence, break-even point in situation (b) is available at 50000 units.

Situation (c) From Proposed Data: Rs.

Selling Price per Unit (300 x 105 ÷ 100) = 315

Less: Variable Cost per Unit = (210 + 5) = 215

Contribution per Unit = 100

334

(Units) = (Rs. 3600000 ÷ Rs. 100) = Rs. 36000 Units

Situation (d): From Proposed Data:

Actual Sales = 50000 Units

BEP Sales = 40000 Units

Excess Sales = 10000 Units

Original Contribution in Profit on excess Sale = (10000 x 90) = Rs. 900000

Store’s Net Profit after commission @ Rs. 3 per unit on Excess sale

= Rs. 900000 – (10000 x 3) or Rs. 900000 – Rs. 30000 = Rs. 870000

Question 27

The following information is obtained from the cost records of Patta Limited for the year ended 31st March, 2016: Rs.

Sales 25 Lakhs

Variable Costs 15 Lakhs

Fixed Costs 6 Lakhs

(a) Find the P/V Ratio, Break-even Point, and Margin of Safety at this level.

(b) Calculate the effect of:

(i) 20% decrease in fixed costs;

(ii) 10% increase in fixed costs;

(iii) 10% decrease in variable costs;

(iv) 10% increase in selling price;

(v) 10% increase in selling price together with an increase of fixed overheads by Rs. 120000;

Answer

(a) At the existing level:

P/V Ratio = S

V - S x 100

= lakhs 25 Rs.

lakhs 15 Rs. - lakhs 25 Rs.

= lakhs 25 Rs.

lakhs 10 Rs. x 100 = 40%

BEP = RatioP/V

F

= 40%

lakhs 6 Rs. = Rs.15 lakhs

335

Margin of safety = Sales – BEP Sales = Rs. 25 lakhs – Rs. 15 lakhs = Rs. 10 lakhs

Or Margin of Safety = RatioP/V

Profit =

40%

6) - 15 - (25 =

40%

lakhs 4 = Rs. 10 lakhs

(b) (i) 20% decrease in fixed costs:

P/V Ratio = 40%, Decreased fixed cost

= 6 lakhs – 20% of 6 lakhs = Rs. 4.8 lakhs

BEP = RatioP/V

F =

40%

lakhs 4.8 = Rs. 12 lakhs

Margin of safety = Sales–BEP Sales = Rs. 25 lakhs – Rs. 12 lakhs = Rs. 13 lakhs

(ii) 10% increase in fixed costs:

P/V Ratio = 40%, Increased fixed cost = Rs. 6.6 lakhs

BEP =RatioP/V

F=

40%

lakhs 6.6 Rs. = Rs. 16.50 lakhs

Margin of Safety = Sales – BEP Sales = Rs. 25 lakhs – Rs. 16.5 lakhs = Rs. 8.50 lakhs

(iii) 10% decrease in variable costs:

P/V Ratio = lakhs 25 Rs.

lakhs) 13.50 Rs. - lakhs 25 (Rs. x 100

= lakhs 25 Rs.

lakhs 11.50 Rs. x 100 = 46%

BEP = 46%

lakhs 6 Rs. = Rs. 1304348

Margin of Safety = (Sales – BEP Sales) = Rs. 2500000 - Rs. 1304348 = Rs. 1195652

(iv) 10% increase in selling price:

P/V Ratio = lakhs 27.50 Rs.

lakhs 15 Rs. - lakhs 27.50 Rs. x 100

= lakhs 27.50 Rs.

lakhs 12.50 Rs. x 100 = 45.45%

BEP = 45.45%

lakhs 6 Rs. = Rs. 1320132

Margin of Safety = Rs. 2750000 – Rs. 1320132

= Rs. 1429868

(v) 10% increase in selling price with increase in fixed overhead by Rs. 120000:

P/V Ratio = lakhs 27.50 Rs.

lakhs 15 Rs. - lakhs 27.50 Rs.

= 45.45%

336

BEP = 45.45%

720000 Rs. = Rs. 1584158

Margin of Safety = Sales – BEP Sales = Rs. 2750000 – Rs. 1584158

= Rs. 1165842 Question 28

Savitri Limited produces calculators. Due to competition, the company proposes to reduce the selling price. If the present level of profit is to be maintained, indicate the number of calculators to be sold if the proposed reduction in selling price is:

(i) 5 percent;

(ii) 10 percent; and

(iii) 15 percent.

The following additional information is available:

Present annual production and sales 125000 calculators

Rs.

Cost of manufacturing: Variable 5625000

Fixed 1875000

Administrative and Selling Cost: Variable 1625000

Fixed 1375000

Profit earned 2625000

Answer

Working Note:

1. Calculation of per unit variable cost, selling price and total fixed cost.


Rs.

Per unit

Rs.

Variable: Manufacturing Cost

Adm. & Selling Cost

Total Variable Cost (A)

Fixed Cost : Manufacturing

Adm. & Selling

Total Fixed Cost (B)

Total Cost (A + B)

Add: Profit earned

Sales

5625000

1625000

45

13

7250000 58

1875000

1375000

15

11

3250000 26

10500000

2625000

84

21

13125000 105

337

2. Computation of contribution per unit at various prices.

Particulars Present Price (Rs.)

Price at a Reduction (Rs.)

5% 10% 15%

Selling Price

Less: Variable Cost

Contribution per unit

105

58

99.75

58

94.50

58

89.25

58

47 41.75 36.50 31.25

3. Total Contribution Required = Total fixed cost + Present Profit

= Rs. 3250000 + Rs. 2625000 = Rs. 5875000

Computation of units required to produce for meet out the total contribution Rs. 5875000:

At the present price: Rs. 5875000/Rs.47 = 125000 Units

At a price reduced by 5%: Rs. 5875000/Rs.41.75 = 140719 Units

At a price reduced by 10%: Rs.5875000/Rs.36.50 = 160959 Units

At a price reduced by 15%: Rs.5875000/Rs.31.25 = 188000 Units

Question 29

KCS Limited has production capacity of 500000 Units per annum at its full capacity. Company’s Cost structure is as under:

Rs.

Variable production cost per unit 32

Variable selling expenses per unit 9.60

Fixed production cost per annum 3000000

Fixed selling expenses per annum 2000000

During the year ended 31st March, 2016, the company worked at 80 percent of its capacity. The operating data for the year are as follows:

Production 400000 Units

Sales @ Rs. 64 per Unit 387500 Units

Opening stock of finished goods 50000 Units

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, 2016:

(i) On the basis of marginal costing

(ii) On the basis of absorption costing.

338

Answer

(i) Statement of Cost and Profit under Marginal Costing

for the year ending 31st March, 2016

Output = 400000 units


Sales: 387500 units @ Rs. 64

Less: Marginal cost/variable cost:

Variable cost of production (400000 x Rs. 32)

Add : Opening stock 50000 units @ Rs. 32

Less: Closing Stock

[(400000 + 50000 – 387500)

= 62500 units @ Rs. 32]

Variable cost of production of 387500 units

Add: Variable selling expenses @ Rs. 9.60 per unit

Contribution (sales – variable cost)

Less: Fixed production cost

Fixed selling expenses

Actual profit under marginal costing

12800000

1600000

24800000

16120000

14400000

2000000

____________

12400000

3720000

3000000

2000000

8680000

5000000

3680000

(ii) Statement of Cost and Profit under Absorption Costing

for the year ending 31st March, 2016

Output = 400000 units


Sales: 387500 units @ Rs. 64

Less : Cost of sales:

Variable cost of production

(400000 @ Rs. 32)

Add : Fixed cost of production absorbed

400000 units @ Rs. 6 (refer W.N. 1)

12800000

2400000

24800000

339

Add : Opening Stock: 50000 x 400000

15200000

Less : Closing Stock: 62500 x 400000

15200000

Production cost of 387500 units

Selling expenses:

Variable: Rs. 9.60 x 387500 units

Fixed

Unadjusted profit

Less : Overheads under absorbed: (refer W.N. 2)

Fixed production overheads

Actual profit under absorption costing

1900000

20445000

17100000

2375000

14725000

3720000

2000000

4355000

600000

3755000

Working Notes:

1. Absorption rate for fixed cost of production = 500000

3000000 Rs.

= Rs. 6 per unit

2. Fixed production overhead under absorbed = Rs. (3000000–2400000)

= Rs. 600000

Question 30

Dafali Limited reports the following cost structure at two capacity levels:

80% capacity 60% capacity

Output (Units) 30000 22500

Production overhead I

Production overhead II

Rs. 30 per unit

Rs. 45 per unit

Rs. 40 per unit

Rs. 45 per unit

If the selling price, reduced by direct material and labour is Rs. 120 per unit, what would be its break-even point?

340

Answer

Computation of Break-even point in units:

Output (Units) 30000 22500

Production Overhead I : Fixed Cost (Rs.)

Selling price – Material and labour (Rs.) (A)

Production Overhead II (Variable Overhead) (B)

Contribution per unit (A) – (B)

900000

(30000 unit x Rs. 30 per unit)

120

45

75

900000

(22500 unit x Rs.40 per unit)

120

45

75

Break-even point = unit per onContributi

Cost Fixed =

75

900000 = 12000 Units

Question 31

Following are the data relating to budgeted unit cost structure in N. Ram Limited:

(Rs.)

Direct material 162

Direct labour 3 hrs. @ Rs. 45 135

Variable factory overhead 3 hrs. @ Rs. 11 33

Fixed factory overhead 3 hrs. @ Rs. 15 45

375

Selling and administrative costs:

Variable Rs. 20 per unit

Fixed Rs. 725000

During the year ended 31st March, 2016 the company has the following activity:

Units produced = 25000

Units sold = 21500

Opening stock NIL

Unit selling price = Rs. 530

Direct labour hours worked = 75000

Actual fixed factory overhead was Rs. 148000 less than the budgeted fixed factory overhead. Budgeted variable factory overhead was Rs. 120000 less than the actual variable factory overhead. The company used an expected activity level of 75000 direct labour hours to compute the predetermine overhead rates.

341

Required:

(i) Compute the unit cost and total income under:

(a) Absorption costing

(b) Marginal costing

(ii) Under or over absorption of overhead.

(iii) Reconcile the difference between the total income under absorption and marginal costing.

Answer

(i) Computation of Unit Cost & Total Income

Unit Cost Absorption Costing (Rs.)

Marginal Costing (Rs.)

Direct Material

Direct Labour

Variable Factory Overhead

Fixed Factory Overhead

Unit Cost of Production

162

135

33

45

375

162

135

33

----

330

Income Statement

Absorption Costing

Sales (21500 Units @ Rs. 530)

Less : Cost of goods sold (21500 x 375) 8062500

Less : Over Absorption 28000

Less : Selling & Distribution Expenses (20 x 21500) + 725000

Profit under absorption costing

11395000

8034500

3360500

1155000

2205500

Marginal Costing

Sales

Less : Cost of goods sold (21500 x 330) 7095000

Add: Under Absorption 120000

11395000

7215000

4180000

342

Less: Selling & Distribution Expenses (21500 x 20)

Contribution

Less: Fixed Factory and Selling & Distribution Overhead

(977000 + 725000)

Profit under marginal costing

430000

3750000

1702000

2048000

(ii) Under or over absorption of overhead: (Rs.)

Budgeted Fixed Factory Overhead

75000 hrs. x Rs. 15 1125000

Less : Actual Overhead was less than Budgeted Fixed Overhead 148000

Actual Fixed Factory Overhead 977000

Budgeted Variable Factory Overhead

75000 hrs. x Rs. 11 825000

Add : Actual Overhead was higher than Budgeted 120000

Budgeted 945000

Both Fixed & Variable Factory Overhead applied

75000 x Rs. 26 1950000

Actual Overhead (977000 + 945000) 1922000

Over Absorption 28000

(iii) Reconciliation of Profit

Difference in Profit: Rs. 2205500 – Rs. 2048000 = Rs. 157500

Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing not in Marginal Costing.

Therefore,

Difference in Profit = Fixed Factory Overhead Rate (Production – Sale)

Rs. 48 (25000 – 21500) = Rs. 157500

Question 32

The following details provides by the Gargi Limited:

Ratio of variable cost to sales 60 percent

Break-even point at 70 percent of the capacity sales

Fixed cost Rs. 1330000

343


(i) Break-even Point in rupees.

(ii) Sales at full capacity.

(iii) Profit earned at 75 percent of capacity sales.

(iv) Sales capacity needed to earn a profit of Rs. 450000.

Answer

(i) BEP = RatioP/V

F

=% 40

1330000 Rs.

= Rs. 3325000

Note: P/V Ratio = 100 – V/C Ratio = 100 – 60

(ii) Sales at full capacity = level sales - BEP

rupees in BEP

= 70%

3325000 Rs.

= Rs. 4750000

(iii) Profit at 75% capacity sales:

Profit = (Full Capacity Sales x 75% x P/V Ratio) – Fixed Cost

= (Rs. 4750000 x 75% x 40%) – Rs. 1330000

= Rs. 1425000 – Rs. 1330000

= Rs. 95000

(iv) Sales needed for a profit of Rs. 450000

Sales Required = RatioP/V

Profit Desired F

= 40%

450000 Rs. 1330000 Rs.

= 40%

1780000 Rs.

= Rs. 4450000

Hence, Sales capacity = 4750000

4450000 x 100

= 93.68%

344

Question 33

Priyanshu Limited has furnished the following data:

Particulars Year ended 31st March

2015 2016

Sales

Margin of Safety as a % of total sales

P/V Ratio

Rs. 2500 Lakhs

30%

40%

?

22%

36%

There has been substantial saving in fixed cost in the year ended 31st March, 2016 due to the restructuring process. The company could maintain its sales quantity level of 2014-15 in 2015-16 by reducing selling price.

You are required to calculate for the later year:

(i) Sales

(ii) Profit

(iii) Fixed Cost

(iv) Break-even Sales

Answer

Workings:

Variable Cost ratio = 100 – P/V Ratio

V.C. Ratio in 2014-15 = 100 – 40 = 60%

Variable Cost for the year 2014-15 = 60% of sales Rs. 2500 Lakhs = Rs. 1500 Lakhs

(i) Sales for 2015-16:

Sales quantity has same as in 2014-15. Thus variable cost in 2015-16 is Rs. 1500 Lakhs.

P/V Ratio in 2015-16 = 36%

Thus, Variable Cost Ratio = 100 – 36 = 64%

Sales in 2015-16 = Ratio VC

VC

= 64%

Lakhs 1500 Rs.

= Rs. 2343.75 Lakhs

(ii) Profit for 2015-16:

Profit = Margin of Safety x P/V Ratio

= (22% of Rs. 2343.75) x 36%

= Rs. 185.625 Lakhs

345

(iii) Fixed Cost for 2015-16:

Fixed Cost = (Sales x P/V Ratio) – Profit

= (Rs. 2343.75 x 36%) – Rs. 185.625

= 843.75 – 185.625

= Rs. 658.125 Lakhs

Or BEP x P/V Ratio

= 1828.125 x 36%

= Rs. 658.125 Lakhs

(iv) BEP for 2015-16:

BEP = Sales – Margin of Safety

= 100 – 22 = 78% of sales

= 2343.75 x 78%

= Rs. 1828.125 Lakhs

Or BEP = RatioP/V

F

= 36%

658.125 Rs.

= Rs. 1828.125 Lakhs

Question 34

The following particulars are provided by Durga Limited:

Period I Period II

Production and Sales 20000 Units 50000 Units

Selling price per unit Rs. 45 Rs. 45

Profit/Loss per unit Loss Rs. 15 Profit Rs. 12


(i) Calculate the break-even point both in terms of rupees as well as in units.

(ii) Income Statement under marginal costing for both the period.

346

Answer

W.N.: 1. Let per unit variable cost be ‘a’ and fixed cost be ‘b’

We know that S – V = F + P

For the Period-I

(20000 x 45) – 20000a = b + (-15 x 20000)

900000 – 20000a = b – 300000

-20000a – b = -1200000

20000a + b = 1200000 --------- (i)

For the Period-II

(50000 x 45) – 50000a = b + (12 x 50000)

2250000 – 50000a = b + 600000

50000a + b = 1650000 (ii)

Subtracting (i) from (ii) 20000a ± b =1200000 (i)

30000a = 450000

Or a = 450000/30000

Variable cost per Unit (a) = Rs. 15

After putting the value “a = 15” in Equ. (i)

20000 x 15 + b = 1200000

b = 1200000 – 300000

Fixed Cost (b) = Rs. 900000

2. C-per Unit = S – V = Rs. 45 – 15 = Rs. 30 per unit

(i) BEP in Units = Unit per - C

F

= 30 Rs.

900000 Rs.

= 30000 Units

BEP in Rupees = 30000 Units x Rs. 45

= Rs. 1350000

347

(ii) Income Statement under Marginal Costing

Particulars Period-I Period-II

Output and Sales

Sales @ Rs. 45 per unit

Less: Variable Cost @ Rs. 15 per unit

Contribution

Less: Fixed Cost

Profit or (Loss)

Profit/Loss per unit

20000 Units 50000 Units

Rs.

900000

300000

Rs.

2250000

750000

600000

900000

1500000

900000

(300000) 600000

(15) 12

Question 35

M. Lal Limited produces single product and sells its product at Rs. 240 per unit. In 2015-16, the company operated at a margin of safety of 40%. The fixed costs amounted to Rs. 1728000 and the variable cost ratio to sales was 70%.

In 2016-17, it is estimated that the variable cost will go up by 10% and the fixed cost will increase by 5%.

Find the selling price required to be fixed in 2016-17 to earn the same P/V ratio as in 2015-16.

Assuming the same selling price of Rs. 240 per unit in 2016-17, find the number of units required to be produced and sold to earn the same profit as in 2015-16.

Answer

1. Per Unit Contribution and P/V Ratio in 2015-16

Rs.

Selling price per unit 240

Variable cost (70% of Selling Price) 168

Contribution 72

P/V Ratio = 100 – 70% or 72/240 = 30%

2. No. of units sold in 2015-16

Break-even point = Fixed cost ÷ Contribution per unit

= Rs. 1728000 ÷ Rs. 72 = 24000 units.

Margin of safety is 40%. Therefore, break-even sales will be 60% of units sold.

348

No. of units sold = Break-even point in units/60%

= 24000/60%

= 40000 units

3. Profit earned in 2015-16

Rs.

Total contribution (40000 x Rs. 72) 2880000

Less : Fixed cost 1728000

Profit 1152000

Selling price to be fixed in 2016-17

Revised variable cost (Rs. 168 x 1.10) 184.80

Revised fixed cost (1728000 x 1.05) 1814400

P/V Ratio (Same as of 2015-16) 30%

Variable cost ratio to selling price 70%

Therefore revised selling price per unit = Rs. 184.80/70% = Rs. 264

No. of units to be produced and sold in 2016-17 to earn the same profit

We know that Fixed Cost plus profit = Contribution

Rs.

Profit in 2015-16 1152000

Fixed cost in 2016-17 1814400

Desired contribution in 2016-17 2966400

Contribution per unit = Selling price per unit – Variable cost per unit.

= Rs. 240 – Rs. 184.80

= Rs. 55.20

No. of units to be produced in 2016-17 = Rs. 2966400/55.20 = 53739 Units approx.

Question 36

Roshan Limited has the capacity to produce 10000 units per month. The company has current production and sales level of 84000 units per annum. The current domestic market price per unit is Rs. 350.

The cost data for the year ending 31st March, 2016 is as under:

(Rs. in Lakhs)

Variable costs (that vary with units produced):

Direct Material

Direct Labour

Variable costs (that vary with number of batches):

Set-ups; Receiving; and Inspection (560 batches @ Rs. 4500 per batch)

Rs.

105.00

71.40

25.20

349

Fixed Costs:

Manufacturing

Administrative

Selling

21.00

8.00

4.60

Roshan Limited has received a special one-time export order for 36000 Units at Rs. 270 per unit. The company manufactures units for its existing customers in batch size of 150 units but the special export order for 36000 units requires, the company to manufacture in batches of 100 units per batch.

You are required to answer the following:

(i) Should Roshan Limited accept the special export order? Why?

(ii) Suppose the plant capacity is 9000 units instead of 10000 units per month. The special order must be taken either in full or rejected totally.

Should the company accept the order? Why?

Answer

Working Notes

1. Calculation of Present Contribution on 84000 Units

(Rs. in Lakhs)

Sales Revenue: 84000 units @ Rs. 350 per unit

Less : Variable Costs

Direct Material: 10500000/84000 = @ Rs. 125 p.u.

Direct Labour: 7140000/84000 = @ Rs. 85 p.u.

Setup, Receiving: and Inspection: 560 batches @ Rs. 4500 per batch)

Total Contribution Margin

Contribution per unit = 9240000/84000 = Rs. 110 p.u.

Rs.

105

71.40

25.20

Rs.

294

201.60

92.40

350

(i) Calculation of contribution on Accepting the Special Export order of 36000 units

(Rs. in Lakhs)

Sales Revenue: 36000 units @ Rs. 270 per unit

Less : Variable Costs:

Direct Material (@Rs. 125 per unit)

Direct Labour @ Rs. 85 per unit

Set-ups; Receiving; and Inspection costs

(36000/100= 360 batches @ Rs. 4500 per batch)

Contribution

Rs.

45

30.60

16.20

Rs.

97.20

91.80

5.40

Decision : Roshan Limited should accept the special export order since its acceptance would increase the operating profit of the company by Rs. 540000.

(ii) Calculation of Loss/Gain on accepting of special Export order when the capacity is 9000 units per month:

Gain in Contribution margin due to special order

Less : Loss of contribution on reduction of 12000 Units (9000 x 12 = 108000 – 36000 = 72000 – 84000) sales in the internal/domestic market (Rs. 110 x 12000)

Loss of Contribution

Rs.

540000

1320000

(780000)

Decision:

When the capacity is reduced to 9000 units per month, then the special export order of 36000 units should not be accepted since this decision will result in a loss of contribution by Rs. 780000.

Question 37

On the basis of the following information in respect of Toli Engineering Limited, determine the product-mix which will give it highest profit:


X Y Z

Maximum possible sales (in units) 24000 16000 12000

351

Per unit cost:

Raw Material @ Rs. 20 per kg. (Rs.)

Direct Labour @ Rs. 50 per hour (Rs.)

Selling price per unit (Rs.)

200

150

550

120

100

400

300

200

775

Variable overheads are charged @ 50% of direct labour.

Total fixed overheads are Rs. 2150000.

Maximum Labour hours and raw materials are available 140000 hours and 475000 kgs. Respectively.

Answer

Statement showing product-wise contribution and Ranks


X Y Z

(i) Selling price per unit

Variable costs per unit:

Raw Material

Direct Labour

Variable Overheads @ 50% Labour

(ii) Total Variable Cost

(iii) Contribution per unit [(i) – (ii)]

(iv) Material required per unit

Contribution per kg. (iii)/(iv)

Rank based on above

(v) Labour hours required per unit

Contribution per Labour hour (iii)/(v)

Rank based on above

Rs.

550

Rs.

400

Rs.

775

200

150

75

120

100

50

300

200

100

425 270 600

125 130 175

20

200=10kg.

Rs. 12.50

II

50

150=3hrs.

Rs. 41.67

III

20

120=6kg.

Rs. 21.67

I

50

100=2hrs.

Rs. 65

I

20

300=15kg.

Rs. 11.67

III

50

200 =4hrs.

Rs. 43.75

II

352

On the basis of above analysis first priority should be given to produce the product Y. 16000 x 6 = 96000 kgs Materials and 16000 x 2 = 32000 Labour hours would be used for the manufacturing of 16000 units of product Y and remaining Materials 475000 – 96000 kgs = 379000 kgs and Labour hours 140000 hrs. – 32000 hrs. = 108000 hours would be utilised for the production of product X and Z as follows:

Production of Product X be ‘a’ and of product Z be ‘b’

Material required for X and Z

10a + 15y = 379000 (i)

Labour hours required for X and Z

3a + 4b = 108000 (ii)

Equ. (i) multiplied by 0.3 and subtracted from Equ. (ii)

3a + 4b = 108000 (ii)

3a + 4.5b = 113700 (iii)

-0.5b = -5700

Or b = 11400

After putting the value of ‘b’ in Equ. (i)

10a + 15 x 11400 = 379000

10a = 379000 – 171000

a = 208000/10 = 20800

Hence, Output of Product X = 20800 Units

Output of Product Z = 11400 Units

The best product-mix and highest profit will be as follows:

Particulars Output (Units) Contribution per Unit (Rs.)

Total Product-wise Contribution (Rs.)

Product X

Product Y

Product Z

20800

16000

11400

125

130

175

2600000

2080000

1995000

Total Contribution

Less : Fixed Cost

Profit

6675000

2150000

4525000

353

Question 38

The production manager of Murliwala Limited, while reviewing the order for 15000 Units at Rs. 75 each unit, found that he gets more than the cost incurred to produce them and he presented the following supporting data:

Particulars Before Accepting the order (Rs.)

After Accepting the order (Rs.)

Variable Cost

Fixed Cost

6250000

11250000

6600000

12162000

Total Cost 17500000 18762000

Cost per Unit (Rs.) 70 70.80

You are required to analyse the above data and advice whether the production manager accept this order?

Answer

Comparative Cost Statement

Particulars Cost before Accepting the order (Rs.)

Cost after Accepting the order (Rs.)

Differential Cost of 15000 Units (Rs.)

Variable Costs

Fixed Cost

Total Costs

Output (Units) (W.N.)

Cost per Unit (Rs.)

6250000

11250000

6600000

12162000

350000

912000

17500000 18762000 1262000

250000 265000 15000

70 70.80 84.13

Advice : This is not a profitable proposition. Because, the incremental revenue will be 15000 x 75 = Rs. 1125000 and the differential cost will be Rs. 1262000, then profit would be reduced by Rs. 137000 (1125000 – 1262000).

Hence, Order should not be accepted.

Working Note :

Calculation of output units:

Before accepting order = Rs.17500000/Rs.70 = 250000 Units

After accepting order = Rs.18762000/Rs.70.80 = 265000 Units

***

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Question 1

Question 1

What do you understand by ‘Standard Cost’ and ‘Standard Costing’?

Answer

Standard costs are the scientifically pre-determined costs of manufacturing a single unit or a number of units of product or of rendering a service during a specified future period. The Chartered Institute of Management Accountants, London, defines standard cost as “a standard expressed in money. It is built up from an assessment of the value of cost elements. Its main uses are providing bases for performance measurement, control by exception reporting, valuing stock and establishing selling prices.

The term ‘standard cost’ consists of two parts, viz., ‘standard’ and ‘cost’. ‘Standards’ can be established in respect of quantities and qualities like materials and labour. Cost involves the expression of the standard so established in values.

CIMA defines standard costing as “a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance”. The technique of standard costing may be summarised as follows:

(i) Pre-determination of technical data related to production, i.e. details of materials and labour operations required for each product, the quantum of losses, level of activity, etc.

(ii) Pre-determination of standard costs, in full details for each element of cost viz. material, labour and overhead.

(iii) Comparison of the actual performances and costs with the standards and working out the variances i.e., the difference between the actuals and the standards.

(iv) Analysis of the variances in order to determine the reasons for deviations of actuals from the standards, and

(v) Presentation of information to the appropriate level of management for suitable action.

Question 2

What are the applications of standard costing?

9

Standard Costing

355

Answer

Applications of standard costing

Standard costing is quite useful to the management in its functions like planning, controlling etc. and most important in decision making and performance evaluation. Standard costing can be used for:

1. Projecting the profit level of the business at any level of production.

2. To help in execution of management’s function effectively i.e. planning and controlling of cost.

3. To analyse the impact of cost if sales volume increase/decrease by certain percentage.

4. To measure the efficiency of production.

5. To measure the performance of each segment.

6. To identify and measure of variances between standards and actuals.

7. To design performance measurement systems to encourage employees to participate for the betterment of the Organisation.

Question 3

Explain briefly the following:

(a) Basic Standard

(b) Current Standard

(c) Ideal Standard

Answer

(a) Basic Standard

This is a “standard” which is established for use, unaltered over a long period of time. Standards are fixed scientifically and hence it is more of a technical job. These standards are supposed to remain unchanged so long as quality requirements are constant. Moreover, if forward contracts are entered into regarding materials and labour pact signed for a certain period, the costs can be planned accordingly. Such costs, i.e., basic standards may, however, have to be adjusted for changes in circumstances in a period.

(b) Current Standard

In practice, standards are fixed on the basis of scientific studies but adjusted for current subjective factors. A standard, therefore, is made realistic to reflect the anticipated conditions affecting operations; it is not too idealistic. Such a standard would bring to sharp focus the avoidable causes for variances, leading to control action. A current standard is a standard for a certain period, for certain condition and for certain circumstances. Basic standards are more idealistic whereas current standards are more realistic. Most companies use current and not basic standards.

356

(C) Ideal Standard

This standard refers to the target which can be attained under most ideal conditions. Hence, it is more idealistic and less realistic. It is defined by the Terminology as: “The standard which can be attained under the most favourable conditions, with no allowance for normal losses waste and machine down time”.

Question 4

Give the steps which are involved in the installation of a standard costing system.

Answer:

The installation of a standard costing system involves the following steps:

• To set the predetermined standards for sales margin and production costs

• To ascertain and collect the actual results

• To compare the actual performance with pre-determined standards

• To determine the variances

• To analyze and investigate the variances

• To ascertain the causes of variance

• To take corrective action where necessary.

• To adjust the budget in order to make the standards more realistic

Question 5

State the features of a standard costing system.

Answer

Features of a standard costing system are:

• The fact that standards are based on estimates.

• Standards will change according to conditions.

• It provides continual incentive for employee to keep costs and performance in line with predetermined standard.

• A standard cost system helps focus management’s attention on the following questions and their causes:

(a) Were materials purchased at prices above or below standard?

(b) Were materials used in quantities above or below standard?

(c) Is labour being paid at rates above or below standard?

(d) Is labour being used in amounts above or below standard?

Question 6

What is material price variance? What are causes of arising the material price variance?

357

Answer

Material Price Variance

This is that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid. Material price variance is that portion of the direct materials cost variance which is the difference between the standard price specified and actual price paid for the direct materials used. This is an “incurring” variance. This reflects the extra price paid on the units purchased. While making this calculation standard consumption of units should not be given any consideration. It is computed by multiplying the actual quantity by the difference between the standard price and the actual price. In other words, material price variance is the difference between ‘what it actually cost and what it would have cost if the actual usage had been paid for at the standard price’.

Causes of Material Price Variance :

The reasons for material price variance may be one or more of the following:

(i) Changes in market price of materials used;

(ii) Changes in quantity of purchase or uneconomical size of purchase order resulting in a different price;

(iii) Failure to obtain cash and/or trade discounts which were provided while setting standards;

(iv) Rush order to meet shortage of supply;

(v) Failure to take advantage of off-season price, or failure to purchase when price is cheaper;

(vi) Emergency purchase on the request of production/sales manager;

(vii) Changes in issue price due to differences in changes related to store-keeping, materials handling, carriage inward expenses etc.;

(viii) Changes in the amount of taxes and duties;

(ix) Changes in quality or specification of materials purchased;

(x) Use of substitute material having a higher or lower unit price;

(xi) Changes in the pattern or amount of taxes and duties.

Question 7

State the accounting treatment of variances in cost accounting.

Answer

Accounting Treatment of Variances

The cost records maintained and entries made under a system of standard costing vary from company to company depending upon the information that is desired from cost records, and the intended use of standard cost and variance analysis. Variances which

358

emerge in standard costing and recorded in the cost books may be disposed of in any of the following ways:

(i) Transfer to costing profit and loss account : In this method, the stock of work-in-progress, finished goods and cost of sales are maintained at standard cost and all variances are charged to costing profit and loss account at the end of the accounting period. This method is favoured because standard costs facilities prompt inventory valuation and also variances are separated out so as to attract the attention of the management.

(ii) Allocation of variances to finished stock, work-in-progress and cost of sales account under this method the variances are distributed over stocks of finished goods, work-in-progress and to cost of sales account in proportion to the closing balances (value) of each account depending upon the type of variance.

(iii) Transfer to reserve account : In this method favourable variances are carried forward as deferred credits until they are set-off by adverse variances. It is considered that controllable variances according to method (ii).

Question 8

Following particulars are given for the month of April, 2016:

Standard quantity of material required for one unit of output 30 kgs

Standard price of materials Rs. 25 per Kg.

Actual quantity of material purchased 3000 kg.

Value of material purchased Rs. 91500

Opening stock of material NIL

Closing stock of material 600 kg.

Actual output during the period 82 Units


(i) Material Cost Variance

(ii) Material Price Variance

(iii) Material Usage Variance

Answer

Working Notes:

1. Standard Quantity (SQ) for actual output of 82 units= 82 x 30 kg= 2460 kg.

2. Actual Quantity (AQ)= 3000kgs – 600kgs (closing stock)= 2400 kg.

359

3. Actual price per kg = kgs 3000

91500 Rs.

= Rs. 30.50 per kg

(i) MCV = (SQ x SP) - (AQ x AP)

= (2460x25)-(2400x30.50)

= 61500 – 73200

= Rs.11700 (A)

(ii) MPV = AQ(SP-AP)

= 2400kgs (25-30.50)

= Rs.13200 (A)

(iii) MUV = SP(SQ-AQ)

= Rs.25 (2460-2400)

= Rs.1500 (F)

Question 9

The following data is obtained from the cost record of Priyanshu Limited:

Standard Mix

Material X : 120 kg. @ Rs. 25

Material Y : 80 kg. @ Rs. 50

200 kg.

Less: Loss 30% 60 kg.

Output 140 kg.

Actual Mix

Material X : 110 kg. @ Rs. 30

Material Y : 90 kg. @ Rs. 45

200 kg.

Less: Loss 25% 50 kg.

Output 150 kg.

You are required to find out the following material variances:

(i) Cost Variance;

(ii) Price Variance;

(iii) Usage Variance;

(iv) Mix Variance; and

(v) Yield Variance.

360

Answer

Working Notes

1. Calculation of Total Standard Material Cost (TSC) or (SQxSP):

Rs.

Material X : 120 x 25 = 3000

Material Y : 80 x 50 = 4000

TSC for std. output of 140kgs = 7000

Hence, TSC for Actual Output 150 kg = 140

7000 x 150 = Rs.7500

Per unit standard cost of output = 7000/140 or 7500/150= Rs.50

2. Total Actual Cost (TAC) or (AQ x AP)

Material X : 110x 30 = Rs. 3300

Material Y : 90 x 45 = Rs. 4050

TAC = Rs. 7350

3. (AQ x SP):

Material X : 110 x 25 = Rs. 2750

Material Y : 90 x 50 = Rs .4500

Rs. 7250

4. Revised Standard Quantity (RSQ)

For Material X = Total AQ 200 x 200

120 = 120 kg.

RSQ for Material Y = 80 kg.

5. (RSQ x SP):

Material X : 120 x 25 = Rs.3000

Material Y : 80 x 50 = Rs.4000

Rs.7000 Variances:

(i) MCV= TSC – TAC

= Rs.7500 – Rs.7300 = Rs.150 (F)

(ii) MPV= AQ(SP-AP) or (AQ x SP)-(AQ x AP)

= Rs.7250 – Rs.7350 = Rs.100 (A)

(iii) MUV= SP(SQ-AQ)or (SPxSQ)- (SP x AQ)

= Rs.7500 – Rs.7250 = Rs.250 (F)

361

(iv) MMV= SP (RSQ-AQ) or (SP x RSQ)-(SP x AQ)

= Rs.7000 – Rs.7250 = Rs.250 (A)

(v) MYV = SC per unit (AY – SY)

= Rs.50 (150-140) = Rs.500 (F)

Question 10

The standard material cost for a mix of one tonne of final product is based on the following:

Material Usage (kg.) Price per kg (Rs.)

A 250 12

B 450 15

C 600 20

During the month of May, 2016, 12 tonnes of final product were produced from the following:

Material Usage (tonnes) Cost (Rs.)

A 3.50 45500

B 6.10 85400

C 6.5 143000

You are required to calculate the material variances and verify them.

Answer

Working Notes

1. Total standard cost (TSC)= (SQ x SP)

Rs.

Material A: 250 x12 = 3000

Material B: 450 x 15 = 6750

Material C: 600 x 20 = 12000

TSC for one tonne of final output 21750

TSC for actual output of 12 tonnes = 21750 x 12= Rs.261000

2. Total Actual Cost (TAC) and Actual Price (AP):

Material AQ (kg)

(tonnes x1000 kg)

Cost (Rs.) AP=(Cost/AQ)

(per kg Rs.)

A

B

C

3500

6100

6500

45500

85400

143000

13

14

22

TAC 16100 273900

362

Rs.

3. AQ x SP : Material A: 3500 x 12 = 42000

Material B: 6100 x 15 = 91500

Material C: 6500 x 20 = 130000

= 263500

4. Revised Standard Quantity (RSQ)= Total Actual Quantity divide into standard mix ratio.

RSQ : for A= 16100 kg x 250/1300 = 3096 kg.

: for B= 16100 kg x 450/ 1300= 5573 kg.

: for C= 16100 kg x 600/ 1300= 7431 kg.

5. (RSQ x SP) : Material A = 3096 x 12 = 37152

: Material B = 5573 x 15 = 83595

: Material C = 7431 x 20 = 148620

269367

6. Standard yield (SY) by using actual Quantity one tonne SY from 250+450+600=1300 kg

SY from Actual Quantity = 16100/1300=12.3846 tonnes.

Calculation of Material Variances:

1. MCV = TSC –TAC or (SQ x SP) - (AQ x AP)

= Rs.261000 – Rs.273900 = Rs.12900 (A)

2. MPV = AQ (SP-AP) or (AQ x SP)-(AQ x AP)

=Rs.263500 – Rs.273900 = Rs.10400 (A)

3. MUV = SP (SQ - AQ) or (SP x SQ) - (SP x AQ)

= Rs.261000 – Rs.263500 = Rs.2500 (A)

4. Material Mix Variance (MMV)

= SP (RSQ-AQ) or (SP x RSQ) - (SP x AQ)

= Rs.269367 – Rs.263500 = Rs.5867 (F)

5. Material Sub Usage Variance (MSUV)

= SP (SQ – RSQ) or (SP x SQ) – (SP x RSQ)

= Rs.261000 – Rs.269367 =Rs.8367 (A)

6. Material Yield Variance (MYV)

= SC per unit (AY – SY)

= Rs.21750 (12- 12.3846) = Rs.8365 (A)

363

Verification:

(i) MCV = MPV + MUV

Rs.12900 (A) = Rs.10400 (A) + Rs.2500 (A)

OR

Rs.12900 (A) = Rs.12900 (A)

(ii) MUV = MMV + MSUV

Rs.2500 (A) = Rs.5865 (F) + Rs.8365 (A)

OR

Rs.2500 (A) = Rs.2500 (A)

(iii) MSUV = MYV

Rs.8365 (A) = Rs.8365 (A)

Question 11

The standard and actual figures of Meenakshi Limited are as under:

Standard time for the job : 800 hours

Standard rate per hour : Rs.60

Actual wages paid : Rs.50688

Actual rate per hour : Rs.64


(i) Compute Labour Cost Variance; Labour Rate Variance; and Labour Efficiency Variance

(ii) Verify the above Variances as (i).

Answer

(i) Computation of Variances:

Labour Cost Variance (LCV) = TSC-TAC or (SH x SR) – (AH x AR)

= (800 x 60) – (792 x 64)

= 48000 – 50688 = Rs.2688 (A)

Labour Rate Variance (LRV) = AH (SR – AR)

= 792(60 – 64)

= Rs.3168(A)

Labour Efficiency Variance (LEV) = SR(SH – AH)

= Rs.60(800 – 792)

= Rs.480 (F)

Note: Actual Hours Worked (AH) = Rs.50688/Rs.64=792 hours

364

(ii) Verification:

LCV = LRV + LEV

Rs.2688 (A) = Rs.3168 (A) + Rs.480 (F)

Or Rs.2688 (A) = Rs.2688 (A)

Question 12

The following standards have been set by Shivam Limited to manufacture a particular product:

Direct material Rs.

A -2 units @ Rs.30 per unit 60

B -3 units @ Rs.20 per unit 60

C-15 units @ Rs.15 per unit 225

345

Direct Labour : 6 hrs. @ Rs.45 per hour 270

Total standard prime cost 615

The company manufactured and sold 5800 units of the product during the year. Direct material costs were as follows:

12,500 units of A at Rs.35 per unit

18,000 units of B at Rs.18 per unit

88,500 units of C at Rs.16 per unit

The company worked 32600 direct labour hours during the year. For 4500 of these hours, the company paid at Rs.50 per hour while for the remaining, the wages were paid at standard rate. Calculate materials price variance and usage variance and labour rate and efficiency variances.

Answer

For Material Cost Variances

Actual cost of material used (AQ x AP) Rs.

A 12500 units x Rs.35 = 437500

B 18000 units x Rs.18 = 324000

C 88500 units x Rs.16 = 1416000

= 2177500

Standard cost of material used (AQ x SP) Rs.

A 12500 units x Rs.30 = 375000

B 18000 units x Rs.20 = 360000

C 88500 units x Rs.15 = 1327500

2062500

Standard material cost of production: (SQ for actual production x SP) or (SP x SQ)

= 5800 units x Rs.345 = Rs.2001000

365

Variances:

MPV = AQ(SP – AP) or (AQ x SP) – (AQ x AP)

= Rs.2062500 – Rs.2177500

= Rs.115000 (A)

MUV = SP (SQ – AQ) or (SP x SQ) – (SP x AQ)

= Rs.2001000 – Rs.2062500

= Rs.61500 (A)

For Labour Cost Variance

Actual wages paid to workers (AH x AR) Rs.

4500hrs.x Rs.50 = 225000

28100 hrs.x Rs.45 = 1264500

= 1489500

Standard cost for actual hours (AH x SR)

= 32600 hours x Rs.45 = Rs.1467000

Standard labour cost of output achieved (Actual output x SR of labour per unit) or SR x SH

= 5800 units x Rs.270 = Rs.1566000

LRV = AH(SR – AR) or (AH x SR) – (AH x AR)

= Rs.1467000 – Rs.1489500

= Rs.22500 (A)

LEV = SR (SH – AH) or (SR x SH) – (SR x AH)

= Rs.1566000 – Rs.1467000

= Rs.99000 (F)

Question 13

The following data are given:

Standards: 100 kg material for 70 kg finished product @ Rs.25 per kg.

Actuals: 25000 kg.material used at a cost of Rs.606250 for output of 17080 kg.





(iv) Material Yield Variance

366

Answer

(i) MCV = (SQ x SP) – (AQ x AP)

= (24400 x Rs.25) – (25000 x Rs.24.25)

= Rs.610000 – Rs.606250

= Rs.3750 (F)

Note: SQ for actual output of 17080 kg= 70

100 x 17080=24400kg.

AP = 25000

606250 = Rs.24.25 per kg.

(ii) MPV = AQ(SP – AP)

= 25000(25 – 24.25)

= Rs.18750 (F)

(iii) MUV = SP (SQ – AQ)

= Rs.25 (24400 – 25000)

= Rs.15000 (A)

(iv) MYV = SC per unit (AY – SY)

= Rs.35.7143 (17080 – 17500)

= Rs.15000 (A)

Note: SC per unit = units 7080

610000 Rs. = Rs.35.7143 per unit

Standard yield (SY) by using actual quantity =25000x70/100= 17500 Units

Question 14

Minkya Limited manufactures a standard product. The standard mix of it is:

Material X : 60% at Rs.15 per kg.

Material Y : 40% at Rs.10 per kg.

Normal loss in output is 20 percent of input due to shortage of material Y. The actual results for May, 2016 were:

Material X : 210 kg at Rs.16 per kg.

Material Y : 190 kg at Rs.10.50 per kg.

Actual output : 330 kg.




367


(iv) Material Mix Variance

(v) Material Yield Variance

Answer

Working notes:

1. Total SQ for actual output= 330x 100/80= 412.50 kg.

SQ for X = 412.50 x 60% = 247.5 kg.

SQ for Y = 412.50x 40 % = 165 kg.

2. RSQ = TAQ x Standard proportion

RSQ for X =210 + 190 or 400 x 60%= 240 kg.

RSQ for Y = 400x40%= 160 kg.

3. Standard Yield (SY) by using actual quantity: 400kg x 80%= 320 kg.

(i) MCV = (SQ x SP) – (AQ x AP)

For material X : (247.5x15) –(210x16)

= 3712.50 – 3360 = Rs. 352.50 (F)

For material Y : (165 x 10) – (190 x 10.50)

= 1650 – 1995 = Rs. 345 (A)

MCV = Rs. 7.50 (F)

(ii) MPV = AQ(SP – AP)

For X : 210 (15 – 16) = Rs.210 (A)

For Y : 190 (10 – 10.50) = Rs.95 (A)

MPV = Rs.305 (A)

(iii) MUV = SP (SQ – AQ)

For X : 15 (247.50 – 210) = Rs.562.50 (F)

For Y : 10 (165 – 190) = Rs.250.00 (A)

MUV = Rs.312.50 (F)

(iv) MMV = SP (RSQ – AQ)

For X : 15 (240 – 210) = Rs.450 (F)

For Y : 10 (160 – 190) = Rs.300 (A)

MMV = Rs.150 (F)

(v) MYV = SC per unit (AY – SY)

= Rs.16.25 (330 – 320)

= Rs.162.50(F)

Note : Standard Cost (SC) per unit:

368

X : 247.50 x 15 = Rs. 3712.50

Y : 165 x 10 = Rs. 1650.00

TSC for 330 units of output = Rs.5362.50

SC per unit = 330

5362.50 Rs. = Rs.16.25

Question 15

Calculate the Material Mix Variance from the following data:

Standard mix for one unit of a product is:

Material A – 100 kg. @ Rs.15 per kg.

Material B – 150 kg. @ Rs.25 per kg.

Actual mix was used for one unit of the product as:

Material A – 120 kg @ Rs.13 per kg

Material B – 140 kg @ Rs.27 per kg.

Answer

Material Mix Variance (MMV) = SP (RSQ – AQ)

For A = Rs.15 (104 – 120) = Rs.240 (A)

For B = Rs.25 (156 – 140) = Rs.400 (F)

MMV = Rs.160 (F)

RSQ = TSQ

TAQx SQ

TAQ = 120+140 = 260 kg.

TSQ= 100 +150 = 250 kg.

RSQ for A : 250

260 x 100 = 104 kg.

RSQ for B : 250

260 x150 = 156 kg.

Question 16

The standards and actuals for a 50 hourly week are as under:

Standards:

Skilled : 100 workers @ Rs.60 per hour

Unskilled : 200 workers @ Rs.40 per hour

369

Actuals:

Skilled : 130 workers @ Rs.55 per hour

Unskilled : 215 workers @ Rs.30 per hour

You are required to compute Labour Mix Variance.

Answer:

Total Standard Time / Hours

Skilled : 100 x 50 = 5000 hours

Unskilled :200 x 50 = 10000 hours

Total = 15000 hours

Total Actual Time / Hours

Skilled : 130 x 50 = 6500 hours

Unskilled : 215x50 = 10750 hours

Total = 17250 hours

RSH for Skilled = 15000

5000 x 17250= 5750 hours

RSH for unskilled = 15000

10000 x 17250= 11500 hours

Labour Mix Variance (LMV)= SR (RSH – AH)

For skilled = Rs.60 (5750 – 6500) = Rs.45000 (A)

For Unskilled = Rs.40 (11500 – 10750) = Rs.30000 (F)

Total = Rs.15000(A)

Question 17

The following details relating to a month are given:

Standard

Grade A : 120 workers @ Rs.90 per hour

Grade B : 160 workers @ Rs.40 per hour

Budgeted hours for one month 200.

Budgeted production 5000 units less standard loss 20 %

Actual

Grade A : 110 workers @ Rs.80 per hour

Grade B : 184 workers @ Rs.45 per hour

Actual hours during the month 200.

Actual production 4250 units

370


(i) Labour Cost Variance

(ii) Labour Rate Variance

(iii) Labour Efficiency Variance

(iv) Labour Gang (mix) Variance

(v) Labour Yield Variance

Answer

Working note:

1. Calculation of Standard: (SH x SR)

Hours Rate (Rs.) Amount (Rs.)

Grade A : 120x 200 = 24000 90 2160000

Grade B : 160x 200 = 32000 40 1280000

56000 3440000

TSC for 5000 x 80 % = 4000 units

TSC for Actual output = 4250 units

= 4000

3440000 x 4250 = Rs.3655000

2. Calculation of Actual:

AH AR (Rs.) (AH x AR) (Rs.)

Grade A : 110x 200 22000 80 1760000

Grade B : 184x 200 36800 45 1656000

58800 3416000

3. Rs.

SR x AH: A - Rs.90 x 22000 = 1980000

B - Rs.40 x 36800 = 1472000

3452000

4. Calculation of RSH and RSH x SR

RSH SR RSH x SR (Rs.)

Grade A

Grade B

56000

24000x 58800 = 25200

56000

32000 x 58800 = 33600

90

40

2268000

1344000

Total 3612000

371

5. SC per Unit = Rs.3440000/4000 Units

= Rs. 860 per Unit

6. Std. yield (SY) from actual hours

56000

4000 x 58800 = 4200 Units

Calculation of Variances:

1. LCV = (SH x SR) – (AH x AR)

= Rs. 3655000 – Rs.3416000

= Rs. 239000 (F)

2. LRV = AH (SR – AR) or (AH x SR) – (AH x AR)

= Rs. 3452000 – Rs.3416000

= Rs. 36000 (F)

3. LEV = SR (SH – AH) or (SR x SH) – (SR x AH)

= Rs. 3655000 – Rs.3452000

= Rs. 203000 (F)

4. LMV = SR (RSH – AH) or (SR x RSH) – (SR x AH)

= Rs. 3612000 – Rs.3452000

= Rs. 160000 (F)

5. LYV = SC per Unit (AY – SY)

= Rs. 860 (4250 – 4200)

= Rs. 43000 (F)

Question 18

Calculate Labour Yield Variance from the following details:

Standard Actual

Skilled 180 workers @ Rs. 80 per hour 160 workers

Unskilled 120 workers @ Rs. 40 per hour 140 workers

Budgeted hours for one month 200. Actual hours during the month 180; Budgeted production 6000 units less standard loss 20%, Actual production 4600 units.

372

Answer

Standard production (yield) = 6000 units less 1200 (Loss) = 4800 units

Actual production = 4200 units

Total standard hours and actual hours have been calculated as follows:

Calculation of Standard Calculation of Actuals

Budgeted No. of Total Actual No. of Total Hours Workers Hours Hours Workers Hours

Skilled 200 180 36000 180 160 28800

Unskilled 200 120 24000 180 140 25200

Total 300 60000 300 54000

Standard yield or SY = Total actual time x time standard Total

mix Std. from Yield Std.

= 54000 Hours x hours 60000

units 4800 = 4320 units

Standard rate per unit (SR) has been calculated as follows:

Standard Wages:

Skilled workers = 36000 Hours x Rs. 80 = Rs. 2880000

Unskilled workers = 24000 Hours x Rs. 40 = Rs. 960000

Total = Rs. 3840000

Standard rate per unit (SR) = Rs. 4800

840000= Rs. 800

Now, Labour Yield Variance = (AY – SY) x Standard rate per unit

= (4600 – 4320) x Rs. 800

= Rs. 224000 (F)

Question 19

Calculate (i) Labour Cost Variance, (ii) Labour Rate Variance, (iii) Labour Efficiency Variance, (iv) Labour Mix Variance, and (v) Labour Idle Time Variance, from the following:

Standard: Rs.

Workman A: 20 hours @ Rs. 30 600

Workman B: 20 hours @ Rs. 70 1400

40 hours 2000

Actual: Rs.

Workman A: 30 hours @ Rs. 40 1200

373

Workman B: 25 hours @ Rs. 60 1500

55 hours 2700

In actual production, 4 hours (included in above) have been lost on account of machine breakdown.

Answer

(i) Labour Cost Variance = Total Standard Labour Cost – Total Actual Labour Cost

= Rs. 2000 – Rs. 2700 = Rs. 700 (A)

(ii) Labour Rate Variance =

(Standard rate per hour – Actual rate per hour) x Actual time paid for

For A = (Rs. 30 – Rs. 40) x 30 Hours = Rs. 300 (A)

For B = (Rs. 70 – Rs. 60) x 25 Hours = Rs. 250 (F)

= 50(A)

(iii) Labour Efficiency Variance = (Standard time – Actual time) x SR per hour

For A = (20 hours – 26 hours) x Rs. 30 = Rs. 180 (A)

For B = (20 hours – 21 hours) x Rs. 70 = Rs. 70 (A)

= Rs.250 (A)

(iv) Before Labour Mix Variance, we have to calculate revised standard time as follows:

Revised std. time = workers all by taken time Std. Total

worker particular a by taken time Std.x Total Act. time Taken

For A = hours 40

hours 20 x 47 hours = 23.5 Hours

For B = hours 40

hours 20 x 47 hours = 23.5 Hours

Labour Mix Variance = (Revised standard time – Actual time) x SR per hour

For A = (23.5 hours – 26 hours) x Rs. 30 per hour = Rs. 75 (A)

For B = (23.5 hours – 21 hours) x Rs. 70 per hour = Rs. 175 (F)

Rs. 100 (F)

(v) Labour Idle Time Variance = Idle Time x Standard Rate per hour

For A = 4 hours x Rs. 30 per hour = Rs. 120 (A)

For B = 4 hours x Rs. 70 per hour = Rs. 280 (A)

= Rs.400 (A)

Working Note: Actual production hours

A: 30 hours – 4 idle hours = 26 hours

B: 25 hours – 4 idle hours = 21 hours

47 hours

374

Question 20

The following is the standard mix to produce 10 units of a product:

A: 12 Units @ Rs. 150; B: 16 Units @ Rs. 200; C: 20 Units @ Rs. 250;

During the month of April, 2016, ten mixes were completed but the actual output obtained was only 90 units. Calculate Material Cost Variance, Material Price Variance, Material Mix Variance and Material Yield Variance if the actual consumption of material was as follows:

A: 128 Units @ Rs. 200; B: 192 Units @ Rs. 150; C: 168 Units @ Rs. 300;

Answer

As actual output is 90 units, SQ will be

A: 12 x 10

90 = 108 Units;

B: 16 x 10

90 = 144 Units; and

C: 20 x 10

90 = 180 Units.

Total Standard Cost will be

TSC =

A : 108 x 150 = Rs. 16200

B : 144 x 200 = Rs. 28800

C : 188 x 250 = Rs. 45000

= Rs. 90000

Total Actual Cost will be

TAC =

A : 128 x 200 = Rs. 25600

B : 192 x 150 = Rs. 28800

C : 168 x 300 = Rs. 50400

= Rs. 104800

MCV = Rs. 90000 – Rs. 104800 = Rs. 14800 (A)

Material Price Variance = AQ (SP – AP)

A : 128 (150-200) = Rs. 6400 (A)

B : 192(200 – 150) = Rs. 9600 (F)

C : 168 (250 – 300) = Rs. 8400 (A)

= Rs. 5200 (A)

375

Material Mix Variance = SP (RSQ – AQ)

First RSQ will be calculated as follows:

RSQ (Revised Standard Quantity =

A: 12 x 48

488 = 122 Units; B: 16 x

48

488 = 162.67 Units; C: 20 x

48

488 = 203.33 Units;

Now Material Mix Variance will be:

A: 150 (122 – 128) = Rs. 900 (A)

B: 200 (162.67 – 192) = Rs. 5867 (A)

C: 250 (203.33 – 168) = Rs. 8833 (F)

Rs. 2066 (F)

Material Yield Variance = SC per unit (AY – SY)

SY = 10 x 48

488 = 101.667 Units

SC per unit = Rs. 90000 ÷ 90 = Rs. 1000 per unit

Hence, Material Yield Variance = Rs. 1000 (90 – 101.667)

= Rs. 11667 (A)

Verification:

Material Cost Variance = Price Variance + Mix Variance + Yield Variance

Or 14800 (A) = 5200 (A) + 2066(F) + 11667 (A)

Or 14800 (A) = Rs. 14801 (A)

Question 21

Calculate Labour Variances from the following data:

Standard

Number in the gang 80 Men and 40 Women

Wage Rate per hour: Rs. 45 for man and Rs. 40 for woman

Output per gang hour: 50 Units

Gang-hours in a five day week: 40

Actual

Number in the gang: 64 Men and 56 Women

Wage Rate per hour: Rs. 50 for man and Rs. 25 for woman

Actual gang hours paid for: 40

Actual gang hours worked: 39

Actual output: 2400 Units

376

Answer

Labour Cost Variance (LCV) : TSC – TAC

Standard Labour Cost of 50 Units:

Men : 80 x 45 = Rs. 3600

Women : 40 x 40 = Rs. 1600

= Rs. 5200

Standard Labour Cost of 2400 Units = 2400 x 50

5200 = Rs. 249600

Actual Labour Cost of 2400 Units:

Men : 64 x 40 x 50 = Rs. 128000

Women : 56 x 40 x 25 = Rs. 56000

= Rs. 184000

LCV = Rs. (249600 – 184000) = Rs. 65600 (F)

Labour Rate Variance (LRV): (SR – AR) x AH

Men : (45 –50) x (64 x 40) = Rs. 12800 (A)

Women : (40 – 25) x (56 x 40) = Rs. 33600 (F)

= Rs.20800 (F)

Labour Efficiency Variance (LEV) = (SH – AHW*) x SR

Standard hours (SH i.e., Actual Output in terms of standard hours):

Man Hours : 50

2400 or 48 x 80 = 3840

Woman Hours: 48 x 40 = 1920

Actual Hours paid (AH): Men 40 x 64 = 2560 Hours

Women: 40 x 56 = 2240 Hours

LEV :

Men : (3840 – 2496) x Rs. 45 = Rs. 60480 (F)

Women : (1920 – 2184) x Rs. 40 = Rs. 10560 (A)

= Rs. 49920 (F)

* AHW means Actual Hours Worked – Idle Hours

Labour Idle Time Variance (LITV) = Idle Hours x SR

Men : 1 x 64 x 45 = Rs. 2880 (A)

Women : 1 x 56 x 40 = Rs. 2240 (A)

= Rs. 5120 (A)

377

Labour Mix Variance (LMV) = (RSH – AH) x SR

Actual Hours (AH) worked:

Men : 39 x 64 = 2496 Hours

Women : 39 x 56 = 2184 Hours

= 4680 Hours

Required Standard Hours (RSH) i.e., Standard Proportion (2:1) of 4680 Hours

Men : 4680 x 3

2 = 3120 Hours

Women: 4680 x 3

1 = 1560 Hours

LMV:

For Men : (3120 – 2496) x 45 = Rs. 28080 (F)

For Women : (1560 – 2184) x 40 = Rs. 24960 (A)

= Rs. 3120 (F)

LYV = SC per unit (AY – SY)

= Rs.104 (2400 – 1950) = Rs. 46800 (F)

SY = Time Standard Total

Output Standard x Total Actual Time excluding Idle Time

= 4800

2000 x 4680 = 1950 Units

SC per unit = 2400

249600 Rs. = Rs. 104

Question 22

Following data are given by Mogary Limited:

Standards

Grade A: 120 workers @ Rs. 60 per hour

Grade B: 80 workers @ Rs. 40 per hour

Budgeted hours: 1000

Production: 5000 units less standard loss 20 percent.

Actuals

Grade A: 110 workers @ Rs. 70 per hour

Grade B: 90 workers @ Rs. 42 per hour

Actual hours: 900

378

Actual loss 900 units

You are required to compute Labour Variances.

Answer

Working Notes:

1. Standard Output = 5000 Units – 20% of 5000

= 4000Units

Actual Output or yield (AY) = 5000 – 900 = 4100 Units

2. Calculation of Total Standard Cost TSC or (SH x SR)

Grade No. of Workers Budgeted hours

Total hours (SH)

Rate (SR) Rs.

SH x SR Rs.

A

B

120

80

1000

1000

120000

80000

60

40

7200000

3200000

Total 200000 10400000

TSC for actual output 4100 units

= 4000

10400000 x 4100 = Rs. 10660000

Standard Cost (SC) per unit = 4000

10400000 or

4100

10660000 = Rs. 2600 per unit

3. Total Actual Cost: TAC or (AH x AR)

Grade No. of workers

Actual hours

Total hours (AH)

Rate (AR) Rs.

AH x AR Rs.

A

B

110

90

900

900

99000

81000

70

42

6930000

3402000

Total 180000 10332000

4. Standard Cost for actual hours (AH x SR)

Grade AH SR (Rs.) AH x SR (Rs.)

A

B

99000

81000

60

40

5940000

3240000

Total 9180000

379

5. Revised Standard Hours (RSH) and RSH x SR

Grade RSH SR (Rs.) RSH x SR (Rs.)

A

B

200000

120000 x 180000 = 108000

200000

8000 x 180000 = 72000

60

40

6480000

2880000

Total 9360000

Calculation of Labour Variances:

(i) LCV = TSC – TAC

= Rs. 10660000 – Rs. 10332000

= Rs. 328000 (F)

(ii) LRV = AH (SR – AR) or (AH x SR) – (AH x AR)

= Rs. 9180000 – Rs. 10332000

= Rs. 1152000 (A)

(iii) LEV = SR (SH – AH) or (SH x SR) – (AH x SR)

= Rs. 10660000 – Rs. 9180000

= Rs. 1480000 (F)

(iv) LMV = SR (RSH – AH) or (RSH x SR) – (AH x SR)

= Rs. 9360000 – Rs. 9180000

= Rs. 180000 (F)

(v) LYV = SC per Unit (AY – SY)

= Rs. 2600 (4100 Units – 3600 Units)

= Rs. 1300000 (F)

Note: Standard yield (SY) by using Actual Hours

= 200000

4000 x 180000

= 3600 Units

Verification:

LCV = LRV + LEV

Rs. 328000 (F) = Rs. 1152000 (A) + Rs. 1480000 (F)

Or Rs. 328000 (F) = Rs. 328000 (F)

380

LEV = LMV + LYV

Rs. 1480000 (F) = Rs. 180000 (F) + Rs. 1300000 (F)

Or Rs. 1480000 (F) = Rs. 1480000 (F)

Question 23

Standard Wage Rate (Original) Rs. 50 per hour

Standard Wages Rate after award, 20% increase

Actual for the month:

Output equivalent to 1850 standard hours, Hours worked 2000 hours;

Labour Cost Rs. 128000.

You are required to calculate the following on the basis of revised standard rate:

(i) Labour Cost Variance

(ii) Labour Rate Variance

(iii) Labour Efficiency Variance

Answer

(i) LCV = (SH x SR) – (AH x AR)

= (1850 x 60) – 128000

= Rs. 111000 – 128000

= Rs. 17000 (A)

(ii) LRV = AH (SR – AR)

= 2000 (60 – 64)

= Rs. 8000 (A)

(iii) LEV = SR (SH – AH)

= 60 (1850 – 2000)

= Rs. 9000 (A)

W.N.:

1. Revised Standard Rate = Rs.50 + 20% of 50 = Rs. 60 per hour

2. Actual Wages Rate = 2000

128000 Rs. = Rs.64 per hour

Question 24

Compute the missing data indicated by the question marks from the following information:

Particulars A B

Standard Price/Unit (SP) Rs. 24 Rs. 30

Actual Price/Unit (AP) Rs. 30 Rs. 40

381

Standard Input (kgs.) (SQ) 100 kg. ?

Actual Input (kgs.) (AQ) ? 140

Material Price Variance (MPV) ? ?

Material Usage Variance (MUV) ? Rs. 1200 (A)

Material Cost Variance (MCV) ? ?

Material mix variance of both materials together was Rs. 180 adverse.

Answer

If standard quantity of material B is assumed x then material usage variance will be as follows:

MUV = SP (SQ – AQ)

= 30 x (x – 140) = -1200

= 30x – 4200 = -1200

= 30x = -1200 + 4200

= 30 x= 3000 or x = 100

From the given and calculated information, variances of ‘B’ may be calculated as follows:

MPV = AQ (SP – AP)

= 140 (30 – 40) = Rs. 1400 (A)

MCV = SP x SQ – AP x AQ

= (30 x 100) – (40 x 140) = Rs. 2600 (A)

If the actual input of the total material is x kg., then the input of material A will be (x – 140) because actual input of material B is equal to 140 kg. The standard quantity of material A and B is 100 kg for each., i.e., both type of materials are utilised in the same ratio. If the

actual quantity is x kg., then RSQ for each type of material will be 2

x uniformly.

MMV = SP (RSQ – AQ)

For Material A = 24

140) - (x - 2

x

For Material B = 30

1402

x

MMV = 24

140) - (x - 2

x + 30

1402

x = -180

Or MMV = 24

140) - (x - 2

x + 30

1402

x = -180

= (12x – 24x + 3360) + (15x – 4200) = -180

382

= 12x – 24x + 15x = -180 – 3360 + 4200

= 3x = 660 or x= 220

If x = 220 then actual material of ‘A’ will be 220 – 140 = 80 kg. and hence, by knowing all the relevant information of material ‘A’, then MPV, MUV and MCV for material A can be calculated as under:

MPV = AQ (SP – AP)

= 80 (24 – 30) = Rs. 480 (A)

MUV = SP (SQ – AQ)

= 24 (100 – 80) = Rs. 480 (F)

MCV = (SP x SQ) – (AP x AQ)

= (24 x 100) – (30 x 80) = NIL

Question 25

The following information are obtained from the cost records of Jaiash Limited for the month of May, 2016:

Standard Actual

Output (Units)

Working days

Fixed Overheads (Rs.)

Variable Overheads (Rs.)

8000

20

2000000

600000

7600

21

1950000

600000


(i) Variable Overhead Variance

(ii) Fixed Overhead Variance

(a) Expenditure Variance

(b) Volume Variance

(c) Cost Variance

Answer

(i) Actual Variable Overheads = Rs. 600000

Standard Variable Overheads for actual output

= (600000/8000) x 7600 Units

= Rs. 570000

Variable Overhead Variance

383

= (Std. Variable Overhead for actual output – Actual variable overheads)

= Rs. 570000 – Rs. 600000

= Rs. 30000 (A)

(ii) Actual Fixed Overheads = Rs. 1950000

Budgeted fixed overheads = Rs. 2000000

Std. fixed overheads for actual output

= (Rs. 2000000/8000 Units) x 7600 Units

= Rs. 1900000

(a) Fixed Overhead Expenditure Variance

= Budgeted Fixed Overhead – Actual Fixed Overheads

= Rs. 2000000 – Rs. 1950000

= Rs. 50000 (F)

(b) Fixed Overhead Volume Variance

= Standard fixed overhead for actual output – Budget fixed overhead

= Rs. 1900000 – Rs. 2000000

= Rs. 100000 (A)

(c) Fixed Overhead Cost Variance

= Std. fixed overhead for actual output – Actual fixed overhead

= Rs. 1900000 – Rs. 1950000

= Rs. 50000 (A)

Question 26

A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fixed overheads are budgeted at Rs. 720000 per month. The standard time required to manufacture one unit of product is 2 hours.

In April, 2016, the company worked 24 days of 840 machine hours per day and produced 10610 units of output. The actual fixed overheads were Rs. 710000.


(i) Expenditure Variance

(ii) Volume Variance

(iii) Total fixed overheads variance

384

Answer

Working Notes

1. Budgeted working hours per month: 120 x 8 x 25 = 24000 hours

2. Actual working hours during the month: 840 x 24 = 20160 hours

3. Budgeted production units per month = (Budget 24000 ÷ 2 hrs.) = 12000 Units.

4. Actual production during the month = 10610 Units

5. Standard F.O. rate per unit = Rs.720000/12000 = Rs. 60

6. Standard F.O. rate per hour = Rs.720000/24000 = Rs. 30

7. Standard F.O. rate per day = Rs.720000/25 = Rs. 28800

8. Standard fixed overhead for actual production = 10610 units x Rs. 60 = Rs. 636600

Variances:

(i) F.O. Expenditure Variance = Budgeted F.O. – Actual F.O.

= Rs.720000 – Rs.710000 = Rs. 10000 (F)

(ii) Total Volume Variance = (Standard F.O. Absorbed – Budgeted F.O.)

= 636600 – 720000 = Rs. 83400 (A)

(iii) Fixed overhead variance = (Std. F.O. Absorbed – Actual F.O.)

= 636600 – 710000

= Rs. 73400 (A)

Or Expenditure + Volume = 10000 (F) + 83400 (A) = Rs. 73400 (A)

Question 27

Savitri Limited has furnished you the following information for the month of May, 2016:

Budget Actual

Output (units) 60000 65000

Hours 30000 33000

Fixed overhead Rs. 450000 Rs. 500000

Variable overhead Rs. 600000 Rs. 680000

Working days 25 26

Calculate overhead variances.

Answer

Basic Calculations

Standard hours per unit = 60000

30000

units Budgeted

hours Budgeted = 0.5 hour

Std. hrs. for actual output = 65000 x 0.5 hr. = 32500 hours

385

Standard overhead rate per hour = hours Budgeted

overhead Budgeted

For fixed overhead = 30000

450000 = Rs. 15 per hour

For variable overhead = 30000

600000 = Rs. 20 per hour

Std. F.O. rate per day = Rs.450000 ÷ 25 days = Rs. 18000

Recovered overhead = Std. hrs. for actual output x Std. rate

For fixed overhead = 32500 hrs. x Rs. 15 = Rs. 487500

For variable overhead = 32500 hrs. x Rs. 20 = Rs. 650000

Standard overhead = Actual hours x Std. rate

For fixed overhead = 33000 x 15 = Rs. 495000

For variable overhead = 33000 x 20 = Rs. 660000

Revised budget hours =days Budgeted

hours Budgeted x Actual days

= 25

30000x 26 = 31200 hours

Revised budgeted overhead (for fixed overhead) = 31200 x 15 = Rs. 468000

Calculation of variances:

Fixed Overhead Variances

(i) F.O. Cost Variance = Recovered Overhead – Actual Overhead

= 487500 – 500000

= Rs. 12500 (A)

(ii) F.O. Expenditure Variance = Budgeted Overhead – Actual Overhead

= 450000 – 500000

= Rs. 50000 (A)

(iii) F.O. Volume Variance = Recovered Overhead – Budgeted Overhead

= 487500 – 450000

= Rs. 37500 (F)

Variable Overhead Variances

(i) V.O. Cost Variance = Recovered Overhead – Actual Overhead

= 650000 – 680000

= Rs. 30000 (A)

(ii) V.O. Expenditure Variance = Standard Overhead – Actual Overhead

386

= 660000 – 680000

= Rs. 20000 (A)

(iii) V.O. Efficiency Variance = Recovered Overhead – Standard Overhead

= 650000 – 660000

= Rs. 10000 (A)

Verification

(i) F.O. Cost Variance = Expenditure variance + Volume variance

12500 (A) = 50000 (A) + 37500 (F)

(ii) V.O. Cost Variance = Expenditure Variance + Efficiency Variance

30000 (A) = 20000 (A) + 10000 (A)

Question 28

MDS Limited has furnished the following data:

Budget Actual

No. of working days 25 27

Production in units 10000 11000

Fixed overheads Rs.450000 Rs.465000

Budgeted fixed overhead rate is Rs. 15 per hour. In May, 2016, the actual hours worked were 31500.

Calculate the following variances:

(i) Volume variance.

(ii) Expenditure variance.

(iii) Total overhead variance.

Answers

For Fixed Overhead Variances

Actual F.O. incurred Rs.465000

Budgeted F.O. for the period or standard fixed overhead Rs.450000

Standard F.O. absorbed for production (Standard output for actual time x

Standard F.O. per unit) (Rs.450000/10000) x 11000 = Rs.495000

Computation of Variances:

(i) Fixed overhead expenditure variance:

= (Budgeted F.O. – Actual F.O.)

= Rs.450000 – Rs.465000 = Rs. 15000 (A)

387

(ii) Fixed overhead volume variance:

= (Standard F.O. absorbed – Budgeted F.O.)

= Rs.495000 – Rs.450000 = Rs.45000 (F)

(iii) Fixed overhead variance:

= (Standard F.O. absorbed – Actual F.O.)

= Rs.495000 – Rs.465000 = Rs.30000 (F)

Question 29

In Sewda Industries Limited the standard units of production of the year were fixed at 600000 units and overhead expenditure were estimated to be:

Fixed Rs. 6540000

Variable Rs. 3360000

Actual production during the month of April, 2016 was 40000 units. Each month has 20 working days. During the month in question there was one statutory holiday. The actual overheads amounted to:

Fixed Rs. 652600

Variable Rs. 278400

You are required to find out the:

(i) Overhead Cost Variance

(ii) Fixed Overhead Cost Variance

(iii) Variable Overhead Cost Variance

(iv) Fixed Overhead Volume Variance

(v) Fixed Overhead Expenditure Variance

(vi) Fixed Overhead Calendar Variance

Answer

(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads

= (Rs. 436000 + Rs. 224000) – (Rs. 652600 + Rs. 278400)

= (Rs. 660000 – Rs. 931000)

= Rs. 271000 (A)

(ii) F.O. Cost Variance = Absorbed F.O. – Actual F.O.

= Rs. 436000 – Rs. 652600

= Rs. 216600 (A)

(iii) Variable Overhead Cost Variance = Std. V.O. for actual production – Actual V.O.

= Rs. 224000 – Rs. 278400

= Rs. 54400 (A)

388

(iv) F.O. Volume Variance = Absorbed F.O. – Budgeted F.O.

= Rs. 436000 – Rs. 545000

= Rs. 109000 (A)

(v) F.O. Expenditure Variance = Budgeted F.O. – Actual F.O.

= Rs. 545000 – Rs. 654000

= Rs. 109000 (A)

(vi) F.O. Calendar Variance = Possible F.O. – Budgeted F.O.

= Rs. 517750 – Rs. 545000

= Rs. 27250 (A)

Working Notes:

1. Standard Rate of absorption of Fixed Overhead per unit =Units 600000

6540000 Rs.= Rs. 10.90

per Unit

2. Absorbed F.O. on production = 40000 Units @ Rs. 10.90 = Rs. 436000

3. Standard Variable Overhead per unit = Units 600000

3360000 Rs. = Rs. 5.60 per unit

4. Standard V.O. for 40000 Units (output) = 40000 Units x Rs. 5.60 = Rs. 224000

5. Budgeted monthly F.O. = Rs. 6540000/12 = Rs. 545000

6. Possible F.O. for the month = days working Budgeted

F.O. Budgetedx Actual days

= days 20

545000 Rs. x 19 days

= Rs. 517750

Question 30

Jeenu Limited has furnished the following standard cost data for per unit of production:

Material: 5 kg @ Rs. 20 per kg.

Labour: 3 hours @ Rs. 45 per hour

Variable Overhead @ Rs. 15 per Labour hour

Fixed Overhead Rs. 621000 per month based on a normal volume of 51750 Labour hours.

The actual cost data for the month of May, 2016 were as follows:

Material used 42250 kg at a cost of Rs. 1679000

Labour paid Rs. 2285000 for 51000 hours

Variable Overheads Rs. 742800

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Fixed Overheads Rs. 615400

Actual production 16650 Units



(ii) Labour Cost Variance

(iii) Variable Overhead Cost Variance

(iv) Fixed Overhead Cost Variance

Answer

Working Notes

1. Budgeted monthly production = 51750 hours/3 = 17250 Units

2. Budgeted F.O. Rate = Rs. 621000/17250 Units = Rs. 36 per Unit

3. Total Standard Material Cost for actual production

= 16650 Units x 5 kg x Rs. 20 = Rs.1665000

4. Total Standard Labour Cost for actual production

= 16650 Units x 3 hours x Rs.45 = Rs.2247750

5. Absorbed F.O. = 16650 x Rs. 36 = Rs.599400

6. Absorbed V.O. = 16650 Units x 3 hours x Rs. 15 = Rs.749250

Variances:

(i) MCV = TSC – TAC

= Rs. 1665000 – Rs.1679000

= Rs. 14000 (A)

(ii) LCV = TSC – TAC

= Rs. 2247750 – Rs.2285000

= Rs. 37250 (A)

(iii) F.O. Cost Variance = Absorbed F.O. – Actual F.O.

= Rs. 599400 – Rs.615400

= Rs. 16000 (A)

(iv) V.O. Cost Variance = Absorbed V.O. – Actual V.O.

= Rs. 749250 – Rs.742800

= Rs. 6450 (F)

Question 31

The following details are available in the cost records of Patta Limited for the month of May, 2016:

Raw material purchased 60000 kg.at a cost of Rs. 1530000

390

Raw material consumed 56500 kg

Wages paid Rs. 481800 for 8760 hours

Units produced 11500 Units

Standards:

Raw Material: 5 kg per unit @ Rs. 25 per kg

Direct Wages: 3 hours required for 4 units of output @ Rs. 50 per hour

You are required to calculate material and labour variances for the month of May, 2016.

Answer

Material Variances

(i) Material Cost Variance = (SQ x SP) – (AQ x AP)

= (57500 x 25) – (56500 x 25.50)

= Rs. 1437500 – Rs.1440750

= Rs. 3250 (A)

(ii) Material Price Variance = AQ (SP – AP)

= 56500 (25 – 25.50)

= Rs. 28250 (A)

(iii) Material Usage Variance = SP (SQ – AQ)

= 25 (57500 – 56500)

= Rs. 25000 (F)

Labour Variances

(i) Labour Cost Variance = (SH x SR) – (AH x AR)

= (8625 x 50) – (8760 x 55)

= Rs.431250 – Rs.481800

= Rs. 50550 (A)

(ii) Labour Rate Variance = AH (SR – AR)

= 8760 (50 – 55)

= Rs. 43800 (A)

(iii) Labour Efficiency Variance = SR (SH – AH)

= 50 (8625 – 8760)

= Rs. 6750 (A)

Working Notes:

(i) Actual Price (AP) = Rs. 1530000/60000 kg = Rs. 25.50 per kg

(ii) Actual hourly wages Rate (AR) = Rs. 481800/8760 hours = Rs. 55 per hour

(iii) Standard Quantity (SQ) = 11500 Units x 5 kg = 57500 kg

(iv) Standard Hours (SH) = 11500 x 4

3 = 8625 hours.

***

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Question 1

Question 1

What do you understand by forecast and budget? Distinguish between forecast and budget.

Answer

Forecast and Budget

A forecast is an assessment of probable future events. Budget is an operating and financial plan of a business enterprise. At planning stage it is necessary to prepare forecasts of probable course of action for the business in future. Budget is a sort of commitment or a target which the management seek to attain on the basis of the forecasts made. Forecasts are made regarding sales, production cost and financial requirements of the business. A forecast denotes some degree of flexibility while a budget denotes a definite target.

The following points of distinction can be noted between forecast and budget:

Forecast Budget

(i) Forecast is a mere estimate of what is likely to happen. It is a statement of probable events which are likely to happen under anticipated conditions during a specified period of time.

Budget shows that policy and programmes to be followed in a future period under planned conditions.

(ii) Forecasts, being statements of future events, do not connote any sense of control.

A budget is a tool of control since it represents actions which can be shaped according to will so that it can be suited to the conditions which may or may not happen.

(iii) Forecasting is a preliminary step for budgeting. It ends with the forecast of likely events.

It begins when forecasting ends. Forecasts are converted into budgets.

(iv) Forecasts have wider scope, since it can be made in those spheres also where budgets can not interfere.

Budgets have limited scope. It can be made of phenomenon non capable of being expressed quantitatively.

10

Budget, Budgeting and

Budgetary Control

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Question 2

State the objectives of budgetary control.

Answer

Objectives of Budgetary Control

The objectives of budgetary control are the following:

(1) To use different levels of management in a co-operative endeavour for achievement of the objectives of the firm.

(2) To facilitate centralised control with delegated authority and responsibility.

(3) To achieve maximum profitability by planning income and expenditure through

optimum use of the available resources.

(4) To ensure adequate working capital in other resources for efficient operation of

business.

(5) To reduce losses and wastes to the minimum.

(6) To bring out clearly where effort is needed to remedy the situation.

(7) To see that the firm is not deflected from marching towards its long-term

objectives without being overwhelmed by emergencies.

(8) Various activities like production, sales, purchase of materials etc. are co-

ordinated with the help of budgetary control.

Question 3

What are the limitations of budgetary control?

Answer

Limitations of Budgetary Control are:

(1) Budgetary control starts with the formulation of budgets which are mere estimates. Therefore, the adequacy or otherwise of budgetary control system, to a very large extent, depends upon the adequacy or accuracy with which estimates are made.

(2) Budgets are meant to deal with business conditions which are constantly changing. Therefore, budgets estimates lose much of their usefulness under changing conditions because of their rigidity. It is necessary that budgetary control system should be kept adequately flexible.

(3) The system of budgetary control is based on quantitative data and represent only an impersonal appraisal to the conduct of business activity unless it is supported by proper management of personal administration.

(4) It has often been found that in practice the organisation of budgetary control system become top heavy and, therefore, costly specially from the point of view of small concern.

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(5) Budgets and budgetary control have given rise to a very unhealthy tendency to be regarded as the solvent of all business problems. This has resulted in a very luke-warm human effort to deal with such problems and ultimately results in failure of budgetary control system.

(6) It is a part of human nature that all controls are resented to. Budgetary control which places restrictions on the authority of executive is also resented by the employees.

The limitations stated above merely point to the need of maintaining the budgetary control system on a realistic and dynamic basis rather than as a routine.

Question 4

Write short note on Superiority of zero base budgeting (ZBB) to traditional budgeting.

Answer

Superiority of zero base budgeting (ZBB) to traditional budgeting

Zero base budgeting is superior to traditional budgeting due the following reasons:

(i) Zero base budgeting provides a systematic base for evaluation of different activities.

(ii) It gives an opportunity for management to allocate resources to various activities after a proper cost benefit analysis.

(iii) It assigns that the functions undertaken are critical for the achievement of the objectives.

(iv) It provides a base for a system of management by objectives.

(v) It provides a close relationship between departmental budget and corporate objectives / budget.

(vi) It helps in identifying wastage and their elimination.

Question 5

What is a budget manual? Explain.

Answer

Budget Manual

A budget manual is a document which sets outstanding instructions governing the responsibilities of persons and the procedures, forms and records relating to the preparation and use of budgets and it is a booklet containing standing instructions regarding the procedures to be followed and the time schedules to be observed. The following are some important matters dealt with in the budget manual:

(i) the dates by which preliminary forecasts and plans are to submitted;

(ii) the form in which these are to be submitted and the persons to whom these are to be forwarded;

394

(iii) the important factors that must be considered for each forecast or plan;

(iv) the categorisation of expenses, e.g., variable and fixed, and the manner in which each category is to be estimated and dealt with;

(v) the manner of scrutiny and the personnel to carry it out;

(vi) the matters which must be settled only with the consent of the managing director, departmental manager, etc.;

(vii) the finalisation of the functional budgets and their compilation into the master budget;

(viii the form in which the various reports are to be made out, their periodicity and dates, the persons to whom these and their copies are to be sent;

(ix) the reporting of the remedial action;

(x) the manner in which budgets, after acceptance and issuance, are to be revised or amended; and (xi) the matters, included in budgets, on which action may be taken only with the approval of top management.

Question 6

State the pre-requisitions required for the successful implementation of a budgetary control system.

Answer

Pre-requisitions for Implementation of a Budgetary Control System

For the successful implementation of a system of budgetary control certain pre-requisites are to be fulfilled. They are summarised below:

(1) There should be an organisation chart laying out in clear terms the responsibilities and duties of each level of executives and the delegation of authority to the various levels.

(2) The objectives, plans, and policies of the business should be defined in clear cut and unambiguous terms.

(3) The budget factor or the key factor(s) which will be the starting point of the preparation of the various budgets should be indicated.

(4) For formulation and efficient execution of the plan, a Budget Committee should be set up.

(5) There should be an efficient system of accounting to record and provide data in line with the budgetary control system.

(6) There should be a proper system of communication and reporting between the various levels of management.

(7) There should be a Budget Manual wherein all details regarding the plan and its procedure of operation are given as also the length of the budget period.

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(8) The budgets should primarily be prepared by those who are responsible for performance.

(9) The budgets should be comprehensive, complete, continuous and realistic to attain.

(10) There should be an assurance from the top management executives for co-operation and acceptance of the budgetary control system.

(11) For the success of a budgetary control system, it is essential that there should be a sound organisation for budget preparation, budget maintenance, and budget administration. The budgetary control organisation is usually headed by a top executive who is known variously as the Budget Controller, Budget Director, or Budget Officer, who may have under him a Budget Committee constituted with the representatives of various departments like purchases, sales, production, development, administration and accounts.

Question 7

List 10 functional budgets prepared by a business concern.

Answer 7

Main functional budgets are:

(i) Sales Budget

(ii) Production Budget

(iii) Plant utilisation Budget

(iv) Direct Material Purchase Budget

(v) Direct Material Usage Budget

(vi) Direct Labour Budget

(vii) Factory overhead Budget

(viii) Production Cost Budget

(ix) Cost of Goods Sold Budget

(x) Administration Expenses Budget

(xi) Selling and Distribution Expenses Budget

(xii) Research and development Budget

(xiii) Capital Expenditure Budget

(xiv) Cash Budget

Question 8

Briefly explain the concept of master budget.

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Answer

Master Budget

Master budget is a consolidated summary of the various functional budgets. A master budget is the summary budget incorporating its component functional budget and which is finally approved, adopted and employed. It is the culmination of the preparation of all other budgets like the sales budget, production budget, purchase budget etc. It consists in reality of the budgeted profit and loss account, the balance sheet and the budgeted funds flow statement.

The master budget is prepared by the budget committee on the basis of coordinated functional budgets and becomes the target of the company during the budget period when it is finally approved. This budget acts as the company’s individualised key to successful financial planning and control. It provides the basis of computing the effect of any changes in any phase of operations, such as sales volume, product mix, prices, labour costs, material costs or change in facilities. It segregates income, costs and profits by areas of responsibility. Master budget presents all this information to the depth appropriate for the top management action.

In the master budget, costs are classified and summarised by types of expenses as well as by departments. This information extends the range of usefulness of master budget. It is considered as the best mode of understanding the company’s micro- economic position relating to the forthcoming budget period. Master Budget is not merely a compendium of theoretical calculations. The figures that it contains, are the reflection of the actual intentions of the company relating to different areas for the forthcoming budget period.

Question 9

What is fixed budget and Flexible budget? State the differences between the two.

Answer

Fixed Budget

A fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained. A fixed budget is one which is designed for a specific planned output level and is not adjusted to the level of activity attained at the time of comparison between the budgeted and actual costs. The fixed budgets can be established only for a small period of time when the actual output is not anticipated to differ much from the budgeted output. However, a fixed budget is liable to revision if due to business conditions undergoing a basic change or due to other reasons, actual operations differ widely from those planned in the fixed budget.

Flexible Budget

CIMA, London defines flexible budget as a budget which by recognising different cost behaviour patterns, is designed to change as volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost for any level of activity. It is a budget which by recognising the difference between fixed, semi-fixed and variable cost is designed to change in relation to the activity attained. It is designed to furnish budgeted cost at any level of activity attained

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Difference between fixed and flexible budgets

S. No. Fixed Budget Flexible Budget

1.

It does not change with actual volume of activity achieved. Thus it is rigid.

It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.

2. It operates on one level of activity and one set of conditions.

It consists of various budgets for different level of activity.

3.

If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture.

It facilitates the cost ascertainment and price fixation at different levels of activity.

4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels.

It provided meaningful basis of comparison of actual and budgeted targets.

Question 10

What do you understand by zero base budgeting? State its advantages.

Answer

Zero Base Budgeting

Zero base budgeting is a revolutionary concept of planning the future activities and there is a sharp contradiction from conventional budgeting. Zero base budgeting, may be better termed as “De nova budgeting” or budgeting from the beginning without any reference to any base-past budgets and actual happening. Zero base budgeting may be defined as “a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should spend any money at all. The approach requires that all activities be analysed in decision packages which are evaluated by systematic analysis and ranked in order of importance”.

CIMA defines zero base budgeting as “a method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available.”

Advantages of Zero Base Budgeting:

(i) Zero base budgeting is not based on incremental approach, so it promotes operational efficiency because it require managers to review and justify their activities or the fund requested.

(ii) Since this system requires participation of all managers, preparation of budgets, responsibility of all levels at management in successful execution of budgetary system can be ensured.

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(iii) This technique is relatively elastic because budgets are prepared every year on a zero base. This system makes it obligatory to develop financial planning and management information system.

(iv) This system weeds out inefficiency and reduces the cost of production because every budget proposal is evaluated on the basis of cost benefit analysis.

(v) It provides the organisation with a systematic way to evaluate different operations and programmes undertaken by the management. It enables management to allocate resources according to priority of the programmes.

(vi) It is helpful to the management in making optimum allocation of scarce resources because a unique aspect of zero base budgeting is the evaluation of both current and proposed expenditure and placing it some order of priority.

Question 11

The following information is provided by Vikash Limited

Product Sales (Units) as per Sales Budget for 2016-17

Stock (Units) 1.4.2016

Estimated Stock (Units) 31.3.2017

P-1 3,75,000 34,000 39,500

P-2 2,15,000 22,000 18,000

P-3 4,32,000 37,500 47,000

P-4 1,87,000 15,000 21,000

You are required to prepare a production budget for the year ending 31st March, 2017.

Answer

Production Budget for the year ending 31st March, 2017


P1 (Units) P2 (Units) P3 (Units) P4 (Units)

Sales as per Sales Budget for 2016-17

3,75,000 2,15,000 4,32,000 1,87,000

Add : Estimated stock on 31.3.2017

39,500 18,000 47,000 21,000

4,14,500 2,33,000 4,79,000 2,08,000

Less : Stock on 01.04.2016 34,000 22,000 37,500 15,000

Production Budget for 2016-17 3,80,500 2,11,000 4,41,500 1,93,000

399

Question 12

Pooja Limited sells and produces two products A and B. Which are sold in four areas N,S,E and W. The Budgeted sales for the year ended 31st March 2016were as follows:

N. A: 10,000 units at Rs. 200 each

B: 6,000 units at Rs. 100 each

S. B: 12,000 units at Rs. 100 each

E. A: 15,000 units at Rs. 200 each

W. A: 8,000 units at Rs. 200 each


Actual sales for this period were as follow:

N. A: 11,500 units at Rs. 200 each


S. B: 12,500 units at Rs. 100 each

E. A: 16,500 units at Rs. 200 each

W. A: 9,500 units at Rs. 200 each


Budgeted sales for the year ending 31st March, 2017 could be as follow:

N. A: Increase of 2,000 units on 31.3.2016 budget

B: Increase of 500 units on 31.3.2016 budget

S. B: Increase of 1,000 units on 31.3.2016 budget

E. A: Increase of 2,000 units on 31.3.2016 budget

W. A: Increase of 1,000 units on 31.3.2016 budget

B: Increase of 500 units on 31.3.2016 budget

It is decided to undertake sales campaigns in areas S and E. This will result in additional sales of 3,000 units of A in the S area and 5,000 units of B in the E area. Prepare sales budget for the year ended 31st March 2017. Also show the budgeted and actual sales for the year ended 31st march, 2016.

400

Answer

Sales Budget For the year ending 31st March,2017

Area Product

Budget for year ended 31.3.2017

Budget for year ended 31.3.2016

Actual for year ended 31.3.2016

Units PriceRs.

Amount Rs.

Units Price Rs.

Amount Rs.

Units Price Rs.

Amount Rs.

N A 12,000 200 24,00,000 10,000 200 20,00,000 11,500 200 23,00,000

B 6,500 100 6,50,000 6,000 100 6,00,000 7,000 100 7,00,000

TOTAL 18500 30,50,000 16,000 26,00,000 18,500 30,00,000

S A 3,000 200 6,00,000 - - - - - -

B 13,000 100 13,00,000 12,000 100 12,00,000 12,500 100 12,50,000

TOTAL 16,000 19,00,000 12,000 12,00,000 12,500 12,50,000

E A 17,000 200 34,00,000 15,000 200 30,00,000 16,500 200 13,00,000

B 5,000 100 5,00,000 - - - - - -

TOTAL 22,000 39,00,000 15,000 30,00,000 16,500 33,00,000

W A 9,000 200 18,00,000 8,000 200 16,00,000 9,500 200 19,00,000

B 5,500 100 5,50,000 5,000 100 5,00,000 5,250 100 5,25,000

TOTAL 14,500 23,50,000 13,000 21,00,000 14,750 24,25,000

GRAND TOTAL

71,000 1,12,00,000 56,000 89,00,000 62,250 99,75,000

Question 13

Patasa limited manufactures two products A and B and sells them, through two divisions North and South .From the following information prepare a sales budget showing the budgeted and actual sales for the current year:

Budget sales for the current year Actual sales for the year

Product North South North South

A 20,000 units @ Rs.18

30,000 units @ Rs.18

25,000 units @ Rs.18

35,000 units @ Rs.18

B 15,000 units @ Rs.42

25,000 units @ Rs.42

10,000 units @ Rs.42

20,000 units @Rs.42

401

Adequate market studies reveal that product “A” is popular under priced. It is observed that if the price of A is increased by Rs. 2, it will still find a ready market. On the other hand “B” is over priced for customers and the market could absorb more if sales price of “B”, be reduced by Rs. 2. The management has agreed to give effect to the above price changes. As a result of the above decisions, the following estimates have been prepared by divisional managers:

Product North South

A +10% +10%

B +20% +10%

With the help of intensive advertisement campaign the following additional sales, over estimated the sales of divisional managers are possible:

Product North South

A 3000 units 2000 units

B 2000 units 2500 units

Answer

Expected Sales for Future

Particulars A A B B

North South North South

Budget Sales(Units) 20,000 30,000 15,000 25,000

Add : Increase due to change in price policy

2,000 3,000 3,000 2,500

Add : Increase due to advertisement campaign

3,000 2,000 2,000 2,500

Total (Nos.) 25,000 35,000 20,000 30,000

Sales Budget of Patasa limited

Division

&

Product

Budget for current year Actual for current year Budget for future period

Qty. Price

Rs.

Value

Rs. Qty.

Price

Rs.

Value

Rs. Qty.

Price

Rs.

Value

Rs.

North A 20,000 18 3,60,000 25,000 18 4,50,000 25,000 20 5,00,000

B 15,000 42 6,30,000 10,000 42 4,20,000 20,000 40 8,00,000

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Total 35,000 9,90,000 35,000 8,70,000 45,000 13,00,000

South A 30,000 18 5,40,000 35,000 18 6,30,000 35,000 20 7,00,000

B 25,000 42 10,50,000 20,000 42 8,40,000 30,000 40 12,00,000

Total 55,000 15,90,000 55,000 14,70,000 65,000 19,00,000

Sum. A 50,000 18 9,00,000 60,000 18 10,80,000 60,000 20 12,00,000

B 40,000 42 16,80,000 30,000 42 12,60,000 50,000 40 20,00,000

Total 90,000 25,80,000 90,000 23,40,000 1,10000 32,00,000

Question 14

The Sales Director of a manufacturing company reports that in the new year, he expects to sell 27000 units of a certain product. The production manager consults the store-keeper and casts his figures as follows.

Two kinds of raw materials, A and B are required for manufacturing the product. Each unit of the product requires 4 units of A and 6 units of B. The estimated opening balances at the commencement of the next year are: Finished Product: 5000 units, A: 24000 units, and B: 30000 units. The desirable closing balances at the end of the next year are: Finished Product: 7000 units, A: 26000 units, and B: 32000 units. Draw up a quantitative chart showing the Material Purchase Budget for the next year.

Answer

Production Budget (Finished Product)

Particulars Units

Expected Sales Volume

Add: Desired Closing Stock

Total requirements

Less: Opening Balance

Production (i.e., units to be produced during next year)

27000

7000

34000

(5000)

29000

Purchase Budget (Raw Materials A and B)

Particulars Raw Materials

A (units) B (units)

Raw Materials required for producing 29000 units: (A: 29000 x 4)

(B : 29000 x 6)

Add: Desired Closing Stock

116000

26000

174000

32000

403

Total requirements

Less: Opening Balance

Purchase to be made, next year

142000

24000

206000

30000

118000 176000

Purchase = (for Production + Closing Stock – Opening Stock)

Question 15

Mohari Limited produces two types of fans, Deluxe and summer. From the following information prepare its production budget for the year ended 31st March 2017:

I Quarter II Quarter III Quarter IV Quarter

Sales Deluxe 12,000 9,000 6,000 3,000

Summer 60,000 48,000 36,000 12,000

Budgeted Closing Stock:

Deluxe 3,000 2,400 1,200 3,000

Summer 12,000 9,000 6,000 12,000

Stock on 31.3.2016 Deluxe 3,000

Summer 12,000

Answer

Production Budget

(For the year ended 31st March, 2017)

(Production in Units)

Particulars I Quarter II Quarter III Quarter IV Quarter

Deluxe Summer Deluxe Summer Deluxe Summer Deluxe Summer

Sales 12,000 60,000 9,000 48,000 6,000 36,000 3,000 12,000

Add : Closing Stock

3,000 12,000 2,400 9,000 1,200 6,000 3,000 12,000

Total

15,000 72,000 11,400 57,000 7,200 42,000 6,000 24,000

Less : Open. Stock

3,000 12,000 3,000 12,000 2,400 9,000 1,200 6,000

Estimates of Production

12,000 60,000 8,400 45,000 4,800 33,000 4,800 18,000

404

Question 16

You are requested to prepare Selling & Distribution Overhead Budget from the estimates given below.

Rs.

Advertisement 250000

Salaries of the Distribution department 500000

Expenses of sales department 150000

Sales department salaries and dearness allowances 600000

Commission to counter salesmen at 1% on their sales.

Travelling salesmen’s commission at 10% on their sales and expenses at 5% on their sales.

Distribution Cost @ 2% on total sales.

The sales during the period were estimated as follows.

Counter Sales Travelling Salesmen’ Sales

(i) Rs. 8000000 Rs. 1000000

(ii) Rs. 12000000 Rs. 1500000

(iii) Rs. 14000000 Rs. 2000000

Answer

Selling & Distribution Overhead Budget

Particulars

Estimated Sales (Rs.)

9000000 13500000 16000000

Variable Overheads:

Commission to counter salesmen (at 1% on their sales)

Travelling salesmen:

Commission (10% on their sales)

Expenses (5% on their sales)

Distribution Cost @ 2% on total sales

(a)

Fixed Overheads:

Advertisement

80000

100000

50000

180000

120000

150000

75000

270000

140000

200000

100000

320000

410000 615000 760000

250000

250000

250000

405

Salaries of Distribution department

Expenses of Sales department

Salary and DA of Sales department

(b)

Therefore, Total Selling & Distribution Overheads (a + b)

500000

150000

600000

500000

150000

600000

500000

150000

600000

1500000 1500000 1500000

1910000 2115000 2260000

1. Sales overhead expenses are computed at three different sales levels viz., Rs. 9000000; Rs. 13500000 and Rs. 16000000. These three sales levels represent aggregate of counter sales and sales by travelling salesmen [(Rs. 8000000 + Rs. 1000000 = Rs. 9000000), (Rs. 12000000 + Rs. 1500000 = Rs. 13500000), (Rs. 14000000 + Rs. 2000000 = Rs. 16000000)]

2. Commission = 1% of sales at the counter (i.e., 1% of Rs. 8000000 = Rs. 80000; 1% of Rs. 12000000 = Rs. 12000000 = Rs. 120000; and 1% of Rs. 14000000 = Rs. 140000)

Question 17

Patel Electronics Limited is manufacturing for sale, two model of LED Television Sets. The major components, viz, Cabinet, Transformer and the Speaker are bought out by the company. Two cabinet style (A and B), one kind of transformer and one kind of speaker are assembled in the following ways in the final product:

Model Cabinet Transformer Speaker

Standard A @ Rs. 2,000 @Rs. 2,000 @ Rs. 3,000

Deluxe B @ Rs. 3,000

Stock in hand on 1.3.2016, was:

Finished Sets : Standard 460, Deluxe 730

Sub-assemblies:

Cabinet: A-300, B-400, Transformers: 310, Speakers: 270

The sales manager estimates that sales for the quarter April to June, 2016 will be:

Standard : 2000 and Deluxe : 6000

The following quantities of stock have been budgeted for 30th June, 2016 finished sets: 250 in each model;

Sub-assemblies: Cabinet 150 each model; Transformers 200 and Speakers 300.

Prepare Production and Material cost Budgets for the above items for the quarter April to June, 2016.

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Answer

Production Budget for LED Television Sets

(April to June, 2016)

Particulars Standard Deluxe

Quantity Quantity

Budgeted Sales 2,000 6,000

Add : Required Closing Stock 250 250

2,250 6,250

Less : Estimated Opening Stock 460 730

Budgeted Production 1,790 5,520

Total Budgeted Production = 1790 + 5520 = 7310 LED Television Sets

Material Cost Budget

Cabinet Transformer Speaker

A B

Budgeted production 1790 5520 7310 7310

Add: Closing Stock 150 150 200 300

1940 5670 7510 7610

Less : Opening Stock 300 400 310 270

Net Purchase (Quantity) 1640 5270 7200 7340

Rate per unit (Rs.) 2,000 3,000 2,000 3,000

Material Purchase (Rs.) 32,80,000 1,58,10,000 1,44,00,000 2,20,20,000

Total Material Cost Rs. 55510000

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Question 18

The following information is given to you. Prepare selling and Distribution Cost Budget for six months ending 30th September, 2016.

(i) Direct Selling Expenses : 10% of Sales.

(ii) Advertising : 2% of Sales.

(iii) Distribution Expenses : 5% of Sales.

(iv) Sales office Expenses : N Rs. 10,000; S Rs. 8,000; E Rs. 12000; and W Rs. 15,000.

(v) Sales @ Rs. 50 per unit : N : 6100 units; S : 3800 units ; E : 7800 units and W : 4700 units.

Answer

Selling and Distribution Cost Budget

For the six months ended 30th Sept. 2016

Areas Total

Particulars N S E W

Rs. Rs. Rs. Rs. Rs.

Direct Selling Expenses 30,500 19,000 39,000 23,500 1,12,000

Advertising 6,100 3,800 7,800 4,700 22,400

Distribution Expenses 15,250 9,500 19,500 11,750 56,000

Sales Office Expenses 10,000 8,000 12,000 15,000 45,000

61,850 40,300 78,300 54,950 2,35,400

Question 19

The following details are available from the costing records of Ralawata Manufacturing Limited regarding budgeted figures for the year ended 31st march, 2017:

(i) Budgeted Sales : 125000 units @ Rs. 400 per unit (A).

(ii) Budgeted Production Cost : Materials Rs. 20000000 (D), Labour Cost Rs. 7500000 (E); and Factory Overheads Rs. 2500000 (F)

(iii) Budgeted Administration Overhead Rs. 6000000 (G)

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(iv) Budgeted Selling Overheads Rs. 4000000 (H)

(v) Appropriations : Taxes Rs. 5000000; Divided Rs. 3500000 and Transfer to Reserves Rs. 1500000

Prepare the Master Budget for the year ended 31st march, 2017

[Note : (A), (D), (E), (F), (G) and (H) given within brackets indicate the examples given above, these figures have been taken from these functional budgets.]

Answer

Master Budget


(Rs. in Lakhs)

Rs. Rs.

Sales 125000 units at Rs. 400 each (A) 500

Cost of Sales :

Direct Material (D) 200

Direct Labour (E) 75

Factory Overhead (F) 25 300

Gross Profit 200

Administration Overhead (G) 60

Selling Overhead (H) 40 100

Net Profit 100

Profit Appropriation : Taxes 50

Dividends 35

Reserves 15 100

Question 20

Three articles, X, Y and Z are produced by Shri Ram Industries. They pass through two cost centers : A and B. From the data furnished, compile a statement for budgeted machine utilization in both the centers.

(a) Sales budget for the year,

Product Annual Budget Sales (units)

Opening Stock of Finished Products (units)

Closing Stock

X

Y

Z

48000

24000

24000

6000

3000

8000

Equivalent to two months’ Sales



409

(b) Machine hours per unit of products,

Product Machine Hours per unit, Cost Centre

A B

X

Y

Z

0.3

2

0.375

0.7

1

0.125

(c) Total number of machines,

Cost Centre Number

A

B

Total

29

25

54

(d) Total working hours during the year, Estimated 2500 hours per machine.

Answer

Number of machine hours available,

Cost Centre: A = (29 machines x 2500 hours) = 72500 hours

B = 25 machines x 2500 = 62500 hours

Production Budget (units)

Particulars Products (units)

X Y Z

Annual Sales Volume (budgeted)

Add : Closing Stock (two months’ sales)

Total requirement

Less : Opening Stock

Therefore, Production

48000

8000

24000

4000

24000

4000

56000

6000

28000

3000

28000

8000

50000 25000 20000

410

Machine Utilisation Budget

Particulars Cost Centre

A B

Number of Machine Hours required for Budgeted Production of products:

X: (50000 units x 0.3 hours); (50000 units x 0.7 hours)

Y: (25000 units x 2 hours); (25000 units x 1 hour)

Z: (20000 units x 0.375 hours); (20000 units x 0.125 hours)

Total number of machine hours

Number of Machines required for product:

X

Y

Z

Number of Machines required

15000

50000

7500

35000

25000

2500

72500 62500

6

20

3

14

10

1

29 25

1. Closing Stock:

[(48000 units ÷ 12 months) x 2 months] = 8000 units (Product X)

[(24000 units ÷ 12 months) x 2 months] = 4000 units (Product Y)

[(24000 units ÷ 12 months) x 2 months] = 4000 units (Product Z)

2. Number of Machines required:

For Product X,

Centre A, (15000 hours ÷ 2500 hours per year) = 6 machines

B, (35000 hours ÷ 2500 hours per year) = 14 machines

For Product Y,


B, (25000 hours ÷ 2500 hours per year) = 10 machines

Product Z,


B, (2500 hours ÷ 2500 hours per year) = 1 machine

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Question 21

Estimate cash requirements of Satish Milk Products Limited for June, 2016 on the basis of the following data : Rs.

(a) Sales :

February , 2016 25000000

March, 2016 20000000

April to June, 2016 30000000 per month

Roughly half the sales are for cash, 90% of Credit Sales are collected in the month following the sale and the balance one month after.

(b) Milks are always bought for cash to avail of the cash discount of 5%. The purchase budget for the second quarter (April-June) was 15,000 carrots per month at Rs. 1050 per carrots

(c) Wages and salaries for second quarter were budgeted at Rs. 4250000 per month.

(d) Manufacturing and other expenses budgeted for the quarter are : Cash Manufacturer Expenses Rs. 4470000. Depreciation Rs. 7500000’ Selling Expenses Rs. 2520000; Administrative Expenses (in April and May only) Rs. 1800000.

Answer

Cash Budget for the quarter ending June, 2016

(Rs. in Thousands)

Particulars April May June

Cash Receipts Rs. Rs. Rs.

Balance B/d -------- 2807.5 9865

Cash Sales (1/2 of Sales) 15,000 15,000 15,000

Cash Collected from Debtors 10,250 14,500 15,000

Total 25,250 32307.5 39865

Cash Disbursements:

Cash Purchase (Less : Cash Discount) 14962.5 14962.5 14962.5

Wages & Salaries 4250 4250 4250

412

Cash Expenses (4470000/3) 1490 1490 1490

Selling Expenses (2520000/3) 840 840 840

Adm. Exp.(1800000/2) 900 900 ----

Total 22442.5 22442.5 21542.5

Closing Cash Balance 2807.5 9865 18322.5

Cash requirements for June 2016 will be Rs. 18322500

Working Notes : Collection from Debtors regarding credit sales are as follows:

(Rs. in 000’)

Particulars February March April May June

Rs. Rs. Rs. Rs. Rs.

Credit Sales (1/2 of Total Sales)

12,500 10,000 15,000 15,000 15,000

Collection from Debtors :

90% of Previous Month’s credit sales

--- --- 9,000 13,500 13,500

10% of Credit Sales of previous two months

--- --- 1,250 1,000 1,500

Total --- --- 10,250 14,500 15,000

2. Cash Purchase : 15000 carrots @ Rs. 1050 = Rs. 15750000

Less : 5% Cash Discount = Rs. 787500

Net Cash Purchase per month = Rs. 14962500

Question 22

Using the information given below, prepare a Cash Budget showing expected cash receipts and disbursements for the month of May and balance expected on May 31, 2016:

Budgeted Cash Balance on May 1, 2016 Rs. 550000

Sales for March, Rs.70000000; April, Rs.45000000 and May, Rs. 80000000, half of which is collected in the month of sale, 40% in next month, 10% in third month.

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Merchandise purchase for April: Rs. 50000000, May: Rs. 66000000; 40%payment in month of purchase, 60% paid in next month.

Wages due in May Rs. 7920000

Three years Insurance Policy due in May for renewal Rs. 420000 to be paid in cash. Other expenses for May, payable in May, Rs.44,000,00

Depreciation for month of May: Rs. 2,00000

Fixed Deposit Receipts due May15 : Rs. 17000000 plus Rs. 1500000 interest.

Answer

Cash Budget for the month of May, 2016

Cash Receipts : Rs. Rs.

Balance on May 1st 550,000

Debtors Collected: ½ of May Sales 4,00,00,000

March Sales : being 10% 70,00,000

April Sales : being 40% of 4,50,000 00 1,80,00,000

Fixed Deposits 1,85,00,000 8,40,50,000

Less : Cash Disbursements :

Payment to Creditors:

40% of May Purchase Rs. 66000000 2,64,00,000

60% of April Purchase Rs. 50000000 3,00,00,000

Wages paid 79,20,000

Insurance Premium 4,20,000

Other Expenses

Cash Balance on 31st May, 2016

44,000,00

6,91,40,000

1,49,10,000

414

Question 23

From the following information, prepare cash budget for kachari Limited by adjusted profit and loss account method for the year ended 31st March, 2017:

Summarised Balance sheet as on 31st March, 2016

(Rs.in Crores)

Liabilities Rs. Assets Rs.

Share Capital 125 Plant and Machinery 220

Profit and Loss Account 133.50 Investments 100

Debentures 73.50 Stock 61.9

Accumulated Depreciation 50 Debtors 49

Creditors 67.5 Cash and Bank 18.6

449.50 449.5

Summarised Forecast Profit and Loss Account

For the year ended March 31st March, 2017

Rs.in Crores

Rs. Rs.

To Depreciation 22 By Gross Profit 200

To Adm. and Selling Overhead 10 By Profit on Sale of Investments 2

To Interest 3 By Interest 10

To Loss on Sale of Plant 8

To Net Profit 169

212 212

To Income Tax 5 By Net Profit 169

To Dividend 10

To Balance c/d 154

169 169

Additional information is as follows :

(i) New plant costing Rs. 80 Crores to be purchased during the year and an old plant costing Rs.60 Crores. (Accumulated Depreciation Rs.42 crores.)to be sold for Rs. 10 crores.

(ii) Investment Rs. 10 Crores to be sold for Rs. 12 Crores.

415

(iii) Debentures to be redeemed Rs.23.5 Crores

(iv) New shares to be issued Rs. 50 Crores

(v) Balance on 31st March, 2017: Debtors Rs. 83.2 Crores; Creditors Rs. 100.2 Crores and Stock Rs. 92.5 Crores.

Answer

Cash Budget

for the year ended 31 March, 2017

(Adjusted Profit and Loss Account Method)

(Rs. in Crores)

Rs. Rs.

Opening Balance of cash and bank (31 March, 2016) 18.6

Add : Budgeted Profit for the year 154

Depreciation 22

Loss on Sale of plant 8

Sale of Investments Less Profit(12-2) 10 Sale of old Plant 10 Increase in Creditors 32.7

Issue of Shares 50

Total 305.3

Less : Dividend 10

Increase in Stock 30.6

Increase in Debtors 34.2

Redemption of Debentures 23.5

Purchase of Plant 80 178.3

Closing Balance of Cash and Bank 127

Question 24

Prepare a Cash Budget for April to June, 2016 from the following information:

a. The estimated sales and expenses are as follows (Rs.):

Feb, 2016 Mar, 2016 Apr, 2016 May, 2016 June, 2016

Sales 1000000 1500000 2400000 2000000 2000000

Wages &

Salaries 240000 240000 300000 270000 270000

Misc.

Expenses 300000 240000 270000 270000 270000

b. 20% of the sales are on cash and the balance on credit.

416

c. The firm has a gross margin of 25% on sales.

d. 50% of the credit sales are collected in the month following the sales, 30% in the second month and 20% in the third month.

e. Material for the sales of each month is purchased one month in advance on a credit for two months.

f. The time lag in the payment of wages and salaries in one-third of a month and of miscellaneous expenses one month.

g. The firm maintains a minimum cash balance of Rs. 400000. Funds can be borrowed at 12% per annum in the multiples of Rs. 10000, the interest being payable on monthly basis.

h. Cash balance at the end of March is Rs. 648000.

Answer

Calculation of Collection from Customers and Payment of Wages

Particulars April (Rs.) May (Rs.) June(Rs.)

Cash Sales (20%)

Collection:

50% of Credit Sales in the following month

30% in the second month

20% in the third month

Total collection

Wages and Salaries:

2/3rd in the same month

1/3rd in the following month

480000

600000

240000

192000

400000

960000

360000

160000

400000

800000

576000

240000

1512000 1880000 2016000

200000

80000

180000

100000

180000

90000

280000 280000 270000

Calculation of Payment to Suppliers

Particulars Feb (Rs.) March (Rs.)

April (Rs.)

May (Rs.) June (Rs.)

Sales

Cost of Material 75% of sales

Purchase of Material are made one month in Advance, hence March’s material purchased in February

1000000

750000

1125000

1500000

1125000

1800000

2400000

1800000

1500000

2000000

1500000

1500000

2000000

1500000

417

Payment to suppliers on two months credit

1125000

1800000

1500000

Cash Budget (April to June, 2016)

Particulars Month (2016)

April (Rs.) May (Rs.) June (Rs.)

Opening balance of Cash

Add: Receipts from Customers

Sales of Debentures

Bank Borrowings*

Total (a)

Payments to Suppliers

Payment of Wages and Salaries

Payment of Miscellaneous expenses

Interest on Bank Loan

Total (b)

Closing Balance

648000

1512000

-

-

515000

1880000

-

360000

405000

2016000

-

30000

2160000 2755000 2451000

1125000

280000

240000

-

1800000

280000

270000

-

1500000

270000

270000

3600

1645000 2350000 2043600

515000 405000 407400

May, 2016 (Rs.) June, 2016 (Rs.)

*Total of Opening Balance and Cash

Receipts (excluding Bank Loan) 2395000 2421000

Total Cash Payments 2350000 2043600

Add : Minimum Cash Balance 400000 2750000 400000 2443600

Loan to be raised 355000 22600

Therefore, it has to borrow Rs. 360000 and Rs. 30000 of loan (i.e., in multiples of Rs. 10000) during May and June respectively.

Question 25

Mudgal School has a total 1500 students consisting of 25 sections with 60 students per section. The school plans a picnic around the city during the week end to places such as the zoo, the amusement park, the planetarium etc. A private transport operator has come forward to lease out the buses for taking the students. Each bus will have a maximum capacity of 50 excluding 4 seats reserved for the teachers accompanying the students. The school will employ four teachers for each bus, paying them an allowance of Rs. 500 per teacher. It will also lease out the required number of buses. The following are the other cost estimates :

418

Cost per student

Rs.

Breakfast 50

Lunch 100

Tea 30

Entrance fee at zoo 20

Rent Rs. 6500 per bus

Special permit fee Rs. 500 per bus

Block entrance fee at the planetarium Rs. 5000

Prizes to students for games Rs. 5000

No costs are incurred in respect of the accompanying teachers except the allowance of Rs. 500 per teacher.

Prepare a flexible budget estimating the total cost for the levels of 300, 600, 900, 1200 and 1500 students and showing each item of cost separately. Also compare the average cost per student at these levels.

Answer

Flexible Budget

Items Levels of Students

300 600 900 1200 1500

Rs. Rs. Rs. Rs. Rs.

A. Variable Costs :

Breakfast @Rs.50 15000 30000 45000 60000 75000

Lunch@ Rs.100 30000 60000 90000 120000 150000

Tea@ Rs.30 9000 18000 27000 36000 45000 Ent. fee at zoo@ Rs.20 6000 12000 18000 24000 30000

60000 120000 180000 240000 300000 B. Semi-Variable Costs :

Bus Rent

39000

78000

117000

156000

195000

Special Permit Fee 3000 6000 9000 12000 15000 Allowance for Teachers 12000 24000 36000 48000 60000

54000 108000 162000 216000 270000 C. Fixed Costs :

Block Ent. Fee 5000 5000 5000 5000 5000

Prizes to Students 5000 5000 5000 5000 5000

10000 10000 10000 10000 10000

D. Total Cost(A+B+C) 124000 238000 352000 466000 580000

Avg. Cost per student 413.33 396.67 391.11 388.33 386.67

Note : Semi-variable costs are based on number of buses taken on lease i.e.6, 12, 18, 24, 30 for 300, 600, 900, 1200 and 1500 students.

mailto:[email protected]

mailto:[email protected]

mailto:Ent.feeatzoo@%20₹20

419

Question 26

A Company produces a standard product. The Estimated costs are as follows :

Raw material Rs. 80 per unit

Direct labour Rs. 40 per unit

The semi-variable costs are : Indirect material Rs. 470000, Indirect labour Rs. 312000 Maintenance and repairs Rs. 1140000

The variable cost per unit included in semi variables are; Indirect material Rs. 1, Indirect labour Rs. 1.60; Maintenance and repairs Rs. 2.0

The fixed costs are : Factory Rs. 4,000000 Administration Rs. 6,000000 ; Selling and Distribution Rs. 5000000.

The above costs are for 70% of normal capacity producing 70000 units and selling price is Rs. 600 per unit.

Prepare ‘Flexible Budget’ for 60%, 80% and 100% of normal capacity with the help of the above information.

Answer

Flexible Budget

(Rs. in Thousands)

Particulars Levels of Activity

Capacity 60% 80% 100%

Units 60,000 80,000 1,00,000

(A) VariableCosts Rs. Rs. Rs.

Direct Materials 4,800 6,400 8,000

Direct Wages 2,400 3,200 4,000

Variable Overhead 6,000 8,000 10,000

Total Variable Cost 13,200 17,600 22,000

(B) Semi-variable Cost

Indirect Material :

(i) Fixed 400 400 400

(ii) Variable 60 80 100 Indirect Labour:

(i) Fixed 200 200 200

(ii) Variable 96 128 160

Maintenance and Repairs :

(i) Fixed 1,000 1,000 1,000

(ii) Variable 120 160 200

Total Semi-Variable Cost 1,876 1,968 2,060

420

(C) Total Fixed Cost :

Factory 4,000 4,000 4,000

Administration 6,000 6,000 6,000

Selling and Distribution 5,000 5,000 5,000

Total Fixed Cost 15,000 15,000 15,000

(D) Total Cost = (A) + (B) + (C) 30,076 34,568 39,060

Profit 5,924 13,432 20,940

Sales @ Rs. 600 per unit 36,000 48,000 60,000

Question 27

The following data are available in a manufacturing company for the year ended 31st march 2017.

Fixed Expenses : Rs. (in Crores)

Wages and Salaries 9.5

Rent, rates and taxes 6.6

Depreciation 7.4

Sundry administrative expenses 6.5

Semi-Variable Expenses: (at 60%of Capacity)

Maintenance and repairs 3.5

Indirect labour 7.9

Sales department salaries etc. 3.8

Sundry administrative Expenses 2.8

Variable Expenses: (at 60% of Capacity)

Materials 26.04

Labour 24.48

Other Expenses 9.48

Assume that the fixed expenses remain constant for all levels of production; semi-variable expenses remain constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and by 20% between 80% an 100% capacity.

Sales at various levels are : Rs. (in crores)

60% Capacity 120

75% Capacity 150

90% Capacity 180

100% Capacity 200

Prepare a flexible budget for the year at 75%, 90% and 100% capacity.

421

Answer :

Flexible Budget

For year ended 31st March, 2017

(Rs. in Crores)

Capacity

75% 90% 100%

Rs. Rs. Rs.

Sales (a) 150 180 200

Variable Expenses :

Materials 32.55 39.06 43.40

Labour 30.60 36.72 40.80

Other Expenses 11.85 14.22 15.80

Semi-Variable Expenses :

Maintenance and Repairs 3.85 4.20 4.20

Indirect labour 8.69 9.48 9.48

Sales department salaries etc. 4.18 4.56 4.56

Sundry administrative expenses 3.08 3.36 3.36

Fixed Expenses :

Wages and Salaries 9.50 9.50 9.50

Rent, rates and taxes 6.60 6.60 6.60

Depreciation 7.40 7.40 7.40 7.40

Sundry administrative expenses 6.50 6.50 6.50

Total Cash (b) 124.80 141.60 151.60

Profit (a-b) 25.20 38.40 48.40

Question 28

Shivam Limited is currently working at 50 percent capacity and produces 20000 units. At this level the production costs are Rs. 184 per unit and is sold at Rs. 200 per unit. The breakup of the unit cost is as follows:

Rs.

Materials Cost 80

Labour Cost 50

Manufacturing overhead 30 (60% variable)

422

Administrative and Selling overhead 24 (50% fixed)

Estimate the profit of the company when it works to 60% capacity and 80% capacity . At 60% working, raw material cost decreases by 2% and selling price falls by 2 percent. At 80%, raw material cost decreases by 5 percent and selling price falls by 10 percent.

Answer

Statement showing profit at different output levels or flexible Budget

Particulars Output Levels

50% 60% 80%

(i) Output and Sales (Units) 20000 24000 32000

(ii) Selling price per unit

Rs.

200

Rs.

196

Rs.

180

Variable Costs:

Material Cost 80 78.40 76

Labour Cost 50 50 50

Manufacturing overhead 18 18 18

Adm. Selling overhead 12 12 12

(iii) Total variable cost per unit 160 158.4 156

(iv) Contribution per unit (ii)—(iii) 40 37.60 24

(v) Total Contribution (iv) X (i) 800000 902400 768000

Less : Fixed Cost 480000 480000 480000

Estimated Profit 3,20,000 422400 288000

Working Notes:

(i) Unit Selling price at 60% : 200 – 2% of 200 = 196

at 80% : 200 – 10% of 200 = 180

(ii) Unit Material Cost at 60% : 80 – 2% of 80 = 78.4

At 80% : 80-5% of 80 = 76

(iii) Variable overhead per unit :

Manufacturing – 60% of 30 = 18

Adm.& Selling 50% of 24 = 12

(iv) Fixed overhead at 50% capacity level :

423

Manufacturing 30 – 18 = 12 x 20000 = Rs. 2,40,000

Adm. & Selling 24 – 12 = 12 x 20, 000 = Rs. 2,40,000

Total Rs. 4,80,000

Question 29

Lookahead Ltd. produces and sells a single product. Sales budget for the calendar year 2009 for each quarter is as under :

Quarter No. of Units to be Sold

I 12,000

II 15,000

III 16,500

IV 18,000

The year 2009 is expected to open with an inventory of 4,000 units of finished product and close with an inventory of 6,500 units.

Production is customarily scheduled to provide for two-thirds of the current quarter’s demand plus one-third of the following quarter’s demand. Thus production anticipates sales volume by about one month. The standard cost details for one unit of the product is as follows :

— Direct materials 10 Kgs. @ 50 paise per kg.

— Direct labour 1 hour 30 minutes @ Rs.4 per hour.

— Variable overheads 1 hour 30 minutes @ Re.1 per hour.

— Fixed overheads 1 hour 30 minutes @ Rs.2 per hour based on a budgeted production volume of 90,000 direct labour hours for the year.

Answer the following —

(i) Prepare a production budget for the year 2009 by quarters, showing the number of units to be produced.

(ii) If the budgeted selling price per unit is Rs.17, what would be the budgeted profit for the year as a whole ? (iii) In which quarter of the year the company is expected to break-even ?

Answer

Number of units to be sold during the year 2009

Quarter I 12,000 units

Quarter II 15,000 units

Quarter III 16,500 units

Quarter IV 18,000 units

Sales during the year 61,500 units

424

(i) Production Budget (for the year 2009 by quarters)

Quarter I

Units

Quarter II

Units

Quarter

III Units

Quarter

IV Units

Total

Units

Units to be produced in each quarter :

8,000 10,000 11,000 12,000 41,000

2/3rd of the current

quarter’s sales demand

(2/3 x

12,000)

(2/3 x

15,000)

(2/3 x

16,500)

(2/3 x

18,000)

Add : 1/3 of the following quarter’s sales demand in first 3 quarters and closing inventory in the 4th quarter

5,000

(1/3 x

15,000)

5,500

(1/3 x

16,500)

6,000

(1/3 x

18,000)

6,500 23,000

Total 13,000 15,500 17,000 18,500 64,000

(1) Variable Cost per unit

Rs. Rs.

Direct Material : 10 kgs. @ 50 paise per kg. 5.00

Direct labour : 1-½ hours @ Rs.4 per hour 6.00

Variable overheads : 1-½ hours @ Re.1 per hour 1.50 12.50

(2) Fixed overhead per annum : 90,000 hrs. @ Rs. 2 = Rs.1,80,000

(ii) Statement of Budgeted Profit for the year (as a whole)

Rs.

Total Sales : 61,500 units @ Rs.17 per unit 10,45,000

Less : Total Variable Cost : 61,500 units @ 12.50 per unit 7,68,750

Contribution 2,76,750

Less : Fixed cost for the year 1,80,000

Profit for the year 2009 as a whole 96,750

(iii) Calculation of Break-even point/sales

Break Even Point = unit per Cost Variable – unit per Price Selling

Overheads Fixed

425

= 12.50 Rs. – 17 Rs.

1,80,000 Rs. = 40,000 units.

Total sales (in units) by the end of 3rd quarter will be 43,500 (i.e. 12,000 + 15,000 + 16,500).

Therefore, the company will break-even in the later part of the 3rd quarter.

Question 30

The monthly budgets for the manufacturing overheads of a concern for two levels of activity were as follows :

Capacity 60% 100%

Budgeted production (units) 600 1,000

Rs. Rs.

Wages 1,200 2,000

Consumable stores 900 1,500

Maintenance 1,100 1,500

Power and fuel 1,600 2,000

Depreciation 4,000 4,000

Insurance 1,000 1,000

9,800 12,000

You are required to ––

(i) Indicate which of the items are fixed, variable and semi-variable;

(ii) Prepare a budget for 80% capacity; and

(iii) Find total cost, both fixed and variable costs per unit of output at 60%, 80% and 100% capacity.

Answer

(i) Fixed Costs : Depreciation and Insurance

Rs. 500 Variable Costs : Wages (Rs. 2 per unit)

Consumable Stores (Rs. 1.5 per unit)

Semi - Variable Costs:

Maintenance

Variable =600 - 1000 Rs.

1100 - 1500 Rs.

= Rs. 1 per unit

426

Fixed = Rs. 1100 – Rs. 600 =

Power and Fuel

Variable = 600 - 1000 Rs.

1600 - 2000 Rs.

= Rs.1 per unit

Fixed = Rs. 1600 – Rs. 600 =Rs. 1,000

(ii) Budget for 80% capacity (800 units)

Rs.

Wages (Rs. 2 per unit) 1,600

Consumable Stores (Rs.1.5 per unit) 1,200

Maintenance (Rs. 1 per unit + 500) 1,300

Power and Fuel (Rs. 1 per unit + 1,000) 1,800

Depreciation 4,000

Insurance 1,000

Total Cost 10,900

(iii) Flexible budget

Capacity Units 60%

600

80%

800

100%

1000

Total Cost (Rs.)

Per unit Total Cost (Rs.)

Per unit

Total Cost (Rs.)

Per unit

Fixed Costs

Depreciation 4,000 4,000 4,000

Insurance 1,000 1,000 1,000

Maintenance 500 500 500

Power and Fuel 1,000 1,000 1,000

(A) Total 6,500 10.83 6,500 8.125 6,500 6.5

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Variable Costs

Wages (Rs. 2 per unit) Consumable Stores

1,200 1,600 2,000

(Rs. 1.5 per unit) 900 1,200 1,500

Maintenance (Rs. 1 per unit)

600 800 1,000

Power and Fuel (Rs. 1 per unit)

600 800 1,000

(B) Total 3,300 5.5 4,400 5.5 5,500 5.5

Total Cost (A + B) 9,800 16.33 10,900 13.625 12,000 12

***

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Question 1

Question 1

What do you mean by Cost Audit?

Answer

Cost audit is an independent examination of cost records and other related information of an entity including a non-profit entity, when such an examination is conducted with a view to expressing an opinion thereon.

Cost audit comprises of the followings:

(a) Verification of the cost accounting records for the accuracy of the cost accounts, cost reports, cost statements and cost data and

(b) Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objectives.

Question 2

State the provisions of the Companies Act, 2013 with respect to Cost Accounting records.

Answer

Section 2(13) and section 128 of the Companies Act, 2013 deals with the books of accounts to be kept by a company. According to section 2(13) on the Companies Act, 2013 “books of account” includes records maintained in respect of-

(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

(ii) all sales and purchases of goods and services by the company;

(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

Section 128 on the Companies Act, 2013 provides that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting.

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Cost Accounting Records and

Cost Audit

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Further all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place.

Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed.

Question 3

What is the purpose of Cost Audit. Briefly explain various advantages of Cost audit.

Answer

The primary purpose of Cost audit is to express an opinion on the cost accounts of the company whether these have been properly maintained and compiled according to the cost accounting system followed by the enterprise or not.

However the purposes of cost audit may be segregated into general and social objectives.

The general objectives can be described to include the following:

1. Verification of cost accounts with a view to ascertaining that these have been properly maintained and compiled according to the cost accounting system followed by the enterprise.

2. Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to.

3. Detection of errors and fraud.

4. Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been properly ascertained.

5. Determination of inventory valuation.

6. Facilitating the fixation of prices of goods and services.

7. Periodical reconciliation between cost accounts and financial accounts.

8. Ensuring optimum utilization of human, physical and financial resources of the enterprise.

9. Detection and correction of abnormal loss.

10. Inculcation of cost consciousness.

11. Advising management, on the basis of inter-firm comparison of cost records, as regards the areas where performance calls for improvement.

12. Promoting corporate governance through various operational disclosures.

Social purposes of cost audit

The following deserve special mention

1. Facilitate in fixation of reasonable prices of goods and services produced by the enterprise.

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2. Improvement in productivity of human, physical and financial resources of the enterprise.

3. Channelise enterprise resources to most optimum, productive and profitable areas.

4. Availability of audited cost data as regards contracts containing escalation clauses.

5. Facilitate in settlement of bills in the case of cost-plus contracts entered into by the Government.

6. Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc., such that necessary corrective action could be taken in time.

Advantages of Cost Audit

Cost audit provides numerous benefits to the management, society, shareholders and the government. The advantages are as under :

Advantages to Management

(i) Management gets reliable data for its day-to-day operations like price fixing, control, decision making, etc.

(ii) A close and continuous check on all wastages will be kept through a proper system of reporting to management.

(iii) Inefficiencies in the working of the company will be brought to light to facilitate corrective action.

(iv) Management by exception becomes possible through allocation of responsibilities to individual managers.

(v) The system of budgetary control and standard costing will be greatly facilitated.

(vi) A reliable check on the valuation of closing stock and work-in-progress can be established.

(vii) It helps in the detection of errors and fraud.

Advantages to Society

(i) Cost audit is often introduced for the purpose of fixation of prices. The prices so fixed are based on the Audit Cost data and so the consumers are saved from exploitation.

(ii) Since price increase by some industries is not allowed without proper justification like increase in cost of production, inflation through price hikes can be controlled and consumers can maintain their standard of living.

Advantages to Shareholder

Cost audit ensures that proper records are kept as to purchases and utilisation of materials and expenses incurred on wages, etc. It also makes sure that the valuation of closing stocks and work-in- progress is on a fair basis. Thus the shareholders are assured of a fair return on their investment.

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Advantages to Government

(i) Where the Government enters into a cost-plus contract, cost audit helps government to fix the price of the contract at a reasonable level.

(ii) Cost audit helps in the fixation of ceiling prices of essential commodities and thus undue profiteering is checked.

(iii) Cost audit enables the government to focus its attention on inefficient units.

(iv) Cost audit enables the government to decide in favour of giving protection to certain industries.

(v) Cost audit facilitates settlement of trade disputes brought to the government.

(vi) Cost audit and consequent management action can create a healthy competition among the various units in an industry. This imposes an automatic check on inflation.

Question 3

Discuss the Applicability of Cost audit under the Companies Act, 2013 and exemptions if any.

Answer

Every company covered under Rule 3 of the Companies (Cost Records and Audit) Amendment Rules, 2014 and with such threshold limits as specified in the Rules shall within one hundred and eighty days of the commencement of every financial year appoint a cost auditor. The company shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central

Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.

Further every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed. The cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.

The cost auditor shall forward his report to the Board of Directors of the company within a period of one hundred and eighty days from the closure of the financial year to which the report relates and the Board of directors shall consider and examine such report particularly any reservation or qualification contained therein.

Every company covered above shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained

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therein, in form CRA-4 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.

The provisions of section 143(12) of the Companies Act, 2013 and the relevant rules made thereunder shall apply mutatis mutandis to a cost auditor during performance of his functions under section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014.

Exemptions

The requirement of Cost Audit is not applicable for the following categories of companies even if they are covered under applicable class of companies:

· whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total revenue or

· which is operating from a special economic zone

Question 4

Write short notes on the following:

(a) Cost audit report

(b) Cost audit programme

(c) Appointment of Cost auditor

Answer

(a) Cost audit report

Cost audit report means the report duly audited and signed by the cost auditor including attachment, annexure, qualifications or observations etc. to cost audit report. Every cost auditor, who conducts an audit of the cost records of the company, shall within 180 days from the close of the company’s financial year to which the report relates, submit the cost audit report along with his reservations or qualifications or observations or suggestions in the Form CRA-3 to the Board of Directors of the company.

Every cost auditor shall forward his report to the Board of Directors of the company within a period of 180 days from the closure of the financial year to which the report relates and the Board of Directors shall consider and examine such report particularly any reservation or qualification contained therein.

(b) Cost audit programme

Cost audit programme is an essential prerequisite for conducting an audit. It is a plan of action drawn in advance before taking up the audit, and to help the auditor to cover the entire area of his function thoroughly. The audit programme should include all the usual broad steps that a financial auditor includes in his audit programme. However, the significant things that should not be missed are: proper vouching of expenses, capital and revenue character determination, allocation of expenses, apportionment of overheads, arithmetical accuracy, the statutory requirements, examination of contracts and agreements, review of the Board’s and

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shareholders’ minute books to trace important decisions having bearing on costs, verification of title deeds and documents relating to properties and assets, etc.

(c) Appointment of Cost auditor

As per the Companies (Cost Records and Audit) Rules, 2014, cost audit will be performed by a Cost auditor who shall be a Cost Accountant in practice. The companies covered under the Cost audit category shall within 180 days of the commencement of every financial year, appoint a cost auditor at remuneration to be determined in accordance with provisions of section 148(3) of the Companies Act, 2013 and rules made thereunder.

Provided that before such appointment is made, written consent of the cost auditor to such appointment, and a certificate that the appointment, if made, shall be in accordance with the provisions of section 139, section 141 and section 148 of the Companies Act, 2013 and the rules made thereunder, as applicable shall be obtained from the cost auditor.

***

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Que

stion 1

Question 1

Describe the methods and devises used for analysis of financial statements.

Answer

The analysis of financial statements consists of a study of relationship and trends, to determine whether or not the financial position and results of operations as well as the financial progress of the company are satisfactory or unsatisfactory.

Analytical methods and devices used in analysing financial statements are as follows:

1. Comparative Statements

2. Common Size Statements

3. Trend Ratios

4. Ratio Analysis

5. Cash Flow Statements

6. Fund Flow Statement

Question 2

Write down the advantages and limitations of Ratio Analysis.

Answer

Advantages of Ratio Analysis

1. It helps to analyse and understand financial health and trend of a business, its past performance, and makes it possible to forecast the future state of affairs of the business. They diagnose the financial health by evaluating liquidity, solvency, profitability etc. This helps the management to assess the financial requirements and the capabilities of various business units. It serves as a media to link the past with the present and the future.

2. It serves as a useful tool in management control process, by making a comparison between the performance of the business and the performance of similar types of business.

3. Ratio analysis play a significant role in cost accounting, financial accounting, budgetary control and auditing.

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Analysis and Interpretation of

Financial Statements

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4. It helps in the identification, tracing and fixing of the responsibilities of managerial personnel at different levels.

5. It accelerates the institutionalisation and specialisation of financial management.

6. Accounting ratios summarise and systematise the accounting figures in order to make them more understandable in a lucid form. They highlight the inter-relationship which exists between various segments of the business expressed by accounting statements.

Limitations of Ratio Analysis:

Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. But these are subject to certain limitations:

(i) Usefulness of ratios depend on the abilities and intentions of the persons who handle them. It will be affected considerably by the bias of such persons.

(ii) Ratios are worked out on the basis of money-values only. They do not take into account the real values of various items involved. Thus, the technique is not realistic in its approach.

(iii) Historical values (specially in balance sheet ratios) are considered in working out the various ratios. Effects of changes in the price levels of various items are ignored and to that extent the comparisons and evaluations of performance through ratios become unrealistic and unreliable.

(iv) One particular ratio, in isolation is not sufficient to review the whole business. A group of ratios are to be considered simultaneously to arrive at any meaningful and worthwhile opinion about the affairs of the business.

(v) Since management and financial policies and practices differ from concern to concern, similar ratios may not reflect similar state of affairs of different concerns. Thus, comparisons of performance on the basis of ratios may be confusing.

(vi) Ratio analysis is only a technique for making judgements and not a substitute for judgement.

(vii) Since ratios are calculated on the basis of financial statements which are themselves affected greatly by the firm’s accounting policies and changes therein, the ratios may not be able to bring out the real situations.

(viii) Ratios are at best, only symptoms; they may indicate what is to be investigated - only a careful investigation will bring out the correct position.

(ix) Ratios are only as accurate as the accounts on the basis of which these are established. Therefore, unless the accounts are prepared accurately by applying correct values to assets and liabilities, the statements prepared there from would not be correct and the relationship established on that basis would not be reliable.

Question 3

What is Management Information System? What are its features? Explain the role of MIS.

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Answer

Management Information System (MIS)

Management Information System is a systematic process of providing relevant information in right time in right format to all levels of users in the organization for effective decision making. MIS is also defined to be system of collection, processing, retrieving and transmission of data to meet the information requirement of different levels of managers in an organization.

According to CIMA MIS is a set of procedures designed to provide managers at different levels in the organization with information for decision making, and for control of those parts of the business for which they are responsible.

Feature of MIS

1. The MIS is a system which provides information support for decision making in the organization.

2. The MIS is an integrated system of man and machine for providing the information to support the operations, the management and the decision making function in the organization.

3. The MIS is a system based on the database of the organization evolved for the purpose of providing information to the people in the organization.

4. The MIS is a Computer based Information System.

Role of the Management Information System

MIS ensures that an appropriate data is collected from the various sources, processed, and sent further to all the needy destinations. The system is expected to fulfil the information needs of an individual, a group of individuals, the management functionaries: the managers and the top management.

The MIS satisfies the diverse needs through a variety of systems such as Query Systems, Analysis Systems, and Decision Support Systems. MIS helps in Strategic Planning, Management Control, Operational Control and Transaction Processing.

Question 4

Write Short Notes on:

(a) Liquidity Test Ratio

(b) Profitability Test Ratios

(c) Turnover Ratios.

Answer

(a) Liquidity test ratio

Liquid test ratio is also known as Quick Ratio or Acid Test Ratio. This ratio is calculated by relating liquid or quick assets to current liabilities. Liquid assets mean those assets which are immediately converted into cash without much loss. All

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current assets except inventories and prepaid expenses are categorised as liquid assets. The ratio can be computed as:

Liquid Ratio = Liquid Assets /Current Liabilities

Liquidity ratio may also be computed by substituting liquid liabilities in place of current liabilities. Liquid liabilities mean those liabilities which are payable within a short period. Bank overdraft and cash credit facilities, if they become a permanent mode of financing are to be excluded from current liabilities to arrive at liquid liabilities. Thus:

Liquid Ratio = Liquid Assets/ Liquid Liabilities

This ratio is an indicator of the liquid position of an enterprise. Generally, a liquid ratio of 1:1 is considered as ideal as the firm can easily meet all current liabilities.

(b) Profitability test ratios

A measure of ‘profitability’ is the overall measure of efficiency. By measuring the output as a proportion of the input, and comparing result of similar other firms or periods the relative change in its profitability can be established.

The income as compared to the capital employed indicates profitability of a firm. Thus the chief profitability ratio is:

(Operating Profit (net margin) / Operating Capital Employed)×100

Once this is known, the analyst compares the same with the profitability ratio of other firms or periods. Then, when he finds some contrast, he would like to have details of the reasons.

Profitability ratio can be determined on the basis of either investments or sales. Profitability in relation to investments is measured by return on capital employed, return on shareholders’ funds and return on assets. The profitability in relation to sales are profit margin and expenses ratio or operating ratio.

(c) Turnover ratios

These ratios used to measure the effectiveness of the employment of resources are termed as activity ratios. Since these ratios relate to the use of assets for generation of income through turnover they are also known as turnover ratios,. More efficient the operations of an undertaking, the quicker and more number of times the rotation is. The turnover ratios as regards capital employed and assets are discussed below:

1. Capital Turnover Ratio = Net Sales/ Capital Employed

The higher the ratio the greater are the profits.

2. Total Assets Turnover Ratio =Net Sales/ Total Assets

A high ratio is an indicator of overtrading of total assets while a low ratio reveals idle capacity.

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3. Fixed Assets Turnover Ratio =Net Sales/ Fixed Assets

This ratio is an indicator of the extent to which investment in fixed assets contributes to generate sales. The fixed assets are to be taken net of depreciation. The higher is the ratio the better is the performance.

4. Working Capital Turnover Ratio = Net Sales /Working Capital

It indicates to what extent the working capital funds have been employed in the business towards sales.

5. Stock Turnover Ratio (Inventory Turnover Ratio) = Cost of Goods Sold/Average Inventory.

Question 5

From the following data calculate :

(i) Gross Profit Ratio

(ii) Net Profit Ratio

(iii) Return on Total Assets

iv) Inventory Turnover

(iv) Working Capital Turnover

(v) Net worth to Debt

Rs.

Sales 23, 94,000

Cost of sale 18,24,000

Net profit 3,42,000

Net worth 14,25,000

Debt. 8,55,000

Fixed Assets 13,68,0000

Inventory 7,60,000

Current Liabilities 5,70,000

Answer

1. Gross Profit Ratio = (GP/ Sales) * 100 = (5,70,000 / 23,94,000)*100 =23.81

Sales – Cost of Sales = Gross Profit

23,94,000 – 18,24,000 = 5,70,000

2. Net Profit Ratio = (NP / Sales)* 100 = (3,42,000 / 23,94,000) *100= 14.29

3. Inventory Turnover Ratio = (Cost of Sales / Average Inventory) = 1824000/766,000 = 2.4 times

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4. Return on Total Assets = NP/ Total Assets = (3,42,000 /21,28,000)*100 = 16.07%

Total Asset = FA+ Inventory =13, 68,000+ 7, 60,000] = 21, 28,000

5. Net worth to Debt = Net worth/ Debt= (14,25,000 / 8,55,000) = 1.66 times

6. Working Capital Turnover = Sales /Working capital = 23, 94,000 /1, 90,000= 12.6

Working Capital = Current Assets – Current Liabilities

= 7,60,000 – 5,70,000

=1,90,000

Question 6

Zenith Consultancy Services have the following Balance sheet. You are required to compute the following ratios.

(a) Liquid Ratio

(b) Solvency Ratio

(c) Debt-Equity Ratio

(d) Stock of Working Capital Ratio

Balance Sheet


Equity share capital 14,55,000 Fixed Assets

13,58,000

Reserve Fund 97,000 Stock 4,85,000

6% Debentures 2,91,000 Debtors 1,94,000

Overdraft 77,600 Cash 1,26,100

Creditors 2,42,500

Total 21,63,100 Total 21,63,100

Answer

(a) Liquid Ratio = Liquid Assets / Current Liabilities

= 3,20,100 / 3,20,100 = 1

Liquid Asset = Debtors + Cash = 1,94,000+ 1,26,100

= 3,20,100

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Current Liabilities = Creditors + Overdraft

= 2,42,500 + 77,600

= 3,20,100

(b) Debt Equity Ratio = Debt / Share holders’ Equities

= 6,11,100 / 15,52,000

= 0.394

Debt = 2,91,000+ 77,600 + 2,42,500 = 6,11,100

Share holders Equities = Capital + Reserves

= 14,55,000 + 97,000 = 15,52,000

(c) Solvency Ratio = Outside Liabilities / Total Assets

Outside Liabilities = Debenture + Overdraft + Creditors

= 2,91,000+ 77,600 + 2,42,500 = 6,11,100

Solvency Ratio = (6,11,100 / 21,63,100) * 100

= 28.25%

(d) Stock of Working Capital Ratio = Stock / Working Capital


= 8,05,100 – 3,20,100 = 4,85,000

Stock of Working Capital Ratio = (4,85,000 / 4,85,000)* 100 = 100%

Question 7

Calculate the following ratios from the Balance Sheet given below :

(i) Debt – Equity Ratio

(ii) Liquidity Ratio

(iii) Fixed Assets to Current Assets

(iv) Fixed Assets Turnover

(v) Proprietary Ratio

Balance Sheet


Equity shares of Rs. 10 each 1,05,000 Goodwill 63,000

Reserves 21,000 Fixed Assets 1,47,000

P&L A/c 31,500 Stock 31,500

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Secured loan 84,000 Sundry Debtors 31,500

Sundry creditors 52,500 Advances 26,250

Provision for taxation 21,000 Cash Balance 15750

3,15,000 3,15,000

The sales for the year were Rs. 5,88,000.

Answer

Debt – Equity Ratio = Long – Term Debt / Shareholders Fund

Shareholder’s Fund = Equity Share Capital + Reserves + P&L A/c

= 1, 05,000 + 21,000 + 31,500

= 1, 57,500

Debt-Equity Ratio = 84,000 / 1, 57,500=0.53

Liquidity Ratio = Liquid Assets / Liquid Liabilities

Liquid Assets = Sundry Debtors + Advances + Cash Balance

=31,500 + 15,750 + 26,250

= 73,500

Liquid Liabilities = Provision for Taxation + sundry creditors

= 21,000 + 52,500 = 73,500

Liquid Ratio = 73,500 / 73,500= 1

Fixed Assets to Current Assets= Fixed Assets / Current Assets

= 1,47,000/ 1,05,000

= 1.4

Fixed Assets Turnover =Turnover / Fixed Assets

= 5, 88,000/1,47,000

= 4

Proprietor’s Ratio = Proprietor’s Fund / Total Tangible Assets

Proprietor’s Fund = Equity Share Capital + Profit and Loss a/c + Reserves

=1,05,000 + 31,500 + 21,000

=1,57,500

Total Tangible Assets =Total Assets –Goodwill

=3,15,000 – 63,000 =2,52,000

Proprietary Ratio =1,57,500 / 2,52,000

= 0.625

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Question 8

(a) From the following details of a trader you are required to calculate:

(i) Purchase for the year.

(ii) Rate of Stock Turnover

(iii) Percentage of Gross Profit to Turnover

Sales Rs. 33,984

Sales Returns Rs. 380

Stock at the beginning at cost price Rs.1378

Stock at the close at cost price Rs. 1814

Gross Profit for the year Rs. 8068

(b) Calculate Stock Turnover Ratio from the following information:

Rs.

Opening stock 55,100

Purchases 4,59,800

Sales 6,08,000

Gross Profit Rate 25% on Sales

(c) Calculate the operating Ratio from the following figures.

Items (Rs.)

Sales 17,87,400

Sales Returns 400

Other Incomes 5,300


Administration and Selling Exp 1,84,300

Answer

(a)

Dr. Trading Account Cr.

Rs. Rs.

To Opening Stock 1378 By Sales 33,984

To Purchase (Bal. Fig)

26,732 Sales Return 380

To gross profit 8068 By closing Stock 1814

36,178 36,178

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(i) Purchase for the year Rs. 26,732

(ii) Stock Turnover = Cost of Goods Sold/ Average Stock

Cost of Goods Sold = Sales – G.P.

= 33,984 – 8,068 = 25,916

Average Stock = (Opening Stock + Closing Stock)/ 2

= (1372+ 1814)/2= 1596

Stock turnover ratio = 25916/1596 = 16.24 times

(iii) Percentage of Gross Profit to Turnover = Gross Profit / Sales *100

= 8,068 / 33,984 * 100= 23.74%.

(b) Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Cost of Goods Sold = Sales– G.P

= 6,08,000 – 1,52,000 = 4,56,000

Stock Turnover Ratio = 4,56,000 /55,100

= 8.27 times

(c) Operating Ratio = [(Cost of Goods Sold + Operating Expenses)/Sales * 100]

= [(15,44,000 + 1,84,300)/ 17,87,000)*100]

= 97%

Question 9

Using the following information, complete the Balance Sheet given below:

i) Total Debt to Net Worth : 1:2

ii) Total Assets Turnover : 2

iii) Gross Profit on sales : 25%

iv) Average Collection Period : 30 days

(Assume 360 days in a year)

v) Inventory turnover ratio based on

cost of goods sold and year end inventory : 3

vi) Acid test ratio : 0.75

Balance Sheet


Equity Share Capital 4,40,000 Plant & Machinery ------------

Reserve & Surplus 6,60,000 Other Fixed Asset ------------

Total Debt:

Current Liabilities

------------

Current Assets:

Inventory

Debtors

Cash

------------

------------

------------

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Answer

Net worth = Capital + Reserve & Surplus

= 440000 + 660000 =11,00,000

Total Debt / Net worth =1/2

Total Debt =11,00,000/2= 5,50,000

Total Liability Side =4,40,000 + 6,60,000 + 5,50,000

=16,50,000

So, Total Assets =16,50,000

Total asset turnover = Sales /Total Assets

2 = Sales /16,50000

Sales = 33,00,000

Gross profit on sales =25%

=33,00,000*25%

=8,25,000

Cost of Sales =33,00,000 – 8,25,000

=24,75,000

Inventory Turnover = Cost of sales / Inventory

3 =24,75,000/ Inventory

Inventory =8,25,000

Average Collection period = Average Debtors/Sales per day

30 =Debtors / (33,00,000/360)

Debtors =2,75,000

Acid test ratio = (Current Asset – Stock)/ Current Liabilities

0.75 = (Current Asset – 8, 25,000)/ 5,50,000

=Current Asset=12,37,500

Fixed Asset =Total Assets – Current Assets

=16,50,000– 12,37,500

= 4,12,500

Cash and Bank Balances = Current Assets – Inventory – Debtors

= 12,37,500 – 8,25,000 – 2,75,000

=1,37,500

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Balance Sheet


Equity Share Capital

4,40,000 Plant & Machinery 4,12,500

Reserve & Surplus 6,60,000 Current Assets:

Inventory

Debtors

Cash

8,25,000

2,75,000

1,37,500

Total Debt:

Current Liabilities

5,50,000

16,50,000 16,50,000

Question 10

From the following information, calculate cash flow from operating activities using direct method.

Statement of Profit and Loss for the year ended on March 31, 2015

Particulars Figures for Current reporting period (Rs)

i) Revenue from operations 2,09,000

ii) Other Income -------

iii) Total revenue (i+ii) 2,09,000

iv) Expenses:

Cost of materials consumed 1,14,000

Employees benefits expenses 28,500

Depreciation 19,000

Other expenses -----

Insurance Premium 7,600

Total expenses 1,69,100

v) Profit before tax (iii-iv) 39,900

Less : Income tax (9,500)

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vi) Profit after tax 30,400


Particulars April 01, 2014 March 31, 2015

Rs Rs

Trade receivables 31,350 34,200

Trade payables 16,150 14,250

Inventory 20,900 25,650

Outstanding employees benefits 1,900 2,850

Prepaid insurance 4,750 5,225

Income tax outstanding 2,850 1,900

Answer

Cash Flows from Operating Activities

Particulars (Rs)

Cash receipts from customers 2,06,150

Cash Paid to suppliers (1,20,650)

Cash Paid to employees (27,550)

Cash Paid for Insurance premium (8,075)

Cash generated from operations 49,875

Income Tax paid (10,450)

Net Cash Inflow from Operations 39,425

Working Notes:

1. Cash Receipts from Customers is calculated as under:

Cash Receipts from Customers = Revenue from Operations + Trade Receivables

in the beginning – Trade Receivables in the end

= Rs 2,09,000 + Rs 31,350 – Rs 34,200

= Rs 2,06,150

2. Purchases = Cost of Revenue from Operations – Opening Inventory

+ Closing Inventory

= Rs 1,14,000 – Rs 20,900 + Rs 25,650= Rs 1,18,750

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3. Cash payment to suppliers = Purchases + Trade Payables in the beginning – Trade Payables in the end.

= Rs 1,18,750 + Rs 16,150 – Rs 14,250

= Rs 1,20,650

4. Cash Expenses = Expenses on Accrual basis – Prepaid Expenses in the beginning and Outstanding Expenses in the end + Prepaid Expenses in the end and Outstanding Expenses in the beginning.

5. Cash Paid to Employees = Rs 28,500 + Rs 1,900 – Rs 2,850

= Rs 27,550

6. Cash Paid for Insurance Premium = Rs 7,600 – Rs 4,750 + Rs 5225 = Rs 8,075

7. Income Tax Paid = Rs 9,500+Rs 2,850 – Rs1,900

= Rs 10,450

Question 11

Calculate cash flows from operating activities from the following information.

Statement of Profit and Loss for the year ended March 31, 2015:

Particulars (Rs)

i) Revenue from Operations 47,500

ii) Other Income 4,750

iii) Total Revenue (i+ii) 52,250

iv) Expenses

Cost of Materials Consumed 14,250

Employees Benefits Expenses 9,500

Depreciation and Amortisation 6,650

Expenses:

Other Expenses 19,950

50,350

v) Profit before Tax (iii-iv) 1,900

Working Notes:

1. Other Income = Profit on Sale of Machinery + Income Tax Refund

= Rs 1,900 + Rs 2,850

= Rs 4,750

448

2. Depreciation and Amortisation = Depreciation + Goodwill Expenses Amortised

= Rs 4,750 + Rs 1,900

= Rs 6,650

3. Other Expenses = Rent + Loss on Sale of Equipment + Provision for Taxation

= Rs 9500 + Rs 2850 + Rs 7600

= Rs 19,950

Additional Information:

April 01, 2014 March 31, 2015

Rs Rs

Provision for Taxation 9,500 12,350

Rent Payable 1,900 2,375

Trade Payables 19,950 23,750

Trade Receivables 14,250 19,950

Inventories 23,750 20,900

Answer


Particulars (Rs)

Net profit before taxation, and extraordinary items 6,650

Adjustments for:

Depreciation

Loss on sale of equipment

Goodwill amortised

Profit on sale of machinery

Operating Profit before Working capital changes

Increase in Trade receivables

Decrease in Inventories

Increase in Trade payables

Increase in Rent payable

4,750

2,850

1,900

(1,900)

14,250

(5,700)

2,850

3,800

475

Cash generated from operations 15,675

Income Tax paid (4,750)

Income Tax refund 2,850

Net Cash from Operating activities 13,775

449

Working Notes:

1. Net profit before taxation & extraordinary item = Rs 1,900 + Rs 7,600 – Rs 2,850

= Rs 6,650

Dr. Provision for taxation Account Cr.

Particulars Amount in (Rs) Particulars Amount in (Rs)

Cash (Income tax paid during the year: Bal. Fig.)

4,750 Balance b/d 9,500

Balance c/d 12,350 Profit and Loss a/c 7,600

17,100 17,100

Question 12

Square Ltd., made a profit of Rs 1,05,000 after charging depreciation of Rs. 21,000 on assets and a transfer to general reserve of Rs 31,500. The goodwill amortised was Rs 7,350 and gain on sale of machinery was Rs 3,150. Other information available to you (changes in the value of current assets and current liabilities) are trade receivables showed an increase of Rs 3,150; trade payables an increase of Rs. 6,300; prepaid expenses an increase of Rs 210; and outstanding expenses a decrease of Rs 2,100. Ascertain cash flow from operating activities.

Answer


Particulars (Rs.)

Net Profit before Taxation 1,36,500

Adjustment for Non-cash and Non-operating Items:

Depreciation

Goodwill amortised

Gain on sale of machinery

Operating profit before working capital

Adjustment for working capital charges:


Increase in Trade payables

Increase in Prepaid expenses

Decrease in Outstanding expenses

21,000

7,350

(3,150)

1,61,700

(3,150)

6,300

(210)

(2,100)

Net Cash from Operating Activities 1,62,540

450

Working Notes:

Calculation of Net Profit before Taxation and Extraordinary items:

Rs.

(1) Net Profit 1,05,000

Transfer to General reserve 31,500

1,36,500

Question 13

(a) Marcos Ltd. has provided the following information:

(Rs.)

Machinery as on April 01, 2012 50,000

Machinery as on March 31, 2013 60,000

Accumulated Depreciation on April 01, 2012 25,000

Accumulated Depreciation on March 31, 2013 15,000

During the year, a Machine costing Rs 25,000 with Accumulated Depreciation of

Rs 15,000 was sold for Rs 13,000.

Calculate cash flow from Investing Activities on the basis of the above information.

(b) From the following information, calculate cash flows from financing activities:

April 1, March 31,

2014 2015

(Rs.) (Rs.)

Long-term Loans 2,00,000 2,50,000

During the year, the company repaid a loan of Rs 1,00,000.

Answer

(a)

Cash Flows from Investing Activities

Sale of Machinery 13,000

Purchase of Machinery (35,000)

Net cash used in Investing Activities (22,000)

451

Working Notes:

Dr. Machinery Account Cr.

Particulars Amount in (Rs)

Particulars Amount in (Rs)

Balance B/d 50,000 Cash (proceeds from sale of machine)

13,000

Profit on sale of machine 3,000 Accumulated Depreciation 15,000

Cash (bal. Fig. new machinery purchased)

35,000 Balance c/d 60,000

88,000 88,000

Dr. Accumulated Depreciation Account Cr.


Machinery 15,000 Balance b/d 25,000

Balance c/d 15,000 By Profit and Loss (Depreciation provided during the year)

5,000

30,000 30,000

(b)

Cash flows from Financing Activities

Proceeds from long-term borrowings 1,50,000

Repayment of long-term borrowings (1,00,000)

Net cash inflow from Financing Activities 50,000

452

Working Notes:

Dr. Long-term Loan Account Cr.


Cash (loan repaid) 1,00,000 Balance B/d 2,00,000

Balance C/d 2,50,000 Cash (new loan raised) 1,50,000

3,50,000 3,50,000

Question 14

From the following information, prepare Cash Flow Statement for Pratik Ltd.

Balance Sheet of Pratik Ltd., as on March 31, 2015

Particulars 31st March 2015 (Rs)

31st March 2014 (Rs)

I. Equity and Liabilities

1. Shareholders’ Funds

a) Share capital

b) Reserve and surplus

6,65,000

3,32,500

4,75,000

1,90,000

2. Non-current Liabilities

Long-term borrowings: Bank Loan

47,500

95,000

3. Current Liabilities

a) Trade payables

b) Other current liabilities: outstanding rent

c) Short-term provisions

42,750

6,650

1,14,000

47,500

4,750

76000

Total 12,08,400 8,88,250

II. Assets

1. Non-current assets

a) Fixed assets

(i) Tangible assets

(ii) Intangible assets

4,75,000

90,250

4,75,000

95,000

453

b) Non-current investments 95,000 -

2. Current assets

a) Inventories

b) Trade receivables

c) Cash and cash equivalents

1,23,500

1,14,000

3,10,650

47,500

76,000

1,94,750

Total 12,08,400 8,88,250

Notes to Accounts:

Particulars 31st March

2015 (Rs)

31st March

2014 (Rs)

1. Equity Share Capital 6,65,000 4,75,000

2. Reserve and Surplus

Surplus: i.e., Balance in Statement of Profit and Loss

3,32,500 1,90,000

3. Short-term Provision:

Proposed Dividend

Provision for Taxation

66,500

47,500

47,500

28,500

4. Fixed Assets

– Tangible assets

– Equipments

– Furniture

2,18,500

2,56,500

1,90,000

2,85,000

5. Intangible Assets

Patents

90,250

95,000

6. Cash and cash equivalents

i) Cash

ii) Bank balance

25,650

2,85,000

4,750

1,90,000

454

During the year, equipment costing Rs 76,000 was purchased.Loss on Sale of equipment amounted to Rs 4,750. Depreciation of Rs 14,250 and Rs2,850 charged on equipments and furniture.

Answer

Cash Flow Statement

Particulars (Rs.)

I. Cash flows from Operating Activities :

Net profit before taxation & extraordinary items

Provision for:

Depreciation on equipment

Depreciation on furniture

Patents written-off

Loss on sale of equipment

Operating Profit before Working capital Changes

Decrease in Trade payables

Increase in Outstanding rent


Increase in inventories

Cash generated from Operating activities

Tax paid

A. Cash Inflows from Operating Activities

2,56,500

14,250

28,500

4,750

4,750

3,08,750

(4,750)

1,900

(38,000)

(76,000)

1,91,900

(28,500)

1,63,400

II. Cash flows from Investing Activities:

Proceeds from sale of equipments

Purchase of new equipment

Purchase of Investments

B. Cash used in Investing Activities

28,500

(76,000)

(95,000)

(1,42,500)

III. Cash flows from Financing Activities:

Issues of equity share capital

Repayment of bank loan

Payment of dividend

C. Cash Inflows from Financing Activities

1,90,000

(47,500)

(47,500)

95,000

455

Net increase in Cash & Cash Equivalents (A+B+C) 1,15,900

Cash and Cash Equivalents in the beginning 1,94,750

Cash and Cash Equivalents in the end 3,10,650

Working Notes:

(1)

Dr. Equipment Account Cr.


Balance b/d 1,90,000 Depreciation 14,250

Cash 76,000 Bank 28,500

Profit & Loss

(Loss on Sale)

4,750


2,66,000 2,66,000

(2) Patents of Rs 4,750 (i.e., Rs 95,000 – Rs 90,250) were written-off during the year, and depreciation on furniture Rs 28,500. (Rs 2,85,000 – Rs 2,56,500)

(3) It is assumed that dividend of Rs 47,500 and tax of Rs 28,500 provided in 2013- 2014 has been paid during the year 2014-15. Hence, proposed dividend and provision for tax during the year amounts to Rs 66,500 and Rs 47,500 respectively.

(Rs)

(4) Profit and Loss at the end 3,32,500

(–) Profit and Loss in the beginning 1,90,000

Net Profit during the year 1,42,500

+ Provision for tax during the year 47,500

+ Proposed dividend 66,500

Net Profit before taxation & extraordinary Items 2,56,500

456

Question 15

From the following Balance Sheets of AMX Ltd., prepare cash flow statement.

Balance Sheets of AMX Ltd.





a) Share capital

b) Reserve and surplus

14,25,000

7,12,500

9,50,000

5,70,000


Long-term borrowings

95,000

1,90,000


a) Trade payables

b) Short-term provisions(Provision for taxation)

95,000

90,250

1,04,500

76,000

Total 24,17,750 18,90,500

II. Assets


a) Fixed assets

(i) Tangible assets

(ii) Intangible assets (Goodwill)

b) Non-current investment

9,59,500

1,71,000

5,70,000

11,40,000

1,90,000

-

2. Current assets

a) Inventories

b) Trade Receivables


1,71,000

1,90,000

3,56,250

95,000

1,42,500

3,23,000

Total 25,17,750 18,90,500

457


1. Dividend proposed and paid during the year Rs 1,42,500.

2. Income tax paid during the year includes Rs 14,250 on account of dividend tax.

3. Land and building book value Rs 1,42,500 was sold at a profit of 10%.

4. The rate of depreciation on plant and machinery is 10%.

Answer

Cash Flow Statement

Particulars (Rs)


Net profit before taxation & extraordinary items

Adjustment for –

Depreciation

Goodwill written-off

3,75,250

38,000

19,000

Notes to Accounts:



1. Long-term borrowings:

i) Debentures

ii) Bank loan

-

95000

95000

1,90,000

-

1,90,000

2. Tangible Assets

i) Land and building

ii) Plant and machinery

6,17,500

3,42,000

9,59,500

7,60,000

3,80,000

11,40,000

3. Cash and cash equivalents

i) Cash in hand

ii) Bank balance

66,500

2,89,750

3,56,250

47,500

2,75,500

3,23,000

458

Profit on Sale of Land

Operating Profit before working capital changes

Decrease in Trade Payables

Increase in Trade Receivables

Increase in Inventories

Cash generated from Operations

Income Tax Paid (1)

A. Cash Inflows from Operations

(14,250)

4,18,000

(9,500)

(47,500)

(76,000)

2,85,000

(61,750)

2,23,250

II. Cash flows from Investing Activities

Proceeds from Sale of Land and Building

Purchase of Investment

B. Cash used in Investing Activities

1,56,750

(5,70,000)

(4,13,250)

III. Cash flows from Financing Activities

Proceeds from issue of Equity Share Capital

Redemption of Debentures

Proceeds from raising Bank Loan

Dividend Paid

Dividend Tax Paid

C. Cash flows from Financing Activities

4,75,000

(1,90,000)

95,000

(1,42,500)

(14,250)

2,23,250

Net Increase in cash and cash equivalents (A+B+C) 33,250

Cash and Cash Equivalents in the beginning 3,23,000

Cash and Cash Equivalent at the end 3,56,250

Working Notes:

(1) Total tax paid during the year Rs 76,000

Dividend tax paid (given) Rs (14,250)

Income tax paid for operating activities Rs 61,750

(2) Net profit earned during the year after tax and dividend

= Rs 7,12,500 – 5,70,000 = Rs 1,42,500

459

(3) Net profit before tax

= Net profit earned during the year after tax and dividend + Provision for tax made + Proposed Dividend

= 1,42,500 + 90,250 +1,42,500

= Rs 3,75,250

Dr. Equity Share Capital Account Cr.


Balance c/d 14,25,000 Balance b/d 9,50,000

Cash

(New capital raised)

4,75,000

14,25,000 14,25,000

Dr. Debenture Account Cr.


Cash (Redemption) 19,000 Balance b/d 19,000

19,000 19,000

Dr. Bank Account Cr.


Balance c/d 95000 Cash 95000

95,000 95,000

Dr. Provision for Taxation Account Cr.


Cash (Tax paid : which includes Rs 14,250 as dividend )

76,000 By Balance b/d 76,000

Balance c/d 90,250 By Profit and Loss (Provision made during the year)

90,250

1,66,250 1,66,250

460

Dr. Land and Building Account Cr.


Balance b/d 76,000 Cash 1,56,750

To Profit and Loss

(Profit on sale)

14,250 Balance c/d 6,17,500

7,74,250 7,74,250

Dr. Proposed Dividend Account Cr.


Cash 1,42,500 Surplus 1,42,500

1,42,500 1,42,500

Dr. Plant and Machinery Account Cr.


Balance b/d 3,80,000 Depreciation 38,000


3,80,000 3,80,000

Question 16

From the following information of PQR Ltd., prepare cash flow statement:

Balance Sheet of PQR Ltd. as on 31st March, 2014 and 2015





a) Share capital

1,300

1400

461

b) Reserve and surplus (Surplus) 4,700 4000


a) Short-term loan

b) Trade payables

200

500

600

400

Total 6,700 6,400

II. Assets


(a) Fixed assets

(b) Non-current investment

2400

300

2400

200

2. Current assets

a) Inventories

b) Trade Receivables


d) Short-term loans and advances

1,200

800

1200

800

1300

900

800

800

Total 6,700 6,400

Notes to Accounts:

Particulars 31st March 31st March 2014 (Rs) 2015 (Rs)

1. Share capital

Equity share capital 1,000 1,000

10% preference share capital 300 400

1,300 1,400

2. Fixed assets

Tangible assets 3,600 3,400

Less: Accumulated depreciation (1,200) (1,000)

2,400 2,400

Statement of Profit and Loss for the year ended 31st March, 2015

Particulars 31st March, 2015 (Rs)

I. Revenue from operation 2,800

II. Other income (dividend income) 1,000

462

III. Total Revenue 3,800

IV. Expenses

Cost of material consumed 400

Employees benefit expenses 200

Finance cost (interest paid) 200

Depreciation 200

Loss due to earthquake 1,100

2,100

V. Profit before tax 1,700

VI. Tax paid (1,000)

Profit after tax 700


1. No dividend paid by the company during the current financial year.

2. Out of fixed assets, land worth Rs 1,000 having no accumulated depreciation was sold at no profit or no loss.

Answer

Cash Flow Statement

Particulars (Rs)


Net Profit before Tax and Extraordinary Items (w.n.1)

Adjustment for :

Interest paid

Depreciation



Decrease in Trade Receivables

Increase in Trade Payables

Cash generated from operations

Income Tax paid

Cash Flow before Extraordinary items

Loss due to earthquake

A. Net cash from Operating Activities

2,800

200

200

3,200

100

100

100

3,500

(1,000)

2,500

(1,100)

1,400

463

II. Cash flows from Investing Activities

Sale of Land

Purchase of fixed assets (w.n.2)

Purchase of Investments

B. Net cash from Investing Activities

1,000

(1,200)

(100)

(300)


Payment of short-term loans

Interest Paid

Redemption of 10% preference share capital

C. Net Cash used in Financing Activities

(400)

(200)

(100)

(700)

Net Increase in cash and cash equivalents (A+B+C) 400

Cash and Cash Equivalents in the beginning 800

Cash and Cash Equivalent at the end 1,200

Working Notes:

(1) Net Profit before Tax and Extraordinary Items = Rs 700 + Rs 1,100 + Rs 1,000

= Rs 2,800

(2)

Dr. Fixed Assets Account Cr.


Balance b/d 3,400 Cash (Sale of land) 1,000

Cash (Purchase of fixedassets)

1,200 Balance c/d 3,600

4,600 4,600



Balance b/d 1,200 Balance b/d 1,000

By Profit and Loss 200

1,200 1,200

464

Question 17

From the following information of ST Ltd., prepare a cash flow statement:

Balance Sheet of PQR Ltd. as on 31st March, 2014 and 2015





a) Share capital

b) Reserve and surplus (Surplus)

15,000

34,100

12,500

13,800


Long-term borrowings

(Long-term loan)

11,100

10,400


a) Trade payables

b) Other current liabilities

1,500

6,300

18,900

11,000

Total 68,000 66,600

II. Assets


a) Fixed assets

b) Non-current investments

7,300

25,000

8,500

25,000

2. Current assets

a) Current investments (Marketable)

b) Inventories

c) Trade Receivables

d) Cash and cash equivalents

e) Other current assets

(Interest receivables)

6,700

9,000

17,000

2,000

1000

1,350

19,500

12,000

250

--

Total 68,000 66,600

465

Notes to Accounts:



1. Other Current Liabilities

i) Interest payable

ii) Income tax payable

2,300

4,000

1,000

10,000

6,300 11,000

2. Fixed Assets:

Tangible

Less: Accumulated depreciation

21,800

(14,500)

19,100

(10,600)

7,300 8,500

Statement of Profit and Loss for the year ended31st March, 2015

Particulars 31st March, 2015

(Rs)

I. Revenue from operation 3,06,500

II. Other income 6,400

III. Total Revenue 3,12,900

IV. Expenses

Cost of material consumed 2,60,000

Finance cost (interest expenses) 4,000

Depreciation 4,500

Other expenses 9,100

(Admn. and selling expenses) _______

Total expenses 2,77,600

Profit before tax 35,300

Less: Tax (3,000)

Profit after tax 32,300

466

Notes to Accounts:

Particulars Rs.

1. Other Income during the year 2014-15

i) Interest Income 3,000

ii) Dividend Income 2,000

iii) Insurance Proceeds from earthquake disaster Settlement 1,400

6,400


(i) An amount of Rs 2500 was raised from the issue of share capital and a further Rs 2500 was raised from long-term borrowings.

(ii) Interest expense was Rs 4000 of which Rs 1700 was paid during the period. Rs 100 relating to interest expense of the prior period was also paid during the period.

(iii) Dividends paid were Rs 12,000.

(iv) Tax deducted at source on dividends received (included in the tax expense of Rs 3000 for the year) amounted to Rs 400.

(v) During the period, the enterprise acquired Fixed Assets for Rs 3500. The payment was made in cash.

(vi) Plant with original cost of Rs 800 and accumulated depreciation of Rs 600 was sold for Rs 200.

(vii) Trade Receivables and Trade Payables include amounts relating to credit sales and credit purchases only.

Answer

Cash Flow Statement

Particulars (Rs)


Net Profit before Taxation and Extraordinary Item

Adjustments for:

Depreciation

Interest Income

Dividend Income

Interest Expense


33,900

4500

(3000)

(2000)

4000

37,400

467

Increase in Trade Receivables


Decrease in Trade Payables

Cash generated from Operations

Income Tax paid

Cash flow before Extraordinary Items

Proceeds from earthquake disaster settlement

Net cash from Operating Activities

(5000)

10500

(17400)

25,500

(8600)

16,900

1400

18,300

II. Cash Flows from Investing Activities

Purchase of Fixed Assets

Proceeds from Sale of Equipment

Interest Received

Dividends Received (net of TDS)

Net cash from Investing Activities

(3500)

200

2000

1600

300


Proceeds from issuance of Share Capital

Proceeds from Long-term Borrowings

Repayment of Long-term Borrowings

Interest Paid

Dividends Paid

Net Cash used in Financing Activities

2500

2500

(1800)

(2700)

(12000)

(11500)

Net Increase in Cash and Cash Equivalents 7100

Cash and Cash Equivalents at the beginning of the period 1600

Cash and Cash Equivalents at the end of the period 8700

Working Notes:

(1) Cash and Cash Equivalents:

Cash and Cash Equivalents consist of cash in hand and balances with banks, and investments in money-market instruments. Cash and Cash Equivalents included in the Cash Flow Statement comprise of the following balance sheet amounts.

2015 2014

(Rs) (Rs)

Cash in Hand and balances with Bank 2,000 250

468

Short-term Investments 6,700 1,350

___ ____

Cash and Cash Equivalents 8,700 1,600

(2) Cash Receipts from Customers

Sales 3,06,500

Add : Trade Receivables at the beginning of the year 12,000

3,18,500

Less : Trade Receivables at the end of the year (17,000)

3,01,500

(3) Cash paid to Suppliers and Employees

Cost of Revenue from operations 2,60,000

Administrative and Selling Expenses 9,100

(i) 2,69,100

Add : Trade Payables at the beginning of the year 18,900

Inventories at the end of the year 9,000

(ii) 27,900

(i) + (ii) 2,97,000

Less : Trade Payables at the end of the year 1500

Inventories at the beginning of the year 19500 (21,000)

2,76,000 (4) Income Tax paid (including TDS from dividends received)

Income Tax expense for the year 3000 (including tax deducted at source from dividends received)

Add : Income Tax liability at the beginning of the year 10,000

13,000

Less : Income tax payable at the end of the year (4000)

9,000

Out of Rs 9000, tax deducted at source on dividends received (amounting to Rs 400) is included in cash flows from investing activities and the balance of Rs 8600 is included in cash flows from operating activities.

(5) Repayment of Long-term Borrowings

Long-term Debts at the beginning of the year 10,400

Add : Long-term Borrowings made during the year 2,500

12,900

469

Less : Long-term Borrowings at the end of the year (11,100)

1,800

(6) Interest paid

Interest expense for the year 4,000

Add: Interest Payable at the beginning of the year 1,000

5,000

Less : Interest Payable at the end of the year (2,300)

2,700

Question 18

The following are the summarised balance sheets of M/s. Pelican Ltd. as on 31.12.2014 and 31.12.2015

Balance Sheet of Pelican Ltd. as on 31st March, 2014 and 2015



Liabilities

10% preference shares 1,00,000 1,10,000

Equity Shares 2,20,000 2,50,000

Share premium 20,000 26,000

Profit & Loss A / c 1,04,000 1,34,000

12% debentures 70,000 64,000

Creditors 38,000 46,000

Bills Payable 5,000 4,000

Provision for tax 10,000 12,000

Dividend Payable 7,000 8,000

5,74,000 6,54,000

Assets

Machinery 2, 00,000 2,30,000

Buildings 1,50,000 1, 76,000

470

Land 18,000 18,000

Cash 42,000 32,000

Debtors 38,000 38,000

Bills receivable 42,000 62,000

Stock 84,000 98,000

5,74,000 6,54,000

You are required to prepare a statement of sources and application of funds.

Answer

Fund Flow Statement

Source of funds Amount in (Rs)

Application of fund Amount in (Rs)

Issue of preference shares 10,000 Purchase of machinery 30,000

Issue of Equity shares 30,000 Purchase of Building 26,000

Share premium received 6,000 Increase in working capital

14,000

Fund from operation 30,000 Redemption of debenture

6,000

76,000 76,000

Workings

(i) Statement of changes in working capital

2014 2015

Rs. Rs.

Current Assets:

Cash 42,000 32,000

Debtors 38,000 38,000

471

Bills receivables 42,000 62,000

Stock 84,000 98,000

Total current assets 2,06,000 2,30,000

Current Liabilities :

Creditors 38,000 46,000

Bills payable 5,000 4,000

Provision for Tax 10,000 12,000

Dividend payable 7,000 8,000

Total current liabilities 60,000 70,000

Working capital 1,46,000 1,60,000

Increase in working capital : Rs 14000 (1,46,000 – 1,60,000)



To Balance b/d (closing)

1,34,000 By Balance c/d

1,04,000

By Fund from operation

30,000

1,34,000 1,34,000

Question 19

From the following balance sheets, prepare schedule of changes in working capital.

Liabilities Mar 2014

Rs.

Mar 2015

Rs.

Assets Mar 2014

Rs.

Mar 2015

Rs.

Share capital 2,00,000 2,50,000 Cash 30,000 47,000

Creditors 70,000 45,000 Debtors 1,20,000 1,15,000

Retained Earnings

10,000 23,000 Land 50,000 66,000

Stock 80,000 90,000

2,80,000 3,18,000 2,80,000 3,18,000

472

Answer

Fund Flow Statement

Source of funds Amount in (Rs)

Application of fund Amount in (Rs)

Issue of shares 50,000 Purchase of Land 16,000

Fund from operation 13,000 increase in working capital

47,000

63000 63000

Workings


Current Assets : Mar. 2014 Mar. 2015

Rs Rs

Cash 30,000 47,000

Debtors 1,20,000 1,15,000

Stock 80,000 90,000


Current liabilities:

Creditors 70,000 45,000

Total current Liabilities 70,000 45,000


Increase in working capital (2,07,000 – 1,60,000) = Rs 47,000

(ii)

Dr. Profit and Loss Accounts Cr.

Particular Amount in (Rs) Particular Amount in (Rs)

To Balance b/d 23,000 By Balance c/d 10,000

By Fund from operation (b/f)

13,000

23000 23000

473

Question 20

The following are the summarized balance sheets of PQR Ltd., as on 31 March 2014 and 2015.

Liabilities 31st Mar 2014 Rs

31st Mar 2015 Rs

Assets 31st Mar 2014 Rs

31st Mar 2015 Rs

Redeemable preference Shares

-

10,000

Fixed Assets 41,000 40,000

Less: Depreciation 11,000

30,000

15,000

25,000

Equity shares

40,000 40,000 Debtors 20,000 24,000

General Reserve

2,000 2,000 Stock 30,000 35,000

Profit and loss A/c

1,000 1200 Prepaid exp. 300 500

Debentures 6000 7000 Cash 1,200 3,500

Creditors 12000 11000

Provision for Tax

3,000 4,200

Proposed dividend

5,000 5,800

Bank overdraft

12,500 6,800

81,500 88,000 81,500 88,000


1. A statement showing changes in the working capital

2. A statement of sources and application of funds.

474

Answer

Fund Flow Statement

Source of Funds Amount in (Rs) Application of Funds Amount in (Rs)

Issue of Preference Shares 10,000 Increase in working capital

16,200

Issue of Debentures 1,000

Sale of Fixed Assets 1,000

Fund from Operation 4,200

16,200 16,200

Workings:

i. Statement of Changes in working capital :

2014 2015 Rs Rs

Current Assets :

Debtors 20,000 24000

Stock 30,000 35000

Prepaid Expenses 300 500

Cash 1,200 3500

Total Current Assets (A) 51,500 63000

Current liabilities :

Creditors 12,000 11,000

Provision for tax 3,000 4,200

Proposed Dividend 5,000 5,800

Bank Overdraft 12,500 6,800

Total Current Liabilities (B) 32,500 27800

Working capital (A – B) 19,000 35,200

Increase in working capital 16,200

475

(ii)



To Balance b/d 1200 By Balance c/d 1000

To Depreciation 4000 By fund from operation 4200

5200 5200

Question 21

From the following balance sheets of Beta Ltd., prepare a statement showing changes in working capital during 2015.

Balance sheet of Beta Ltd as on 31st December

Liabilities 2014 Rs.

2015 Rs.

Share Capital 5,00,000 6,00,000

Reserves 1,50,000 1,80,000

P.L. A/c 40,000 65,000

Debentures 3,00,000 2,50,000

Creditors for goods 1,70,000 1,60,000

Provision for income tax 60,000 80,000

12,20,000 13,35,000

Assets

Fixed Assets 10,00,000 11,20,000

Less: Depreciation 3,70,000 4,60,000

6,30,000 6,60,000

Stock 2,40,000 3,70,000

Book debts 2,50,000 2,30,000

Cash in hand and at Bank Balance 80,000 60,000

Preliminary Expenses 20,000 15,000

12,20,000 13,35,000

476

Answer

Fund Flow Statement

Source of Funds Amount in (Rs) Application of Funds Amount in (Rs)

Issue of shares 1,00,000 Redemption of debentures

50,000

Fund from operation 1,50,000 Purchase of fixed assets

1,20,000

Increase in working capital

80,000

2,50,000 2,50,000

Workings


2014 2015 Rs. Rs.

Current Assets:

Stock 2,40,000 3,70,000

Book Debts 2,50,000 2,30,000

Cash in hand & Bank Balance 80,000 60,000

Total Current assets 5,70,000 6,60,000

Current liabilities:

Creditors for goods 1,70,000 1,60,000

Provision for income tax 60,000 80,000

Total Current Liabilities 2,30,000 2,40,000



(ii)



To Balance b/d 65,000 By Balance c/d 40,0000

To Reserves 30,000 By fund from operation

1,50,000

To Preliminary Expenses Written off

5,000

To Depreciation 90,000

1,90,000 1,90,000

477

Question 22

Calculate Fund from Operation from the information given below as on 31.3.2015.

1. Net profit for the year ended 31.3.2015 Rs. 6,50,000.

2. Gain on sale of buildings Rs. 35,500.

3. Goodwill appears in the books at Rs. 1,80,000 out of that 10% has been written off duringthe year.

4. Old machinery worth Rs. 8,000 has been sold for Rs. 6,500 during the year.

5. Rs. 1,25,000 have been transferred to reserve fund.

Depreciation has been provided during the year on machinery and furniture at 20% whose value is Rs. 6,50,000.

Answer

Calculation of Fund from operation Rs. Rs.

Net profit for the year ended 31.3.2015 6,50,000

Add : Non fund items

Goodwill written off

(1,80,000 x 10/100)

Loss on sale of machinery

(8000 – 6500)

Transferred to Reserve fund

Depreciation

(6,50,000 x 20/100)

18000

1,500

1,25,000

1,30,000

2,74,500

9,24,500

Less : Non fund items

Gain on sale of Buildings

(35,500)

Fund from operation 8,89,000

Question 23

From the following balance sheets of a sole trader, prepare a fund flow statement.

Liabilities 2014

Rs.

2015

Rs.

Assets 2014

Rs.

2015

Rs.

Capital 63,000 1,00,000 Cash 15,000 20,000

Long term loans

50,000 60,000 Debtors 30,000 28,000

478

Trade creditors

42,000 39,000 Stock 55,000 72,000

Bank overdraft

35,000 25,000 Land & building 80,000 1,00,000

Outstanding expenses

5,000 6,000 furniture 15,000 10,000

195000 2,30,000 1,95,000 2,30,000

Answer

Fund Flow Statement

Source of funds Amount in (Rs) Application of funds Amount in (Rs)

Loan borrowed 10,000 Purchase of land & Buildings

20,000

Sale of Furniture 5,000 Increase in working capital

32,000

Fund from operation 37,000

52,000 52,000

Workings


2014 2015 Rs. Rs.

Current Assets :

Cash 15,000 20,000

Debtors 30,000 28,000

Stock 55,000 72,000


Current Liabilities :

Trade creditors 42,000 39,000

Bank overdraft 35,000 25,000

Outstanding expenses 5,000 6,000

Total current liabilities 82,000 70,000

Working capital 18,000 50,000


479

(ii)

Dr. Capital Account Cr.


To Balance c/d 1,00,000 By Balance b/d 63,000

By P.L. A/c 37,000

1,00,000 1,00,000

(iii)



To Capital Account 37,000 By Fund from operation

37,000

37,000 37,000

Question 24

The following are the Balance Sheets of Garima Limited for the year ending 31st March, 2014 and 31st March, 2015:

Balance Sheet of Garima Ltd as on 31st March, 2014 and 31st March 2015

Liabilities 2014 Rs.

2015 Rs.

Share Capital 6,41,250 7,48,125

General Reserves 2,13,750 2,67,188

Capital Reserve (Profit on sale of investment) - 10,688

Profit & Loss Account 1,06,875 2,13,750

15% Debentures 3,20,625 2,13,750

Accrued Expenses 10,688 12,825

Creditors 1,71,000 2,67,188

Provisions for Dividends 32,063 36,338

Provisions for Taxation 74,813 81,225

15,71,063 18,51,077

480

Assets

Fixed Assets 10,68,750 12,82,500

Less: Depreciation (2,13,750) (2,67,188)

Net Fixed Assets 9,00,000 10,15,313

Long-term Investments (at cost) 1,92,375 1,92,375

Stock (at cost) 2,13,750 2,88,563

Debtors (net of provisions for doubtful debts of Rs. 45,000 and Rs. 56,250 respectively for 2014 and 2015)

2,40,469 2,61,844

Bills Receivables 42,750 69,469

Prepaid Expenses 10,688 12,825

Miscellaneous Expenditures 16,031 10,688

15,71,063 18,51,077


i) During the year 2014 and 2015, fixed assets with a net book value of Rs. 10,688 (accumulated depreciation, Rs. 32,063) was sold for Rs. 8,550.

ii) During the year 2014-15, Investments costing Rs. 85,500 were sold and also Investments costing Rs. 85,500 were purchased.

iii) Debentures were retired at a Premium of 10%.

iv) Tax of Rs. 58,781 was paid for 2014-15.

v) During the year 2014-15, bad debts of Rs. 14,963 were written off against the provision for Doubtful Debts account.

vi) The proposed dividend for 2013-14 was paid in 2014-15.

Required:

Prepare a Funds Flow Statement (Statement of changes in Financial position on working capital basis) for the year ended 31st March, 2015.

Answer

Computation of Funds from Operations

Particulars Amount in (Rs.)

Profit and Loss Balance on 31st March, 2015 2,13,750

Add : Depreciation

Loss on Sale of Assets

85,501

2,138

481

Miscellaneous Expenditure written off

Transfer to Reserves

Premium on Redemption of Debentures

Provision for Dividend

Provision for Taxation

5,343

53,438

10,688

36,338

65,193

4,72,389

Less : Profit and Loss Balance on 31st March, 2014 (1,06,875)

Funds from Operations 3,65,514



To Fixed Asset A/c 32,063 By Balance b/d 2,13,750

To Balance c/d 2,67,188 By Profit and Loss A/c ( Provision for Depreciation)

85,501

2,99,251 2,99,251

Dr. Fixed Assets Account Cr.


To Balance b/d 10,68,750 By Accumulated Depreciation A/c

32,063

To Bank A/c (Fixed Assets)

(Balancing Figure)

2,56,501 By Cash A/c 8,550

By Profit and Loss A/c (Loss on sale)

2,138


13,25,251 13,25,251

482

Dr. Provision for Tax Account Cr.


To Cash (tax paid) 58,781 By Balance b/d

74,813

To Balance c/d 81,225 By Profit and Loss A/c (Provision)

(Balancing Figure)

65,193

1,40,006 1,40,006

Statement of Changes in Working Capital

Particulars 31st March, 2014

31st March, 2015

Changes in Working Capital

+ -

Current Assets :

Stock 2,13,750 2,88,563 74,813 -

Debtors 2,40,469 2,61,844 21,375 -

Bills Receivables 42,750 69,469 26,719 -

Prepaid Expenses 10,688 12,825 2,137 -

5,07,656 6,32,700 1,25,044 -

Less : Current liabilities

Accrued Expenses 10,688 12,825 - 2,137

Creditors 1,71,000 2,67,188 - 96,188

1,81,688 2,80,013 - 98,325

Working Capital 3,25,968 3,52,687 - -

Increase in Working Capital - 26,719

1,25,044 1,25,044

483

Funds Flow Statement for the ended 31st March, 2015

Sources Rs.

Working Capital from operations 3,65,514

Sale of Fixed Assets 8,550

Sale of Investments 96,188

Share Capital Issued 1,06,875

Total Funds Provided (A) 5,77,125

Uses Rs.

Purchase of Fixed Assets 2,56,500

Purchase of Investments 85,500

Payments of Debentures (at a Premium of 10%) 1,17,563

Payment of Dividends 32,063

Payment of Taxes 58,781

Total Funds Applied (B) 5,50,406

Increase in Working Capital (A-B) 26,719

Question 25

Distinguish between Cash Flow and Funds Flow Statement.

Answer

Difference between Cash Flow and Fund Flow

Cash Flow Fund Flow

Cash flow statement is based on narrow concept of funds, which considers changes in cash.

Funds flow statement is based on the concept of working capital.

It does not contain any opening and closing balance.

It contains opening as well as closing balances of cash and cash equivalents.

Cash flow statement is more useful in short term analysis and cash planning.

Funds flow statement is more useful in long-term analysis of financial planning.

In cash flow statement cash from the operations are calculated after adjusting the increases and decreases in current assets and liabilities.

In funds flow statement such changes in current items are adjusted in the changes of working capital.

Classification of current and non-current is not relevant.

Such classification is required in this case.

484

Question 26

Following are the financial statement of Zenith Limited:

Balance Sheet as on

31st March, 2014

Rs.

31st March, 2015

Rs.

Capital and Liabilities:

Share Capital, Rs. 10 par value 16,750 15,000

Share Premium 33,500 23,750

Reserves and Surplus 17,430 12,325

Debentures 24,000 -

Long-term Loans 4,000 5,000

Creditors 2,880 2,710

Bank Overdraft 750 625

Accrued expenses 435 460

Income-tax Payable 4,825 1,685

1,04,570 61,555

Assets :

Land 360 360

Building, net of depreciation 60,180 17,840

Machinery, net of depreciation 11,085 10,705

Investment in ‘A’ Ltd. 7,500 -

Stock 5,880 4,615

Prepaid expenses 190 230

Debtors 7,635 7,715

Trade investments 4,000 10,500

Cash 7,740 9,590

1,04,570 61,555

485

Income Statement


Particulars Rs.

Net Sales 1,35,000

Less : Cost of goods sold and operating expenses (including depreciation on Buildings of Rs. 600 and depreciation on machinery of Rs. 1,140)

1,25,895

Net operating profit 9,105

Gain on sale of trade investments 640

Gain on sale of machinery 185

Profits before tax 9,930

Less : Income-tax 4,825

Profits after tax 5,105


i) Machinery with a net book value of Rs. 915 was sold during the year.

ii) The shares of ‘A’ Ltd. were acquired by issue of debentures.

Required:

Prepare a Funds Flow Statement (Statement of changes in Financial position on Working capital Basis) for the year ended 31st March, 2015.

Answer

Schedule of Changes in Working Capital

Particulars 31st March,

2015 31st March,

2014

Impact on Working Capital

Increase Decrease

Current Assets:

Stock 5,880.00 4,615.00 1 ,265.00 -

Prepaid expenses

190.00

230.00 - 40.00

Debtors 7,635.00 7,715.00 - 80.00

Trade Investments 4000.00 10,500.00 - 6,500.00

Cash 7,740.00 9,590.00 - 1,850.00

25,445.00 32,650.00 1,265.00 8,470.00

486

Current Liabilities:

Creditors 2880.00 2710.00 - 170.00

Bank overdraft 750.00 625.00 - 125.00

Accrued expenses 435.00 460.00 25.00 -

Income tax payable

4825.00

1685.00 - 3140.00

8890.00 5480.00 25.00 3435.00

Net Working Capital 16,555.00 27,170.00 1,290.00 11,905.00

Decrease in net working capital 10,615.00 - 10,615.00 -

27,170.00 27,170.00 11,905.00 11,905.00

Dr. Machinery Account Cr.


To Balance b/d 10,705 By Sale of machinery A/c (given)

915

To Purchase of machinery A/c

2435 By Depreciation A/c (given)

1140

By Balance c/d 11085

13140 13140

Dr. Trade Investment Account Cr.


To Balance b/d 10500 By Cash A/c (sale of trade Investments)

6500

By Balance c/d 4000

10500 10500

487

Estimation of Funds flow from Operations:

Rs.

Profits after tax 5105

Add : Depreciation on Building 660

Depreciation on Machinery 1140 1800

6905

Less : Gain on sale of machinery 185

Funds from Operations 6720

Gain on sale of trade investments has been considered as an operating income. Trade investments have been considered as part of current assets.

Statement of changes in Financial Position (Working Capital basis)

For the ended 31st March, 2015

Sources : Rs.

Funds from Operations 6720.00

Sale of machinery on gain (915 + 185) 1100.00

Debentures issued (Rs. 24000 – 7500) 16500.00

Investment in ‘A’ Ltd. Financial transaction and hence not affecting working capital

Issue of share capital (Including share premium) 11500.00

Financial Resources Provided 35,820.00

Uses :

Purchase of building (60180 + 660 + 17840) 43000.00

Purchase of machinery 2435.00

Payment of long-term loan 1000.00

Financial Resources Applied 46435.00

Net Decrease in Working Capital 10615.00

488

Question 27

(a) Calculate the relevant investment ratios with the following information:

Dividend per share = Rs.0.20

Market price per share = Rs.5.00

Annual earning = Rs.100000

Number of equity shares = Rs 200000

(b) Calculate the relevant profitability ratios with the following information:

Stock at start of year: Rs.30,000

Stock at end of year : Rs.20,000

Annual Sales: Rs.50,000

Annual Purchases:Rs.10,000

Total expenses: Rs.5,000

Capital at start: Rs.62,000

Capital at end: Rs.18,000

(c) Calculate the relevant liquidity ratios with the following information:

Trade Debtors: Rs.21,000

Trade Creditors: Rs.15,000

Proposed dividends: Rs.2,500

Bank: Rs.5,000

Closing stock: Rs.9,000

Opening stock: Rs.8,000

Answer

a) (1) Dividend yield = ( Dividend per share/ Market price per share ) * 100 % = (0.2 / 5) * 100% = 4%

(2) Earnings per share (EPS) = Profit available to shareholders / Number of shares =Rs.100,000 / 200,000 = Rs.0.50

(3) Price earnings ratio (P/E) = Market price per share / EPS = Rs. 5 / 0.50 = 10

(4) Payout Ratio = Dividend per share / EPS = 0.2 / 0.5 = 0.4 = 40%

b) (1) Gross profit percentage = (Gross profit / Net sales) * 100 = (30,000 / 50,000) *100 = 60%

(2) Net profit percentage = (Net profit / Net sales) * 100 = (25,000 / 50,000) * 100 = 50%

(3) Return on capital employed = (Profit before interest / Capital employed) * 100 % = (25,000 / 40,000) * 100 = 62.5%

489

Workings Gross profit = Sales – Cost of goods sold = 50,000 – 20,000 = Rs. 30,000

Cost of goods sold = Stock at start + Purchases – Stock at end = 30,000 + 10,000 – 20,000 = Rs. 20,000

Net profit = Gross profit – Total expenses = 30,000 – 5,000 = Rs. 25,000

Average capital employed = (Capital at start + Capital at end) / 2 = (62,000 + 18,000)/ 2 = Rs. 40,000

(c) (1) Current ratio = Current Assets / Current Liabilities = 35,000 / 17,500 = 2

(2) Quick ratio = (Current Assets – stock) / Current Liabilities = (35,000 – 9,000) / 17,500 = 1.49

Workings:

Current assets = closing stock + debtors + bank = 9,000 + 21,000 + 5,000 = Rs. 35,000

Current liabilities = creditors + proposed dividends = 15,000 + 2,500 = Rs. 17,500

Question 28

(a) Given:

Current Ratio = 2.6

Liquid Ratio = 1.4

Working Capital = Rs. 1,04,500

Calculate: (I) Current Assets (2) Current Liabilities (3) Liquid Assets and (4) Stock.

(b) Calculate Gross Profit Ratio from the following figures :

Rs.

Sales 50,000

Sales Return 5,000

Closing Stock 3,500

Opening Stock 7,000

Purchases 35,000

Answers

a) Calculation of current assets and current liabilities :


Current Ratio = Current Assets: Current Liabilities

(or) Current Assets /Current Liabilities

= 2.6:1

490

Working Capital =Current Assets – Current Liabilities

=2.6– 1

=1.6

Working Capital (Given) = 1,04,500

= 1.6 =1,04,500

(1) Current Assets = 1,04,500 x 2.6 /1.6 = Rs. 1,69,812

(2) Current Liabilities=1,04,500 x1/1.6= Rs.65312

(3) Calculation of Liquid Assets :

Liquid Ratio (Given) =1.4

Liquid Ratio = Liquid Assets/Current Liabilities

1.4=Liquid Assets/65312

Liquid Assets=65312 x 1.4=91,437

(4) Calculation of Stock:

Liquid Assets = Current Assets – (Stock + Prepaid Expenses)

Stock = Current Assets – Liquid Assets

= 1,69,812 – 91,437

= 78,375

b) Gross Profit Ratio = Gross Profit / Net Sales x 100

Net Sales = Sales – Sales Return

= Rs. 50,000 – 5,000

= Rs. 45,000

Gross Profit = Sales – Cost of Goods Sold

Cost of goods sold = Opening Stock + Purchase – Closing Stock

= Rs. 7,000 + 35,000 – 3,500

= Rs. 42,000 – 3,500 = Rs. 38,500

Gross Profit = Rs. 45,000 – 38,500 = Rs. 6,500

Gross Profit Ratio = 6,500 / 45,000 x100

= 14.44%

491

Question 29

The following is the Balance sheet of M/s Sharma Ltd. for the year ending 31st March 2015:


Equity Share Capital 40,000 Goodwill 15,000

Reserves 4,000 Building 20,000

Profit and Loss Alc 8,000 Machinery 25,000

Debenture 10,000 Stock 8,000

Secured Loans 10,000 Sundry Debtors 6,000

Creditors 8,000 Bills Receivable 4,000

Provision for Tax 5,000 Cash at Bank 5,000

Bills Payable 4,000 Preliminary Expenses 6,000

89,000 89,000


(a) Current Ratio

(b) Liquid Ratio

(c) Gross Capital Employed

(d) Net Capital Employed

(e) Average Capital Employed

(f) Return on Capital Employed Ratio

Answer

(a) Current Ratio = Current Assets /Current Liabilities

Current Assets = Stock + Sundry Debtors + Bills Receivable + Cash at Bank +Preliminary Expenses

= 8,000+6,000+4,000 + 5,000+6,000

= 29,000

Current Liabilities = Creditors + Provision for Tax + Bills Payable

= 8,000+5,000+4,000

= 17,000

492

Current Ratio = 29,000 / 17,0000

= 1.70

(b) Liquid Assets = Current Assets – (Stock and Preliminary Expenses)

= 29,000 – (8,000+6,000)

= 15,000

Liquid Ratio = 15,000 / 17,000 =0.88

(c) Gross Capital Employed = Fixed Assets + Current Asset

Fixed Assets = Goodwill + Building + Machinery

= 15,000+20,000+29,000

= 60,000

Current Assets = 29,000

Gross Capital Employed= 60,000+29,000

= 89,000

(d) Net Capital Employed = Total Assets – Current Liabilities

Total Assets = 89,000

Current Liabilities = 17,000

Net Capital Employed = 89,000-17,000

= 72,000

(e) Average Capital Employed = Net Capital Employed + 1/2of Profit after Tax

½ of Profit after Tax = ½(8,000-5,000)

= 1,500

Average Capital Employed = 72,000+1,500

= 73,500

(f) Return on Capital Employed = Net Profit after Tax /Gross Capital Employed x 100

= ((8,000-5,000)/89,000) x 100

= 3.37%

Question 30

a) Classify the following into cash flows from operating activities investing activities financing activities :

(a) Sale of goods in Cash

(b) Cash paid to suppliers of raw material

(c) Cash payments of salaries and wages to employees.

493

(d) Cash payment to acquire fixed assets

(e) Cash proceeds from issues of shares at premium.

(f) Payment of dividend

(g) Interest received on investment

(h) Interest on debenture

(i) Payment of income tax

(j) Cash payment of a long term loan

b) Fill in the blanks:

(i) Provision for taxation is .............

(ii) Increases in share capital is ...........................

(iii) Purchase of fixed assets is ...........................

(iv) Decrease in share capital is ...........................

c) The following relevant Information is obtained from the book of XL LTD.

Liabilities 2014 2015

Rs Rs

Provision for Taxation 40,000 56,000

The amount of tax paid during 2015 amounted to Rs.32,000. How would you deal with this item presuming to be non current? Net profit after taxation is given as Rs.64,000.

Answer

(a) Cash Flow from operating activities are:

(a) Cash sale of goods

(b) Cash paid to suppliers of raw materials

(c) Cash payment of salaries and wages

(d) Payment of Income Tax

Cash Flow from investing Activities

(a) Cash payment to acquire fixed assets

(b) Interest received on Investment

Cash Flow from financing Activities

494

(a) Cash proceeds from issuing shares at premium

(b) Payment of dividends

(c) Interest paid on debentures

(d) Cash payment of a long term loan

(b) i) Non-operating Expenses iii) Investment activities

ii) Inflow of Cash iv) Out flow of Cash

(c)

Dr. Provision for Taxation Account Cr.


To Bank 32,000 By Balance b/d

40,000

To Balance c/d 56,000 By Profit and loss A/c (Bal. Fig.)

48,000

88,000 88,000

(i) Cash provided from operating activities: Rs.

Net Income after taxation 64,000

Add: Provision for taxation treated as non-cash expense 48,000

1,12,00

Question 31

From the following information as at 31st March 2015 prepare balance sheet:

Current ratio 2.5 Working capital 30,000

Liquidity ratio 1.5 Reserves and surplus 20,000

Proprietary ratio 0.75 Bank overdraft 5,000

There is no long-term loan or fictitious asset.

Answer

Working Notes:

(1) Current Ratio = Current Assets/ Current Liabilities= 2.5

Current Asset = 2.5 (Current liabilities)

Working Capital = Current assets – Current liabilities

495

Rs.30,000 = 2.5 (Current liabilities) – Current liabilities

Rs.30,000 = 1.5 (Current liabilities)

Current liabilities = 20,000

Therefore, Current assets = 50,000

(2) Proprietary funds + Current liabilities = Current assets + Fixed assets

Fixed Assets /Proprietary Funds = 0.75

Fixed assets = 0.75 (Proprietary funds)

Substituting in the equation above

Proprietary funds + 20,000 = 50,000 + 0.75 (Proprietary funds)

0.25 Proprietary funds = 30,000

Proprietary funds = 1,20,000

Hence,

Fixed assets = 0.75 (1,20,000)

Fixed assets = 90,000

Share capital = Proprietary funds – Reserve and surplus

= 1,20,000 – 20,000 = 1,00,000

(3) Liquid ratio = Liquid assets / Current Liabilities =1.5

Liquid Assets = 30,000 i.e. 1.5 (Current liabilities)

Therefore, stock = 50,000 – 30,000 = 20,000

(i.e. Stock = Current assets – Liquid assets)

Balance Sheet as at 31st March 2015


Capital 1,00,000 Fixed assets 90,000

Reserves and surplus 20,000 Stock 20,000

Bank overdraft 5,000 Other current assets 30,000

Other current liabilities 15,000

1,40,000 1,40,000

496

Question 32

What is a cash flow statement? Write down its usefulness.

Answers

A statement of cash flows reports the inflows and outflows of cash and its equivalents of an organisation during a particular period. A statement of cash flow reports cash receipts and payments classified according to the entities’ major activities – operating, investing and financing during the period. This statement reports a net cash inflow or net cash outflow for each activity and for the overall business. It also reports from where cash has come and how it has been spent. It explains the causes for the changes in the cash balance

Usefulness of a Cash flow statement:

(i) Predict future cash flows : The cash flow statement makes it possible to predict the amounts, timing and uncertainty of future cash flows on the basis of what has happened in the past. This approach is better than accrual basis data presented by Statement of Profit & Loss and the balance sheet.

(ii) Determine the ability to pay dividends and other commitments : A cash flow statement indicates the sources and uses of cash under suitable headings such as operating, investing and financing activities. Shareholders are interested in receiving dividends on their investments in the shares. Creditors want to receive their interest and principal amount on time. The statement of cash flows helps investors and creditors to predict whether the business can make these payments.

(iii) Show the relationship of net income to changes in the business cash : Usually cash and net income move together. High levels of income tend to lead to increase in cash and vice-versa. However, a company’s cash balance can decrease when its net income is high, and cash can increase when income is low. The users want to know the difference between the net profit and net cash provided by operations. The net profit shows the progress of the business during the year while cash flow relates more to the liquidity of the business. The users can assess the reliability of net profit with the help of cash flow statement.

(iv) Efficiency in cash management : Cash flow analysis helps in evaluating financial policies and cash position. It facilitates the management to plan and co-ordinate the financial operations properly. The management can estimate how much funds are needed, from which source they will be derived, how much can be generated internally and how much should be arranged from outside.

(v) Discloses the movement of cash : A comparison of cash flow statement for the previous year with the budget for that year would indicate to what extent the resources of the enterprise were raised and applied. A comparison of the original forecast with actual result may highlight trend of movement that might otherwise remain undetected.

497

(vi) Discloses success or failure of cash planning : A success or failure of cash planning can be known by comparing the projected cash flow statement with the actual cash flow statement and necessary remedial measures can be taken. Moreover it provides a better measure for inter-period and inter-firm comparison.

vii) Evaluate management decisions : The statement of cash flows reports the companies’ investing and financing activities and thus gives the investors and creditors about cash flow information for evaluating managers’ decisions.

Question 33

From following information of ABC Ltd. prepare cash flow statement for the year ended 31.3.2015.

31.3.2014 Rs.

31.3.2015 Rs.

Liabilities

Equity share capital 1,50,000 2,00,000

8% Preference shares 75,000 50,000

Capital reserve - 10,000

General reserve 20,000 25,000

Profit & Loss Account 15,000 24,000

Proposed dividend 21,000 25,000

Sundry creditors 12,500 23,500

Bills payable 10,000 8,000

Liability for expenses 15,000 18,000

Provision for taxation 20,000 25,000

3,38,500 4,08,500

Assets

Goodwill 50,000 40,000

Land and building 1,00,000 85,000

Plant 40,000 1,00,000

Investment 10,000 15,000

Sundry debtors 70,000 85,000

498

Stock 38,500 54,500

Bills receivable 10,000 15,000

Cash in hand 7,500 5,000

Cash at bank 5,000 4,000

Preliminary expenses 7,500 5,000

3,38,500 4,08,500


(i) A piece of land has been sold during the year and the profit on sale has been credited to capital reserve. Depreciation charged on building during the year is Rs.2,500; no additions under this head during the year.

(ii) A machine was sold for Rs.5,000. The written down value of the machine was Rs.6,000. Depreciation of Rs.5,000 is charged on plant in 2014-15.

(ii) Investments are trade investments. Rs.1,500 by way of dividend is received including Rs.500 from pre-acquisition profit which has been credited to investment account.

(iii) An interim dividend of Rs.10,000 has been paid in 2014-15.

Answer

Cash Flow Statement for the year ended 31.3.2015

Cash Flows from Operating Activities:

Net profit before tax and extraordinary items

Adjustments for: Depreciation:

Building 2,500

Plant & Machinery 5,000

Preliminary expenses

Loss on sale of plant

Goodwill written off

Dividend received

Operating profit before working capital changes

Adjustments for:

Increase in debtors

Increase in stock

54000

7500

2,500

1,000

10,000

(1,000)

74,000

(15,000)

(16,000)

499

Increase in bills receivable

Decrease in bills payable

Increase in sundry creditors

Increase in liability for expenses

Net Cash from Operating Activities

(5,000)

(2,000)

11,000

3,000

50,000

Cash Flows from Investing Activities:

Sale of proceeds of land

Sale proceeds of machine

Purchase of plant

Purchase of investment

Dividend received

Net Cash Used in Investing Activities

22,500

5,000

(71,000)

(5,500)

1,500

(47,500)

Cash Flows from Financing Activities:

Issue of share capital

Redemption of preference shares

Interim dividend paid

Dividend paid (assumed)

Net Cash Used in Financing Activities

50,000

(25,000)

(10,000)

(21,000)

(6,000)

Net Increase in Cash and Cash Equivalents (3,500)

Cash and Cash Equivalents on 31.3.2014 (Opening balance) 12,500

Cash and Cash Equivalents on 31.3.2015(Closing balance) 9,000

(i) Net profit before tax and extra-ordinary items:

Profit & Loss Account as on 31.3.2015 24,000

Less: Profit & Loss Account as on 31.3.2014 (15,000)

Profit earned during the year after appropriation and provision for tax 9,000

Add: Transfer to general reserve 5,000

Proposed dividend 25,000

Interim dividend 10,000

Provision for taxation 5,000 45,000

Profit before tax and extraordinary items 54,000

500

Dr. Land and Building Account Cr.


To Balance b/d 1,00,000 By Depreciation A/c 2,500

To Capital reserve 10,000 By Bank (purchases) (Bal. Fig.)

22,500


1,10,000 1,10,000

Dr. Plant and Machinery Account Cr.


To Balance b/d 40,000 By Bank (sales) 5,000

To Bank (purchases) 71,000 By Profit & Loss Account (loss)

1,000

By Depreciation 5,000


1,11,000 1,11,000

Dr. Investment Account Cr.


To Balance b/d 10,000 By Dividend 500

To Bank (purchases)

5,500 By Balance c/d

15,000

15,500 15,500

***

Documents

Soft copy of Practice Manual - Cost and Management Accounting