cost accounting part 2

CA-CMA Inter

Cost Accounting

Part 2

Dr CMA T K Sridhar

Edition: September, 2021

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CONTENT

Page

Cost Accounting

1 Cost Book Keeping 1

2 Methods of Costing

2.1 Job Costing 12

2.2 Batch Costing 19

2.3 Contract Costing 21

2.4 Process Costing 34

2.5 Joint Products & By Products 57

2.6 Service Costing / Operating Costing 64

3 Cost Accounting Technique

3.1 Marginal Costing 74

3.2 Standard Costing – Variance Analysis 95

3.3 Budget and Budgetary Control 109

Cost Book Keeping 1

1. COST BOOK KEEPING

1. Cost Control Accounts: These are accounts maintained for the purpose of exercising control over

the costing ledgers and also to complete the double entry in cost accounts.

2. Integral System of Accounting – A system of accounting where both costing and financial

transactions are recorded in the same set of books.

3. Non-Integral System of Accounting – A system of accounting where two sets of books are

maintained – (i) for costing transactions and (ii) for financial transactions.

4. Reconciliation – In the Non-Integral System of Accounting, since the cost and financial accounts

are kept separately, it is needed for reconciliation.

Format a Reconciliation Statement

Particulars ₹ ₹

Profit as per Cost Accounts ××××

Add Items increases profit in financial accounts:

Over-absorption of OH ××××

Over-valuation of Opening Stock in Costing ××××

Under-valuation of Closing Stock in Costing ××××

Financial Incomes: (e.g.) Interest & Dividend ×××× ××××

Less Items decreases profit in financial accounts:

Under-absorption of OH ××××

Under-valuation of Opening Stock in Costing ××××

Over-valuation of Closing Stock in Costing ××××

Financial Expenses: Bad Debts ×××× ××××

Profit as per Financial Accounts (A + B +C) ××××

PRACTICAL PROBLEMS

Non-Integration or Inter Locking Method

Question 1: The following balances appeared in the books on 1.1.2019:

General Ledger Adjustment A/c 15,200

Stores Ledger Control Account 8,750

Work-in-progress Ledger Control A/c 4,280

Finished Goods Ledger Control A/c 2,170 15,200

On 31.12.2019 the following information were supplied

Purchases for stores 60,640

Purchases for special job 1,950

Cost Accounting 2

Direct wages 38,627

Indirect factory wages 9,543

Administration salaries 6,731

Selling and distribution salaries 4,252 59,153

Production expenses 10,432

Administrative expenses 9,546

Selling and distribution expenses 6,430

Stores issued to production 56,501

Stores issued to maintenance account 2,586

Returns to supplier 312

Production overhead absorbed by production 23,410

Administrative OH absorbed by finished goods 15,150

Selling overhead recovered on sales 9,515

Production finished during the year 1,18,517

Finished goods sold at cost 1,33,382

Sales 1,55,000

You are required to record the entries in cost ledger for the year 2001 and prepare a TB.

Answer: M.K. Company Ltd. – COST LEDGER

General Ledger Adjustment A/c

To Stores Ledger Control A/c 312 By Balance b/d 15,200

Sales A/c 1,55,000 Stores Ledger Control A/c 60,640

Balance c/d 18,697 Work-in-progress Control A/c 1,950

Wages Control A/c 59,153

Production OH Control A/c 10,432

Administration OH Control A/c 9,546

Selling OH Control A/c 6,430

Costing P & L A/c 10,658

1,74,009 1,74,009

Stores Ledger Control A/c

To Balance b/d 8,750 By Work-in-progress C A/c 56,501

General Ledger Adj. A/c 60,640 Production OH C A/c 2,586

General Ledger Adj. A/c 312

Cost Book Keeping 3

Balance c/d 9,991

69,390 69,390


To Balance b/d 8,750 By Work-in-progress Control A/c 56,501

General Ledger Adj. A/c 60,640 Production OH Control A/c 2,586

General Ledger Adj. A/c 312

Balance c/d 9,991

69,390 69,390

Wages Control A/c

To General Ledger Adj. A/c 59,153 By Work-in-progress C A/c 38,627

Production OH C A/c 9,543

AOH C A/c 6,731

Selling OH C A/c 4,252

59,153 59,153

Production OH Control A/c

To General Ledger Adj. A/c 10,432 By Work-in-progress C A/c 23,410

Stores Ledger C A/c 2,586

Wages C A/c 9,543

Costing P & L A/c (OA) 849

23,410 23,410

Work-in-progress Control A/c

To Balance b/d 4,280 By FG Control A/c 1,18,517

General Ledger Adj. A/c 1,950 Balance c/d 6,251

Stores Ledger Control A/c 56,501

Wages Control A/c 38,627


1,24,768 1,24,768

Administration Overhead Control A/c

To General Ledger Adj. A/c 9,546 By FG Control A/c 15,150

Wages Control A/c 6,731 Costing P/L (UA) 1,127

Cost Accounting 4

16,277 16,277

Finished Goods Control A/c

To Balance b/d 2,170 By Cost of Sales a/c 1,33,382

WIP Control A/c 1,18,517 Balance c/d 2,455

AOH Control a/c 15,150

1,35,837 1,35,837

Selling Overhead Control A/c

To General Ledger Adj. a/c 6,430 By Cost of Sales a/c 9,515

Wages Control a/c 4,252 Costing P/L (UA) 1,167

10,682 10,682

Cost of Sales A/c

To FG Control a/c 1,33,382 By Sales A/c 1,42,897

Selling OH Control a/c 9,515

1,42,897 1,42,897

Costing P/L A/c

To Cost of Sales A/c 1,42,897 By General Ledger Adj. A/c 1,55,000

AOH Control A/c 1,127 Production OH Control A/c 849

Selling OH Control a/c 1,167

General Ledger Adj. A/c 10,658

1,55,849 1,55,849

Trail Balance

Stores Ledger Control A/c 9,991 General Ledger Adj. A/c 18,697

WIP Ledger Control A/c 6,251

FG Ledger Control A/c 2,455

18,697 18,967

Cost Book Keeping 5

Reconciliation Statement

Question 2: The following figures were available for the year ended 31.3. 2001:

Particulars Financial A/c Cost A/c

Opening stock

Raw material 6,000 5,000

Work-in-progress 7,000 6,500

Finished Stock 5,000 4,500

Closing Stock

Raw material 4,000 4,300

Work-in-progress 3,000 3,700

Finished Stock 5,900 6,200

Purchases 40,000

Direct Wages 20,000

Factory Expenses 20,000 21,000 absorbed

Sales 1,10,000

Administration Expenses 3,000 2,300 absorbed

Selling Expenses 4,000 4,500 absorbed

Financial expenses 1,000

Interest and Dividends Received 1,600

Compute profit in Financial Accounts as well as in Cost Accounts and prepare a Reconciliation

Statement. Show clearly the reasons for the variation of the two profit figures.

Answer:

Cost Sheet

Opening Stock of Raw Materials 5,000

Add Purchase of Raw Materials 40,000

45,000

Less Closing Stock of Raw Materials 4,300

Materials Consumed 40,700

Direct Wages 20,000

Prime Cost 60,700

Factory Overheads 21,000

Gross Factory Cost 81,700

Add Opening Stock of WIP 6,500

88,200

Cost Accounting 6

Less Closing Stock of WIP 3,700

Net Factory Cost 84,500

Administration expenses 2,300

Cost of Production 86,800

Add Finished Goods (Beginning) 4,500

Cost of Goods Available for Sale 91,300

Less Finished Goods (Closing) 6,200

Cost of Goods Sold 85,100

Selling Expenses 4,500

Cost of Sales 89,600

Profit as per Cost A/c 20,400

Sales 1,10,000

Profit and Loss A/c (Financial Books)

To Opening Stock By Sales 1,10,000

Raw Materials 6,000 Closing Stock:

Work-in-progress 7,000 Raw Materials 4,000

Finished Stock 5,000 Work-in-progress 3,000

Purchases 40,000 Finished Stock 5,900

Direct Wages 20,000 Interest and Dividend 1,600

Factory Expenses 20,000

Admn. Expenses 3,000

selling Expenses 4,000

Financial Expenses 1,000

Net profit 18,500

1,24,500 1,24,500

Reconciliation statement

Profit as per Costing 20,400

Add Over absorption of FOH (21,000 – 20,000) 1,000

Over absorption of Selling OH (4,500 – 4,000) 500

Interest and Dividend Received 1,600 3,100

Total 23,500

Less Over valuation of opening stock in financial a/c 2,000

Undervaluation of closing stock in financial a/c 1,300

Cost Book Keeping 7

Financial expenses charged in financial a/c 1,000

Under absorption of AOH 700 5,000

Profit as per Financial A/c 18,500

Question 3: A manufacturing company disclosed a net loss of ₹3,47,000 as per their cost accounts for

the year ended 31.3.2003. The financial accounts however disclosed a net loss of ₹5,10,000 for the same

period. The following information was revealed as a result of scrutiny of the figures of both the sets of

accounts.

Particulars ₹

(i) Factory Overheads under-absorbed 40,000

(ii) Administration Overheads over-absorbed 60,000

(iii) Depreciation charged in Financial Accounts 3,25,000

(iv) Depreciation charged in Cost Accounts 2,75,000

(v) Interest on investments not included in Cost Accounts 96,000

(vi) Income-tax provided 54,000

(vii) Interest on loan funds in Financial Accounts 2,45,000

(viii) Transfer fees (credit in financial books) 24,000

(ix) Stores adjustment (credit in financial books) 14,000

(x) Dividend received 32,000

Prepare a memorandum Reconciliation A/c

Answer:

Memorandum Reconciliation A/c

Particulars ₹ Particulars ₹

To Net loss as per costing 3,47,000 By Over absorption of AOH 60,000

Under absorption of FOH 40,000 Financial items (Credits)

Depreciation charged less in Costing 50,000 Interest on investment 96,000

Financial items (Debits) Transfer fees 24,000

Income tax 54,000 Stores adjustment 14,000

Interest on loan 2,45,000 Dividend received 32,000

Net loss as per financial a/c 5,10,000

7,36,000 7,36,000

Cost Accounting 8

Integrated A/c

Question 4: The extract of balances of integrated ledger on 31.3.2020 is given below:

Particulars Dr Cr

Stores Control A/c 3,600

FG A/c 2,600

WIP A/c 3,400

Creditors A/c 1,600

Cash at Bank 2,000

Debtors A/c 2,400

Fixed Assets A/c 11,000

P/L A/c 6,400

Depreciation Provision A/c 1,000

Share Capital A/c 16,000

Total 25,000 25,000

Transactions for the year ending 31st March, 2020 were:


Wages-indirect 1,000 Selling and distribution OH – cheque 2,800

Wages-direct 17,400 Depreciation (works) 260

Stores purchased on credit 20,000 Payment from customers 58,000

Stores issued to production 22,000 Payment to suppliers 20,200

Stores issued to repair order 400 Purchases of fixed assets in cash 400

Goods finished during the period 43,000 Fines paid 100

Goods sold at cost 46,400 Income Tax 4,000

Goods sold at sales value (on credit) 60,000 Charitable donations 200

Production overhead recovered 9,600 Prepaid rent in production OH 60

Production overhead Paid –Cheque 8,000 Interest on Bank Loan 20

Administration overhead –Cheque 2,400

You are required to write up the a/c in integral ledger and take out a TB.

Answer:



To Balance b/d 3,600 By WIP Control A/c 22,000

Creditors A/c 20,000 POH Control A/c 400

Cost Book Keeping 9

Balance c/d 1,200

23,600 23,600

Wages Control A/c

To Bank 18,400 By Work-in-progress C A/c 17,400


18,400 18,400

Production OH Control A/c

To Bank 8,000 By Work-in-progress C A/c 9,600

Stores Ledger C A/c 400 Prepaid Rent 60

Wages C A/c 1,000

Depreciation Provision 260

9,660 9,660

WIP Control A/c

To Balance b/d 3,400 By FG C A/c (COP) 43,000

Stores Ledger C A/c 22,000 Balance c/d 9,400

Wages C A/c 17,400


52,400 52,400

AOH Control A/c

To Bank A/c 2,400 By FG LC A/c 2,400

2,400 2,400

FG C A/c

To Balance b/d 2,600 By Cost of Sales a/c 46,400

AOH L Control A/c 2,400

WIP C A/c 43,000 Balance c/d 1,600

48,000 48,000

Selling OH C A/c

To Bank 2,800 By Cost of Sales A/c 2,800

2,800 2,800

Cost Accounting 10

Cost of Sales A/c

To FG C a/c 46,400 By Costing P/L A/c 49,200

Selling OH C a/c 2,800

49,200 49,200

Costing P/L A/c

To Cost of Sales A/c 49,200 By Debtors (Sales) 60,000

P/L A/c 10,800

60,000 60,000

P/L A/c

To Charitable Donations 200 By Balance b/d 6,400

Interest on Bank Loan 20 Costing P/L A/c 10,800

Fines 100

Income Tax 4,000

NP 12,880

17,200 17,200

Prepaid A/c

To Production OH A/c 60 By Balance c/d 60

60 60

Depreciation Provision A/c

To Balance c/d 1,260 By Balance b/d 1,000

Production OH 260

1,260 1,260

Debtors A/c

To Balance b/d 1,260 By Bank 58,000

Cost of Sales A/c 60,000 Balance c/d 4,400

62,400 62,400

Creditors A/c

To Bank 20,200 By Balance b/d 1,600

Cost Book Keeping 11

Balance c/d 1,400 Stores Control A/c 20,000

21,600 21,600

Fixed Assets A/c

To Balance b/d 11,000 By

Bank 400 Balance c/d 11,400

11,400 11,400

Bank A/c

To Balance b/d 2,000 By Wages C A/c 18,400

Debtors A/c 58,000 Fixed Assets A/c 400

Production OH A/c 8,000

Administration OH A/c 2,400

Selling OH 2,800

Creditors A/c 20,200

Charitable Donation 200

Fines 100

Interest on Bank Loan 20

Income Tax 4,000

Balance c/d 3,480

60,000 60,000

Share Capital A/

To Balance c/d 16,000 By Balance b/d 16,000

16,000 16,000

Trail Balance

Stores C A/c 1,200 Creditors A/c 1,400

FG A/c 1,600 P/L A/c 12,880

WIP A/c 9,400 Depreciation Provision A/c 1,260

Cash at Bank 3,480 Share Capital A/c 16,000

Debtors A/c 4,400

Prepayments A/c 60

Fixed Assets A/c 11,400

31,540 31,540

Cost Accounting 12

2 METHODS OF COSTING

2.1 JOB COSTING

Job costing:

A method of costing

Used when the work is undertaken as per the customer’s special requirement

Price is quoted to the customer on estimation

Actual cost is compared with estimation for price variation and P/L

Applicable: printing press, ship-building, heavy machinery, interior decoration, etc.

{CA inter M01}

PRACTICAL PROBLEMS

Job Cost Sheet

Question: The Production department of a factory furnishes the following data for May 2013.

Materials used ₹54,000

Direct Wages ₹45,000

Overheads ₹36,000

Labour hours worked 36,000

Machine hours 30,000

For a certain job executed by the Department during the period, the following date is given:

Materials used ₹6,000

Direct Wages ₹5,000

Labour hours worked 4,000

Machine hours used 2,400

Calculate the cost of the job when the overheads are charged using

(i) Direct Material Cost Rate

(ii) Labour Hour Rate

(iii) Machine Hour Rate

{CMA inter J13, 5 marks}

Answer: Statement of the cost of the job

Base for OH recovery Direct Material Labour Hour Rate Machine Hour Rate

Particulars ₹ ₹ ₹

Material Cost 6,000 6,000 6,000

Labour 5,000 5,000 5,000

Job Costing 13

Overheads (𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝐵𝑎𝑠𝑒)

36,000

54,000× 6,000

4,000 36,000

36,000× 4,000

4,000 36,000

30,000× 2,400

2,880

Cost of Job 15,000 15,000 13,880

Job Costing

Question 2: During June 2001, a company was engaged on three jobs, all of which were started on 1st

June. The following details relating to the jobs are available:

Particulars Total Job 120 Job 121 Job 122

Purchase of Materials 5600 2000 2200 1400

Stores issued 940 240 - 700

Direct Wages 2200 900 700 600

Materials returned to Stores 40

Materials valued at ₹80 were transferred from job number 120 to Job No. 122. Overheads for the month

amounted to ₹2,800 and overheads are absorbed at 120% of direct wages. Job No. 121 was completed

during the month and invoiced to the customer at ₹4,200.

Prepare Job Cost A/c, Work-in-progress Control A/c, Overheads Control A/c and Costing P/L A/c for

June 2001.

Answer:

Job Cost A/c

J-120 J-121 J-122 J-120 J-121 J-122

To Direct Material 2,000 2,200 1,400 By Transfers 80

Stores 240 700 Costing PL 3,740

Direct Wages 900 700 600 Material Returned 40

Overheads 1,080 840 720

Transfer 80 Balance c/d 4,140 3,460

4220 3740 3,500 4,220 3,740 3,500

WIP Ledger Control A/c

To Direct Material 5,600 By Direct Material Returned 40

Stores 940 J-121 A/c 3,740

Direct Wages 2,200

Overheads 2,640 Balance c/d 7,600

11,380 11,380

Cost Accounting 14

Overheads Ledger Control A/c

To OH Incurred 2,800 By OH Absorbed 2,640

Under Absorption 160

2,800 2,800

Costing P/L A/c

To J-121 A/c 3,740 By Sales 4,200

Under absorption 160

Profit 460

4,200 4,200

Question 3: In a factory following the job costing Method, an abstract from the WIP as at 30th Sep was

prepared as under:

Job No. Material Director Labour Factory overheads Applied

115 1,325 400 hours 800 640

118 810 250 hours 500 400

120 765 300 hours 475 380

2,900 1,775 1,420

Materials used in October were as follows:

Material requisition Job Cost

No. No. ₹

54 118 300

55 118 425

56 118 515

57 120 665

58 121 910

59 124 720

3,535

Labour Hours during October

Job no Number of Hours

Shop A Shop B

115 25 25

118 90 30

120 75 10

Job Costing 15

121 65 —

124 20 10

275 75

Indirect Labour:

Waiting for material 20 10

Machine Breakdown 10 5

Idle time 5 6

Overtime Premium 6 5

316 101

A shop credit slip was issued in October that material issued under Requisition No. 54 was returned to

stores as being not suitable. A material Transfer Note issued in October indicated that material issued

under requisition No.55 for job 118 was directed to job 124.

The hourly rate in shop A per labour hour is ₹3 per hour while at shop B, it is ₹2 per hour. The Factory

Overhead is applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October.

You are asked to compute the factory cost of the completed jobs. It is the practice of the management

to put a 10% on the factory cost to cover administration and selling overheads and invoice the job to

the customer on a total cost plus 20% basis. What would be the invoice price of these three jobs?

{CMA inter, J16, 15 marks}

Answer:

Factory Cost Statement of Completed Jobs

Month Job No. Materials Direct labour FOH (80% of DL) Factory cost

September 115 1,325 800 640 2,765

October 115 — 125 100 225

Total 1,325 925 740 2,990

September 118 810 500 400 1,710

October 118 515 330 264 1,109

Total 1,325 830 664 2,819

September 120 765 475 380 1,620

October 120 665 245 196 1,106

Total 1,430 720 576 2,726

Invoice price of completed jobs

Job number 115 118 120

Factory cost 2,990 2,819 2,726

Admn. And SD OH @ 10% on factory cost 299 282 273

Total Cost 3,289 3,101 2,999

Cost Accounting 16

Profit (20% of Total cost) 658 620 600

Invoice price 3,947 3,721 3,599

Note: In the above solution it has been assumed that indirect labour costs have been included in the

factory overhead and they have been recovered as 80% of the labour cost.

Question 4: A factory incurred the following expenditure during the year 2007:

Particulars ₹ ₹

Direct material consumed 12,00,000

Manufacturing Wages 7,00,000

Manufacturing overhead: 19,00,000

Fixed 3,60,000

Variable 2,50,000 6,10,000

Cost of Production 25,10,000

In the year 2008, following changes are expected in production and cost of production.

1. Production will increase due to recruitment of 60% more workers in the factory.

2. Overall efficiency will decline by 10% on account of recruitment of new workers.

3. There will be an increase of 20% in Fixed overhead and 60% in Variable overhead.

4. The cost of direct material will be decreased by 6%.

5. The company desires to earn a profit of 10% on selling price.

Ascertain the cost of production and selling price.

{CA inter M08, 8 marks}

Answer:

Particulars ₹ ₹ Workings

Direct material consumed 12,00,000 16,24,320 12,00,000 ×

1441

100×

94

100

Manufacturing Wages 7,00,000 11,20,000 7,00,000 ×

160

100

Manufacturing overhead: 19,00,000 27,44,320

Fixed 3,60,000 4,32,000 3,60,000 ×

120

100

Variable 2,50,000 4,00,000 2,50,000 ×

160

100

Cost of Production 25,10,000 35,76,320 90

Profit 3,97,369 10

Sales 39,73,689 100

1 Production will increase by 60% but efficiency will decline by 10%. hence

160 – 10% of 160 = 144% so increase by 44%.

Job Costing 17

Question 5: In an engineering company, the factory overheads are recovered on a fixed percentage

basis on direct wages and the administration overheads are absorbed on a fixed percentage basis on

factory cost. The company has furnished the following data relating to two jobs undertaken by it in a

period:

Job 101 Job 102

₹ ₹

Direct Materials 54,000 37,500

Direct Wages 42,000 30,000

Selling Price 1,66,650 1,28,250

Profit Percentage on total cost 10% 20%

Required:

1. Computation of percentage recovery rates of factory overheads and administrative overheads.

2. Calculation of the amount of factory OH, administrative OH and profit for each of the two jobs.

3. Using the above recovery rates fix the selling price of job 103. The additional data being

Direct Materials 24,000

Direct Wages 20,000

Profit percentage on selling price 12.5%


Answer: (i) Let factory overhead recovery rate, as percentage of direct wages be F and administrative

overheads recovery rate, as percentage of factory cost be A. Also assumed as no selling overheads

Description Job 101 Job 102

Direct Materials 54,000 37,500

Direct Labour 42,000 30,000

Prime Cost 96,000 67,500

+ Factory Overheads 42,000F 30,000F

Factory Cost 96,000+ 42,000F 67,500+30,000F

Administration Overheads (96,000+42,000F)A (67,500+30,000F)A

Cost of Production / Cost of Sales 100 1,51,500 100 1,06,875

+ Profit 10 15,150 20 21,375

Sales 110 1,66,650 120 1,28,250

Total Cost of Production of Jobs:

Job 101 = (₹96,000 + ₹42,000F) + (₹96,000 + ₹42,000F)A = 1,51,500

Job 102 = (₹67,500+ ₹30,000F) + (₹67,500 + ₹30,000F)A = 1,06,875

Simplifying the equations

Job 101 = 96,000 + 42,000F + 96,000A + 42,000FA = 1,51,500

Job 102 = 67,500 + 30,000F + 67,500A + 30,000FA = 1,06,875

Cost Accounting 18

Multiplying equation Job 102 with 1.4

Job 101 96,000 + 42,000F + 96,000A + 42,000FA = 1,51,500

Job 102 ×1.4 94,500 + 42,000F + 94,500A + 42,000FA = 1,49,625

[Job 101 – Job 102] & finding A

1,500 + 1,500A = 1,875

A [% of AOH on FC] 0.25 = 25%

Applying 0.25 in A and finding F

Job 101 96,000 + 42,000F + 96,000A + 42,000FA = 1,51,500

96,000 + 42,000F + 96,000(0.25) + 42,000F(0.25) = 1,51,500

96,000 + 42,000F + 24,000 + 10,500F = 1,51,500

1,20,000 + 52,500F = 1,51,500

F [% of FOH on DW] 0.6 = 60%

(i) Statement of jobs, showing amount of FOH, AOH & profit

Job 101

₹

Job 102

₹

Job 101

₹

Direct Materials 54,000 37,500 24,000

Direct Wage 42,000 30,000 20,000

Prime Cost 96,000 67,500 44,000

Factory Overheads (60% of Direct Wages) 25,200 18,000 12,000

Factory Cost 1,21,200 85,500 56,000

Administrative Overheads (25% of Factory Cost) 30,300 21,375 14,000

Total Cost 1,51,500 1,06,857 70,000

Profit (10% & 20% on cost and 12.5% on sales) 15,150 21,375 10,000

Selling Price 1,66,650 1,28,250 80,000

Batch Costing 19

2.2 BATCH COSTING

Batch costing:

It is an extension of job costing.

Under this method of costing products are standardized and process are repetitive.

Applicable: Toy making | Radio | T.V. parts | Watch making etc.,

Advantages: It helps in the reduction of cost as units/good are purchased in batches.

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐵𝑎𝑡𝑐ℎ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √2𝐴𝑆

𝐶

A – Annual demand, S – Set up cost, and C – Carrying cost p.u. p.a.

{CA inter M00, M01 & M07 | CMA inter D04, D06 & D10, 2~5 marks}

Question 1: A television company manufactures several components in batches.

The following data relate to one component:

Annual demand 32,000 units Annual rate of interest 12%

Set up cost / batch ₹120 Cost of production per unit ₹16

Calculate the Economic Batch Quantity (EBQ)


Answer: 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √2𝐴𝑆

𝐶= √

2×32,000×120

16×12%= 2,000 units

Question 2: OPTIMA Ltd is committed to supply 24,000 bearings per annum to BKT Ltd. on a steady

basis. It is estimated that it costs ₹2.40 as inventory holding cost per bearing per annum and that the

set-up cost per run of bearing manufacture is ₹648. What would be the optimum run (batch) size for

bearing manufacture?


Answer: 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √2𝐴𝑆

𝐶= √

2×24,000×648

2.4= 3,600 bearings

Question 3: X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on a steady basis. It is

estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set-up

cost per run of bearing manufacture is ₹324.

1. What would be the optimum run size for bearing manufacture?

2. Assuming that the company has a policy of manufacturing 6,000 bearing per run, how much extra

costs the company would be incurring as compared to the optimum run suggested in (a) above?

3. What is the minimum inventory holding cost?

{CA inter N00}

Answer:

Cost Accounting 20

(1) 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √2𝐴𝑆

𝐶= √

2 × 24,000 × 324

1.2= 3,600 units

(2) Extra cost incurred by the company

Run size 3,600 u 6,000 u

Setup cost 24,000

3,600× 324

2,160 24,000

6,000× 324

1,296

Carrying cost 3,600

2× 1.2

2,160 6,000

2× 2

3,600

Total cost 4,320 4,896

Additional cost because of improper run size is [4,896 – 4,320] = ₹576

Batch Cost Sheet

Question 4: Batch number A-100 incurred the following cost:

Direct Material – ₹10,000;

Department A: 800 labour hours @ ₹5 per hour

Department B: 1,400 labour hours @ ₹6 per hour.

Factory overheads are absorbed on labour hours’ basis and the rates are

₹7 per hour for Department A

₹4 per hour for Department B

The firm uses a cost-plus system for selling prices, and expects a 25% gross profit (sales value minus

factory cost). Administrative O.H is absorbed at 10% of selling price. Assuming that 1,000 units were

produced in Batch A-100, calculate the selling price p.u.

Answer:

COST SHEET OF BATCH NO. A-100

Direct Material 10,000

Direct Labour: Dept. A: 800 × ₹5 4,000

Direct Labour: Dept. B: 1400 × ₹6 8,400 12,400

Factory OH: Dept. A: 800 × ₹7 5,600

Factory OH: Dept. B: 1400 × ₹4 5,600 11,200

Factory Cost 33,600

Administration OH (10% on Selling price) 4,480

Cost of Production 38,080

Profit (15% on Selling price) 6,720

Selling Price 44,800

Selling price per unit = 44,800/1000 44.8

Contract Costing 21

2.3 CONTRACT COSTING

Contract costing:

Contract is a form of job costing.

In fact, a bigger job is referred to as a contract.

Applicable: Civil contracts | Building | Dam etc.

Sub-contract: Sub-Contract costs are also debited to the Contract A/c

Notional Profit = Value of work certified – Cost of works certified

Value of work certified by the architect / surveyor which includes P/L

Cost of work certified is the cost portion of value of work certified by the Architect / Surveyor

Work uncertified: work pending for certification of architect or surveyor


Estimated Profit = Contract Price – Cost to date – Further estimated cost for completion

Retention Money = Value of work certified – Cash paid

Retention money is payable after ensuring fulfillment of contractor’s commitment


Type of Contract

1. Fixed price contract

2. Cost price contract

3. Contract with escalation clause: additional payment for price hike due to inflation

Credit for profit on incomplete contracts

{CA inter M99 & N03, CMA inter D02, J03, D04, J12 & J13, 4~8 marks}

Stage of Completion Profit to be taken

1 0 to 25% Nil

2 25% to 50% 1

3×

𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑× 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡

3 50% to 90% 2

3×


𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑× 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡

4 Contracts nearing

to complete

90% to 100%

[Any one of the formulas]

𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡


𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑡𝑜 𝑑𝑎𝑡𝑒

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑡𝑜 𝑑𝑎𝑡𝑒

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡


𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒× Notional profit

Cost Accounting 22

PRACTICAL PROBLEMS

Concept Problem: Simple | Multiple Years | Multiple Contracts

Contract Nearing to Completion

Contract with Escalation Clause

Question 1: The following are the particulars relating to a contract which has begun on 1st April, 2019


Contract price 5,00,000 Uncertified work 9,000

Machinery 30,000 Overheads 8,240

Material 1,70,600 Material returned 1,600

Wages 1,48,750 Machinery as on 31st March, 2011 22,000

Direct expenses 6,330 Material in hand on 31st March 2011 3,700

Outstanding wages 5,380 Value of work certified 3,90,000

Cash received 3,51,000

Prepare the contract account for the financial year 2018-19 showing the amount of profit that may be

taken to the credit of profit and loss account for the year.

Answer:

Contract A/c

To Machinery 30,000 By Work in progress

Material 1,70,600 Certified work 3,90,000

Wages 1,48,750 Uncertified work 9,000

Outstanding wages 5,380 1,54,130 Material returned 1,600

Direct expenses 6,330 Machinery as on 31st March, 2011 22,000

Overheads 8,240 Material in hand on 31st March 2011 3,700

Notional Profit 57,000

4,26,300 4,26,300

P/L A/c2 34,200 Notional Profit 57,000

WIP Reserve 22,800

57,000 57,000

2 𝑃/𝐿 𝐴/𝑐: 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×

2

3×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑; 57,000 ×

2

3×

3,51,000

3,90,000

Contract Costing 23

One contract for multiple years

Question 2: Mr. Bhagwandas undertook a Contract for ₹15,00,000 on an arrangement that 80% of the

value of the work done as certified by the architect of the contractee, should be paid immediately and

that the remaining 20% be retained until the contract was completed.

Particulars 2000 2001 2002

Direct Material 1,80,000 2,20,000 1,26,000

Direct Wages 1,70,000 2,30,000 1,70,000

Carriage 6,000 23,000 6,000

Cartage 1,000 2,000

Sundry Expenses 3,000 4,000 3,000

Work Certified 3,60,000 3/4th Certified Completed

Work Uncertified 20,000

Cash paid @ 80% of work certified. Prepare all the relevant accounts.

Answer:

Contract A/c [2017]

To Direct Material 1,80,000 By WIP c/d 3,60,000

Direct Wages 1,70,000

Carriage 6,000

Cartage 1,000

Sundry Expenses 3,000

3,60,000 3,60,000

Contract A/c [2018]

To Work in Progress b/d 3,60,000 By Work in Progress

Direct Material 2,20,000 Work Certified 11,25,000

Direct Wages 2,30,000 Work Uncertified 20,000

Carriage 23,000

Cartage 2,000

Sundry Expenses 4000


11,45,000 11,45,000

Profit and Loss A/c3 1,63,200 Notional Profit 3,06,000

3 P/L A/c: Notional Profit ×

2

3×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑; 306,000×

2

3×

4

5

Cost Accounting 24

Work in Progress Reserve 1,42,800

3,06,000 3,06,000

Contract A/c [2019]

To Work in Progress b/d 11,25,000 By Work in Progress Reserve b/d 1,42,800

Work Uncertified 20,000 Contractee’s A/c 15,00,000

Direct Material 126,000

Direct Wages 170,000

Carriage 6,000

Sundry Expenses 3,000

Profit 192,800

1,642,800 1,642,800

Contractee A/c

To Balance c/d – 2017 2,88,000 By Cash 2,88,000

2,88,000 2,88,000

Balance c/d 2,88,000

Balance c/d – 2018 9,00,000 Cash 6,12,000

9,00,000 9,00,000

Contract A/c – 2019 15,00,000 Balance b/d 9,00,000

Cash 6,00,000

15,00,000 15,00,000

Balance Sheet [Extract] [2017]

Contractee A/c 2,88,000 Work in Progress 3,60,000


Profit from Contract 1,63,200 Work in Progress – certified 11,25,000

Contractee A/c 9,00,000 Work in Progress – uncertified 20,000

Work in Progress (Reserve) 1,42,800


Profit from Contract 1,92,800

Contract Costing 25

Question 3: Modern Construction Ltd. obtained a contract No. B-37 for ₹40 lakhs. The following

balances and information relate to the contract for the year ended 31 st March, 2020:

Particulars 1.4.2019 31.3.2020

Work-in-progress: ₹ ₹

Work certified 9,40,000 30,00,000

Work uncertified 11,200 32,000

Materials at site 8,000 20,000

Accrued wages 5,000 3,000

Additional information relating to the year 2019-2020 is:


Materials issued from store 4,00,000 Indirect expenses 10,000

Materials directly purchased 1,50,000 Share of general overheads for B-37 18,000

Wages paid 6,00,000 Materials returned to store 25,000

Architect’s fees 51,000 Materials returned to supplier 15,000

Plant hire charges 50,000 Fines and penalties paid 12,000

The contractee pays 80% of work certified in cash.

You are required to prepare:

1. Contract A/c showing clearly the profits transferred to P/L A/c.,

2. Contractee’s A/c and

3. Balance Sheet


Answer: Books of Modern Constructions Ltd.

Contract No. B-37 A/c for the year ended 31.3. 2020


To WIP b/d (9,40,000 + 11,200) 9,51,200 By Wages Accrued b/d 5,000

Stock (materials) b/d 8,000 Materials returned to Store 25,000

Materials issued 4,00,000 Materials returned to suppliers 15,000

Materials purchased 1,50,000 WIP c/d - Work Certified 30,00,000

Wages paid 6,00,000 WIP – Work uncertified 32,000

Wages Accrued c/d 3,000 Materials stock c/d 20,000

Architect’s fees 51,000

Plant Hire charges 50,000

Indirect expenses 10,000

Cost Accounting 26

General overheads 18,000

Notional profit c/d 8,55,800

30,97,000 30,97,000

P/L A/c4 4,56,427 8,55,800

WIP Reserve c/d 3,99,373 Notional Profit b/f

8,55,800 8,55,800

Note: Fines and penalties are not shown in Contract A/c

Contractee’s A/c

To Balance c/d 24,00,000 By Balance b/d (80% of 9,40,000) 7,52,000

Bank 16,48,000

24,00,000 24,00,000

Balance Sheet (Extract) as on 31.3.2020

Profit & Loss A/c 4,56,427 Materials at site 20,000

(-) Fines 12,000 4,44,427 Materials in store 25,000

O/s wages 3,000 Work in Progress

Work Certified 30,00,000

(+) Work Uncertified 32,000

(+) Advance 24,00,000

(+) WIP Reserve 3,99,373 2,32,627

Contract Nearing to Complete

Question 4: Compute a conservative estimate of profit on a contract (which has been 80%

complete) from the following particulars. Illustrate four methods of computing the profit:

₹

Total expenditure to date 1,70,000

Estimated further expenditure to complete the contract 34,000

(including contingencies)

Contract Price 3,06,000

Work Certified 2,00,000

Work not certified 17,000

Cash Received 1,63,200

4 𝑃&𝐿 𝐴/𝑐 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×

2

3×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑= 8,55,800 ×

2

3×

80

100

Contract Costing 27


Answer: Working Notes

1. Computation of estimated profit ₹

Contract price 3,06,000

− Total expenditure to date 1,70,000

− Estimated further expenditure to complete the contract 34,000

Estimated profit 1,02,000

2. Computation of Notional Profit

Value of work certified 2,00,000

− Cost of work certified:

(Expenditure-to-date less work not certified) (₹1,70,000–₹17,000)

1,53,000


Computation of a conservative estimate of the profit to be taken to P/L A/c (Deferent Methods)

1 Estimated profit ×

work certified

cotract price×

cash rec eived

work certified 1,02,000 ×

2,00,000

3,06,000×

1,63,200

2,00,000

₹54,400

2 Estimated profit ×

work certified

cotract price 1,02,000 ×

2,00,000

3,06,000

₹66,667

3 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑡𝑜 𝑑𝑎𝑡𝑒

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡×


𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 1,02,000 ×

1,70,000

2,04,000×

1,63,200

2,00,000

₹69,360

4 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑡𝑜 𝑑𝑎𝑡𝑒

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡× 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 1,02,000 ×

1,70,000

2,04,000

85,000

5 Notional profit ×

work certified

contract price 47,000 ×

2,00,000

3,06,000

₹30,719

6 2

3× Notional profit ×

cash received

work certified

2

3× 47,000 ×

1,63,200

2,00,000

₹25,568

Escalation Clause

Question 5: Deluxe Limited undertook a contract for ₹5,00,000 on 1st July, 2000. On 30th June, 2001

when the accounts were closed, the following details about the contract were gathered:


Materials Purchased 1,00,000 Wages Accrued 30-6-2001 5,000

Wages Paid 45,000 Work Certified 2,00,000

General Expenses 10,000 Cash Received 1,50,000

Plant Purchased 50,000 Work Uncertified 15,000

Materials on Hand 30-6-2001 25,000 Depreciation of Plant 5,000

The above contract contained an escalation clause which read as follows:

Cost Accounting 28

“In the event prices of materials and rates of wages increase by more than 5%, the contract price would

be increased accordingly by 25% of the raise in the cost of material and wages beyond 5% in each case.”

It was found that since the date of signing the agreement the prices of materials and wages rates

increased by 25%. The value of the work does not take into account the effect of the above clause.

Prepare the Contract A/c.


Answer:

Contract A/c

To Direct Material 1,00,000 By WIP – Certified 2,00,000

Direct Wages (45,000 + 5,000) 50,000 WIP – Uncertified 15,000

General Expenses 10,000 Material on hand 25,000

Plant – Depreciation 5,000 Contract Escalation 5,000


2,45,000 2,45,000

P/L A/c 1

3×

150,000

200,000 × 80,000 20,000 Notional Profit 80,000

WIP – Reserve 60,000

80,000 80,000

Working Notes:

Calculation Increase Up to 5% Beyond 5%

Direct Material (100,000 – 25,000) ×

25

125

15,000 3,000 12,000

Direct Wages 50,000 ×

25

125

10,000 2,000 8,000

Total Increase 25,000 5,000 20,000

Increase in contract profit = 25% of increase in material and wage beyond 5% = 25

125 ×20,000 = 4,000

Advanced Problems

Question 6: A construction company under-taking a number of contracts, furnished the following

data relating to its uncompleted contracts as on 31st March, 2018.

(₹ in lacs)

Contract Numbers

723 726 729 731

Total Contract Price 23.20 14.40 10.08 28.80

Estimated Costs on completion of Contract 20.50 11.52 12.60 21.60

Expenses for the year ended 31.03.18

Contract Costing 29

Direct Materials 5.22 1.80 1.98 0.80

Direct Wages 2.32 4.32 3.90 2.16

O.H (excluding depreciation) 1.06 2.60 2.62 1.05

Profit Reserve as on 1.4.17 1.50 - - -

Plant issued at Cost 5.00 3.50 2.75 3.00

Material at Site on 1.4.17 0.75 - - -

Material at Site on 31.3.18 0.45 0.20 0.08 0.05

Work Certified till 31.3.17 4.65 - - -

Work Certified during the year 2017-2018 12.76 13.26 7.56 4.32

Work Uncertified a on 31.3.18 0.84 0.24 0.14 0.18

Progress payment received during the year 9.57 9.00 5.75 3.60

Depreciation @ 20% p.a. is to be charged on plant issued. While the Contract No. 723 was carried

over from last year, the remaining contracts were started in the 1 st week of April, 2017, required.

1. Determine the P/L in respect of each contract for the year ended 31st March, 2018.

2. State the P/L to be carried to Profit & Loss A/c for the year ended 31 st March, 2018

{CA inter N96}

Answer: Statement of P/L in respect of following contract numbers for the year ended 31.03.18

(₹ in lakhs) Contract Numbers

723 726 729 731

A Contract completion percentage:

(a) Work Certified 17.41 13.26 7.56 4.32

(b) Contract price 23.20 14.40 10.08 28.80

Percentage of completion [(a)/(b)%] 75.04 92.08 75.00 15.00

B Estimated profit on completion:

(c) Contract Price 23.20 14.40 10.08 28.80

(d) Estimated costs on completion 20.50 11.52 12.60 21.60

Profit / (Loss) [(c) – (d)] 2.70 2.88 (2.52) 7.20

C Profit of the year

Opening stock of materials 0.75 - - -

Materials issued 5.22 1.80 1.98 0.80

Direct wages 2.32 4.32 3.90 2.16

Overheads 1.06 2.60 2.62 1.05

Depreciation 1.00 0.70 0.55 0.60

P Total 10.35 9.42 9.05 4.61

Profit in reserve 1.50 - - -

Cost Accounting 30

Material at site on 31.03.18 0.45 0.20 0.08 0.05

Q Total 1.95 0.20 0.08 0.05

R Cost of contract [(P) – (Q)] 8.40 9.22 8.97 4.56

Work certified 12.76 13.26 7.56 4.32

Work not certified 0.84 0.24 0.14 0.18

S Total (S) 13.60 13.50 7.70 4.50

Profit / (Loss) for the year [(R) – (S)] 5.20 4.28 (1.27) (0.06)

Profit to be taken to Profit & Loss A/c of the year in respect of respective contract

(ii) Contract Formula Calculation P/(L)

1 723 𝑁𝑃 ×

2

3×

𝐶𝑅

𝑊𝐶

2

3× 5.20 ×

9.57

12.76

₹2.60

2 726 𝐸𝑃 ×

𝑊𝐶

𝐶𝑃×

𝐶𝑅

𝑊𝐶 2.88 ×

13.26

14.40×

9.00

13.26

₹1.80

3 729 (₹1.27)

4 731 (₹0.06)

Question 7: Batrom Ltd., a contractor commences the contract No. HB-108 on 1st July, 2017. The

details about the contract for the year ending 31st March, 2018 were following;

Particulars ₹

Contract price 30,00,000

Materials issued 8,00,000

Material transferred from contract n. 101 50,000

Wages paid 6,31,000

Wages outstanding 35,000

Supervisor’s Salary 1,80,000

Establishment Exp. 41,000

Plant Issued 10,00,000

Material costing ₹15,000 was sold for ₹11,000 and plant costing ₹80,000 returned to stores on 31st

December, 2017.

A crane costing ₹20,00,000 has been on the contract site for 73 days. Its working life is estimated at

6years and its scrap value at ₹1,10,000. Depreciation on plant is to be charge @ 15% per annum. Up to

31st March, 2018, ¾ (Three-fourth) of the contract was completed but architect’s certificate has been

issued covering 2/3rd of the contract price and 15,00,000 had been received in cash on account.

Required:

(a) Prepare the Contract No. HB-108 Account for the year ended March 31, 2018.

(b) State as how much Profit should be credited to P/L A/c for the year ended March 31, 2018.

{CMA inter D14, 10 marks}

Contract Costing 31

Answer:

(a) Contract Account of Contract No. HB-108 for the period 01.07.17 to 31.03.18

Dr Particulars ₹ Cr Particulars ₹

To Material issued 8,00,000 By Work certified 20,00,000

Material from contract 101 50,000 Work uncertified 2,10,500

Wages paid 6,31,000 Cash (Sale of material) 11,000

Wages outstanding 35,000 P&L Account 4,000

Supervisor’s salary 1,80,000

Establishment expenses 41,000

Depreciation on crane5 63,000

Depreciation on plant6 1,09,500

Notional Profit 3,16,000

21,72,875 21,72,875

Profit and Loss A/c 1,58,000 Notional Profit 3,16,000

WIP Reserve 1,58,000

3,16,000 3,16,000

(b) Profit

to be recognized

2

3× 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×

𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

2

3× ₹3,16,000 ×

15𝑙

20𝑙 ₹1,58,000

Working Note:

(1) Calculation of Notional Profit

Value of Work Completed 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 ×

𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 30,00,000 ×

2

3

20,00,000

− Cost of Work Completed 𝐶𝑜𝑠𝑡 𝑡𝑜 𝑑𝑎𝑡𝑒 ×

𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 18,94,500 ×

4

3×

2

3

16,84,000

3,16,000

(2) Cost of Work Completed 18,94,500

Cost of Work Certified 16,84,000

Cost of Work Uncertified 2,10,500

5 [

(20,00,000×1,10,000)

6×

73

365]

6 [10,00,000 ×6

12×

15

100] + [9,20,000 ×

3

12×

15

100]

Cost Accounting 32

Question 8: RST Construction Limited commenced a contract on 1.4.2017. The total contract was for

₹4,921,875. It was decided to estimate the total Profit on the contract and to take to the Credit of Profit

and Loss A/c that proportion of estimated profit on cash basis, which work completed bore to total

Contract. Actual expenditure for the period 1.4.2017 to 31.3.2018 & estimated expenditure for April 1,

2018 to September 30, 2018 are given below:

1.4.17 to 31.3.18

(Actuals)

1.4.17 to 30.9.18

(Estimated)

Particulars ₹ ₹

Materials Issued 7,76,250 12,99,375

Labour: Paid 5,17,500 6,18,750

: Prepaid 37,500 ―

: Outstanding 12,500 5,750

Plant Purchased 4,00,000 ―

Expenses: Paid 2,25,000 3,75,000

: Outstanding 25,000 10,000

: Prepaid 15,000 ―

Plant returns to Store (historical cost) 1,00,000

(On 30.9.2017)

3,00,000

(On 30.9.2018)

Work certified 22,50,000 Full

Work uncertified 25,000 ―

Cash received 18,75,000 ―

Materials at site 82,500 42,500

The plant is subject to annual depreciation @ 25% on written down value method. The contract is

likely to be completed on September 30, 2018.

Required: Prepare the contract A/c. Determine the profit on the contract for the year 2017 -18 on

prudent basis, which has to be credited to Profit and Loss Account.

{CA inter}

Answer:

Contract A/c for the year ending March 31, 2018


To Materials issued 7,76,250 By Work-in-progress

Labour 5,17,500 Certified 22,50,000

Add: Outstanding 12,500 Uncertified 25,000 22,75,000

Less: Prepaid 37,500 4,92,500 Plant returned 30.09.05 87,500

Plant 4,00,000 (1,00,000 – 25% × ½)

Expenses 2,25,000 Materials at site 82,500

Contract Costing 33

Add: Outstanding

Less: Prepaid

25,000

15,000

2,35,000

Plant at site

(3,00,000 – 25%)

2,25,000

Notional Profit c/d 7,66,250

26,70,000 26,70,000

Profit and Loss A/ca 3,89,000 Notional Profit b/d 7,66,250

WIP (Reserve) 3,77,250

7,66,250 7,66,250

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 × 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑟𝑖𝑐𝑒 ×

𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑


𝑃𝑟𝑜𝑓𝑖𝑡 = 10,21,125 × 22,50,000

49,21,875 ×

18,75,000

22,50,000 = 3,89,000

Statement for calculating estimated profit ₹ ₹

Contract Price 4,92,1875

(-) Cost to date [WIP – notional Profit] [22,75,000 – 7,66,250] 15,08,750

Further Cost to Complete

Material1 13,39,375

Labour2 6,49,500

Expenses2 3,75,000

Plant Depreciation3 28,125

23,92,000 39,00,750

Estimated Profit 10,21,125

Material1 Labour2 Expenses2

Opening Stock 82,500 Paid 6,18,750 3,75,000

+ Issues 12,99,375 + Outstanding CY 5,750 10,000

13,81,875 6,24,500 3,85,000

- Closing Stock 42,500 - Advance CY - -

13,39,375 6,24,500 3,85,000

- Outstanding PY 12,500 25,000

6,12,000 3,60,000

+ Advance PY 37,500 15,000

Actual expenses 6,49,500 3,75,000

Cost Accounting 34

2.4 PROCESS COSTING

Process Costing: used in industries where the material has to pass through two or more processes for

being converted into a final product.

Operation Costing: It is the refinement of process costing. It is concerned with the determination of

the cost of each operation rather than the processes.

PRACTICAL PROBLEM TYPE

1. Basic problems (Normal Loss, Abnormal Loss (Gain))

2. Problems with stocks (Equivalent Products): FIFO | Average Price

3. Inter Process Profit

4. Operation Costing

PRACTICAL PROBLEM

Question 1: The product of company passed through three distinct processes to completion. They are

known as A, B and C. From past experience it is ascertained that loss is incurred in each process as:

Process A – 2%, Process B – 5%, Process C – 10%.

In each case the percentage of loss is computed on the number of units entering the process concerned.

The loss of each process possesses a scrap value. The loss of processes A and B are sold at ₹5 per 100

units and that of process C at ₹20 per 100 units.

The output of each process passes immediately to the next process and the finished units are passed

from process C into stock.

Particulars Process A Process B Process C

Materials consumed 6,000 4,000 2,000

Direct Labour 8,000 6,000 3,000

Manufacturing expenses 1,000 1,000 1,500

20,000 units have been issued to process A at a cost of ₹10,000. The output of each process has been as:

Process A – 19,500; Process B – 18,800 and Process C – 16,000. There is no work-in-progress in any

process. Prepare Process A/c. Calculations should be made to the nearest rupee.

{CMA inter D03}

Answer:

Process A A/c

Particulars Unit ₹ Particulars Unit ₹

To Units Introduced 20,000 10,000 By Normal Loss 400 20

Materials 6,000 Abnormal Loss A/c 100 127

Direct Labour 8,000 Process B 19,500 24,853

Mft. Expenses 1,000

20,000 25000 20,000 25,000

Process Costing 35

Process B A/c

To Process A 19,500 24,853 By Normal Loss 975 49

Materials 4,000

Direct Labour 6,000 Process C 18,800 36,336

Mft. Expenses 1,000

Abnormal Gain 275 532

19,775 36,385 19,775 36,385

Process C A/c

To Process C 18,800 36,336 By Normal Loss 1,880 376

Materials 2,000 Abnormal Loss 920 2,309

Direct Labour 3,000 Finished Goods 16,000 40,151

Mft. Expenses 1,500

18,800 42,836 18,800 42,836

Abnormal Loss A/c

To Process A 100 127 By Cash 1,020 189

Process C 920 2,309 Costing P/L 2,247

1,020 2,436 1,020 2,436

Normal Loss A/c

To Process A 400 20 By Abnormal Gain 275 14

Process B 975 49 Cash 2,980 431

Process C 1,880 376

3,255 445 3,255 445

Abnormal Gain A/c

To Normal Loss 275 14 By Process B 275 532

Costing P/L 518

275 532 275 532

Cost Accounting 36

Question 2: A product passes through three distinct processes I, II and III. The output of each process

is transferred to the next process and the output of process III is transferred to finished goods stock.

The normal wastage in each process and the realizable value of the same are given below:

Process Percentage of normal value

waste related to input

Realizable

per unit

I 5 ₹0.70

II 7 ₹0.80

III 10 ₹1.00

The details of cost data and output for a month are as follows:

Process

I II III

Material Consumed (₹) 1,20,000 40,000 40,000

Direct Labour Cost (₹) 80,000 60,000 60,000

Production expenses (₹) 40,000 40,000 28,000

Output (Units) 38,000 34,600 32,000

Process I was fed with 40,000 units of input costing ₹3,20,000. There were no opening and closing work-

in-progress. Prepare the process accounts for the month.

Answer:

Process I A/c

Particulars Units ₹ Particular Units ₹

To Raw material 40,000 3,20,000 By Normal loss 2,000 1,400

Direct Material 1,20,000 Process II a/c 38,000 5,58,600

Direct Labour 80,000

Production Exp. 40,000

40,000 5,60,000 40,000 5,60,000

Process II A/c

To Process I a/c 38,000 5,58,600 By Normal loss 2,660 2,128

Direct Material 40,000 Abnormal loss (WN1) 740 14,585

Direct Labour 60,000 Process III a/c 34,600 6,81,887


38,000 6,98,600 38,000 6,98,600

Process Costing 37

Process III A/c

To Process II a/c 34,600 6,81,887 By Normal loss 3,460 3,460

Direct Material 40,000 Finished Goods Stock a/c 32,000 8,28,700



Abnormal Gain 860 22,273

35,460 8,32,160 35,460 8,32,160

Abnormal Loss A/c

To Process B 740 14,585 By Cash 740 592

Costing P/L 13,993

14,585 14,585

Abnormal Gain A/c

To Normal Loss 860 860 By Process C 860 22,273

Costing P/L 21,413

860 22,273 860 22,273

Normal Loss A/c

To Process A 2,000 1,400 By Abnormal Gain (C) 860 860

Process B 2,660 2,128 Cash 6,128

Process C 3,460 3,460

6,988 6,988

Working Note

WN Cost per unit of normal output Abnormal

Gain / (Loss)

FG

Transferred Total Cost − Scrap Value

Input − Normal Lossor

Normal Cost

Normal Output

Process Calculation Cost per unit Units Amount Units Amount

1 II ₹6,98,600 − ₹2,218

38,000 − 2,660 units

₹19.71 per unit (740) (₹14,585) 34,600 6,81,887

2 III ₹8,09,887 − ₹3,460

34,600 − 3,460

₹25.89 per units 860 (₹22,273) 32,000 8,28,700

Question 3: A product passes through three processes – A, B and C. The details of expenses incurred

on the three processes during the year 1992 were as under:

Cost Accounting 38

Process A B C

Units issued / introduced cost per unit ₹100 10,000

₹ ₹ ₹

Sundry Materials 10,000 15,000 5,000

Labour 30,000 80,000 65,000

Direct Expenses 6,000 18,150 27,200

Selling price / per unit of output 120 165 250

Management expenses during the year were ₹80,000 and selling expenses were ₹50,000. These are not

allocable to the processes. Actual output of the three processes was: A – 9,300 units, B – 5,400 units and

C – 2,100 units. 2/3rd of the output of Process A and ½ of the output of Process B was passed on to the

next process & the balance was sold. The entire output of process C was sold.

The normal loss of the three processes, calculated on the input of every process was:

Process A – 5%; B – 15% and C – 20%

The Loss of Process A was sold at ₹2 p.u. that of B at ₹5 p.u. and of Process C at ₹10 p.u.

Prepare the Three Processes Accounts and the Profit and Loss A/c.

Answer:

Process A A/c

Particulars Units p.u. ₹ Particulars Units p.u. ₹

To Units brought in 10,000 100 10,00,000 By Normal Loss 500 1,000

Sundry Materials 10,000 Abnormal loss [Nt] 200 110 22,000

Labour 30,000 Process B A/c [Nt] 6,200 110 6,82,000

Direct expenses 6,000 P/L A/c 3,100 110 3,41,000

10,000 10,46,000 10,000 10,46,000

Process B A/c

To Process A A/c 6,200 110 682,000 By 15% Normal Loss 930 5 4,650

Sundry materials 15,000 Process C A/c [Nt] 2,700 150 405,000

Labour 80,000 Profit & Loss A/c 2,700 150 405,000

Direct expenses 18,150

Abnormal gain [Nt] 130 150 19,500

6,330 814,650 6,330 814,650

Process C A/c

To Process B A/c 2,700 150 4,05,000 By Normal Loss 540 10 5,400

Sundry Materials 5,000 Abnormal Loss [Nt] 60 230 13,800

Labour 65,000 Profit & Loss A/c [Nt] 2,100 230 4,83,000


2,700 5,02,200 2,700 5,02,200

Process Costing 39

Profit & Loss A/c

To Process A A/c 3,100 110 341,000 By Sale (Process A's) 3,100 120 372,000

Process B A/c 2,700 150 405,000 Sale (Process B's) 2,700 165 445,500

Process C A/c 2,100 230 483,000 Sale (Process C's) 2,100 250 525,000

Mgt Expenses 80,000 Abnormal gain 18,850

Selling Expenses 50,000 Net Loss 32,450

Abnormal Loss 34,800

7,900 1393,800 7,900 1393,800

Abnormal Loss A/c

To Process A A/c 200 110 22,000 By Sale of Process A loss 200 2 400

Process C A/c 60 230 13,800 Sale of Process C loss 60 10 600

Profit & Loss 34,800

260 35,800 260 35,800

Abnormal Gain A/c

To Normal Loss 130 5 650 By Process B 130 150 19,500

Profit & Loss A/c 18,850

19,500 19,500

Note

Particulars Formula A B C

Cost per unit of

normal

production

Normal cost

Normal output

1,046,000 − 1,000

9,500= 110

795,150 − 4,659

5,270= 150

502,200 − 5,400

2,160= 230

Equivalent Product [FIFO]

Steps

1. Prepare statement of equivalent product

Level of completion for normal loss – always nil

Level of abnormal gain – always 100%

Level of abnormal loss = level of completion of normal loss if given

Level of completion for the material transferred from previous process - 100%

2. Calculate cost p.u. [material, labour & OH]

3. Prepare statement of cost for FG / WIP / AL(G)

4. Open process a/c

Cost Accounting 40

FIFO method

Question 1: From the following particulars, prepare the following in the books of X Ltd.:

(a) Statement of equivalent of cost.

(b) Statement of apportionment of cost.

Opening stock as on 1st August: 200 units @ ₹4 per unit

Degree of completion: Materials 100%, Labour and Overheads 40%

Units introduced during August: 1,050 units

Output transferred to the next process: 1,100 units

Closing stock: 150 units

Degree of completion: Materials 100%, Labour and Overheads 70%

Other relevant information regarding the process: Materials: ₹3,150, Labour: ₹4,500 and Overheads:

₹2,250.


Answer: FIFO method

(1) Statement of Equivalent units (using FIFO method)

Units Particulars Units Material Q Labour

In Out % EU % EU

200 Opening WIP

1,050 Input

FG Op. WIP 200 — — 60 120

New 900 100 900 100 900

Closing WIP 150 100 150 70 105

1,250 1,250 1,050 1,125

(2) Statement of Cost per equivalent unit and total cost

Material Labour & OH

Costs 3,150 6,750

Equivalent units (1) 1,050 1,125

Cost per unit 3 6

(3) Process Cost Sheet ₹ ₹

1 Finished Goods

Opening WIP processed Opening value 200×₹4 800

Labour & OH 120×₹6 720

New units processed Material, Labour & OH 900×₹9 8,100 9,620

2 Closing WIP Material 150×₹3 450

Labour & Overheads 105×₹6 630 1,080

Process Costing 41

(4) Process Q A/c

Particulars Units ₹ Particulars Units ₹

To Op. W.I.P. 200 800 By Completed units 1,100 9,620

Materials 1,050 3,150 Cl. WIP 150 1,080

Labour 4,500

Overheads 2,250

1,250 10,700 1,250 10,700

Question 2: From the following Information for the month ending October 2005, prepare Process Cost

accounts for Process III. Use First-in-fist-out (FIFO) method to value equivalent production.

Direct materials added in Process III (Opening WIP) 2,000 units at ₹25,750

Transfer from Process II 53,000 units at ₹4,11,500

Transferred to Process IV 48,000 units

Closing stock of Process III 5,000 units

Units scrapped 2,000 units

Direct material added in Process III ₹1,97,600

Direct wages ₹97,600

Production Overheads ₹48,800

Degree of completion:

Opening Stock Closing Stock Scrap

Materials 80% 70% 100%

Labour 60% 50% 70%

Overheads 60% 50% 70%

The normal loss in the process was 5% of production and scrap was sold at ₹3 p.u.

{CA inter 14 marks}

Answer:


Units Particulars Units Material A Material B Labour & OH

In Out % EU % EU % EU

2,000 Opening WIP

53,000 Input

FG Op. WIP 2,000 — — 20 400 40 800

New 46,000 100 46,000 100 46,000 100 46,000

Cost Accounting 42

Closing WIP 5,000 100 5,000 70 3,500 50 2,500

Normal loss 2,500 — — — — — —

Abnormal Gain (500) 100 (500) 100 (500) 80 (500)

55,000 55,000 50,500 49,400 48,800


Material A Material B Labour Overheads

Material Cost 4,11,500 1,97,600 97,600 48,800

(-) Scrap value of normal loss (2,500 × ₹3) 7,500

Total 4,04,000 1,97,600 97,600 48,800

Equivalent Units 50,500 49,400 48,800 48,800

Cost p.u. 8 4 2 1


1 Finished Goods

Opening WIP processed Opening value 25,750

Material B 400×₹4 1,600

Wages & Overheads 800×₹3 2,400

New units processed Total cost 46,000×₹15 6,90,000 7,19,750

2 Closing WIP Material A 5,000×₹8 40,000

Material B 3,500×₹4 14,000

Wages & Overheads 2,500×₹3 7,500 61,500

3 Abnormal Gain Total Cost 500×₹15 7,500

(4) Process III A/c


To Balance b/d 2,000 25,750 By Normal Loss 2,500 7,500

Process II A/c 53,000 4,11,500 Process IV A/c 48,000 7,19,750

Direct Material 1,97,600 Balance c/d 5,000 61,500

Direct Wages 97,600

Prod. Overheads 48,800

Abnormal Gain 500 7,500

55,500 7,88,750 55,500 7,88,750

Process Costing 43

FIFO & Average Price Method

Question 3: The following data relate to Process Q

1. Opening work-in-process 4,000 units and the degree of completion:

Materials 100% ₹24,000

Labour 60% ₹14,400

OH 60% ₹7,200

2. Received during the month of April, 2020 from process P: 40,000 Units at ₹1,71,000

3. Expenses incurred in Process Q during the month:

Materials ₹79,000

Labour ₹1,38,230

OH ₹69,120

4. Closing WIP is 3,000 units and degree of completion is material – 100% and labour & OH – 50%

5. Units scrapped are 4,000 units & degree of completion is material – 100% and Labour & OH – 80%

6. Normal loss: 5% of current input.

7. Spoiled goods realized ₹1.50 each on sale.

8. Completed units are transferred to warehouse;

Required Prepare:

1. Equivalent unit statement

2. Statement of cost per equivalent unit and total costs.

3. Process Q Account

4. Any other account necessary


Answer: FIFO method


Units Particulars Units Material P Material Q Labour O.H

In Out % EU % EU % EU % EU

4,000 Opening WIP

40,000 Input

FG Op. WIP 4,000 — — — — 40 1,600 40 1,600

New 33,000 100 33,000 100 33,000 100 33,000 100 33,000

Closing WIP 3,000 100 3,000 100 3,000 50 1,500 50 1,500

Normal loss 2,000 — — — — — — — —

Abnormal loss 2,000 100 2,000 100 2,000 80 1,600 80 1,600

44,000 44,000 38,000 38,000 37,700 37,700

Cost Accounting 44


Material I Material II Labour Overheads

Costs 1,71,000 79,000 1,38,230 69,120

(-) Scrap value (2,000 units @ ₹1.50 p.u.) –3,000

Total 1,71,000 76,000 1,38,230 69,120

Equivalent units (i) 38,000 38,000 37,700 37,700

Cost per unit 4.5 2 3.67 1.83

Process Cost Sheet ₹ ₹

1 Finished Goods

Opening WIP processed Opening value 45,600

Wages & Overheads 1,600×₹5.5 8,800

New units processed 33,000×₹12 3,96,000 4,50,400

2 Closing WIP Material I & II 3,000×6.5 19,500

Labour & Overheads 1,500×5.5 8,250 27,750

3 Abnormal loss Material I & II 2,000×6.5 13,000


(3) Process Q A/c


To Op. W.I.P. 4,000 45,600 By Normal loss 2,000 3,000

Units received 40,000 1,71,000 Completed units 37,000 4,50,400

Materials 79,000 Cl. WIP 3,000 27,750

Labour 1,38,230 Abnormal Loss 2,000 21,800

Overheads 69,120

44,000 5,02,950 44,000 5,02,950

(4) Abnormal Loss A/c

To To Process Q A/c 2,000 21,800 By Sale 2,000 3,000

Balance (P/L A/c) 18,800

21,800 21,800

Process Costing 45

Average Profit Method

(1) Statement of Equivalent units

Units Particulars Units Material P Material Q Labour O.H

In Out % EU % EU % EU % EU

4,000 Opening WIP

40,000 Input

Finished Goods 37,000 100 37,000 100 37,000 100 37,000 100 37,000

Closing WIP 3,000 100 3,000 100 3,000 50 1,500 50 1,500

Normal loss 2,000 — — — — — — — —

Abnormal loss 2,000 100 2,000 100 2,000 80 1,600 80 1,600

44,000 44,000 42,000 42,000 40,100 40,100


Material I Material II Labour Overheads

Cost (opening stock) 24,000 14,400 7,200

Costs (current year) 1,71,000 79,000 1,38,230 69,120

(-) Scrap value (2,000 units @ ₹1.50 p.u.) –3,000

Total 1,71,000 1,00,000 1,52,630 76,320

Equivalent units (i) 42,000 42,000 40,100 40,100

Cost per unit 4.0714 2.381 3.8062 1.9032

Process Cost Sheet ₹ ₹

1 Finished Goods 37,000×12.1618 4,49,987

2 Closing WIP Material I & II 3,000×6.4524 19,357


3 Abnormal loss Material I & II 2,000×6.4524 12,905


(3) Process Q A/c


To Op. W.I.P. 4,000 45,600 By Normal loss 2,000 3,000

Units received 40,000 1,71,000 Completed units 37,000 4,49,987

Materials 79,000 Cl. WIP 3,000 27,921

Labour 1,38,230 Abnormal Loss 2,000 22,040

Overheads 69,120 Rounding off 2

Cost Accounting 46

44,000 5,02,950 44,000 5,02,950

(4) Abnormal Loss A/c

To To Process Q A/c 2,000 22,040 By Sale 2,000 3,000

Balance (P/L A/c) 19,040

22,040 22,040

Average Price Method

Question 4: The following information is given in respect of Process 3 for the month of January 2020.

Transferred from Process 2: 20,000 units @ ₹6.00 per unit

Transferred to Process 4: 17,000 units

Expenditure incurred in Process 3

Direct Materials ₹30,000

Direct Labour ₹60,000

Overheads ₹60,000

Scrap 1,000 units Closing Stock 4,000 units

Degree of completion: Degree of completion:

Direct Materials 100% Direct Materials 80%

Direct Labour 60% Direct Labour 60%

Overheads 40% Overheads 40%.

Normal loss 10% of production

Scrapped units realized ₹4 per unit

Prepare Process 3 A/c using average price method, along with necessary supporting statements.


Opening stock – 2,000 units made up of

Direct Materials I ₹12,350

Direct Materials – II ₹13,200

Direct Labour ₹17,500

Overheads ₹11,000

Process Costing 47

Answer:

(1) Statement of Equivalent Production (Average cost method)

Particulars Total Unit Material I Material II Labour Overhead

% Units % Units % Units % Units

2,000 Opening WIP

20,000 Input

Units processed 17,000 100 17,000 100 17,000 100 17,000 100 17,000

Normal Loss1 1,800 — — — — — — — —

Abnormal gain (800) 100 (800) 100 (800) 100 (800) 100 (800)

Closing stock 4,000 100 4,000 80 3,200 60 2,400 40 1,600

22,000 20,200 19,400 18,600 17,800


Material I Material II Labour O.H

Opening Cost 12,350 13,200 17,500 11,000

Current year Costs (₹) 1,20,000 30,000 60,000 60,000

(-) Scrap value (1,800 units @ ₹4 p.u.) (₹) 7,200

Total 1,25,150 43,200 77,500 71,000

Equivalent units: 20,200 19,400 18,600 17,800

Cost per equivalent unit(₹) 6.1955 2.2268 4.1667 3.9888

Total cost p.u. 16.5778


1 Finished Goods 17,000×16.5778 2,81,822

2 Closing WIP Material I 4,000×6.1955 24,782

Material II 3,200×2.2268 7,126

Labour 2,400×4.1667 10,000

Overheads 1,600×3.9888 6,382 48,290

3 Abnormal gain 800×16.5778 13,262

(4) Process 3 A/c


To Opening WIP 2,000 54,050 By Normal Loss 1,800 7,200

Process 2 20,000 1,20,000 Finished goods units 17,000 2,81,822

1 10% of (2,000 units + 20,000 units – 4,000 units)

Cost Accounting 48

Direct Material II 30,000 Closing balance 4,000 48,290


Overhead 60,000

Abnormal gain 800 13,262

22,800 3,37,312 22,800 3,37,312

LIFO method

Question 5: From the following information relating to the month of January, 2020. Calculate the

equivalent production units and the value of finished production and WIP using LIFO method.

Opening WIP on 1st January 15,000 units; 50% complete.

Material: 18,000 Labour: 24,000 Overheads: 24,000 Total: 66,000

Units introduced in the process: 30,000 units

Material: 90,000 Labour: 157,500 Overheads: 210,000 Total: 457,500

During the period 22,500 units were completed and transferred to the next process. Closing work-in-

progress on 31st January: 22,500 units; 60% complete.

Answer: (1) Calculation of Equivalent Units

Units in Particulars Units Out % EU

15,000 Opening work in progress

30,000 Units introduced

Finished goods 22,500 100 22,500

Closing work in progress [new] 7,500 60 4,500

Closing work in progress [opening] 15,000 10 1,500

45,000 45,000 28,500

(2) 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑈𝑛𝑖𝑡𝑠 =

457,500

28,500 = ₹16.0526

(3) Valuation of finished Production and WIP

1. 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 = 22,500 × ₹16.0526 = ₹3,61,184

2. 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑊𝐼𝑃 = ₹66,000 + (1,500 × 16.0526) + (4,500 × 16.0526) = ₹1,39,720.65

Process Costing 49

Inter Process Profit

Question 1: A certain product passes through two processes desired before it is transferred to finished

stock. The following information is obtained for the month of January 2020.

Particulars P-I P-II FG

Opening Stock 7,500 9,000 22,500

Direct Material 15,000 15,750

Direct wages 11,200 11,250

Production overhead 10,500 4,500

Closing stock 3,700 4,500 11,250

Profit % on transfer price to the next Process 25% 20%

Inter-process profits for opening stock - 1,500 8,250

Stocks in processes are valued at prime cost and finished stock has been valued at the price at which it

was received from process II. Sales during the period were ₹140,000.

Prepare and compute

(a) process cost accounts showing profit element at each stage;

(b) actual realized profit; and

(c) stock valuation for balance sheet purposes.

Answer:

Process – I A/c

Particulars Total Cost Profit

To Opening Stock b/d 7,500 7,500 -

Direct Material 15,000 15,000 -

Direct Wages 11,200 11,200 -

Total 33,700 33,700 -

Less Closing Stock 3,700 3,700 -

Prime Cost 30,000 30,000 -

Factory overhead 10,500 10,500 -

Total Cost 40,500 40,500 -

Profit (1/3 of Cost) 13,500 - 13,500

Total 54,000 40,500 13,500

Process II


To Opening Stock b/d 9,000 7,500 1,500

Cost Accounting 50

Process I transfer 54,000 40,500 13,500

Direct Material 15,750 15,750 -

Direct Wages 11,250 11,250 -

Total 90,000 75,000 15,000

(-) Closing Stock 4,500 3,750 750

Prime Cost 85,500 71,250 14,250

Factory overhead 4,500 4,500 -

Total Cost 90,000 75,750 14,250

Profit (1/4 of Cost) 22,500 - 22,500

Total 1,12,500 75,750 36,750

Finished Stock – II A/c


To Opening Stock b/d 22,500 14,250 8,250

Process II transfer 1,12,500 75,750 36,750

Total 1,35,000 90,000 45,000

(-) Closing Stock 11,250 7,500 3,750

1,23,750 82,500 41,250

Gross profit 16,250 - 16,250

Sales 1,40,000 82,500 57,500

Question 2: A product passes through 3 processes ‘X’, ‘Y’ and ‘Z’. The output of process ‘X’ and ‘Y’ is

transferred to next process at cost plus 20% each on transfer price and the output of process ‘Z’ is

transferred to finished stock at a profit of 25% on transfer price. The following information are available

in respect of the year ending 31.3.2019:

Process Finished

X Y Z Stock

Opening stock 15,000 27,000 40,000 45,000

Material 80,000 65,000 50,000

Wages 1,25,000 1,08,000 92,000

Manufacturing Overheads 96,000 72,000 66,500

Closing stock 20,000 32,000 39,000 50,000

Inter process profit included in opening stock NIL 4,000 10,000 20,000

Process Costing 51

Stock in processes is valued at prime cost. The finished stock is valued at the price at which it is

received from process ‘Z’. Sale of the finished stock during the period was ₹14,00,000. You are

required to prepare:

(a) Process accounts and finished stock A/c showing profit element at each stage.

(b) Profit & Loss A/c.

(c) Show the relevant items in the Balance Sheet.

{CA inter N08, 12 marks}

Answer: (a)

Process X A/c

Particulars Cost Profit Total

Opening stock 15,000 − 15,000

Material 80,000 − 80,000

Wages 1,25,000 − 1,25,000

Total 2,20,000 − 2,20,000

(-) Closing stock 20,000 − 20,000

Prime Cost 2,00,000 2,00,000

Mft. overhead 96,000 − 96,000

Total cost 2,96,000 − 2,96,000

P/L A/c 74,000 74,000

Transfer to Process Y 2,96,000 74,000 3,70,000

Process Y A/c

Opening Stock 23,000 4,000 27,000

Process ‘X’ A/c 2,96,000 74,000 3,70,000

Material 65,000 − 65,000

Wages 1,08,000 − 1,08,000

Total 4,92,000 78,000 5,70,000

(-) Closing stock 27,621 4,379 32,000

Prime Cost 4,64,379 73,621 5,38,000

Mft. overhead 72,000 − 72,000

Total cost 5,36,379 73,621 6,10,000

P/L A/c − 152,500 1,52,500

Transfer to Process Z 5,36,379 226,121 7,62,500

Process Z A/c

Op Stock 30,000 10,000 40,000

Cost Accounting 52

Process ‘Y’ 5,36,379 2,26,121 7,62,500

Material 50,000 − 50,000

Wages 92,000 − 92,000

Total 7,08,379 2,36,121 9,44,500

(-) Closing stock 29,250 9,750 39,000

Prime Cost 6,79,129 2,26,371 9,05,500

Mft. overhead 66,500 − 66,500

Total cost 7,45,629 2,26,371 9,72,000

P/L A/c − 3,24,000 3,24,000

Finished Goods 7,45,629 5,50,371 12,96,000

Finished Goods A/c

Opening Stock 25,000 20,000 45,000

Process ‘Z’A/c 7,45,629 5,50,371 12,96,000

Total 7,70,629 5,70,371 13,41,000

(-) Closing stock 28,733 21,267 50,000

7,41,896 5,49,104 12,91,000

P/L A/c 1,09,000 1,09,000

Sales 7,41,896 6,58,104 14,00,000

(ii) Profit and Loss A/c for the year ending 31st March, 2019

Dr Particulars ₹ Cr Particulars ₹

To Unrealized profit on cl. stock1 35,396 By Unrealized profit on op. stock 34,000

Net Profit 6,58,104 Process X A/c 74,000

Process Y A/c 1,52,500

Process Z A/c 3,24,000

Finished Stock A/c 1,09,000

1 Calculation of amount of unrealized profit on closing stock:

Process ‘X’ Nil

Process ‘Y’ 78,000

570,000× 32,000

₹4,379

Process ‘Z’ 236,121

944,500× 39,000

₹9,750

Finished stock 570,371

13,41,000× 50,000

₹21,267

35,396

Process Costing 53

6,93,500 6,93,500

(iii) Balance Sheet as on 31st March, 2019 (Extract)

Liabilities (₹) (₹) Assets (₹) (₹)

Net profit 6,58,138 Closing stock

Process – X 20,000

Process – Y 32,000

Process – Z 39,000

Finished stock 50,000

1,41,000

[-] unrealized profit 35,396 1,05,604

Advanced Problem

Question 1: A product passes through three processes A, B and C, 10,000 units at a cost of ₹1 were

issued to process A. The other direct expenses were:

Process A Process B Process C

Sundry materials 1,000 1,500 1,480

Direct labour 5,000 8,000 6,500

Direct expenses 1,050 1,188 1,605

The wastage of Process A was 5% and Process B was 4%. The wastage of Process A was sold at ₹0.25

per unit and that of B at ₹0.50 per unit and that of C at ₹1.00 per unit. The overhead charges were 168%

of direct labour. The final product was sold at ₹10.00 per unit, fetching a profit of 20% on sales.

Required: Find the percentage of wastage in Process C.

Answer:

Process A A/c

Dr Particulars Units ₹ Cr Particulars Units ₹

To Units introduced 10,000 10,000 By Normal wastage a/c 500 125

Sundry materials 1,000 Process B a/c. (t/f) 9,500 25,325

Direct labour 5,000


Overheads 8,400

10,000 25,450 10,000 25,450

Cost Accounting 54

Process B A/c


To Process A a/c. (t/f) 9,500 25,325 By Normal wastage a/c. 380 190

Sundry materials 1,500 Process C a/c. 9,120 49,263

Direct labour 8,000


Overheads 13,440

9,500 49,453 9,500 49,453

Process C A/c


To Process B a/c. (t/f) 9,120 49,263 By Normal wastage a/c. 456 456

Sundry materials 1,480 (see working note)

Direct labour 6,500 Sale 8,664 86,640


Overhead 10,920

Profit 17,328

9,120 87,096 9,120 87,096

Working note: Computation of percentage of wastage in Process C

Let waste units = x and

Sales value of waste units (No of waste units × Scrap Value p. u. )(x × ₹1) = x

Total cost = (Sales per unit − Profit %) × No of units produced

Total cost = (₹10 − 20%) × (9,120 − x)

= 72,960 − 8x = 69,768 − x

Hence x = 456

Percentage of Wastage =456

9,120% = 5%

OPERATION COSTING

Question 1: RST Ltd. manufactures plastic moulded chairs. Three models of moulded chairs, all

variation of the same design, are Standard, Deluxe and Executive. The company uses an operation-

costing system.

RST Ltd. has extrusion, form, trim and finish operations. Plastic sheets are produced by the extrusion

operation. During the forming operation, the plastic sheets are moulded into chair seats and the legs

are added. The standard model is sold after this operation. During the trim operation, the arms are

added to the Deluxe and Executive models and the chair edges are smoothed. Only the executive model

enters the finish operation, in which padding is added. All of the units produced receive the same steps

Process Costing 55

within each operation. In April, 2019 units of production and direct material cost incurred are as

follows:

Units

Produced

Extrusion

Materials (₹)

Form

Materials (₹)

Trim

Materials (₹)

Finish

Materials (₹)

Standard Model 10,500 1,26,000 42,000 0 0

Deluxe Model 5,250 63,000 21,000 15,750 0

Executive Model 3,500 42,000 14,000 10,500 21,000

19,250 2,31,000 77,000 26,250 21,000

The total conversion costs for the month of April, 2019 are:

Extrusion

Operation

Form

Operation

Trim

Operation

Finish

Operations

Total conversion costs ₹6,06,375 ₹2.97,000 ₹1,55,250 ₹94,500

Required:

(i) For each product produced by RST Ltd. during April 2019, determine the unit cost and the total

cost

(ii) Now consider the following information for May. All unit costs in May are identical to the April

unit costs calculated as above in (i). At the end of May, 1,500 units of the Deluxe model remain in

work-in-progress. These units are 100% complete as to materials and 65% complete in the trim

operation. Determine the cost of the Deluxe model work-in-process inventory at the end of May.


Answer: Working notes:

1. Statement of equivalent units of Extrusion, Form, Trim and Finish materials for Standard, Deluxe

and Executive model of chairs.

Extrusion

materials

Form

materials

Trim

materials

Finish

materials

Equivalent units of materials required to produce

three brands of plastic molded chairs

19,250 19,250 8,750 3,500

2. Statement of material and conversion cost per equivalent unit:

Extrusion Form Trim Finish

Equivalent units (A) 19,250 19,250 8,750 3,500

Material costs (₹) (B) 2,31,000 77,000 26,250 21,000

Conversion costs (C) 6,06,375 2,97,000 1,55,250 94,500

Material cost per equivalent unit (₹): (B/A) 12 4 3 6

Conversion cost per equivalent unit (₹): (C/A) 31.50 15.43 17.74 27

Cost Accounting 56

Statement of Unit and Total cost Model-wise

Standard Model Deluxe Model Executive Model

Extrusion material 12.00 12.00 12.00

Form material 4.00 4.00 4.00

Trim material – 3.00 3.00

Finish material - - 6..00

Extrusion conversion 31.50 31.50 31.50

Form conversion 15.43 15.43 15.43

Trim conversion – 17.74 17.74

Finish conversion – – 27

(a) Total unit cost 62.93 83.67 116.67

(b) Total Units 10,500 5,250 3,500

Total Cost (a) × (b) 6,60,765 4,39,267.5 4,08,345

Statement of cost of 1,500 units of the Deluxe Model of the chairs lying in WIP inventory at the end

of May 19

Equivalent

Units

Unit cost

(WN 2) ₹

Total Cost

(1) (2) (𝟑) = (𝟏) × (𝟐)

Extrusion materials 1,500 12 18,000

Form materials 1,500 4 6,000

Trim materials 1,500 3 4,500

Extrusion materials conversion 1,500 31.50 47,250

Form materials conversion 1,500 15.43 23,145

Trim materials conversation (1,500 units × 65%) 975 17.74 17,296.50

Total cost of 1,500 units of 1,16,191.50

Deluxe Model of chairs lying in WIP

Joint Products and By Products 57

2.5 JOINT PRODUCTS AND BY- PRODUCTS

Split-off

Joint Process point Products Further Process

========→

Input

Joint cost

Material,

Labour &

Expenses

======→ A Joint product =============→ A1

======→ B Joint product =============→ B1

======→ X By product

1. Joint Products: have equal and significant value

2. By Products: have no significant value (scrap value)

3. Apportioning joint cost for

Joint products

(a) Average unit cost method

(b) Physical unit method

(c) Survey method or Weighted average method

(d) Contribution margin method [Sales – variable cost]

(e) Market value method:

(i) At the point of separation [Market value | Market Price]

(ii) After further processing [Market value | Market Price]

(f) Reverse cost Method or Net realizable value

(g) Reverse cost method with constant GP Ratio or Constant GP Ratio method

By products

(a) Market Value or value on realization

(b) Standard cost in technical estimate

(c) Comparative price

(d) Reuse price

4. Treatment of value for by product

(a) If the value is small: (1) credited to Costing P/L (2) deductible from cost of production

(b) If the value is considerable: apportion like joint costs

(c) If by product require further process: net realizable value

5. Further operation:

Product may be sold after split off point or after further process

If further process cost < incremental revenue, further process is carried on

If further process cost > incremental revenue, further process is not carried on

Cost Accounting 58

PRACTICAL PROBLEMS

Average Unit Cost Method

Question 1: The Rama Corporation produces four products in a manufacturing process.

The corporation produced 10,000 units of A, 20,000 units of B, 15,000 units of C and 25,000 units of D.

The cost before split off point for the four products was ₹140,000. Using the average unit cost method

a. calculate the unit cost, and

b. Show how the joint cost would be apportioned among the products.

Answer:

a. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 =𝐽𝑜𝑖𝑛𝑡 𝑐𝑜𝑠𝑡

𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑=

140,000

70,000= ₹2𝑝. 𝑢

b. Cost apportioned among deferent products:

Product A 10000 ×₹2 ₹20,000

Product B 20000 ×₹2 ₹40,000

Product C 15000 ×₹2 ₹30,000

Product D 25000 ×₹2 ₹50,000

Physical Unit Method

Question 2: The following data is extracted from the books of M/s. East India Coke Co. Ltd:

Joints Products Coke Coal Tar Benzoyl Sul. of Ammonia Gas Total

Yield in lbs. for per ton of coal 1,420 120 22 26 412 2,000

The price of coal is ₹80 per tonne. Direct labour and OH cost to split off point are ₹40 and ₹60

respectively per tonne of coal. Calculate the material, labour, OH and total cost of each product on the

basis of weight.

Answer:

Yield % of Total Apportioned cost

Coal DL OH Total

Coke 1420 71.0 56.80 28.40 42.60 127.80

Coal Tar 120 6.0 4.80 2.40 3.60 10.80

Benzol 22 1.1 0.88 0.44 0.66 1.98

Sul. 26 1.3 1.04 0.52 0.78 2.34

Gas 412 20.6 16.48 8.42 12.36 37.08

Total 2000 100 80.00 40.00 60.00 180.00

Survey Method / Weighted Average Method

Question 3: In the timber industry, the milling operations to the split off point during a period

amounted to ₹17,400 with the production;


First grade timber– 400 units,

Second grade timber– 500 units and

Third grade timber– 600 (Total – 1,500 units)

You are required to apportion the joint cost on technical evaluation with points 5, 4 and 3 for first,

second and third grade respectively.

Answer:

Item

1

Units

2

Points

3

Eq Units

4

Cost p.u.

5

Apportioned Cost

6= (4 × 5)

Cost p.u.

7=(𝟔

𝟐)

I Grade 400 5 2,000 3 6,000 15

II Grade 500 4 2,000 3 6,000 12

III Grade 600 3 1,800 3 5,400 9

Total 1,500 5,800 17,400

Market Value / Sales Price Method (Separation Point)

Question 4: The joint cost of making 40 units of product A, 120 units of product B and 140 units of

product C is ₹2,250. The selling prices of products A, B and C are ₹2, ₹3 and ₹4 respectively. The

products did not require any further processing cost after split off point.

You are required to apportion the joint cost (a) on sales price basis and (b) on sales value basis.

Answer:

Apportionment on

1 2 3=1×2 (a) sales price basis (b) sales value basis

Product SP p.u. Qty Sold Sales Value Ratio Apportioned Ratio Apportioned

A 2 40 80 2/9 500 80/1000 180

B 3 120 360 3/9 750 360/1000 810

C 4 140 560 4/9 1,000 560/1000 1,260

Total 9 1,000 2,250 1000 2,250

Market Value Method (after further processing)

Question 5: X Co. Ltd. manufactures two joint products, A and B and sells them at ₹5 and ₹4 p.u.

respectively. During a particular period, 400 units of A and 500 units of B were produced and sold. The

joint cost incurred was ₹180 and further processing costs for products A and B are ₹1,600 and ₹1,500

respectively. Apportion the joint cost.

Answer:

Sales Value Sales Price

Product Quantity

Produced

SP p.u. Sales

Value

Ratio Apportioned

Joint Cost

Ratio Apportioned

Joint Cost

A 400 5 2000 1 90 5/9 100

Cost Accounting 60

B 500 4 2000 1 90 4/9 80

180 180

Reverse cost method or net realisable value method | Reverse cost method with constant GP ratio

Question 6: The factory produces three products A, B and C of equal value from the same

manufacturing process. The joint cost before split off point is ₹19,600. Subsequent costs are given as

under:

A B C Total

Direct Material 1,500 1,300 1,000

Direct Labour 200 150 100

Overhead 800 550 400

Total 2,500 2,000 1,500 6,000

Selling Price 30,000 24,000 20,000 74,000

Profit on Selling Price 30% 25% 20%

Show how you would propose to apportion the joint costs of manufacture under

1. Net realizable value or reverse cost method

2. Constant gross profit ratio and reverse cost method

Answer: Statement of Apportionment of Joint Cost

Product Sales Profit Constant

GP [65.41%]

Further

Cost

NRV NRV

Apport

NRV

Contant GP

A 30,000 9,000 19,622 2,500 18,500 7,400 7,878

B 24,000 6,000 15,697 2,000 16,000 6,400 6,303

C 20,000 4,000 13,081 1,500 14,500 5,800 5,419

49,000 19,600 19,600

𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝐺𝑃 𝑅𝑎𝑡𝑖𝑜 =𝐺𝑃

𝑆% =

74,000 − 19,600 − 6,000

74,000% = 65.41%

NRV = Sales – Profit – further cost

NRV Apport = Apportionment using NRV

NRV Constant GP = Sales – Constant GP – further cost


By Products – Sales Value or Non-cost Method

Question 1: In a certain period 500 units of main product are produced and 400 units are sold at ₹50

per unit. The by-product emerging from the main product is sold at ₹1000. The total cost of production

of 500 units is ₹15,000. Calculate the amount of gross profit after crediting by-product value (a) to cost

of production, and (b) to cost of sales.

Answer:

(a) By-product value credited to cost of production

Particulars ₹ Units

Cost of Production 500×30 15,000

(-) Value of By-product 1,000

Net Cost of Production 14,000 500

(+) Opening Stock of Finished Stock - -

(-) Closing Stock of Finished Stock (100 ×14,000

500) 2,800 100

Cost of Goods Sold 11,200 400

Gross Profit 8,800

Sale value of main product during the period (400×50) 20,000

(b) By-product value credited to cost of sales

Particulars ₹ Units

Cost of Production 500×30 15,000 500

(+) Opening Stock of Finished Stock - -

(-) Closing Stock of Finished Stock (100 ×15,000

500) 3,000 100

Cost of Goods Sold 12,000 400

(-) Value of By-product 1,000

Gross Profit 9,000

Sale value of main product during the period (400×50) 20,000

Cost Accounting 62

Advanced problem in joint product

Question 1: Pokemon Chocolates manufactures and distributes chocolate products. It purchases

Cocoa beans and processes them into two intermediate products:

Chocolate powder liquor base

Milk-chocolate liquor base

These two intermediate products become separately identifiable at a single split off point. Every 500

pounds of cocoa beans yields 20 gallons of chocolate – powder liquor base and 30 gallons of milk-

chocolate liquor base.

The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of

chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk-chocolate liquor base

is further processed into milk-chocolate. Every 30 gallons of milk-chocolate liquor base yields 340

pounds of milk chocolate.

Production and sales data for October, 2004 are:

Cocoa beans processed 7,500 pounds

Costs of processing Cocoa beans to split off point

(including purchase of beans)

₹712,500

Production Sales Selling price

Chocolate powder 3,000 pounds 3,000 pounds ₹190 per pound

Milk chocolate 5,100 5,100 ₹237.50 per pound

The October, 2004 separable costs of processing chocolate-powder liquor into chocolate powder are

₹302,812.50. The October 2004 separable costs of processing milk-chocolate liquor base into milk-

chocolate are ₹623,437.50.

Pokemon processes both of its intermediate products into chocolate powder or milk-chocolate. There

is an active market for these intermediate products. In October, 2004, Pokemon could have sold the

chocolate powder liquor base for ₹997.50 a gallon and the milk-chocolate liquor base for ₹1,235 a gallon.

Required:

(i) Calculate how the joint cost of ₹7,12,500 would be allocated between the chocolate powder

and milk-chocolate liquor bases under the following methods:

(a) Sales value at split off point

(b) Physical measure (gallons)

(c) Estimated net realizable value, (NRV) and

(d) Constant gross-margin percentage NRV.

(ii) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor

bases under each of the methods in requirements (i)?

(iii) Could Pokemon have increased its operating income by a change in its decision to fully

process both of its intermediate products? Show your computations.

{CA inter N04, 8+2+3=13 marks}


Answer: Working note

Input Joint

Process

Split off

Output

₹ Further

Process [₹]

Further Process

Output

₹

Cocoa

Bean

₹712,500

[500 lbs.]

7,500 lbs.

CPLB [20 g]

300 g × ₹997.50

2,99,250

FC 3,02,812.50

FR 2,70,750.00

FR < FC

CP [200 lbs.]

3,000 lbs. × ₹190

No further process

5,70,000

MCLB [30 g]

450 g × ₹1,235

5,55,750

FC 6,23,437.50

FR 6,55,500.00

FR > FC

MC [340 lbs.]

5,100 lbs. × ₹237.50

Do further process

12,11,250

Total 8,55,000 9,26,250 17,81,250

𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝐺𝑃 𝑅𝑎𝑡𝑖𝑜 =𝐺𝑃

𝑆% =

17,81,250 − 9,26,250 − 7,12,500

17,81,250% = 8%

Apportionment using different bases [refer working note]

SV at

Splitt-off

Physical

Measure

NRV

[S - FPC]

NRV 8%

GP

Constant

GPR [NRV-GP]

CPLB 2,49,375 2,85,000 2,67,187.5 2,22,656.25 45,600 2,21,587.5

MCLB 4,63,125 4,63,125 5,87,812.5 4,89,843.75 96,900 4,90,912.5

7,12,500 7,12,500 7,12,500 7,12,500

(ii) GPR under different apportion bases

CBLB SV at

Split off

Physical

Measure

NRV Constant

GPR NRV

SV of CP 5,70,000.00 5,70,000.00 5,70,000.00 5,70,000.00

(-) Separable costs 3,02,812.50 3,02,812.50 3,02,812.50 3,02,812.50

(-) Joint costs 2,49,375.00 2,85,000.00 2,22,656.25 2,21,587.50

Gross Margin 17,812.50 (17,812.50) 44,531.25 45,600

Gross Margin % 3.125% (3.125%) 7.8125% 8%

MCLB

SV of MC 12,11,250 12,11,250 12,11,250 12,11,250

(-) Separable costs 6,23,437.50 6,23,437.50 6,23,437.50 6,23,437.50

(-) Joint costs 4,63,125 4,27,500 4,89,843.75 4,90,912

Gross Margin 1,24,687.50 1,60,312.50 97,968.75 96,900.50

Gross Margin % 10.29% 13.23% 8.08% 8%

(iii) Further revenue is increased by ₹32,062.5 by not processing CPLB further [refer working note]

Cost Accounting 64

2.6 SERVICE COSTING / OPERATING COSTING

Operating costing: It is a method of ascertaining costs of providing or operating a service.

Applicable: Transport | Hotel | Hospital etc.

{CMA inter, J06 & J09, 5 marks}

Features of operating costs:

1. Operating and running charges: Variable nature like petrol, diesel, lubricating oil, and grease etc.

2. Maintenance charges. Semi-variable nature: cost of tyres and tubes, repairs and maintenance, etc.

3. Fixed or standing charges. garage rent, insurance, road license, depreciation, manager’s salary, etc.

PRACTICAL PROBLEMS

Transport [Absolute tone km & commercial tone km]

Question 1: A truck starts with a load of 10 tons of goods from station P. It unloads 4 tons at station Q

and rest of the goods at station R. It reaches back directly to Station P after getting reloaded with 8 tons

of goods at station R. The distances between P to Q, Q to R and then from R to P are 40 kms, 60 kms

and 80 kms respectively. Compute ‘absolute tonne-km.’ & ‘Commercial tonne-km.'


Answer: Absolute tonne-km = Distance × Load = 40 × 10 + 60 × 6 + 80 × 8 = 1400

Commercial tonne-km = Distance Covered × average Load = 40 + 60 + 80 ×10+6+8

3= 1440

Question 2: SHANKAR has been promised a contract to run a tourist car on a 20 km. long route for the

chief executive of a multinational firm. He buys a car costing ₹150,000. The annual cost of insurance

and taxes are ₹4,500 and ₹900 respectively. He has to pay ₹500 per month for a garage where he keeps

the car when it is not in use. The annual repair costs are estimated at ₹4,000. The car is estimated to

have a life of 10 years at the end of which the scrap value is likely to be ₹50,000.

He hires a driver who is to be paid ₹300 per month plus 10% of the takings as commission. Other

incidental expenses are estimated at ₹200 per month.

Petrol and oil will cost ₹100 per 100 kms. The car will make 4 round trips each day. Assuming that a

profit of 15% on takings is desired and that the car will be on the road for 25 days on an average per

month, what should he charge per round-trip?

Answer:

Statement of Operating cost

Standing charges Per Annum Per Month

₹ ₹

Depreciation 10,000

Insurance 4,500

Taxes 900

Service Costing / Operating Costing 65

Garage (₹500 × 12) 6,000

Annual repairs 4,000

Driver's Salary (₹300× 12) 3,600

Incidental expenses (₹200 × 12) 2,400

31,400 2,617

Variable expenses

Petrol and Oil: *4000kms × 1/100 kms × ₹100 4,000

Total Cost without commission 75 6,617

Driver’s Commission 10 882

Profit 15 1323

Total takings 100 8,822

Total number of round trips per month: 25 days × 4 round trips per day = 100

Hence the charge per round trip = 8822

100 = ₹88.22

* 20 kms × 2 × 4× round trips × 25 days = 4,000 kms.

Question 3: Mahi Transport Company operates a luxury bus, which runs between Delhi to Jaipur and

back for 10 days in a month. The distance from Delhi to Jaipur is 270 kms. The bus completes the trip

from Delhi to Jaipur and comes back on the same day. The bus goes on a Delhi-Agra trip for 10 days in

a month. The distance from Delhi to Agra is 180 kms. This trip is also completed on the same day. For

4 days of its operation in a month it runs in the local city. Daily distance covered in the city is 65 kms.

The other information is given below:

Particulars ₹

Cost of Bus ₹15,00,000

Depreciation 15% per annum

Salary of Driver ₹9,000 per month

Salary of Conductor ₹8,000 per month

Salary of par time accountant ₹4,500 per month

Insurance ₹10,800 per quarter

Diesel ₹49 per liter

Distance covered per liter 5 kms.

Token Tax ₹8,100 per quarter

Lubricant oil ₹300 per 100 k.m.

Repairs and Maintenance ₹8,000 per month

Permit Fee ₹13,050 per quarter

Normal capacity 50 persons

Cost Accounting 66

The bus is generally occupied 90% of the capacity when it goes to Jaipur and 80% when it goes to Agra.

It is always full when it runs within the city. Passenger tax is 25% of the fare.

Calculate the rate, the company should charge a passenger when it wants to earn a profit of 33 1/3 %

on its revenue.


Answer:

Statement of total running kms per month:

Particulars k.m. per trip Trips per day Days per month k.m. per month

Delhi to Jaipur 270 2 10 5,400

Delhi to Agra 180 2 10 3,600

Local City 65 - 4 260

Total running Kms. For the month 9,260

Statement of total seating capacity per month

Particulars No. of seats No. of trips No. of days Total seating capacity

Delhi to Jaipur 50 2 10 1,000

Delhi to Agra 50 2 10 1,000

Local City 50 - 4 200

Statement of Passenger Km. per month:

Particulars Delhi to Local city

Jaipur Agra

(a) Total seating capacity 1,000 1,000 200

(b) Capacity utilization 90% 80% 100%

(c) Seats occupied 900 800 200

(d) Kms. Per trip 270 180 65

Passenger KM per month = 4,00,000 2,43,000 1,44,000 13,000

Total Passenger KM per month = 4,00,000

Statement of operating cost of Buses run between different cities:

Particulars Per month (₹)

Fixed Cost:

Driver’s salary 9,000

Conductor’s salary 8,000

Part time Accountant’s Salary 4,500

Depreciation [15,00,000 ×15

100×

1

12] 18,750


Insurance (10,800/3) 3,600

Token tax (8,100/3) 2,700

Repair & Maintenance 8,000

Permit fee (13,050 /3) 4,350

Total Fixed Cost 58,900

Variable Cost:

Diesel [9260

5× 49] 90,748

Lubrication oil [9260

100× 300] 27,780

Total Variable Cost 1,18,528

Total Cost (Fixed Cost + Variable Cost) 41

2

3

1,77,428

Passenger tax 25 1,06,457

Total 2,83,885

Profit (Note) 331

3 1,41,942

Total takings 100 4,25,827

Rate per Passenger k.m. = 𝟒,𝟐𝟓,𝟖𝟐𝟕

𝟒,𝟎𝟎,𝟎𝟎𝟎 ₹𝟏. 𝟎𝟔𝟓

Fare to be charged per passenger:

Delhi to Jaipur 270 x 1.065 287.55

Delhi to Agra 180 x 1.065 191.70

Local City 65 x 1.065 69.225

Question 4: Global Transport Ltd. charges ₹90 per ton for its 6 tons truck lorry load from city 'A' to city

'B'. The charges for the return journey are ₹84 per ton. No concession or reduction in these rates is made

for any delivery of goods at intermediate station 'C'.

In January 2020 the truck made 12 outward journeys for city 'B' with full load out of which 2 tons were

unloaded twice in the way of city 'C'. The truck carried a load of 8 tons in its return journey for 5 times

but once caught by police and ₹1,200 was paid as fine. For the remaining trips the truck carried full

load out of which all the goods on load were unloaded once at city 'C'.

The distance from city 'A' to city 'C' and city 'B' are 140 kms and 300 kms respectively. Annual fixed

costs and maintenance charges are ₹60,000 and ₹12,000 respectively. Running charges were spent

during January, 2020 are ₹2,944.

You are required to find out the cost per absolute ton-kilometre and the profit for January, 2020


Answer: Operating Cost and Profit Statement M/s Global Transport Ltd. (during January, 2020)

Particulars ₹

Fixed Costs 5,000 (₹60,000/ 12)

Maintenance charges 1,000 (₹12,000/12)

Cost Accounting 68

Running charges 2,944

Total operating cost 8,944

Cost per absolute ton-km WN3 0.20 (8,944/44,720 absol. ton. kms)

Net revenue received WN4 12,168

(-) Total operating cost 8,944

Profit 3,224

1 Working Notes

1. Outward journeys:

1 From city A to city B 10 journeys × 300 kms × 6 tons 18,000-ton kms

2 From city A to city C 2 journeys × 140 kms × 6 tons 1,680-ton kms

3 From city C to city B 2 journeys × 160 kms × 4 tons 1,280-ton kms

Total 20,960-ton kms

2 Return journeys:

1 From city B to city A 5 journeys × 300 kms × 8 tons. 12,000-ton kms

2 From city C to city A 6 journeys × 300 kms × 6 tons 10,800-ton kms

3 From city B to city C 1 journey × 160 kms. × 6 tons 960-ton kms

Total 23,760-ton kms

(3) Total absolute ton kms for a round journeys: WN 1&2 = 20,960-ton kms + 23,760-ton km = 44,720-

ton kms.

4 Net revenue received during January, 2020:

12 trucks × 6 tons × ₹90 6,480 (from city A to city B)

5 trucks × 8 tons × ₹84 3,360 (from city B to city A)

6 trucks × 6 tons × ₹84 3,024 (from city B to city A)

1 truck × 6 tons × ₹84 504 (from city B to city C)

Total revenue 13,368

(-) Fine paid 1,200

Net revenue received 12,168

Question 5: A transport company has a fleet of three trucks of 10 tonnes capacity each plying in

different directions for transport of customer's goods. The trucks run loaded with goods and return

empty. The distance travelled, number of trips made and the load carried per day by each truck are as

under


Truck

No.

One way

Distance Km

Number of trips

per day

Load carried

per trip / day [tons]

1 16 4 6

2 40 2 9

3 30 3 8

The analysis of maintenance cost and the total distance travelled during the last two years is as under

Year Total distance

travelled

Maintenance Cost

₹

1 1,60,200 46,050

2 1,56,700 45,175

The following are the details of expenses for the year under review

Diesel ₹10 per liter. each liter gives 4 km per liter of diesel on an average.

Driver's salary ₹2,000 per month

Licence and taxes ₹5,000 per annum per truck

Insurance ₹5,000 per annum for all the three vehicles.

Purchase Price per truck ₹300,000 Life 10 years. Scrap value at the end of life is ₹10,000.

Oil and sundries ₹25 per 100 km run.

General Overhead ₹11,084 per annum

The vehicles operate 24 days per month on an average.

Required:

1. Prepare an Annual Cost Statement covering the fleet of three vehicles. ,

2. Calculate the cost per km. run and

3. Determine the freight rate per ton km. to yield a profit of 10% on freight

{CA inter N01, 10 marks}

Answer:

1 Annual Cost Statement of three vehicles ₹

Diesel (1,34,784 kms / 4 km) × ₹10) WN1 3,36,960

Oil & sundries (1,34,784 kms / 100 kms) × ₹25 33,696

Maintenance {(1,34,784 kms × 0.25P) + ₹6,000} WN2 39,696

Drivers' salary (₹2,000 × 12 months) × 3 trucks 72,000

Licence and taxes 15,000

Insurance 5,000

Depreciation (₹2,90,000 / 10 years) × 3 trucks 87,000

Cost Accounting 70

General overhead 11,084

Total annual cost 90 6,00,436

+ Profit [10% on freight] 10 66,715

Freight 100 6,67,151

2 Cost p.k.m. Total cost of vehicles p. a

Total km travelled p. a=

₹6,00,436

1,34,784 kms

₹4.45

3 Freight rate p.t.k.m. Total freight p. a

Total t. k. m. travelled p. a=

₹6,67,151

5,25,312 kms

₹1.27

Working notes

Note

1 Total k.m. travelled and t.k.m. (load carried) by three trucks in one year

Truck

number

One way

distance

in k.m.

Number

of trips

Total distance

Covered

in k.m. per day

Load carried

per trip / day

in tons

Total

effective

tons k.m.

1 16 4 128 6 384

2 40 2 160 9 720

3 30 3 180 8 720

Total 468 1,824

Total kilometre travelled by three trucks in one year: 1,34,784 (468 kms × 24 days× 12 months)

Total effective tonnes k.m. of load carried by 3 trucks during one year 5,25,312

(1,824 tonne km × 24 days× 12 months)

2 Fixed and variable component of maintenance cost

Cost Formula Calculation

VC p.k.m Diffence in maintenance cost

Difference in distance travelled

₹46,050 – ₹45,175)

(1,60,200 kms – 1,56,700 kms) ₹ 0.25

FC [Based on year 1] TC – VC p.k.m. × VC p.k.m. ₹46,050 – 160,200 kms × 0.25 ₹6,000

Hospital

Question 6: A Multinational company runs a Public Medical Health Center. For this purpose, it has

hired a building at a rent of ₹10,000 per month with 5% of total taking. Health center has three types

of wards for its patients namely. General word, cottage ward and Deluxe ward. State the rent to be

charged to each bed-day for different type of ward on the basis of the following information;

1. The number of beds of each type are General ward 100, Cottage ward 50, Deluxe ward 30.

2. The rent of cottage ward bed is to be fixed at 2.5 times of the General ward bed and that of Deluxe

ward bed as twice of the Cottage ward bed.

3. The occupancy of each type of ward is as follows:


General ward 100%, cottage ward 80% and Deluxe ward 60%. But, in general ward there were

occasions when beds are full, extra beds were hired at a charge of ₹20 per bed. The total hire

charges for the extra beds incurred for the whole year amount to ₹12,000.

4. The Health Center engaged a heart specialist from outside and on an average fee paid to him was

₹15,000 per trip. He makes three trips in the whole year.

5. The other expenses for the year were as under

Particulars ₹

Salary of supervisors, Nurses, ward boys 4,25,000

Repairs and Maintenance 90,000

Salary of doctors 13,50,000

Food supplied to patients 40,000

Laundry charges for their bed linens 80,500

Medicines supplied 74,000

6. Cost of oxygen, X-ray etc., other than directly borne for treatment of patients 49,500

7. General administration charges 63,000

Provide profit @ 20% on total taking.

The Health Center imposes 8% GST on rent received 360 days may be taken in a year.

{CA final N06, 12 marks}

Answer:

Statement of Total Cost

Total Cost ₹ ₹

Salary of Supervisor, Nurses, Ward boys 4,25,000

Repairs and maintenance 90,000

Salary of doctors 13,50,000

Food supplied to patients 40,000

Laundry charges for their bed linens 80,500

Medicines supplied 74,000

Cost of oxygen, X ray etc., other than directly

Borne for treatment of patients 49,500

General administration charges 63,000 21,72,000

Building rent (10×12,000) 1,20,000

Hire charges extra beds 12,000

Fees to heart specialists (3×15,000) 45,000

Total Cost 75 23,49,000

Additional building rent on takings 5 1,56,600

Profit 20 6,26,400

Cost Accounting 72

Total Takings 100 31,32,000

General ward bed days 1,05,000

Room rent per bed day 29.83

Number of beds with Equivalent Rent

Nature of wards Occupancy Weight of rent Ward days

General ward 100×360×10 36,000×1 36,000

Additional General ward 12,000

20

600×1 600

Cottage ward 50×360×80% 14,400×2.5 36,000

Deluxe ward 50×360×60% 6,480×5 32,400

Total 1,05,000

Rent to be charged

Particulars Basic Service Tax Total

General ward 29.83 2.39 32.22

Cottage ward 74.58 5.97 80.55

Deluxe ward 149.15 11.93 161.08

Hotel

Question 7: Following are the particulars given by the owner of a hotel. You, as a Cost & Management

Accountant, are requested to advise him that what rent should he charge from his customers per day

so that he is able to earn 25% on cost other than interest;

1. Staff salaries ₹80,000 per annum.

2. Room attendants’ salary ₹2 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.

3. Lighting, heating and power. The normal lighting expenses for a room if it is occupied for the whole

month is ₹50. Power is used only in winter and normal charge p.m. if occupied for a room is ₹20.

4. Repairs to Building ₹10,000 per annum.

5. Linen, etc. ₹4,800 per annum.

6. Sundries ₹6,600 per annum.

7. Interior decoration, etc. ₹10,000 per annum.

8. Cost of Building at ₹4,00,000 and its depreciation rate is 5%.

9. Other equipment at ₹1,00,000 and its depreciation rate is 10%.

10. Interest @ 5% may be charged on its investment in the buildings and equipment.

11. There are 100 rooms in the Hotel and 80% of the rooms are normally occupied in summer and 30%

rooms are busy in winter.

You may assume that period of summer and winter is six months each. Normal days in a month may

be assumed to be 30.



Answer:

Statement of rent per room per day

Particulars ₹ ₹

Staff salary 80,000

Salary of room attendants

Summer 100 × 80% × 2 × 30 × 6 28,800

Winter 100 × 30% × 2 × 30 × 6 10,800

Heating & Lighting

Summer 100 × 80% × 50 × 6 24,000

Winter 100 × 30% × 50 × 6 9,000

Power 100 × 30% × 20 × 6 3,600

Repairs to building 10,000

Linen 4,800

Sundries 6,600

Interior decoration 10,000

Depreciation

Buildings 4,000 × 5% 20,000

Other equipment’s 1,00,000 × 10% 10,000

Total Cost per annum 2,17,600

(+) (+) Profit @ 25% on cost before interest 54,400

Interest on investment 5,00,000 × 5% 25,000

Total Revenue required per annum 2,97,000

Total room days per annum

Summer: 100 × 80% × 30 × 6 = 14,400 𝑑𝑎𝑦𝑠

Winter: 100 × 30% × 30 × 6 = 5,400 𝑑𝑎𝑦𝑠 19,800 days

Room rent per day 𝟐, 𝟗𝟕, 𝟎𝟎𝟎

𝟏𝟗, 𝟖𝟎𝟎

15 per day

Cost Accounting 74

3 COST ACCOUNTING TECHNIQUE

3.1 MARGINAL COSTING

Marginal Cost: Variable cost [additional cost for one unit of product or service]

Marginal costing: Application of marginal cost principle.

whereby variable cost = product cost and fixed cost = period cost

Absorption Costing: A method of costing by which all direct cost and applicable overheads are charged

to products or cost centres for finding out the total cost of production. Absorbed cost includes

production cost as well as administrative and other cost.

Comparison between absorption costing and marginal costing

Question 1: The following data relates to XYZ Ltd. which makes and sells computers

Production 1,00,000 units

Sales 80,000 units

Selling price per unit 15

Direct material 2,50,000

Direct labour 3,00,000

Factory overhead: Variable 1,00,000

Factory overhead: Fixed 2,50,000

Selling and distribution overhead: Variable 1,00,000

Selling and distribution overhead: Fixed 2,00,000

You are required to present income statements using (a) absorption costing & (b) Marginal Costing.

Account briefly for the difference in net profit between the two income statements.

(a) INCOME STATEMENT (Absorption costing)

Sales (80000×15) 1,200,000

Less: Cost of goods manufacture

Direct material 250,000

Direct labour 300,000

Factory overheads: Variable 100,000

Factory overheads: Fixed 250,000

Total 900,000

Less: Closing Stock [20

100× 900,000] 180,000 720,000

Gross Profit 480,000

Marginal Costing 75

Less: Selling & Distribution Expenses: Fixed 200,000

Selling & Distribution Expenses: Variable 100,000 300,000

Net Profit 180,000

(b) INCOME STATEMENT (Marginal costing)

Sales (80,000×15) 12,00,000

Less: cost of goods manufacture

Direct Material 2,50,000

Direct Labour 3,00,000

Factory overheads: variable 1,00,000

Total 6,50,000

Less: Closing Stock [20

100× 650,000] 1,30,000

Total 5,20,000

Selling & Distribution Expenses: variable 1,00,000 6,20,000

Contribution 5,80,000

Less: Factory overhead – fixed 2,50,000

Selling & distribution expenses – fixed 2,00,000 4,50,000

Net Profit 1,30,000

Break Even Point: Total revenue = Total cost

Cash Breakeven Point: Total revenue = Total cash cost

Cost Break Even Point (Cost indifference point): Equal cost in two alternatives

Margin of Safety: Total Sales – BEP sales

Basic Formulas

1 𝑃/(𝐿) = 𝑆 − 𝑉 − 𝐹

2 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 = 𝑆 − 𝑉

3 𝑃𝑉𝑅 =

𝐶

𝑆% 𝑜𝑟

∆𝑃

∆𝑆%

4 𝐵𝐸𝑃 =

𝐹

𝑃𝑉𝑅

5 𝑀𝑂𝑆 =

𝑃

𝑃𝑉𝑅

6 𝑇𝑆 = 𝐵𝐸𝑃 + 𝑀𝑂𝑆

7 𝐷𝑃 =

𝐹 + 𝑃

𝑃𝑉𝑅

Cost Accounting 76

PRACTICAL PROBLEMS

Question 1: Sales ₹2,00,000; VC ₹1,20,000; FC ₹50,000 & NP ₹30,000

Calculate the P/V ratio, BEP and MOS.

Particulars % or p.u. Total BEP MOS

Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Question 2: Sales ₹240,000; VC ₹60 p.u.; Profit 25% and Sales price ₹120 p.u. Find out the fixed cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Question 3: Find out the margin of safety: Sales ₹500 lacs; Profit ₹150 lacs; VC 60%.


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Marginal Costing 77

Question 4: Find out the profit: VC ₹200,000; Sales ₹500,000 and BEP Sales ₹300,000


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

Question 5: Find the VC p.u. Sales ₹20,000; FC ₹4,000; BEP sales ₹16,000; Selling price ₹25 p.u.


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Question 6: Find the missing figures

Units Sales VC FC Profit B.E.P

A 1000 2,00,000 ? 1,00,000 - 200,000

B 1000 ? 60% ? 50,000 160,000

Answer:


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Cost Accounting 78


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Question 7: Fixed expenses ₹4,000 and Break Even point ₹10,000. Calculate:

P/V ratio | Profit when sales are ₹20,000 | Sales to earn a profit of ₹20,000

Answer:

Particulars % or p.u. BEP

Sales 20,000

Variable Cost

Contribution

Fixed Cost

Profit/Loss 20,000

Question 8: Selling price per unit is ₹150; Variable cost per unit is ₹90 and Fixed cost is ₹600,000

(a) What will be the selling price per unit if the breakeven point is 8000 units and

(b) Compute the sale required to earn a profit of ₹220,000.

Answer:

8,000

Particulars % or p.u. Total BEP

Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss 2,20,000

Question 9: Sales is ₹200,000. VC is ₹150,000. FC is 30,000

You are required to calculate Present P/V Ratio, BEP and MOS

Marginal Costing 79


Sales

Variable Cost

Contribution

Fixed Cost

Profit/Loss

Revised P/V Ratio, BEP and MOS in each of the following cases:

(i) 25% increase in selling price


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(ii) 10% decrease in selling price


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(iii) 20% increase in fixed cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

Cost Accounting 80

(iv) 10% decrease in fixed cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(v) 10% increase in variable cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(vi) 10% decrease in variable cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(vii) 10% increase in selling price accompanied by 10% decrease in variable cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

Marginal Costing 81

(viii) 10% decrease in selling price accompanied by 10% increase in variable cost


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(ix) 10% increase in sales volume


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

(x) 10% decrease in sales volume


Sales

Variable Cost

Contribution

Fixed Cost

Profit / Loss

10. Question:

Particulars

1 Selling Price p.u. ₹100

2 Variable Cost p.u. ₹60

3 Total Fixed Cost ₹10000

4 Units sold 400

Cost Accounting 82

From the above data, calculate the following

1 Contribution (C) 15 Calculate PVR, BEP & MOS and

impact on these in the following cases 2 Profit or Loss

3 Profit Volume Ratio (PVR) (i) If variable cost increases by 10%

4 Break-even point (BEP) in units (ii) If variable cost decreases by 10%

5 Break-even point in rupees (iii) If fixed cost increases by 10%

6 Break-even point in percent (iv) If fixed cost decreases by 10%

7 Margin of safety (MOS) in units (v) If variable cost increases by 10%

and fixed cost decreases by 10% 8 Margin of safety in rupees

9 Margin of safety in percent (vi) Sales price increases by 10%

10 Sales required to earn a profit of ₹10,000 (vii) Sales price decreases by 10%

11 Sales required to earn a profit of 10% on sales (viii) Sales volume increases by 10%

12 Sales required to earn a profit of 10% on cost (ix) Sales volume decreases by 10%

13 Profit if sales is ₹30,000 (x) Sales price increases by 10%,

variable cost increases by 10%

and fixed cost increases by ₹2,000

14 Revised sales price required to get

(i) BEP in 200 units

(ii) BEP in 400 units (xi) Sales price increases by 10%,

variable cost decreases by 5%


Answer:

Particulars Formula -----------Calculation----------- Answer

1 Contribution (C) p.u. and total 𝑆 − 𝑉

2 Profit or Loss 𝑆 − 𝑉 − 𝐹

3 Profit Volume Ratio (PVR) 𝐶

𝑆%

4 Break-even point (BEP) in units 𝐹

𝐶 𝑝. 𝑢.

5 Break-even point in rupees 𝐹

𝐶× 𝑆

6 Break-even point in percent 𝐵𝐸𝑃

𝑆%

7 Margin of safety (MOS) in units 𝑃

𝐶 𝑝. 𝑢.

8 Margin of safety in rupees 𝑃

𝐶× 𝑆

9 Margin of safety in percent 𝑀𝑂𝑆

𝑆%

10 Sales required to earn

a profit of ₹10,000

𝐹 + 𝐹𝐷𝑃

𝐶 𝑝. 𝑢.

Marginal Costing 83


a profit of 10% on sales

𝐹

(𝐶 − 𝑉𝐷𝑃)𝑝. 𝑢.


a profit of 10% on cost

𝐹 + 𝐹𝐷𝑃

(𝐶 − 𝑉𝐷𝑃)𝑝. 𝑢.

13 Profit if sales is ₹30,000 𝑆 × 𝑃𝑉𝑅 − 𝐹

14 Revised sales price required to get

(i) BEP in 200 units 𝐹

𝑆𝑎𝑙𝑒 𝑢𝑛𝑖𝑡𝑠+ 𝑉

(ii) BEP in 400 units

15 Calculate PVR, BEP & MOS

and impact on these

𝑃𝑉𝑅 =𝐶

𝑆% 𝐵𝐸𝑃 =

𝐶

𝑆% 𝑀𝑂𝑆 =

𝐶

𝑆%

(i) If variable cost increases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(ii) If variable cost decreases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(iii) If fixed cost increases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(iv) If fixed cost decreases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(v) If variable cost increases by 10%

and fixed cost decreases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(vi) Sales price increases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(vii) Sales price decreases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(viii) Sales volume increases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(ix) Sales volume decreases by 10%

Impact =

𝑁 − 𝑂

𝑂%

(x) Sales price increases by 10%,

variable cost increases by 10%

Cost Accounting 84


Impact =

𝑁 − 𝑂

𝑂%

(xi) Sales price increases by 10%,

variable cost decreases by 5%


Impact =

𝑁 − 𝑂

𝑂%

Question 11: The sales turnover and profit during two periods were as follows:

Sales Profit

Period I 20 lakhs 2 lakhs

Period II 30 lakhs 4 lakhs

Calculate: PVR, the sales required to earn a profit of ₹5 lakh and the profit when sales are ₹10 lakh.

Answer:

Particulars Formula Calculate Answer

(a) Profit volume ratio 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑜𝑓𝑖𝑡𝑠

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑙𝑒𝑠%

4,00,000 − 2,00,000

30,00,000 − 20,00,000% 20%

(b) Fixed cost Sales × PVR – Profit 30,00,000×20%– 4,00,000 ₹2,00,000

(c) Sales to earn ₹5 lacs 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝑃𝑉𝑅

2,00,000 + 5,00,000

20% ₹35,00,000

(d) Profit if sales is ₹10

lacs Sales × PVR – Fixed Cost

10,00,000

× 20% – 2,00,000 0

Question 12: A company sells its products at ₹15 per unit. In a period if it produces and sells 8,000

units, it incurs a loss of ₹5 per unit. If the volume is raised to 20,000 units, it earns a profit of ₹4 per unit.

Calculate breakeven point in terms of rupees as well as in units.

Answer:


(a) PVR 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑜𝑓𝑖𝑡𝑠


20,000 × 4 + 8,000 × 5

15(20,000 − 8,000)% 66

2

3%

(b) Fixed cost 𝑆𝑎𝑙𝑒𝑠 × 𝑃𝑉𝑅– 𝑃𝑟𝑜𝑓𝑖𝑡 15 × 20,000 × 662

3%– 20,000 × 4 ₹120,000

(c) BEP in ₹ 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡

𝑃𝑉𝑅

120,000

662

3%

₹180,000

(d) BEP in units 𝐵𝐸𝑃 𝑖𝑛 ₹

𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

180,000

15 12,000 u

Marginal Costing 85

Question 13: From the details given below

Sales Total cost

First 6 months 10 lakhs 8 lakhs

Second 6 months 15 lakhs 11 lakhs

Calculate: PVR, the sales required to earn a profit of ₹5 lakh and the profit when sales are ₹20 lakh.

Answer:


(a) Profit volume ratio 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑜𝑓𝑖𝑡𝑠


4,00,000 − 2,00,000

15,00,000 − 10,00,000% 40%

(b) Fixed cost for 6

months 𝑆𝑎𝑙𝑒𝑠 × 𝑃𝑉𝑅– 𝑃𝑟𝑜𝑓𝑖𝑡 10,00,000×40%– 2,00,000 ₹200,000

Fixed cost for full

year 2,00,000×2 ₹4,00,000

(c) Sales to earn ₹5 lacs 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝑃𝑉𝑅

400,000 + 500,000

40% ₹22,50,000

(d) Profit if sales is ₹20

lacs 𝑆𝑎𝑙𝑒𝑠 × 𝑃𝑉𝑅– 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡

20,00,000 × 40% – 4,00

,000 4,00,000

Problem Type: Decision making & Profit Planning

1. Indifference Point

2. Sales Mix

3. Limiting Factor

4. Elimination of Product

5. Accepting Foreign Order

6. Shut down

7. Make or Buy

8. Plant Merger

Indifference Point

Question 1: Two businesses, Y Ltd. and Z Ltd., sell the same type of product in the same type of market.

Their budgeted profit and loss accounts for the coming year are as follows:

Y Ltd X Ltd

Sales per unit 150 150

Variable Cost per unit 120 100

Fixed Cost 15,000 35,000

You are required to calculate

1. the breakeven point of each business;

2. the sales volume at which each of business will earn ₹5,000 profit;

Cost Accounting 86

3. at which sales volume both the firms will earn equal profits.

4. state which business is likely to earn greater profit in conditions of:

a. heavy demand for the product;

b. low demand for the product and briefly give your reasons.

Answer:

Formula Y Ltd Z Ltd

PVR 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

𝑆𝑎𝑙𝑒𝑠%

20% 33.33%

1 BEP 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡

𝑃𝑉𝑅

75,000 105,000

2 Sales to earn ₹5,000 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝑃𝑉𝑅

100,000 120,000

3 Indifference point

(Cost BEP)

𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡

𝑃𝑉𝑅

150,000

4 (a) Heavy demands High PVR & FC Suitable

4 (b) Low demands Low PVR & FC Suitable

Sales Mix

Question 2: Accelerate Co. Ltd. manufactures and sells four types of products under the brand names

of A, B, C A & D. The sales mix in value comprises 331

3%, 41

2

3%, 16

2

3% & 8

1

3% of products A, B, C

and D respectively. The total budgeted sales (100% are ₹60,000 p.m.). Operating Cost is:

Variable Costs

Product A 60% of selling price

Product B 68% of selling price

Product C 80% of selling price

Product D 40% of selling price

Fixed Cost: ₹14,700 p.m.

(a) Calculate the break-even-point for the products on overall basis and

(b) Also calculate break-even-point, if the sales mix is changed as follows the total sales per month

remaining the same. (Mix: - A-25%: B-40%: C-30%: D-5%)

Answer:

(a) Computation of BEP on overall basis

A B C D Total

Sales ₹ 20,000 25,000 10,000 5,000 60,000

Variable Cost ₹ 12,000 17,000 8,000 2,000 39,000

Contribution ₹ 8,000 8,000 2,000 3,000 21,000

Fixed cost ₹ 14,700

Profit ₹ 6,300

P/V ratio % 40% 32% 20% 60% 35%

Break even sales ₹ 14,700

35%

42,000

Marginal Costing 87

(b) Computation of BEP if the sales mix is changed

A B C D Total

Sales ₹ 15,000 24,000 18,000 3,000 60,000

Variable Cost ₹ 9,000 16,320 14,400 1,200 40,920

Contribution ₹ 6,000 7,680 3,600 1,800 19,080

Fixed cost ₹ 14,700

P/V ratio % 40% 32% 20% 60% 31.8%

Break even Sales ₹ 14,700

31.8%

46,266

Limiting Factor

Question 3: The Following particulars are extracted from the records of a company.

Product A B

Sale Price (₹) 100 110

Consumption of Materials (kgs) 5 4

Material cost 24 14

Direct wages 2 3

Machine hours used 2 3

Variable overheads 4 6

Comment on the profitability of each product (both use the same raw material) when:

(i) Total sales potential in units is limited.

(ii) Total sales potential in value is limited.

(iii) Raw material is in short supply.

(iv) Production capacity (in terms of machine hour) is the limiting factor.

Answer:

Product A B

Sale Price 100 110

Less Variable Cost 30 23

Contribution 70 87

Profit volume ratio 70% 79%

Contribution per kg of material 14 21.75

Contribution per machine hour 35 29

Ranking based on key factor

(i) Sales in units is limited II I

(ii) Sales in ₹ is limited II I

Cost Accounting 88

(iii) Raw material is limited II I

(iv) Machine hour is limited I II

Limiting Factor and Optimum Product Mix

Question 4: ABC Ltd. is manufacturing three products X, Y and Z. All the products use the same raw

material which is scarce and available to the extent of 61,000 kg only. The following information is

available from records of the company:

Particulars Product X Product Y Product Z

Selling price per unit (₹) 100 140 90

Variable cost per unit (₹) 75 10 65

Raw material requirement per unit (kg) 5 8 6

Market demand (units) 5,000 3,000 4,000

Fixed costs are ₹1,50,000. Advise the company about the most profitable product mix. Compute the

amount of profit resulting from such product mix.

{CMA inter}

Answer:

Ranking X Y Z

Selling price 100 140 90

Less: Variable cost 75 110 65

Contribution per unit 25 30 25

Raw material required per unit 5 8 6

Contribution per unit of raw material 5 3.75 4.17

Ranking I III II

Working notes:

1 Optimum product mix as per ranking Balance

Available raw material 61,000 kg

Produce product X (being I rank) maximum 5,000×5 25,000 kg 36,000 kg

Produce product Z (being II rank) maximum 4,000×6 24,000 kg 12,000 kg

Produce product Y (being III rank) maximum 1,500×8 12,000 kg 0

2 Profit for the optimum product mix

Product X Y Z Total

Produced & Sale 5,000 1,500 4,000

Contribution per unit 25 30 25

Marginal Costing 89

Contribution 1,25,000 4,50,000 1,00,000

Total contribution 2,70,000

Less Fixed cost 1,50,000

Profit 1,20,000

Limiting Factor and Optimum Product Mix

Question 5: Z Ltd., makes a range of five products to which the following standards apply:

Per Unit

A B C D E

₹ ₹ ₹ ₹ ₹

Sales price 50 60 70 80 90

Direct Materials 9 10 17 12 21

Direct wages 16 20 24 28 32

Variable production overheads 8 10 12 14 16

Variable selling and distribution overheads 5 6 7 8 9

Fixed overheads 4 5 6 7 8

42 51 66 69 86

The direct labour wage rate is ₹4 per hour. Fixed overheads have been allocation the basis of direct

labour hours. The company has commitment to produce a minimum of 200 units of each product per

month with a maximum demand of 1,000 units of each product per month. Direct hours cannot exceed

13,000 per month.

Required: Give recommendations, supported by calculations, to show how direct labour hours in the

existing factory should be utilized in order to maximize profits.

Answer:

Ranking A B C D E

₹ ₹ ₹ ₹ ₹

1 Selling price 50.00 60.00 70.00 80.00 90.00

2 Variable Cost

(a) Direct material 9.00 10.00 17.00 12.00 21.00

(b) Labour cost 16.00 20.00 24.00 28.00 32.00

(c) Variable POH 8.00 10.00 12.00 14.00 16.00

(d) Variable S/D OH 5.00 6.00 7.00 8.00 9.00

38.00 46.00 60.00 62.00 78.00

3 Contribution (1-2) 12.00 14.00 10.00 18.00 12.00

Hours required {col. (b)/₹4} 4 5 6 7 8

Cost Accounting 90

Contribution per labour hour 3.00 2.80 1.67 2.57 1.50

Priority I II IV III V

1 Optimum product mix as per ranking Balance

Available raw material 13,000 hours

Produce the minimum requirement of ALL products 200×30 6,000 7,000 hours

Produce product A (being I rank) maximum 800×4 3,200 3,800 hours

Produce product B (being I rank) maximum 760×5 3,800 0 hours

2 Profit for the optimum product mix

Product A B C D E Total

Produced & Sale 1,000 960 200 200 200

Contribution per unit 12 14 10 18 12

Contribution 12,000 13,440 2,000 3,600 2,400

Total contribution 33,440

Less Fixed cost 13,000

Profit 20,440

Elimination of a product

Question 6: A company manufactures 3 products A, B and C. There are no common processes and the

sale of one product does not affect prices or volume of sales of any other. The Company's budgeted

profit / loss for 2020 has been abstracted thus:

Total A B C

Sales 300,000 45,000 225,000 30,000

Production Cost: Variable 180,000 24,000 144,000 12,000

Production Cost: Fixed 60,000 3,000 48,000 9,000

Factory Cost 240,000 27,000 192,000 21,000

Sales & Administration Cost: Variable 24,000 8,100 8,100 7,800

Sales & Administration Cost: Fixed 6,000 2,100 1,800 2,100

Total Cost 2,70,000 37,200 201,900 30,900

Profit 30,000 7,800 23,100 (900)

Answer:

Products Total

A B C

Sales 45,000 2,25,000 30,000 3,00,000

Marginal Costing 91

Less Marginal cost

Product cost 24,000 1,44,000 12,000

Sales & Administration cost 8,100 8,100 7,800

Total 32,100 1,52,100 19,800 2,04,000

Contribution per unit 12,900 72,900 10,200 96,000

Less Fixed Cost (60,000 + 6,000) 66,000

Profit 30,000

PVR 28.67% 32.4% 34%

From the above it is clear that the product C is contributing ₹10,200 towards the FOH of the company.

If product C is eliminated, the profit of the company will be reduced to ₹19,800.

Accepting Foreign Order

Question 7: Novina Industrial Ltd. has received an export order for its only product that would require

the use of half of the factory’s present capacity of 4,00,000 units per annum. The factory is currently

operating at 60% level to meet the demand of its domestic market.

As against current price of ₹6.00 per unit, the export order offers @ ₹4.50 per unit, which is less than the

cost of production, the details of which are given below:

Direct materials ₹2.50 per unit

Direct labour ₹1.00 per unit

Variable overheads ₹0.50 per unit

Fixed overheads ₹1.00 per unit

The condition of the export is that it has either to be accept in full or totally rejected. The following

alternative proposals are available for decision:

(a) Accept the order and keep domestic sales unfulfilled to the extent of the excess demand for the

same.

(b) Increase factory capacity by installing a new machinery and also by working extra time to meet the

balance of the required capacity. This will increase fixed overheads by ₹20,000 annually and the

additional cost of overtime will work out to ₹40,000 per annum.

(c) Out-source the production of additional requirement by supplying direct materials and paying

conversion charges of ₹1.75 per unit to a small converter, and engaging one supervisor at a cost of

₹3,000 per month to look after quality, packing and dispatch.

(d) Reject the order and remain with the domestic market only.

As a management Accountant, you are required to make comparative analysis of various proposals

and suggest which of the alternative proposals is the most attractive to Novina Industries Ltd.

{CMA inter J06}

Cost Accounting 92

Answer:

Options → (a) (b) (c) (d)

Domestic sales (u) 2,00,000 2,40,000 2,40,000 2,40,0000

Foreign Sales (u) 2,00,000 2,00,000 2,00,000 -

₹ / p.u.

Domestic sales 6.00 12,00,000 14,40,000 14,40,000 14,40,000

Foreign Sales 4.50 9,00,000 9,00,000 9,00,000

Total Sales 21,00,000 23,40,000 23,40,000 14,40,000

VC [DM+DL+VOH] ₹4.00 16,00,000 17,60,000 17,60,000 9,60,000

Additional VOH 40,000 10,0001

Contribution 5,00,000 5,40,000 5,70,000 4,80,000

Fixed OH2 2,40,000 2,40,000 2,40,000 2,40,000

Additional FOH 20,000 36,000 -

Profit 2,60,000 2,80,000 2,94,000 2,40,000

Option Select

Shut down

Question 8: Sale price – ₹100, VC p.u. – ₹60 and FC – ₹50,000. FC – ₹20,000 is to be incurred even if

closed. Find out sales at shut down

𝑨𝒏𝒔𝒘𝒆𝒓: 𝑆𝑎𝑙𝑒𝑠 𝑎𝑡 𝑠ℎ𝑢𝑡 𝑑𝑜𝑒𝑛 = (𝐹𝐶 − 𝑆ℎ𝑢𝑡 𝑑𝑜𝑤𝑛 𝑐𝑜𝑠𝑡) ×𝑆𝑎𝑙𝑒

𝐶= (50,000 − 20,000) ×

100

40= 75,000

Question 9: The company is presently passing through a period of very lean market demand and

operating at 50% capacity and have also selling its product at a discounted price generating a total sales

revenue of ₹60,000 at that level.

It is expected that the market scenario will improve in the next year and, on a conservative estimate,

the company is likely to operate at 70% capacity level with increased sales revenue of ₹1,20,000.

Note: VA, FC and total cost at 100% capacity are ₹1,01,000, 19,000 and 1,20,000 respectively.

As an option, the management is considering to close down the operation for one year and restart

operation after one year when the market conditions are likely to improve. If closed down for the year

it is estimated that

(a) The present fixed costs will reduce by 60%.

(b) There will be a cost of ₹10,000 towards closing down operations;

(c) To maintain a skeleton maintenance service for which ₹24,000 to be incurred;

(d) An initial cost of re-opening of ₹20,000 to be incurred.

You are required to work out the profitability under the two options and give your comment.

1 Incremental conversion cost × units sub contracted = (₹1.75 – ₹1.5)×40,000 2 ₹1 per unit for current level of operation (2,40,000×₹1)

Marginal Costing 93

Answer:

Profitability between two options

Operation 100% 50% Shutdown 70%

Revenue 60,000 Nil 1,20,000

Variable cost 1,01,000 50,500 Nil 70,700

Fixed costs 19,000 19,000 61,6001 19,000

Profit/(loss) -9,500 -61,600 30,300

Choice Select

Make or buy decisions

Question 10: A manufacturing company finds that while the cost of making a component part is ₹10,

the same is available on the market at ₹9 with an assurance of continuous supply. Give your suggestion

whether to make or buy this part. Give also your views in case the supplier reduces the price from ₹9

to ₹8. The cost information is as follows:

Direct Material 3.50

Direct Labour 4.00

Variable Over Head 1.00

Fixed Over Head 1.50

Total 10.00

Answer: If buy-price > TVC, make else buy. If BP is ₹9 then make. If BP is ₹8 then buy

Plant Merger

Question 11: Two manufacturing companies which have the following operating details to merge:

Company 1 Company 2

Capacity utilization % 90 60

Sales (₹Lakhs) 540 300

Variable costs (₹Lakhs) 396 225

Fixed costs (₹Lakhs) 80 50

Assuming that the proposal is implemented, calculate:

(a) Break-even sales of the merged plant and the capacity utilization at that stage.

(b) Profitability of the merged plant at 80% capacity utilization.

(c) Sales turnover of the merged plant to earn a profit of ₹75 lakhs.

(d) When the merged plant is working at a capacity to earn a profit of ₹75 lakhs, what percentage

increase in selling price is required to sustain an increase of 5% in fixed overheads.

1 40% of FC + closing down + maintenance + reopening costs = (7,600+10,000+24,000+20,000)

Cost Accounting 94

Answer:

₹ in lacs

Company 1 Company 2 (a) Merged (b) (c) (d)

Capacity utilization 90% 100% 60% 100% 100% 80%

Sales [S] 540 600 300 500 1,100 880 7911 797.5

Less: Variable costs [V] 396 440 225 375 815 652 586 586.0

Contribution [C] 144 160 125 285 228 205 211.5

Less: Fixed cost [FC] 80 80 50 50 130 130 130 136.5

Profit [P] 64 80 75 155 98 75 75.0

P/V ratio [PVR] [𝐶

𝑆%] 25.91%

BEP [𝐹𝐶

𝑃𝑉𝑅] ₹501.74

Capacity at BEP [𝐵𝐸𝑃

𝑆%] 45.61%

Profitability [𝑃

𝑆%] 11.14%

Sales price increase in % 0.82%2

1 Sales to earn 75 lacs =

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡

𝑃𝑉𝑅 =

75

25.91%

2 Sales price increase in % = 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠

𝑆𝑎𝑙𝑒𝑠 𝑡𝑜 𝑒𝑎𝑟𝑛 75 𝑙𝑎𝑐𝑠%

Standard Costing – Variance Analysis 95

3.2 STANDARD COSTING – VARIANCE ANALYSIS

Standard Costing or Variance Analysis– A technique for variance analysis and control

Material Variances & Labour Variances

Material Variance Formula Labour Variance Formula

1 Material Cost Variance SC – AC Labour Cost Variance SC – AC

SQ × SP – AQ × AC SHP × SR – AHP × AR

2 Material Price Variance (SP – AP) × AQ Labour Rate Variance (SR – AR) × AHP

3 Material Quantity

Variance

(SQ – AQ) × SP Labour Efficiency

Variance

(SH – AHW) × SR

Idle Time Variance IT × SR

4 Material Mix Variance (RSQ – AQ) × SP Labour Mix Variance (RSH – AHW) × SR

5 Material Yield Variance (AY – SY) × SPO Labour Yield Variance (AY – SY) × SPO

Material Sub-usage (SQ – RSQ) × SP Labour Sub-usage (SH – RSH) × SR

Check Check

MCV MPV + MQV LCV LRV + LEV

MQV MMV + MYV LEV LMV + LYV

FOH and VOH Variances

VOHV Formula FOHV Formula

1 VOH Cost V SVOH – AVOH FOH Cost V TSFOH – TAFOH

SH × SVOH – AH × AVOH SH × SFOH – AH × AFOH

2 VOH Exp V (SVOH – AVOH) × AH FOH Exp V BFOH – TAFOH

(SVOH – AVOH) × AH

3 VOH Eff V (SH – AH) × SVOH FOH Vol V TSFOH – BFOH

(SH – BH) ×SFOH

4 FOH Eff V (SH – AH) × SFOH

5 CapacityV (AH – BH) × SFOH

6 CalenderV (AD - BD) × SFOHPD

(RBH – BH) × SFOH

7 RCapacityV (AH – RBH) × SFOH

Check Check

VOHCV VOHExpV + VOHEffV FOHCV FOHExpV + FOHVolV

FOHVolV FOHEffV + RCapacityV + CalenderV

CapacityV CalenderV + RCapacityV

Cost Accounting 96

Practical Problems

Material Variances

Question 1: From the following particulars furnished by M/s. Starlight Co. ltd. find out

1. Material cost variance;

2. Material usage variance and

3. Material price variance.

Value of Material purchased ₹9,000

Quantity of Material purchased 3,000 units

Standard quantity of materials required per ton of finished product 25 units

Standard rate of material ₹2 per unit

Opening Stock Nil

Closing Stock of material 500 units

Finished production during the period 80 tons.

{CMA inter J12, 4+3+3=10 marks}

Answer:

MIX Material Standard Cost Actual Cost Revised Mix

Quantity Rate Amount Quantity Rate Amount Quantity

25 Input 2,000 2 4,000 2,500 3 7,500

1 Output 80 50 4,000 80 7,500

Note: actual quantity consumed (purchased – close stock) = 3,000 – 500 = 2,500

Variance Formula Calculation Variance

1 MCV SC – AC 4,000 – 7,500 3,500A

2 MPV (SP – AP) × AQ (2 – 3) × 2,500 2,500A

3 MQV (SQ – AQ) × SP (2,000 – 2,500) × 2 1,000A

Check

MCV MPV + MQV 3,500A = 2,500A + 1,000A

Question 2: A product is manufactured by mixing and processing three raw materials X, Y and Z as

per standard data given below:

Raw material Percentage of Input Cost per kg.

X 40% ₹40

Y 40% ₹60

Z 20% ₹85

Note: Loss during processing is 5% of input and this has no realizable value.


During a certain period 5,80,000 kg of finished product was obtained from inputs as per details given

below:

Raw material Quantity consumed Cost / kg

X 2,40,000 kg ₹38

Y 2,50,000 kg ₹59

Z 1,10,000 kg ₹88

Calculate all variances.

{CMA inter D04 & D13, 10 marks | ESKAY Ltd operates}

Answer:

Mix Material Standard Cost Actual Cost Revised Mix


40 X 2,44,211 40 97,68,421 2,40,000 38 91,20,000 2,40,000

40 Y 2,44,211 60 1,46,52,632 2,50,000 59 1,47,50,000 2,40,000

20 Z 1,22,105 85 1,03,78,947 1,10,000 88 96,80,000 1,20,000

100 Input 6,10,527 3,48,00,000 6,00,000 3,35,50,000 6,00,000

5 Loss 30,527 20,000 30,000

95 Output 5,80,000 60 3,48,00,000 5,80,000 57.84 3,35,50,000 5,70,000


1 MCV SC – AC X (97,68,421 – 91,20,000) 6,48,421 F

Y (1,46,52,631.58 – 1,47,50,000) 97,368 A

Z (1,03,78,947.37 – 96,80,000) 6,98,947 F 12,50,000 F

2 MPV (SP – AP) × AQ X (40-38)2,40,000 4,80,000 F

Y (60-59)2,50,000 2,50,000 F

Z (85-88)1,10,000 (3,30,000) A 4,00,000 F

3 MQV (SQ – AQ) × SP X 4,210(40) 1,68,400 F

Y (5,790)(60) (3,47,400) A

Z 12,105(85) 10,29,000 F 8,50,000 F

4 MMV (RSQ – AQ) × SP X 0(40) 0

Y (10,000)(60) (6,00,000) A

Z 10,000(85) 8,50,000 F 2,50,000 F

5 MYV (AY – SY) × SPO 10,000(60) 6,00,000 F

Check

MCV MPV + MQV 4,00,000 + 8,50,000 12,50,000

MQV MMV + MYV 2,50,000 + 6,00,000 8,50,000

Cost Accounting 98

Question 3: A company is manufacturing a chemical product making use of four different types of

raw materials as follows;

Raw Material Share of total input (%) Cost of raw material (₹/kg)

A 40 50

B 30 80

C 20 90

D 10 100

There is an inevitable normal loss of 10% during the processing. For April 2007, the management

furnished the following information;

Raw Material consumed Quantity consumed (kg) Cost of Material (₹/kg)

A 42,000 48

B 31,000 80

C 18,000 92

D 9,000 110

Output obtained for the month was 92,000 kg.

Calculate:

(a) Material cost variance,

(b) Material price variance,

(c) Material mix variance,

(d) Material yield variance,

(e) Material usage variance,


Answer:

Mix Material Standard Cost Actual Cost Revised Mix


40 A 40,889 50 20,44,450 42,000 48 20,16,000 40,000

30 B 30,667 80 24,53,360 31,000 80 24,80,000 30,000

20 C 20,444 90 18,39,960 18,000 92 16,56,000 20,000

10 D 10,222 100 10,22,200 9,000 110 9,90,000 10,000

100 Input 1,02,222 73,59,970 1,00,000 71,42,000 1,00,000

10 Loss 10,222 8,000 - 10,000

90 Output 92,000 80 73,59,970 92,000 71,42,000 90,000



1 MCV SC – AC A 20,44,450 – 20,16,000 28,450 F

B 24,53,360 – 24,80,000 (26,640) A

C 18,39,960 – 16,56,000 1,83,950 F

D 10,22,200 – 9,90,000 32,200 F 2,17,970 F

2 MPV (SP – AP) × AQ A (50 – 48) 42,000 84,000 F

B (80 – 80) 31,000 0

C (90 – 92) 18,000 (36,000)

D (100 – 110) 9000 (90,000) A (42,000)

3 MQV (SQ – AQ) × SP A 50(40,889 – 42,000) (55,550) A

B 80(30,667 – 31,000) (26,640) A

C 90(20,444 – 18,000) 2,19,960 F

D 100(10,222 – 9000) 1,22,200 F 2,59,970 F

4 MMV (RSQ – AQ) × SP A 50(40,000 – 42,000) (1,00,000) A

B 80(30,000 – 31,000) (80,000) A

C 90(20,000 – 18,000) 1,80,000 F

D 100(10,000 – 9000) 1,00,000 F 1,00,000 F

5 MYV (AY – SY) × SPO (92,000 – 90,000)80 1,60,000 F

Check

MCV MPV + MQV 2,59,970 + (42,000) 2,17,970 F

MQV MMV + MYV 1,60,000 + 1,00,000 2,60,000 F

Question 4: Vinak Ltd. produces an article by blending two basic materials. It operates a standard

costing system and the following standards have been set for raw materials:

Material Standard Mix Standard Price per k.gs

A 40% ₹4

B 60% ₹3

The standard loss in processing is 15%. During April 2009 the company produced 1700 k.gs of finished

output. The position of stocks and purchases for the month of April 2009 is as under:

Material Stock on

1.4.2009 (k.gs)

Stock on

30.4.2009 (k.gs)

Purchases during April 2009

k.gs Cost in ₹

A 35 5 800 3400

B 40 50 1200 3000

Cost Accounting 100

Calculate all material variances [Assume FIFO method of pricing material issues]

Answer:

Standard

Mix

Direct

Material

Standard Cost Actual Cost RSQ

Q ₹/p.u ₹ Q ₹/p.u ₹

40 A 800 4 3200 35 4 140 808

795 4.25 3378.75

830 3518.75

60 B 1200 3 3600 40 3 120 1212

1150 2.50 2875

1190 2995

100 I/P 2000 6800 2020 6513.75 2020

15 Loss 300 320 303

85 O/P 1700 4* 6800 1700 6513.75 1717


1 MCV SC – AC A 3200 – 3518.75 318.75 A

B 3600 – 2995 605 F 286.25F

2 MPV (SP – AP) × AQ A (4 – 4.25) × 795 198.75 A

B (3 – 2.5) × 1150 575 F 376.25 F

3 MQV (SQ – AQ) × SP A (800 – 830) × 4 120 A

B (1200 – 1190) × 3 30 F 90A

4 MMV (RSQ – AQ) × SP A (808 – 830) × 4 88 A

B (1212 – 1190) × 3 66 F 22A

5 MYV (AY – SY) × SPO (1700 – 1717) × 4 68 A

Check

MCV MPV + MQV 376.25 F + 90 A 286.25 F

MQV MMV + MYV 22 A + 68 A 90 A

Labour Variances

Question 5: The following information pertains to labour force of UDHHAMI LTD. engaged in a week

of November 2014 for a JOB – PH.

Particulars Skilled Semi- skilled Unskilled Total

No. of workers in standard gang 16 12 8 36

Standard rate per hour (₹) 60 30 10 -


No. of workers in actual gang - - - -

Actual rate per hour (₹) 70 20 20 -

In a 40 hours week, the gang produced 1,080 standard hours. The actual number of semi-skilled workers

is two times of the actual number of unskilled workers. Total number of actual workers are same as

standard gang. The rate variance of semi-skilled workers is ₹6,400 (F).

You are required to find the following

(a) The actual number of workers / labours in each category.

(b) Labour gang (mix) variance

(c) Labour sub-efficiency variance.

(d) Labour rate variance.

(e) Labour cost variance.


Answer:

𝐿𝑅𝑉 = (𝑆𝑅 – 𝐴𝑅) × 𝐴𝐻𝑃 = (30 − 20) × 𝐴𝐻𝑃 = 6,400𝐹, ℎ𝑒𝑛𝑐𝑒 𝐴𝐻𝑃 = 640

𝑁𝑜. 𝑜𝑓 𝑠𝑒𝑚𝑖𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 =640 ℎ𝑜𝑢𝑟𝑠

40 ℎ𝑜𝑢𝑟𝑠= 16, 𝑢𝑛𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 = 8 & 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 = 12

Std Labour Standard Actual RSH

Mix No. Hrs. ₹/p.h. ₹ No. Hrs. ₹/p.h. ₹ Hours

480 Skilled 16 480 60 28,800 12 480 70 33,600 640

360 Semi-skilled 12 360 30 10,800 16 640 20 12,800 480

240 Un- skilled 8 240 10 2,400 8 320 20 6,400 320

1,080 36 1,080 38.8 42,000 36 1440 52,800 1440


LCV SC – AC Skilled 28,800 – 33,600 (4800) A

Un-skilled 10,800 – 12,800 (2000) A

Semi-skilled 2,400 – 6,400 (4000) A (10800) A

LRV (SR – AR) × AH Skilled (60 – 70) 480 (4800) A

Un-skilled (30 – 20) 640 6400 F

Semi-skilled (10 - 20) 320 (3,200) A (1,600) A

LEV (SH – AH) × SR Skilled (480 – 480) 60 0

Un-skilled (360 – 640) 30 (8,400) A

Semi-skilled (240 – 320) 10 (800) A (9,200) A

LMV (RSH – AH) × SR Skilled (640 – 480) 60 9,600 F

Un-skilled (480 – 640) 30 (4800) A

Semi-skilled (320 – 320) 10 0 4,800 F

Cost Accounting 102

LSEV SR(SH- RSH) Skilled (480 – 640) 60 (9600) A

Un-skilled (360 – 480) 30 (3,600) A

Semi-skilled (240 – 320 ) 10 (800) A (14,000) A

Check

LCV LRV + LEV (1,600) + (9,200) (10,800) A

LEV LMV + LSEV 4,800 + (14,000) (9,200) A

Question 6: A group of workers consisting 30 men above 30 years of age, 15 females above 30 years of

age, and 10 youth of age between 20-30 are paid standard hourly rate as follows:

Males ₹80/-per hour

Females ₹60/- per hour

Youth ₹40/- per hour

In a normal working week of 40 hours, the group is expected to produce 200 units of output. During a

week, the group consisting of 40 males, 10 females and 5 youth produced 1600 units they were paid

wages @ ₹70/- for males, ₹65/- for females and ₹30/- for youth per hour.

4 hours were lost due to abnormal idle time.

Calculate:

(a) Wages variance;

(b) Wage rate variance;

(c) Labour efficiency variance;

(d) Labour mix variance;

(e) Labour idle time variance.


Answer:

Mix Standard Actual HR paid Actual HR Worked RSH

Hrs. ₹/p.h. ₹ Hrs. ₹/p.h. ₹ Hrs. ₹/p.h. ₹ IT

1,200 Men 960 80 76,800 1600 70 1,12,000 1440 70 1,00,800 160 1080

600 Women 480 60 28,800 400 65 26,000 360 65 23,400 40 540

400 Youth 320 40 12,800 200 30 6,000 180 30 5,400 20 360

2,200 Input 1760 1,18,400 2200 1,44,000 1980 1,29,600 220 1980

2,000 Output 1600 74 1,18,400 1600 1,44,000 1600 1,29,600 1800


LCV SC – AC Men 76,800– 1,12,000 (35,200) A

Women 28,800– 26,000 2,800 F

Youth 12,800– 6,000 6,800 F (25,600) A

LRV (SR – AR) × AHP Men 1,600 (80– 70) 16,000 F

Women 400(60– 65) (2,000) A


Youth 200(40 – 30) 2,000 F 16,000 F

LEV (SH – AHW) × SR Men 80(960– 1,440) (38,400) A

Women 60 (480 – 360) 7,200 F

Youth 40 (320 – 180) 5,600 F (25,600) A

ITR IT × SR Men 160 (80) 12,800

Women 40(60) 2,400

Youth 20(40) 800 (16,000) A

LMV (RSH – AHW) × SR Men 80(1,080 – 1,440) (28,800) A

Women 60(540– 360) 10,800 F

Youth 40(360– 180) 7,200 F (10,800)

A

LYV (AY – SY) × SPO (1,600– 1,800)74 (14,800) A

Check

LCV LRV + LEV 16,000 + (41,600) (25,600 )

A

LEV LMV + LYV + IT (10,800) + (14,800)

+ (16,000) (41,600) A

Variable OH variances

Question 7: From the following data, calculate variable overhead variances:

Budgeted Actual

Variable OH 2,50,000 2,60,000

Output in units 25,000 20,000

Working hours 1,25,000 1,10,000

Answer:

Budgeted Actual Standard

VOH p.u. 10 13 2,00,000

VOH p.h. 2 26/11 20,000

Time Allowed/Taken 5 5.5 1,00,000

VOHV Formula Calculation Variance

VOHCV 𝑆𝐻 × 𝑆𝑉𝑂𝐻– 𝐴𝐻 × 𝐴𝑉𝑂𝐻 (100,000 × 2)– (110,000 ×

26

11)

60,000A

VOHExpV (𝑆𝑉𝑂𝐻– 𝐴𝑉𝑂𝐻) × 𝐴𝐻 (2–

26

11) × 1,10,000

40,000A

VOHEffV (𝑆𝐻– 𝐴𝐻) × 𝑆𝑉𝑂𝐻 (100,000 – 110,000) × 2 20,000A

Cost Accounting 104

FOH Variances

Question 8: S V Ltd. has furnished you the following data:

Budgeted Actual

Number of working days 25 27

Production in units 20000 22000

Fixed overheads 30000 31000

Budgeted FOH rate is ₹1 per hour. The actual hours worked were 31,500.

Calculate: Efficiency variance, capacity variance, calendar variance, volume variance, expenditure

variance and total overhead variance.

Answer:

Budgeted Actual Standard for

actual output


Production in units 20,000 22,000 22,000

Fixed overheads 30,000 31,000 33,000

Fixed overhead per hour 1

Hours for the production 30,000 31,500 33,000

FOHV Formula Calculation Variance

FOHCV 𝑇𝑆𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 33,000 – 31,000 2,000F

𝑆𝐻 × 𝑆𝐹𝑂𝐻 – 𝐴𝐻 × 𝐴𝐹𝑂𝐻

FOHExpV 𝐵𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 30,000 – 31,000 1,000A

(𝑆𝑉𝑂𝐻 – 𝐴𝑉𝑂𝐻) × 𝐴𝐻

FOHVolV 𝑇𝑆𝐹𝑂𝐻 – 𝐵𝐹𝑂𝐻 33,000 – 30,000 3,000F

(𝑆𝐻 – 𝐵𝐻) × 𝑆𝐹𝑂𝐻 (33,000 – 30,000) × ₹1 3,000F

FOHEffV (𝑆𝐻 – 𝐴𝐻) × 𝑆𝐹𝑂𝐻 (33,000 – 31,500) × ₹1 1,500F

CapacityV (𝐴𝐻 – 𝐵𝐻) × 𝑆𝐹𝑂𝐻 (31,500 – 30,000) × ₹1 1,500F

CalenderV (𝐴𝐷 − 𝐵𝐷) × 𝑆𝐹𝑂𝐻𝑃𝐷 (27 – 25) × 1,200 2,400 F

(𝑅𝐵𝐻 – 𝐵𝐻) × 𝑆𝐹𝑂𝐻 (32,400 – 30,000) × 1 2,400 F

RCapacityV (𝐴𝐻 – 𝑅𝐵𝐻) × 𝑆𝐹𝑂𝐻 (31,500 – 32,400) × ₹1 900A

Check

FOHCV 𝐹𝑂𝐻𝐸𝑥𝑝𝑉 + 𝐹𝑂𝐻𝑉𝑜𝑙𝑉 1,000𝐴 + 3,000𝐹 2,000F

FOHVolV 𝐹𝑂𝐻𝐸𝑓𝑓𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 + 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 1,500𝐹 + 900𝐴 + 2,400𝐹 3,000F

CapacityV 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 2,400𝐹 + 900𝐴 1,500F


Question 9: A manufacturing company operates a costing system and showed the following data in

respect of the month of November, 2015.

Budgeted Actual

Working days 20 Workings days 22

Man hours 4,000 Man hours 4,200

Fixed Overhead Cost (₹) 2,400 Fixed Overhead Cost (₹) 2,500

Output (units) 800 Output (units) 900

You are required to calculate fixed overhead variances from the above data.


Answer:


Actual output


Production in units 800 900 900

Fixed overheads 2400 2500 2700

Fixed overhead per hour 0.6 0.59 0.6

Hours for the production 4000 4200 4500

Working Notes

𝑅𝐵𝐻 = 22

20× 4000 = 4,400

𝑆𝑅 = 2400

400= 0.6


FOHCV 𝐵𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 2,700 − 2,500 200 F

FOHExpV 𝐵𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 2,400– 2,500 100A

FOHVolV 𝑇𝑆𝐹𝑂𝐻 – 𝐵𝐹𝑂𝐻 2,700– 2,400 300F

FOHEffV (𝑆𝐻 – 𝐴𝐻) × 𝑆𝐹𝑂𝐻 (4,500– 4,200)0.6 180 F

CapacityV (𝐴𝐻 – 𝐵𝐻) × 𝑆𝐹𝑂𝐻 (4,000– 4,200)0.6 120A

CalenderV (𝐴𝐷 − 𝐵𝐷) × 𝑆𝐹𝑂𝐻𝑃𝐷 (20– 22)120 240F

RCapacityV (𝐴𝐻 – 𝑅𝐵𝐻) × 𝑆𝐹𝑂𝐻 (4,200– 4,400)0.6 120A

Check

FO-HCV 𝐹𝑂𝐻𝐸𝑥𝑝𝑉 + 𝐹𝑂𝐻𝑉𝑜𝑙𝑉 300𝐹 + 100𝐴 200 F

FOHVolV 𝐹𝑂𝐻𝐸𝑓𝑓𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 + 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 180𝐹 + 120𝐴 + 240𝐹 300 F

CapacityV 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 240𝐹 + 120𝐴 120 F

Cost Accounting 106

Question 10: ABC Enterprise has normal monthly machine-hour capacity of 100 machines working 8

hours per day for 25 working days in a month. The standard time required to manufacture one unit of

the product is 4 hours. The budgeted fixed overhead is ₹150,000.

In a month just concluded, the company worked for 24 days for average 750 machine-hours per day.

The production was 4500 units. The actual fixed overhead was ₹1,60,000.

You are required to complete

(a) Efficiency variance,

(b) Capacity variance,

(c) Calendar variance,

(d) Expenses variance,

(e) Volume variance,

(f) Total fixed overhead variance.

{CMA inter D07 & J14, 12 marks}

Answer:


actual output

No. of Working days 25 24

Production in units 5000 4500 4500

Hours 100 × 25 × 8 = 20000 750 × 24 = 18000 4500 × 4 = 18000

Fixed overheads 1,50,000 1,60,000 1,35,000

Fixed overhead per hours 7.5 8.89 7.5

𝑅𝐵𝐻 =24

25× 20000 = 19,200


FOHCV 𝐵𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 1,35,000 − 1,60,000 25,000A

FOHExpV 𝐵𝐹𝑂𝐻 – 𝑇𝐴𝐹𝑂𝐻 1,50,000 – 1,60,000 10,000A

FOHVolV 𝑇𝑆𝐹𝑂𝐻 – 𝐵𝐹𝑂𝐻 1,35,000– 1,50,000 15,000A

FOHEffV (𝑆𝐻 – 𝐴𝐻) × 𝑆𝐹𝑂𝐻 (18,000– 18,000)7.5 0

CapacityV (𝐴𝐻 – 𝐵𝐻) × 𝑆𝐹𝑂𝐻 (18,000– 20,000)7.5 15,000A

CalenderV (𝐴𝐷 − 𝐵𝐷) × 𝑆𝐹𝑂𝐻𝑃𝐷 (24– 25)6,000 6,000A

RCapacityV (𝐴𝐻 – 𝑅𝐵𝐻) × 𝑆𝐹𝑂𝐻 (18,000– 19,200)7.5 9,000A

Check

FOHCV 𝐹𝑂𝐻𝐸𝑥𝑝𝑉 + 𝐹𝑂𝐻𝑉𝑜𝑙𝑉 10,000𝐴 + 15,000𝐴 25,000A

FOHVolV 𝐹𝑂𝐻𝐸𝑓𝑓𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 + 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 0 + 9,000𝐴 + 6,000𝐴 15,000A

CapacityV 𝐶𝑎𝑙𝑒𝑛𝑑𝑒𝑟𝑉 + 𝑅𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑉 6,000𝐴 + 9,000𝐴 15,000A


Sales Formula Sales Margin Formula

1 Sales Value V ST – AT Sales Margin Value V TSM – TAM

SQ × SP – AQ × AP SQ × SM – AQ × AM

2 Sales Price V (SP – AP) × AQ Sales Margin V (SM – AM) × AQ

3 Sales Vol V (SQ – AQ) × SP Sales Margin Vol V (SQ – AQ) × SM

4 Sales MixV (RSQ – AQ) × SP Sales Margin MixV (RSQ – AQ) × SM

5 Sales Sub Usage V (SQ – RSQ) × SP Sales Margin Sub Usage V (SQ – RSQ) × SM

Check Check

SVV SPV + SVolV SMVV SMV + SMVolV

SVolV SMixV + SSUV SMVolV SMMixV + SMSUV

Sales Value and Sales Margin Variance:

Question 11: From the following particulars calculate all sales variances according to profit method

and value method

Product Budget Actual

Quantity Cost p.u. Selling Price p.u. Quantity Cost p.u. Selling Price p.u.

X 3000 10 12 3200 10.50 13

Y 2000 15 18 1600 14 17

Answer:

Sales

Product Budgeted Actual RSQ

Q ₹/p.u. ₹ Q ₹/p.u ₹

X 3,000 12 36,000 3,200 13 41,600 2,880

Y 2,000 18 36,000 1,600 17 27,200 1,920

Total 5,000 72,000 4,800 68,800 4,800

Profit Method

Product Budgeted Actual RSQ

Q ₹/p.u. ₹ Q ₹/p.u. ₹

X 3,000 2 6,000 3,200 2.5 8,000 2,880

Y 2,000 3 6,000 1,600 3.0 4,800 1,920

Total 5,000 12,000 4,800 12,800 4,800

Cost Accounting 108

Sales Formula Calculation Variance

ST – AT

SVV SQ × SP – AQ × AC A (3,000 × 12) – (3,200 × 13) 5,600F

B (2,000 × 18) – (1,600 × 17) 8,800A 3,200A

SPV (SP – AP) × AQ A (12 – 13) × 3,200 3,200F

B (18 – 17) × 1,600 1,600A 1,600F

SVolV (SQ – AQ) × SP A (3,000 – 3,200) × 12 2,400F

B (2,000 – 1,600) × 18 7,200A 4,800A

SMixV (RSQ – AQ) × SP A (2,880 – 3,200) × 12 3,840F

B (1,920 – 1,600) × 18 5,760A 1,920A

SSUV (SQ – RSQ) × SP A (3,000 – 2,880) × 12 1,440A

B (2,000 – 1,920) × 18 1,440A 2,880A

Check

SVV SPV + SVolV 1,600F + 4,800A 3,200A

SVolV SMV + SSUV 1,920A + 2,880A 4,800A

Profit Formula Calculation Variance

SMVV TSM – TAM

SQ × SM – AQ × AM A (3,000 × 2) – (3,200 × 2.5) 2,000 F

B (2,000 × 3) – (1,600 × 3) 1,200 A 800F

SMV (SM – AM) × AQ A (12 – 13) × 3,200 3,200F

B (18 – 17) × 1,600 1,600A 1,600F

SMVolV (SQ – AQ) × SM A (3,000 – 3,200) × 2 400F

B (2,000 – 1,600) × 3 1,200A 800A

SMMixV (RSQ – AQ) × SM A (2880 – 3200) × 2 640F

B (1920 – 1600) × 3 960A 320A

SMSUV (SQ – RSQ) × SM A (3,000 – 2,880) × 2 240A

B (2,000 – 1,920) × 3 240A 480A

Check

SMVV SMV + SMVolV 1,600F + 800A 800F

SMVolV SMMixV + SMSUV 320A + 480A 800A

Budget and Budgetary Control 109

3.3 BUDGET AND BUDGETARY CONTROL

Budget: An estimated performance in terms of currency / quantity to be achieved in given time

Budget Centre: A section of an orgn for which separate budget is prepared & control exercised.

Budgetary Control: Guiding and regulating activities to attaining predetermined objectives

Budget manual: A written booklet for procedures of budgeting.

Budget Period: The period of time for which a budget is prepared and used

Components of Budgetary Control System:

a) Physical Budgets: Contain information in terms of physical units about sales, production etc.

b) Cost Budget

c) Profit Budgets: Sales budget, profit and loss budget, etc.

d) Financial Budgets: cash budgets, capital expenditure budget, budgeted balance sheet etc.

e) Functional Budget: Purchase budget, sales budget, production budget, plant-utilization budget

f) Master Budget: A consolidated summary of the various functional budgets

g) Long term Budget

h) Short-term Budget

i) Basic Budget: Remains unaltered over a long period of time

j) Current Budget: Used for a short period of time.

k) Fixed Budget: budget designed to remain unchanged irrespective of the level of activity

l) Flexible Budget: Series of fixed budget

Zero Based Budgeting – ZBB (where base is zero) is a method of budgeting whereby all activities are

re-evaluated each time a budget is formulated.

Principal Budget factor: limiting factor (the scarce resource)

{CMA inter J02, J07 & D11, 4 marks}

PRACTICAL PROBLEMS

Material procurement and wages budget

Question 1: ABC Ltd. manufactures two products using one type of material and one grade of labour.

Shown below is an extract form the company’s working papers of the next period’s budget.

Particulars Product A Product B

Budgeted sales (units) 3,600 4,800

Budgeted material consumption per product (kg) 5 3

Budgeted material cost ₹12 per kg.

Standard hours allowed per product 5 4

Budgeted wage rate ₹8 per hr.

Cost Accounting 110

Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are

90 direct workers. The target productivity ratio (or efficiency ratio) for the productive hours worked by

the direct workers in actually manufacturing the products is 80%; in addition, the non-productive

downtime budgeted at 20% of the productive hours Worked. There are twelve 5-day weeks in the

budget period and it is anticipated that sales and production will occur evenly throughout the whole

period. It is anticipated that stock at the beginning of the period will be: Product A – 1,020 units; Product

B – 2,400 units; Raw material 4,300 kgs. The target closing stocks expressed in terms of anticipated

activity during the budget period are: Product A – 15 days sales; Product B – 20 days sales; raw material

10 days consumption.

Required: Calculate the Material Purchases Budget and the Wages Budget for the direct workers,

showing the quantities and values, for the next period.

Answer:

Material Purchase Budget (in quantities and value)

Particulars Product A Product B Total

(a) Budgeted production (units) 3,480 4,000

(b) Material consumption per unit [kg.] 5 3

Material consumption (kg.) [(a) × (b)] 17,400 12,000 29,400

(+) Closing balance of material (kg) 4,900

(-) Anticipated opening balance of material (kg) 4,300

Total quantity of material (kg) to be purchased 30,000

Total value of material to be purchased (₹) (30,000 kg × ₹12) 3,60,000

Direct Workers’ Wages Budget

(Showing hours required and wages paid)

Standard hours for Product A (3,480 units × 5 hours) 17,400

Standard hour for Product B (4,000 units × 4 hours) 16,000

Total standard hours 33,400

Standard hours at 80% efficiency ratio (33,400 × 100/80) 41,750

(+) Non-productive downtime (20% × 41,750 hours) 8,350

Total labour hours required 50,100

(-) Normal labour hours (90 workers × 60 days × 8 hours) 43,200

Overtime hours available 6,900

Wages for normal hours (₹) (43,200 hours × ₹8) 3, 45,600

Overtime wages (₹) (6,900 × ₹12) 82,800

Total wages 4,28,400


(i) Working notes

Closing stock of Products A and B

1 Budgeted period of sales (in days) 12 weeks x 5 days 60 days

2 Closing stock of Product, A (units) (15 days sales) 3,600 units× 15days / 60 days 900 units

3 Closing stock of Product, B (Units) (20 days sales) 4,800 units ×20 days / 60 days 1,600 units

(ii) Production Budget (units)

Particulars Product A Product B

Sales (units) (60 days) 3,600 4,800

(+) Closing stock balance 900 1,600

(-) Anticipated opening balance 1,020 2,400

Total number of units to be produced 3,480 4,000

(iii) Closing balance of material for 10 days of its consumption 10 days 60 days

Total Material Consumption / 60 days × 10 days 29,400kgs. / 60 days × 10 days 4,900 kgs.

Production budget

Question 2: A Ltd. produces and sells a single product. Sales budget for the calendar year 2011 by

quarter is as under:

Quarter Number of units

to be sold

Quarter Number of units

to be sold

I 12,000 III 16,500

II 15,000 IV 18,000

The year 2011 is expected to open with an inventory of 4,000 units of finished product and closed with

an inventory of 6,500 units.

Production is customarily scheduled to provide for two-thirds of the current quarter’s sales demand

plus one-third of the following quarter’s demand. Thus, production anticipates sales volume by about

one month.

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

Direct materials 10 lbs. @ 50 paise per lb.

Direct labour 1 hr. 30 mins. @ ₹4 per hour

Variable overheads 1 hr. 30 mins. @ ₹1 per hr.

Fixed overheads 1 hr. 30 mins. @ ₹2 per hr. based on a budgeted production

Volume of 90,000 direct labour hours for the year.

Cost Accounting 112

1. Prepare a production budget for 2011, by quarters, showing the number of units to be produced

and the total costs of direct material, direct labour, variable overheads and fixed overheads.

2. If the budgeted selling price per unit is ₹17, what would be the budgeted profit for the year as a

whole?

3. In which quarter of the year, is the company expected to break-even?

Answer:

(1) Quarter Budgeted

Production

(units)

Budgeted Costs

Direct

material

Direct

labour

Variable

overheads

Fixed

overheads

I 13,000 65,000 78,000 19,500 45,000

II 15,500 77,500 93,000 23,250 45,000

III 17,000 85,000 1,02,000 25,500 45,000

IV 18,500 92,500 1,11,000 27,750 45,000

64,000 3,20,000 3,84,000 96,000 1,80,000

Note 1: Budgeted Production

Q I 2

3× 12,000 +

1

3× 15,000 13,000

Q II 2

3× 15,000 +

1

3× 16,500 15,500

Q III 2

3× 16,500 +

1

3× 18,000 17,000

Q IV 2

3× 18,000 + 6,500 18,500

Note 2: Fixed overhead for the year: 90,000 hours @ ₹2 = ₹180,000 and ₹1,80,000

4 = ₹45,000 per quarter.

(2) Budgeted Profit ₹ ₹

Budgeted Selling Price per unit 17.00

(-) Budgeted Variable costs :

Direct material 5.00

Direct labour 6.00

Variable overheads 1.50 12.50

Unit contribution 4.50

Total budgeted contribution (61,500 units @ ₹4.50) 2,76,750

(-) Fixed costs 1,80,000

Budgeted profit for the year 96,750

(3) Break-even point 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝. 𝑢.

180,000

₹4.50

40,000


Quarter Sales demand Cum. Sales Demand

I 12,000 12,000

II 15,000 27,000

III 16,500 43,500

IV 18,000 61,500

Thus, A Ltd. wills break-even in the later part of Quarter III.

Flexible Budgeting

Question 3: A factory is currently working at 50% of its working capacity and produces 10,000 units.

At 60% working capacity, the raw material cost increases by 2% and selling price falls 2%. At 80%

working capacity, raw material cost increases by 5% and selling price falls by 5%. At 50% working

capacity, the product costs ₹180 per unit and sold at ₹200 per unit. The cost of ₹180 is made up as

follows:

₹

Material 100

Labour 30

Factory Overhead (40% fixed) 30

Administration overhead (50% fixed) 20

180

You are required to estimate the profits of the factory when it works at 60% and 80% of its capacity.

Answer:

Flexible Budget

Existing proposed

Level of Activity 50% 60% 80%

Number of units 10,000 12,000 16,000

Variable cost

Material 10,00,000 12,24,000 16,80,000

Labour 3,00,000 3,60,000 4,80,000

Factory overhead 1,80,000 2,16,000 2,88,000

Administration overhead 1,00,000 1,20,000 1,60,000

Total variable costs 15,80,000 19,20,000 26,08,000

Fixed Costs

Factory overhead 1,20,000 1,20,000 1,20,000

Administration overhead 1,00,000 1,00,000 1,00,000

Total Fixed Costs 2,20,000 2,20,000 2,20,000

Total costs (i) + (ii) 18,00,000 21,40,000 28,28,000

Sales value 20,00,000 23,52,000 30,40,000

Profit 2,00,000 2,12,000 2,12,000

Cost Accounting 114

Question 4: The following information is obtained from the records of a manufacturing company for a

budgeted production of 10,000 units per annum

Particular ₹ / p.u.

Direct Material 120.00

Direct Labour 60.00

Variable Overheads 50.00

Fixed Overheads (₹3,00,000) 30.00

Variable expenses 10.00

Selling expenses (10% fixed) 30.00

Administrative expenses (₹1,00,000 – rigid for all levels of production) 10.00

Distribution expenses (20% Fixed) 10.00

Total cost of sales (Per unit) 320.00

You are required to prepare a budget for production levels of 6,000, 7,000 and 8,000 units respectively.

Showing distinctly marginal cost and total cost.

Answer:

Cost budget

Particular Cost p.u. 6,000 units 7,000 units 8,000 units

I Variable Cost

Direct material 120 7,20,000 8,40,000 9,60,000

Direct Labour 60 3,60,000 4,20,000 4,80,000

Variable Overheads 50 3,00,000 3,50,000 4,00,000

Variable expenses Direct) 10 60,000 70,000 80,000

Selling Direct (Expenses) 27 1,62,000 1,89,000 2,16,000

Distribution Exp. (80%) 08 48,000 56,000 64,000

Total Variable Costs….I 16,50,000 19,25,000 22,00,000

II Fixed Costs

Fixed Overheads 3,00,000 3,00,000 3,00,000

Selling Expenses (10%) 30,000 30,000 30,000

Administrative Expenses 1,00,000 1,00,000 1,00,000

Distribution Expenses 20,000 20,000 20,000

Total Fixed Costs …. II 4,50,000 4,50,000 4,50,000

Total Costs (I + II) 21,00,000 23,75,000 26,50,000

Cost Per Unit 350 339.28 331.23


Question 5: The cost of a product at capacity level of 5,000 units is given under ‘A’ below. For a variation

in capacity above or below this level, the individual expenses vary as indicated under ‘B’ Below:

Particular ‘A’ ‘B’ (₹)

Material costs 2,50,000 100% varying

Labour costs 1,50,000 100% varying

Power 12,500 80% varying

Repairs and maintenance 20,000 75% varying

Stores 10,000 100% varying

Inspection 5,000 20% varying

Depreciation 1,00,000 100% fixed

Administrative overheads 50,000 25% varying

Selling overheads 30,000 50% varying

Find out the unit cost of product under each individual expenses at budgeted production levels of 4,000

units and 6,000 units.

Answer:

Particular Nature 4,000 units 6,000 units

Total Variable Costs

Material costs 100% (V) 2,00,000 3,00,000

Labour costs 100% (V) 1,20,000 1,80,000

Power 80% (V) 8,000 12,000

Repairs and maintenance 75% (V) 12,000 18,000

Stores 100% (V) 8,000 12,000

Inspection 20% (V) 800 1,200

Administrative overheads 25% (V) 10,000 15,000

Selling overheads 50% (V) 12,000 18,000

Total Variable Costs 3,70,000 5,56,200

Total Fixed Costs

Power 20% (F) 2,500 2,500

Repair and Maintenance 25% (F) 5,000 5,000

Inspection 80% (F) 4,000 4,000

Depreciation 100% (F) 1,00,000 1,00,000

Administration overhead 75% (F) 37,500 37,500

Selling overheads 50% (F) 15,000 15,000

Total Fixed Costs 1,64,000 1,64,000

Total Costs (i) + (ii) 5,34,800 7,20,200

Cost per Unit 133.70 120.03

Cost Accounting 116

Question 6: The Finance Manager of Jay Electrical Ltd. is preparing a flexible budget for the accounting

year commencing from 1st April, 2011. The company produces Component – K of a product. Direct

material costs ₹7 per unit. Direct labour averages ₹2.50 per hour and requires 1.60 hours to produces

one unit of Component – K salesmen are paid a commission of ₹1 per unit sold. Fixed selling and

administration expenses amount to 85,000 per year. Manufacturing overheads has been estimated in

the following amount under specified condition of volume:

Volume of production (in units) 1,20,000 1,50,000

₹ ₹

Expenses:

Indirect material 2,64,000 3,30,000

Indirect labour 1,50,000 1,87,500

Inspection 90,000 1,12,500

Maintenance 84,000 1,02,000

Supervision 1,98,000 2,34,000

Depreciation – Plant and equipment 90,000 90,000

Engineering service 94,000 94,000

Total manufacturing overheads 9,70,000 11,50,000

Normal capacity of production of company is ₹125,000 units

Prepare a budget of total cost at 140,000 units of output.

Answer:

Jay Electricals Ltd.

Budget for the year commencing from 1st April 2011

Output 1,40,000 units

Particulars ₹ /p.u. (₹)

Variable Costs:

Direct Material 7.00 9,80,000

Direct Labour 4.00 5,60,000

Salesman Commission 1.00 1,40,000

Indirect Material 2.20 3,08,000

Indirect Labour 1.25 1,75,000

Inspection 0.75 1,05,000

Total variable costs 22,68,000

Semi – variable cost

Maintenances


Fixed 0.0857 12,000

Variable 0.60 84,000

Supervision

Fixed 0.60 54,000

Variable 1.20 1,68,000

Total Semi – Variable Costs 3,18,000

Fixed costs

Selling and Administration Expenses 85,000

Depreciation: Plant and equipment 90,000

Engineering services 94,000

Total fixed costs 2,69,000

Total Cost 28,55,000

Working Notes

1. Maintenance Cost 84,000

𝑉𝐶 𝑝, 𝑢. =

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑢𝑡𝑝𝑢𝑡

18,000

30,000

0.60

₹0.60 per unit

Total VC for 1,20,000 units 1,20,000 × 0.60 72,000

Total Fixed Cost 84,000 – 72,000 12,000

2. Supervision cost 198,000

𝑉𝐶 𝑝. 𝑢. =

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑢𝑡𝑝𝑢𝑡

36,000

30,000

1.20

Total VC for 1,20,000 units 1,20,000 ×1.20 144,000

Total Fixed Cost ₹54,000

Cash Budget

Question 7:

On 30th September, 2019, the B/S of M Ltd., (retailer) was as under

Equity shares of ₹10 each 20,000 Equipment (at cost) 20,000

Reserves 10,000 (-) Depreciation 5,000 15,000

Trade Creditors 40,000 Stock 20,000

Proposed Dividend 15,000 Trade Debtors 15,000

Balance at bank 35,000

85,000 85,000

Cost Accounting 118

The company is developing a system of forward planning and on 1.10.2019 it supplies the following

information:

Month

Sales Purchases

Credit cash Credit

Sep 2019 (Actual) 15,000 14,000 40,000

Oct,2019 (Budget) 18,000 5,000 23,000

Nov,2019 (Budget) 20,000 6,000 27,000

Dec, 2019 (Budget) 25,000 8,000 26,000

All trade debtors are allowed one month’s credit and are expected to settle promptly. All trade

creditors are paid in the months following delivery.

On 1st Oct, 2019, all equipment were replaced at a cost of ₹30,000. ₹14,000 was allowed in exchange

for the old equipment and a net payment of ₹16,000 was made.

The proposed dividend will be paid in December 2019.

The following expenses will be paid: Wages ₹3,000 per month; Administration ₹1,500 per month;

Rent ₹3,600 for the year up to 30th September, 2020 (to be paid in October, 2019).

You are required to prepare a cash budget for the months of Oct, Nov and December, 2019.

Answer:

Cash Budget – 2019

Oct Nov Dec

Opening Balance (OD) 35,000 (9,100) (12,600)

Cash Inflows:

Cash Sales of current month 5,000 6,000 8,000

Credit sales of previous month 15,000 18,000 20,000

Total Receipts 55,000 14,900 15,400

Cash Outflows:

Creditors for purchase 40,000 23,000 27,000

Equipment 16,000 - -

Wages 3,000 3,000 3,000

Admn. 1,500 1,500 1,500

Rent 3,600 - -

Dividend - - 15,000

Total Payment 64,100 27,500 46,500

Closing Balance (OD) (9,100) (12,600) (31,100)


Question 8: ABC Ltd. provides you the following information:

(i) ABC Ltd. provides you the following information:

Sales Purchases etc. ₹

Particulars April May June July August September

Cash sales 8,000 12,000 16,000 20,000 24,000 28,000

Collection from debtors 16,000 32,000 48,000 64,000 80,000 96,000

Cash purchases 8,000 12,000 16,000 20,000 24,000 28,000

Payment to creditors 12,000 24,000 36,000 48,000 60,000 72,000

Payment of expenses 12,000 5,000 7,800 2,950 27,000 20,000

The opening cash balance of ₹10,000 is the minimum cash balance to be maintained.

1. Any short fall in the minimum cash balance is to be met by Bank borrowings in the multiple of

₹5,000 @ 12% p.a. or by sale of marketable securities in the multiple of ₹10,000. Bank interest on

monthly basis is payable on the first date of the subsequent month. Bank interest is payable for a

minimum period of a month.

2. Any surplus cash is to be used to repay the borrowings in the multiple of ₹5,000 or to purchase the

marketable securities in the multiple of ₹10,000 (ignore interest on securities received and paid).

Required: Prepare the Cash Budget for April to September

Answer:

Cash Budget for April to September ₹

Particulars April May June July August September

A. Total Cash available:

Opening cash balance 10,000 12,000 14,900 14,000 12,000 15,000

Cash sales 8,000 12,000 16,000 20,000 24,000 28,000

Collection from debtors 16,000 32,000 48,000 64,000 80,000 96,000

34,000 56,000 78,900 98,000 1,16,000 1,39,000

B. Total Cash Payments:

Cash purchases 8,000 12,000 16,000 20,000 24,000 28,000

Payment to creditors 12,000 24,000 36,000 48,000 60,000 72,000

Payment of expenses 12,000 5,000 7,800 2,950 27,000 20,000

32,000 41,000 59,800 70,950 1,11,000 1,20,000

C. Surplus (Deficit) [A – B] 2,000 15,000 19,100 27,050 5,000 19,000

Financing and investment:

D Borrowings 10,000 - - - - -

E Sales of securities - - - - 10,000 -

F (-) Repayment of borrowings - - 5,000 5,000 - -

G (-) Interest on borrowings - 100 100 50 - -

H (-) Purchase of securities - - - 10,000 - -

I. Closing cash balance

[C +D +E – F – G –H]

12,000

14,900

14,000

12,000

15,000

19,000

cost accounting part 2

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