soft copy of practice manual - cost and management accounting
TRANSCRIPT
APRIL 2016
Price : Rs. 300/-
© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
No part of this Publication may be translated or copied in any form or by any means without the prior written permission of The Institute of Company Secretaries of India.
The PRACTICE MANUAL has been prepared by competent persons and the Institute hopes that it will facilitate the students in preparing for the Institute's examinations. It is, however, to be noted that the answers are to be treated as model answers and not as exhaustive and there can be alternative solutions available for a questions provided in this practice manual. The Institute is not in any way responsible for the correctness or otherwise of the answers.
The Practice Manual contains the information based on the Laws/Rules applicable at the time of preparation. Students are expected to be well versed with the amendments in the Laws/Rules made upto six months prior to the date of examination.
Please note that the paper of Cost and Management Accounting is in Optical Mark Recognition (OMR) format, but to give an insight into the problem solving technique, this practice manual is prepared to build competency in practical aspects by providing the students with a pool of solved practical problems.
ISBN No. : 978-93-82207-70-2
Printed at : Chandu Press/1,000/April 2016
(ii)
PREFACE
“Knowledge is a treasure, but practice is the key to it” -Lao Tzu
In the contemporary era, the global business is exemplified under the intense competition from
domestic as well as transnational players. Competitive advantages of the inclusive economy can
be achieved by placing right strategy in right direction. The successful achievement of the goals
requires constant update and brushing up of one’s specializations and skills. It is observed time
and again that the updating of knowledge is fundamental to development of changing times. In
line with the dynamic nature of the economy, the students must be equipped and thorough in
their analytical abilities to work in the dynamic environment. This demands the development of
basic theoretical concepts as well as practical aspects of this growing and competitive
specialization.
In lines with updating the information, the Institute in the past brought Practice Manual on
Financial Treasury and Forex Management (Professional Programme) and Company Accounts
and Auditing Practices (Executive Programme). Now, we are presenting the Practice Manual
prepared specifically for the subject “Cost and Management Accounting” to the students of
Executive Programme. This Practice Manual is a learning instrument which serves as a refresher.
Though the pattern of the paper will be in OMR format, but to give an insight into the problem
solving technique, this Practice Manual is prepared to build competency in practical aspects by
providing the students with a pool of solved practical problems.
This Practice Manual is not intended to replace the study material but to supplement the same.
Therefore, the students are expected to make a holistic study of both the study material and
Practice Manual to gain maximum benefit and acquire in-depth knowledge of the subject.
I acknowledge with thanks all those experts, authors and institutions whose material has been
consulted and referred in preparation of this Practice Manual. I place on record my sincere
appreciation to Ms. Akansha Rawat, Executive (Academics) in the Academic Team at the Institute
headed by Ms. Sonia Baijal, Director for this initiative.
I have great pleasure in introducing this practice manual to the students. I am sure, this manual
will prove to be useful and beneficial to the students. Therefore, I advise all the students to take
maximum benefit out of it by meticulously practicing the questions given therein. As the saying
goes “Practice makes a man perfect”, practicing more will develop clear knowledge of
fundamental concepts to solve practical questions correctly and give a stronger hold in the
subject.
My best wishes to you all!
New Delhi CS Mamta Binani
25th April, 2016 President, ICSI
(iii)
CONTENTS
Sl. No. Subject Page No.
1 Introduction to Cost and Management Accounting 1
2 Material Cost 9
3 Labour Cost 55
4 Direct Expenses and Overheads 86
5 Activity Based Costing 132
6 Cost Records 192
7 Costing Systems 259
8 Marginal Costing 303
9 Standard Costing 354
10 Budget, Budgeting and Budgetary Control 391
11 Cost Accounting Records and Cost Audit 428
12 Analysis and Interpretation of Financial Statement 434
(v)
1
Question 1
Question 1
Define costing and discuss its objectives.
Answer
Costing is defined as the technique and process of ascertaining costs. The technique refers to principles, which are applied for ascertaining cost of products, jobs, processes and services. Costing involves the classifying, recording, and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales values and the ascertainment of profitability.
In practice, the terms costing, cost accounting and cost accountancy are most often used interchangeably although they are defined differently. The main objectives of costing may be summarised as follows:
(i) To analyse and classify all expenditures with reference to the cost of products and operations.
(ii) To arrive at the cost of production of every unit, job, operation, process, department or service and to develop cost standard.
(iii) To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial measures.
(iv) To provide data for periodical profit and loss accounts and balance sheets and also, to explain in detail the exact reasons for profit or loss revealed in total in the profit and loss account.
(v) To reveal sources of economies in production having regard to methods, types of equipment, design, output and layout.
(vi) To provide actual figures of cost for comparison with estimates and to serve as guide for future estimates or quotations and to assist the management in their price fixing policy.
(vii) To analyse the variance between budgeted and actuals so that corrective action may be taken.
(viii) To present comparative cost data for different periods and various volumes of output.
1
Introduction to Cost and
Management Accounting
2
(ix) To record the relative production results of each unit of plant and machinery in use as a basis for examining its efficiency.
(x) To provide information to enable management to make short-term decisions of various types.
Question 2
The scope of Cost accounting is very wide. Discuss
Answer
The Scope of Cost Accounting is very wide and includes:
(a) Cost Ascertainment: The main function of cost accounting is the ascertainment of cost of product or services rendered. It includes collection, analysis of expenses and measurement of production at different stages of manufacture. The collection, analysis and measurement requires different methods of costing for different types of production such as Historical costs, Standard costs, Process cost, Operation cost etc. It can be done in two ways, namely
(i) Post Costing, where the ascertainment of cost is done based on actual information as recorded in financial books.
(ii) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where cost information is available as and when a particular activity is completed, so that the entire cost of a particular job is available the moment it is completed.
(b) Control of Costs: In the era of competition, the goal of every business is to sustain; in costs at the lowest point with efficient operating conditions. To sustain, It is essential to examine each individual item of cost in the light of the services or benefits obtained so that maximum utilisation of the money expended or- it may be recovered. This requires planning and use of standard for each item of cost for locating deviations, if any, and taking remedial measures.
(c) Proper matching of cost with revenue: In cost accounting manager prepares monthly or quarterly statements to reflect the cost and income data identified with the sale of that period.
3
(d) Aids to Management Decision-making: Decision-making is a process of choosing between two or more alternatives, based on the resultant outcome of the various alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved through a good cost accounting system
Question 3
The limitations of financial accounting have made the management to realize the importance of cost accounting. In the light of the above briefly discuss the various advantages of cost accounting.
Answer
Cost accounting increases the overall productivity of an organisation and serves as an important tool, in bringing prosperity to the nation. Thus, the importance of cost accounting can be discussed as under:
(a) Costing as an Aid to Management
Cost accounting provides invaluable aid to management. It provides detailed costing information to the management to enable them to maintain effective control over stores and inventory, to increase efficiency of the organisation and to check wastage and losses. It facilitates delegation of responsibility for important tasks and rating of employees.
(b) Costing as an Aid to Creditors
Investors, banks and other money lending institutions have a stake in the success of the business concern and are, therefore, benefited immensely by the installation of an efficient system of costing. They can base their judgment about the profitability and future prospects of the enterprise on the costing records.
4
(c) Costing as an Aid to Employees
Employees have a vital interest in their employer’s enterprise in which they are employed. They are benefited by a number of ways by the installation of an efficient system of costing. They are benefited, through continuous employment and higher remuneration by way of incentives, bonus plans, etc.
(d) Costing as an Aid to National Economy
An efficient system of costing brings prosperity to the business enterprise which in turn results in stepping up of the government revenue. The overall economic development of a country takes place as a consequence increase in efficiency of production.
Question 4
Define and explain the term (a) cost centre and (b) cost unit.
Answer
(a) Cost centre
According to the Chartered Institute of Management Accountants, London, cost centre means, “a production or service location, function, activity or item of equipment whose costs may be attributed to cost units”. Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. Thus cost centre refers to one of the convenient unit into which the whole factory organisation has been appropriately divided for costing purposes.
Cost centres may be classified as follows:
(i) Productive, Unproductive and Mixed Cost Centres
(ii) Personal and Impersonal Cost Centre
(iii) Operation and Process Cost Centre
(b) Cost unit
The Chartered Institute of Management Accountants, London, defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”. A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions. These smaller sub-divisions are attributed to products or services to determine product cost or service cost or cost of time spent for a particular job etc. For example:
Industry/Product Cost unit
Automobile Number
Brick works 1000 bricks
Cement Tonne
Transport Tonne - Kilometre
Passenger - Kilometre
5
Question 5
Distinguish between:
(a) Cost accounting and management accounting
(b) Imputed Costs and Common Costs
Answer
(a) Cost accounting and management accounting
Cost Accounting Management Accounting
1. Cost accounting is concerned with the ascertainment, allocation, distribution and accounting aspects of costs.
Management accounting is concerned with impact and effect aspect of costs.
2. Cost accounting data generally serves as a base to which the tools and techniques of management accounting can be applied to make it more purposeful and management oriented.
The management accounting data is derived both, from the cost accounts and financial accounts.
3. A cost accountant collects and presents costing data.
Management accountant analyses and decides specific business problems on the basis of data available.
4. The cost accountant is generally placed at a lower level of hierarchy.
The management accountant generally is placed at a higher level of hierarchy.
5. The approach of the cost accountant is much narrower
The approach of management accountant is wider as it includes interpretation of economic and statistical data along with the costing data.
6. Tools and techniques like variable costing, break-even analysis, standard costing, etc., are used.
Management accounting, in addition to the techniques of cost accounting, uses other techniques like cash flow, ratio analysis, etc.
7. Cost accounting does not include financial accounting and has nothing to do with tax accounting.
Management accounting includes both financial accounting as well as tax accounting. It also embraces tax planning and tax accounting.
8. Cost accounting is more Management accounting is concerned
6
concerned with short-term planning.
equally with short-term and long-term planning
9. Cost accounting is mostly historical in its approach and it projects the past.
Management accounting is futuristic in its approach.
10. Cost accounting system can be installed without management accounting.
Management accounting cannot be installed without a proper cost accounting system.
(b) Imputed Costs and Common Costs
Imputed costs are the costs that are not incurred but are useful while taking decision pertaining to a particular situation. These costs are known as imputed or notional costs and they do not appear in financial records. These costs are notional in nature and do not involve any cash outlay. It is the value of a benefit where no actual cost is incurred. Interest on internally generated funds, rental value of company owned property and salaries of owners of a single proprietorship or partnership are some examples of imputed costs. When alternate capital investment projects are being evaluated it is necessary to consider the imputed interest on capital before a decision is arrived as to which is the most profitable project.
Common costs are costs, which are incurred for more than one product, job, territory or any other specific costing object. It is the cost of services employed in the creation of two or more outputs which is not allocated to those outputs on a clearly justified basis. They are not easily related with individual products and hence are generally apportioned. Common costs are not only common to products, but they may be common to process, functions, responsibilities, customs, sales territories, periods of time and similar costing units. In general, management decisions influence the occurrence of common costs e.g., rent of the factory in a common cost to all departments located in a factory.
Question 6
Explain the significance of decision-making costs. Briefly explain the various type of costs used by the management in decision-making.
Answer
There are certain costs which are specially used for decision making by the management. Such decision making costs may be relevant costs or irrelevant costs.
Various types of costs used by management in decision making are briefly described below:
• Opportunity costs : Opportunity cost is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received if the asset is utilized in its next best alternative.
• Differential cost : Differential cost has been defined as “the difference in total cost between alternatives, calculated to assist decision making”. It helps management
7
to know the additional profit that would be earned if idle capacity is used or when additional investments are made.
• Imputed costs : Some costs are not incurred and are useful while taking decision pertaining to a particular situation. Examples: Interest on internally generated funds, salaries of owners of proprietorship or partnership, notional rent etc.
• Out-of-pocket costs : Out-of-pocket costs signify such outlay required for an activity. The management would like to know that the income from a particular project will at least cover the expenditure for the project. Acceptance of a special order requires to be considered as additional costs need not be incurred if the special order is not accepted. Hence the importance of out-of-pocket costs.
• Marginal costs : It is the aggregate of variable costs, i.e., prime cost plus variable overheads. Thus, costs are classified as fixed and variable.
• Replacement costs : This is the cost of replacing an asset at current market values e.g. when the cost of replacing an asset is considered, it means the cost of purchasing the asset at the current market price is important and not the cost at which it was purchased.
Question 7
“Management accounting is concerned with accounting information which is useful to management”. Comment.
Answer
According to CIMA, London : “Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for: (a) formulating strategy; (b) planning and controlling activities; (c) decision taking; (d) optimising the use of resources; (e) disclosure to shareholders and others external to the entity; (f) disclosure to employees; (g) safeguarding assets.
The fundamental objective of management accounting is to assist the management in carrying out its duties efficiently so that maximize profits or minimize losses of management.
The main objectives of management accounting are as follows:
1. To formulate Planning and policy
Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the program of activities. It facilitate the preparation of statements in the light of past results and gives estimation for the future.
2. To interpretation of financial documents
Management accounting is to present financial information to the management. Financial information must be presented in such away that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.
8
3. To assist in Decision-making process
Management accounting makes decision-making process more scientific with the help of various modern techniques. Information/figure relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed accordingly which will provide a base for taking sound decisions.
4. To help in control
Management accounting is a helpful for managerial control. Management accounting tools e.g. standard costing and budgetary control are helpful in controlling performance. Cost control is affected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting.
5. To provide report
Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. It informs the performance of various departments regularly to the top management.
6. To Facilitate Coordination of Operations
Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.
***
9
Question 1
Question 1
What are the different techniques of inventory control?
Answer
The following are the common techniques of inventory control:
(i) Min-max Plan
(ii) The two-bin System
(iii) Order Cycling System
(iv) ABC Analysis
(v) Fixation of various levels
(vi) Use of Perpetual Inventory System and Continuous Verifications
(vii) Use of Control Ratios
(viii) Review of Slow and Non-moving Items.
Question 2
Explain the concept of ’ABC Analysis’ as a technique of inventory control.
Answer
ABC Analysis is a system of selective inventory control whereby the measure of control
over an item of inventory varies with its usage value. It exercises discriminatory control
over different items of stores grouped on the basis of the investment involved. Usually the
items of material are grouped into three categories viz; A,B and C according to their use
value during a period. In other words, the high use value items are controlled more closely
than the items of low use value.
(i) ‘A’ Category of items consists of only a small percentage i. e., about 10% of the
total items of material handled by the stores but require heavy investment i. e.,
about 70% of inventory value, because of their high prices and heavy requirement.
(ii) ‘B’ Category of items comprises of about 20% of the total items of material
handled by stores. The percentage of investment required is about 20% of the
total investment in inventories.
2
Material Cost
10
(iii) ‘C’ Category of items does not require much investment. It may be about 10% of
total inventory value but they are nearly 70% of the total items handled by stores.
‘A’ Category of items can be controlled effectively by using a regular system ,which ensures
neither over-stocking nor shortage of materials for production. Such a system plans its
total material requirements by making budgets. The stocks of materials are controlled by
fixing certain levels like maximum level, minimum level and re-order level. A reduction in
inventory management costs is achieved by determining economic order quantities after
taking into account ordering cost and carrying cost. To avoid shortages and to minimize
heavy investment of funds in inventories, the techniques of value analysis, variety
reduction, standardization etc. are used along with aforesaid techniques.
In the case of ‘B’ category of items, as the sum involved is moderate, therefore, the same
degree of control as applied in ‘A’ category of items is not warranted. The order for the
items, belonging to this category may be placed after reviewing their situation periodically.
This category of items can be control by routine control measures.
For ‘C’ category of items, there is no need of exercising constant control. Orders for items in
this group may be placed either after six months or once in a year, after ascertaining
consumption requirements.
Question 3
Distinguish between Bin Card and Stores Ledger.
Answer
Difference between Bin Card and Stores Ledger
Bin Card Stores Ledger
It is a quantity record
It is kept inside the stores
It is maintained by the store-keeper
The postings are done before the transactions take place
Each transaction is individually posted
It is a record of quantity and value
It is kept outside the stores
It is maintained by the accounts department
The postings are done after the transactions take place
Transactions may be posted periodically and in total
Question 4
How will you treat the normal and abnormal losses of material arising during storage, in
cost accounting?
11
Answer
The difference between book balance and actual physical stock, which may either be gain
or loss, should be transferred to Inventory Adjustment Account pending scrutiny to
ascertain the reason for the difference.
If on scrutiny, the difference arrived at is considered as normal, then such a difference
should be transferred to overhead control account and if abnormal, it should be debited to
Costing Profit and Loss Account.
In case of normal losses, an alternative method may be used. Under this method the price of
the material issued to production may be inflated so as to cover the normal loss.
Question 5
What do you mean by scrap? How will you treat it in cost accounting?
Answer
Scrap
Scrap represents the unusable loss which can be sold. It is a residue which is measurable
and has a Minor value. It may result from the processing of materials, obsolete stock or
defective parts.The sale value is credited to the concerned department which produced it. If
the vale is negligible, it is credited to the Costing Profit and Loss Account.
Scrap may arise in the form of turnings, boring’s, filings etc. from metal; sawdust in timber
industry, off-cuts and cut pieces in leather industry.
Accounting Treatment
(i) Where the scrap has negligible value, it is charged to good units. Income is credited
to other income.
(ii) The sale value can be reduced from the material cost.
(iii) If the scrap is of very little value, then only a quantity record need be kept.
(iv) The cost is calculated by reducing the sale price by the selling cost and this sum is
taken as a credit to the production overhead account.
(v) Scrap arising in one job may be used in another. Such transfers should be properly
recorded on material transfer notes.
Question 6
What are defectives? Discuss the accounting treatment of defectives in cost accounting.
12
Answer
Defectives refers to those units or portion of production, which do not meet the prescribed
specifications. Such units can be reworked or re-conditioned by the use of additional
material, labour and/or processing and brought to the point of either standard or sub-
standard units.
The possible way of treating defectives in cost accounting are as follows:
(a) When defectives are normal and it is not beneficial to identity them job-wise, then
the following methods may be used—
1. Charged to good products: The cost of rectification of normal defectives is
charged to good units. This method is used when defectives rectified are
normal.
2. Charged to general overheads: If the department responsible for defectives
cannot be identified, the rework costs are charged to general overheads.
3. Charged to departmental overheads: If the department responsible for
defectives can be correctly identified, the rectification costs should be charged
to the department.
(b) When normal defectives are easily identifiable with specific job the rework costs
are debited to the identified job.
(c) When defectives are abnormal and due to uncontrollable factors,, the rework cost
should be charged to the Costing Profit and Loss Account.
Question 7
Explain why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any
other method of pricing material issues.
Answer
LIFO has following advantages:
(a) The cost of the material issued will be reflecting the current market price.
(b) The use of the method during the period of rising prices does not reflect undue high
profit in the income statement.
(c) In the case of falling price, profit tend to rise due to lower material cost, yet the
finished goods appear to be more competitive and are at market price.
(d) During the period of inflation, LIFO will tend to show the correct profit.
Question 8
Distinguish between bill of material and material requisition note.
13
Answer
Bill of material Material Requisition Note
1. It is document by the drawing office 1. It is prepared by the foreman of the
consuming department
2. It is a complete schedule of component
parts and raw materials required for a
particular job or work order.
2. It is a document authorizing Store –
keeper to issue material to the
consuming department.
3. It often serves the purpose of a Store
Requisition as it shows the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.
3. It cannot replace a bill of materials.
4. It can be used for the purpose of
quotation.
4. It is useful in arriving historical cost.
5. It helps in keeping a quantitative control
on materials drawn through stores
requisition.
5. It shows the material actually drawn
from stores.
Question 9
Shiva Limited buys its annual requirement in 6 instalments. Quarterly requirement of
material is 120000 units. Each unit costs Rs.24 and the ordering cost is Rs. 250. Annual
inventory carrying cost is estimated at 10% of unit cost. Find the total annual cost of the
existing inventory policy. How much money can be saved by Economic Order Quantity?
Answer
(i) Total Annual Cost under Existing Inventory Policy
Rs.
Ordering Cost : 6 orders x Rs. 250 1500
Carrying Cost
(Average Inventory x 10% of unit cost Rs. 24)
or
or 40000 x 2.40 96000
Total Cost 97500
14
(ii) Total Annual Cost under EOQ
EOQ = √
= √
= √
= 10000 units
Rs.
Ordering Cost :
x Rs. 250 12000
Carrying Cost :
or 5000 units x Rs. 2.4 12000
Total Cost 24000
Saving due to EOQ (97500 – 24000) = Rs. 73500
Question 10
Babbu Limited manufactures a special product which requires a component ‘Kachari.’ The
following particulars are collected for the year ending 31st March, 2016 :
(i) Weekly requirement of Kachari : 2000 Units
(ii) Cost of placing an order : Rs. 1000 per order
(iii) Cost per unit of Kachari : Rs. 65
(iv) Annual carrying cost : 20% on cost of average inventory
The company has been offered a quantity discount of 4% on the purchase of ‘Kachari’
provided the order size is 26000 components at a time.
You are required to:
(i) Compute the Economic Order Quantity
(ii) Advise whether the quantity discount offer can be accepted.
Answer
(i) Calculation of EOQ:
EOQ =√
= √
15
= √
= √ = 4000 units
(ii) Evaluation of Quantity Discount offer:
(a) Total cost when EOQ is ordered:
No. of orders = 2000 x 52/4000 =26 orders
Average inventory = 4000/2 = 2000 units
Ordering Cost : 26 x Rs.1000
Carrying Cost : 2000 Units x Rs.13
Purchase Cost : (2000 x 52) x Rs.65
Rs.
26000
26000
6760000
Total Cost 6812000
(b) Total Cost when quantity discount is accepted
No. of orders =
Average inventory =
Purchase price = Rs. 65 x 0.96 = Rs. 62.40 per units
Carrying Cost: 20% of Rs. 62.40 = Rs. 12.48 per unit
Ordering Cost: 4 x Rs. 1000
Carrying Cost: 13000 units x Rs.12.48
Purchase Cost: (2000 x 52) x Rs. 62.40
Rs.
4000
162240
6489600
Total Cost 6655840
Saving due to quantity discount (Rs. 6812000 - 6655840) = Rs. 156160
Advice- the total cost of inventory is lower if quantity discount offer is accepted. Hence, the
company is advised to accept the quantity discount offer.
16
Question 11
The following information is provided by Chandu Agro-Chems Ltd.:
Fertilizer
Fe - I Fe - II
Monthly consumption 2000 bags 1440 bags
Relevant ordering cost per purchase order Rs. 1200 Rs. 1400
Purchase price per bag Rs. 576 Rs. 597.30
Annual relevant carrying cost 10% 10%
You are required to:
(i) Compute Economic Order Quantity (EOQ) for both Fe- I and Fe- II.
(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total
annual relevant carrying costs for both Fe - I and Fe - II.
(iii) For the EOQ, compute the number of deliveries per year for both Fe- I and Fe- II.
Answer
(i) Computation EOQ:
Fe-I Fe-II
EOQ=√
√
=√
=√
=1000 units
√
=√
=√
=900 units (Approx)
17
(ii) Total Annual Relevant Costs:
Fe-I Fe-II
No. of orders
Average inventory
Ordering cost
Carrying cost
2000 x 12/1000 =24 Orders
1000/2 =500 units
Rs.
24 x 1200 = 28800
500 x 57.6 = 28800
1440 x 12/900 =19.2 Orders
900/2 = 450 units
Rs.
19.2 x 1400 = 26880
450 x 59.73 = 26879
Total annual relevant Cost 57600 53759
In case of ‘Fe-II’, relevant Costs can be taken as:
(19.2 or 20 orders x 1400) + (450x59.73)
= 28000 + 26879
= Rs. 54879
(iii) No. of deliveries =
For ‘Fe-I’ =
For ‘Fe-II’ =
Question 12
Shiva Limited provides the following information relating to their operation for a year:
Ordering cost
Inventory carrying cost
Cost of material
Usage
Lead time to supply
Rs. 500 per order
10% per annum on average inventory
Rs. 520 per unit
500 to 1500 units per week
2 to 4 weeks
You are required to compute:
(i) Economic Order Quantity
(ii) Re-order stock Level
18
(iii) Maximum stock level
(iv) Minimum stock level
(v) If the supplier is willing to supply quarterly 13000 units at a discount of 4%, is it worth
accepting?
Answer
Annual consumption = Normal usage per week x 52 weeks
= (500+1500)/2 or 1000 x 52 =52000 units.
Inventory carrying cost = 10% of 520 = Rs. 52 per unit per annum
(i) Economic Order Quantity:
EOQ = √
= √
=1000 units
(ii) Re-order Level
= Maximum usage x Maximum re-order period
= 1500 x 4 = 6000 units per week
(iii) Maximum Level
= (Re-order level + Re-order quantity) – (Mini. usage x Mini. re-order period)
= (6000 + 1000) – (500 x 2)
= 7000 – 1000 = 6000 units
(iv) Minimum Level
= Re-order level – (Normal usage x Average re-order period)
= 6000 – (1000 x 3)
= 3000 units
(v) Evaluation of Discount offer:
Discounted offer price = 520 – 4% of 520 = 520 -20.80 = Rs. 499.20
Carrying cost at discount offer = 10% of 499.20 = Rs. 49.92
19
Particulars At EOQ At Discount Offer
No. of orders(52000/Order size)
Average inventory(Order size/2)
52000/1000=52
1000/2 = 500 units
52000/13000=4
13000/2 = 6500 units
Ordering cost (No. of Orders x 500)
Carrying cost (At EOQ - 500 x
52=26000; At discount offer - 6500
x 49.92=324480)
Cost of purchase (52000x price)
Rs.
26000
26000
27040000
Rs.
2000
324480
25958400
Total cost 27092000 26284880
Since the total cost under quarterly supply of 13000 units with 4% discount is lower than
that when order size is 1000 units (EOQ), therefore the offer should be accepted.
Question 13
From the following data for the year ended 31st March, 2016, calculate (i) Inventory
turnover ratio and (ii) The number of days for which the average inventory is held.
Rs.
Opening stock 115000
Purchases during the year 2240000
Closing stock 265000
Answer
(1.) Inventory turnover ratio =
=
=11
(2.) Average Number of days for which the average inventory held =
=
20
Working Note :
1. Cost of raw material Consumed = Opening stock Rs. 1,15,000 + Purchase
Rs.22,40,000 - closing stock Rs. 265000 = Rs.2090000
2. Average stock = (Opening stock + closing stock ) / 2
= (115000+265000)/2 = Rs.190000
Question 14
The following data is available in respect of material ‘X’ and ‘Y’ for the year ended 31st
March, 2016:
Material X Material Y
Stock on 1st April, 2015
Purchases during the year
Stock on 31st March, 2016
Rs.
210000
1942500
240000
Rs.
190000
645000
220000
Calculate the inventory turnover ratio of the above two items and put forward your
comments on them.
Answer
Material ‘X’
Rs.
Material ‘Y’
Rs.
Stock on 1st April,2015
Add : Purchases
Less : Stock on 31st march 2016
Cost of raw material consumed
Average inventory : (opening +
closing)/2
Inventory turnover ratio : (material
consumed ÷Average inventory)
Inventory storage period :
(365/Inventory turnover ratio)
210000
1942500
2152500
-240000
1912500
225000
8.5times
365/8.5= 43 Days
(approx)
190000
645000
835000
-220000
615000
205000
3 times
365/3=122 Days
(approx)
Comments : Material X is more fast moving than Material Y.
21
Question 15
Poowa Ltd. uses three raw materials X, Y and Z for a particular product for which the
following data apply:
Raw
Material
Usage per
unit
of product
(kgs)
Re-order
Quantity
(kgs)
Price per
kg
Rs.
Delivery Period in days
Minimum Average Maximum
X
Y
Z
5
2
3
20000
10000
20000
10
30
15
4
6
3
6
9
5
8
12
7
Daily production varies from 350 to 450 units, averaging 400 units of the said product.
What would be the following quantities?
(i) Minimum Stock Level of X
(ii) Maximum Stock Level of Y
(iii) Re-order Level of Z
(iv) Average Stock Level of Y
Answer
(i) Minimum Level of X = Re-order Level – (Average Usage x Average delivery
period)
= 18000 – (5x400x6)
= 18000 – 12000
= 6000 Kgs.
Note : Re-order Level of X = Max. usage x Max. delivery period
= (5 x 450) x 8
=18000 Kgs.
(ii) Maximum Level of Y = (Re-order Level + Re-order quantity) – (Min. usage x Min.
delivery period )
= (10800 + 10000)- (2 x 350 x 6 )
= 20800 – 4200
= 16600 Kgs.
Note : Re-order Level of Y =Max. usage x Max. delivery period
=2 x 450 x12 =10800 Kgs.
22
(iii) Re-order Level of Z =Maximum usage x maximum delivery period
= 3 x 450 x 7 =9450 Kgs.
(iv) Average Level of Y =(Minimum Level of Y + Maximum Level of Y)/2
= (3600 + 16600)/2
= 10100 Kgs.
OR Average Level of Y = Minimum of Y + ½ of Re-order quantity of Y
= 3600 + ½ x 10000
= 8600 Kgs.
Note : Minimum Level of Y = Re-order Level - (Average usage x Average delivery
period)
= 10800 – (2 x 400 x 9)
= 10800 – 7200
= 3600 Kgs.
Question 16
Nanu Ltd. has provided the following data relating to a particular material which is used
for Baby train toys:
Monthly demand of the Baby train toys : 5000 toys
Purchase price of material : Rs. 51.10 per unit
Cost of placing an order : Rs. 2000 per order
Carrying cost of average inventory : 10% per annum
Re-order period : 10 to 18 days
Consumption of raw material varies from 250 units to 450 units per day, the average
consumption being 350 units.
You are required to calculate:
(i) Re-order Level
(ii) Maximum Level
(iii) Minimum Level
(iv) Average Level
Answer
(1.) Re-order level = Maximum consumption x Maximum re-order period
= 450 units x 18 days
= 8100 units
23
(2.) Maximum level =(Re-order level +Re-order quantity) – (Minimum consumption x
Minimum re-order period)
= [8100+10000(EOQ)] – (250 x 10)
= 18100 – 2500
=15600 units
(3.) Minimum Level = Re-order Level – (Avg. cons. x Avg. Re-order period)
= 8100 – (350 x 14)
= 8100 – 4900
= 3200 units
(4.) Average level = (Maximum level + Minimum Level ) / 2
= (15600+3200)/2
=9400 units
OR
Average level = Minimum level + ½ of re-order quantity
= 3200 +10000 x 1/2
=8200 units
Working Note :
(1.) Re-order quantity ( Economic order Quantity ) = √
=√
=√
=1000 units
(2.) Average Re-order period = (10+18)/2 = 14 Days.
Question 17
Peena Ltd. manufactures a special product, which requires material ‘XE’. The following
particulars were collected for the year 2015-16:
Cost of material ‘XE’ : Rs.130 per unit
Ordering Cost : Rs. 1500 per order
24
Required return on investment in average inventory : 10% per annum
Rent, insurance expenses etc. : Rs. 7 per unit per annum
Re-order Period : 2 to 4 weeks
Normal usage : 1500 units per week
Minimum usage : 900 units per week
Maximum usage : 2100 units per week
Required:
(i) Economic Order Quantity
(ii) Re-order Level
(iii) Maximum Level
(iv) Minimum Level
(v) Average Level
Answer
Workings:
1. Annual Usage = 1500 Units X 52 = 78000 Units
2. Inventory Carrying Cost = (10% of Rs. 130) + Rs. 7 = Rs. 20 per unit
3. Normal reorder period =
(i) Economics Order Quantity (EOQ) = √
= √
= √
= 3420.53 or 3421 units
(ii) Re-order Level = (Max. usage x max. Re-order Period)
= 2100 x 4
= 8400 units
(iii) Maximum Level = (Re-order Level + Re-order quantity or EOQ) – (Min. usage x
min re-order period)
= (8400 + 3421) – (900 x 2)
= 11821 – 1800
= 10021 Units
25
(iv) Minimum level = Re-order level – (Normal usage x Normal re-order period)
= 8400 – (1500 x 3)
= 8400 – 4500
= 3900 Units
Average level = (Minimum level + maximum level) /2
= (3900 + 10021) / 2
= 6960.5 or 6961 Units
Question 18
Jaggu Ltd. has received an offer of quantity discount on its order of materials as under:
Price per unit Order size (No. of units)
Rs.
105 Less than 5000
100 5000 and less than 10000
95 10000 and less than 20000
91 20000 and less than 30000
90 30000 and above
The annual requirement for the material is 60000 units. Cost of placing an order is Rs.
15000 and the inventory holding cost is estimated at 20% of the material cost per annum.
You are required to:
(i) Compute the most economical purchase level
(ii) Compute Economic Order Quantity if there are no quantity discount and the
purchase price per units is Rs. 110.
Answer
(i) Computation of most economic purchase level
Order size
(units)
No. of
orders
Ordering cost
(2) x Rs.15000
Carrying
cost
Rs.
Cost of
purchase
Rs.
Total cost
(3+4+5) Rs.
(1) (2) (3) (4) (5) (6)
4000
5000
15
12
225000
180000
42000
50000
6300000
6000000
6567000
6230000
26
10000
20000
30000
6
3
2
90000
45000
30000
95000
182000
270000
5700000
5460000
5400000
5885000
5687000
5700000
The above table shows that the total cost of 60000 units including ordering and carrying
costs is minimum of Rs. 5687000 when the order size is 20000 units. Hence, the most
economic purchase level is 20000 units.
(ii) Computation of EOQ:
EOQ = √
= √
=√
=√
=9045.34 or 9045 units
Working Notes:
Order size(units) 4000 5000 10000 20000 30000
No. of Orders
(60000/ order Size)
15 12 6 3 2
Average inventory
(Units = order size
/2)
2000 2500 5000 10000 15000
Carrying cost per
unit (Rs.)
105x.20=21 100x.20=20 95x.20=19 91x.20=18.20 90x.20=18
Total Carrying cost
Rs. (Avg. inventory x
carrying cost per
unit)
42000 50000 95000 182000 270000
Cost of Purchase
Rs.
60000 x105
=6300000
60000 x100
=600000
60000 x95
=5700000
60000 x91
=5460000
60000 x90
=5400000
27
Question 19
Prepare a Stores Ledger Account from the following transactions of Richa Ltd. during the
month of January, 2016:
Jan.1 Opening balance 600 units @ Rs. 25 per unit
Jan.4 Receipt 500 units @ Rs. 22 per unit
Jan.6 Issue 300 units
Jan.8 Receipt 400 units costing Rs. 9600
Jan.10 Issue 350 units
Jan.14 Receipt 100 units costing Rs. 2500
Jan.15 Shortage 40 units
Jan.20 Receipt 250 units @ Rs. 26 per unit
Jan.22 Issue 200 units
Jan.27 Issue 400 units
The issues up to 10.01.2016 will be priced at LIFO and from 14.01.2016 issues will be
priced at FIFO. Shortage will be charged as overhead.
Answer
Stores Ledger Account for January, 2016
(LIFO up to 10-01-2016 and after that FIFO)
Date
Receipts Issues Balance
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
1-1-16 - - - - - - 600 25 15000
4-1-16 500 22 11000 - - - 600
500
25
22
26000
6-1-16 - - - 300 22 6600 600
200
25
22
19400
8-1-16 400 24 9600 - - - 600
200
400
25
22
24
29000
28
10-1-16 - - - 350 24 8400 600
200
50
25
22
24
20600
14-1-16 100 25 2500 - - - 600
200
50
100
25
22
24
25
23100
15-1-16 - - - 40
(Shor
tage)
25 1000 560
200
50
100
25
22
24
25
22100
20-1-16 250 26 6500 -- - - 560
200
50
100
250
25
22
24
25
26
28600
22-1-16 - - - 200 25 5000 360
200
50
100
250
25
22
24
25
26
23600
27-1-16 - - - 360
40
25
22
9880 160
50
100
250
22
24
25
26
13720
29
Question 20
The following are the details of receipts and issues of a material of stores in Mahi Ltd. for
the quarter ending 30th June, 2015:
Date of
Receipt
Units Rate per
unit (Rs.)
Date of
Issue
Units
April 5
April 25
May 10
May 22
June 19
June 27
1800
2500
1600
1000
900
2000
52
53
53.50
54
55
54.50
April 3
April 27
May 15
June 10
June 20
June 28
1500
2100
1700
1600
1300
1900
There were 2100 units in stock on April 1, 2015 which were valued at Rs. 51 per unit.
Issues are to be priced on the basis of weighted average method. The stock verifier of the
company reported a shortage of 70 units on 30th April, 2015 and 80 units on 30th June,
2015. The shortage is treated as inflating the price of remaining material on account of
shortage.
You are required to prepare a Stores Ledger Account.
Answer
Store Ledger Account
For the Quarter ending 30th June , 2015
(Weighted Average Method)
Date
Receipts Issues Balance
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Rate for
further issue
(Rs.)
April-1 - - - - - - 2100 107100 51
April-3 - - - 1500 51 76500 600 30600 51
April-5 1800 52 93600 - - - 2400 124200 124200/2400
=51.75
30
April-25 2500 53 132500 - - - 4900 256700 256700/4900
=52.39
April- 27 - - - 2100 52.39 110019 2800 146681 52.39
April- 30 - - - 70
Short
.
- - 2730 146681 146681/2730
=53.73
May-10 1600 53.50 85600 - - - 4330 232281 232281/4330
=53.64
May-15 - - - 1700 53.64 91188 2630 141093 53.64
May-22 1000 54 54000 -- - - 3630 195093 195093/3630
=53.74
June-10 - - - 1600 53.74 85984 2030 109109 53.74
June-19 900 55 49500 - - - 2930 158609 158609/2930
=54.13
June-20 - - - 1300 54.13 70369 1630 88240 54.13
June-27 2000 54.5 109000 - - - 3630 197240 197240/3630
=54.34
June-28 - - - 1900 54.34 103246 1730 93994 54.34
June -30 - - - 80
Short
- - 1650 93994 93944/1650=
56.93
Question 21
The quarterly production of Priya Limited’s product which has a steady market is 60000
units. Each unit of the product requires 1.5 Kg. of raw material. The cost of placing one
order for raw material is Rs. 7500 and the inventory carrying cost is Rs. 6 per unit per
annum. The lead time for procurement of raw material is 36 days and a safety stock of
9000 Kgs. of raw materials is maintained by the company. The company has been able to
negotiate the following discount structure with the raw material supplier:
31
Order Quantity (Kgs.) Discount (Rs.)
Less than 60000
60000-80000
80000-100000
100000-150000
150000-300000
300000-400000
Nil
25000
50000
120000
150000
200000
You are required to:
(i) Calculate the re-order point taking 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw
material after considering the discount of the company elects to place one, two,
three, four, or six orders in the year.
(iii) State the number of orders which the company should place to minimize the cost
after taking EOQ also into consideration.
Answer
Working Notes:
1. Annual production = 60000 x 4 = 240000 units
2. Annual requirement of raw material = 240000 x 1.5 = 360000 Kgs.
3. EOQ = √
= √
= √
= 30000 Kgs.
4. Total cost of procurement and storage when the order size is equal to EOQ or 30000
Kgs.
No. of orders 360000/30000 = 12 orders
Average inventory 30000/2 = 15000 Kgs.
Total ordering cost : 12 x 7500 Rs. 90000
Total carrying cost : 15000 x 6 Rs. 90000
Total cost Rs. 180000
32
(i) Re-order point =Lead time consumption + Safety stock
= (360000/360) x 36 + 9000 Kgs.
= 36000+9000
= 45000 Kgs.
(ii) Statement showing the total cost of procurement and storage of raw material (after
considering the discount)
Order
size
(kgs)
No. of
Orders
Total of
Procurement
Rs.
Average
Stock
(kgs)
Total cost of
Storage of
raw materials
(Rs.)
Discount
(Rs.)
Total cost
(Rs.)
(1) (2) (3)=(2)x Rs.7500 (4)=(1)/2 (5)=(4) x Rs.6 (6) (7)=3+5+6
60000
90000
120000
180000
360000
6
4
3
2
1
45000
30000
22500
15000
7500
30000
45000
60000
90000
180000
180000
270000
360000
540000
1080000
25000
50000
120000
150000
200000
200000
250000
262500
405000
887500
(iii) Number of orders which the company should place to minimize the costs after taking
EOQ also into consideration is 12 orders each of size 30000 kgs. The total cost of
procurement and storage in this case comes to Rs. 180000, which is minimum.
Question 22
Assume that the following quantity discount schedule for a particular material is
available to a retail store:
Order size (units) Discount
0 – 4999 0%
5000 – 9999 4%
10000 – 14999 6%
15000 – 19999 10%
20000 – 24999 11%
25000 and above 12%
33
The per unit cost of the material with no discount is Rs. 30. The monthly demand is 2500
units. Ordering cost is Rs. 2500 per order and annual inventory carrying cost is Rs. 4.5 per
unit. Determine the optimal order quantity and the associated minimum total cost of
inventory and purchasing costs.
Answer
Statement Showing Total Cost at Various Order Sizes
Order
Size
(Units)
No. of
orders
In a
years
Ordering
Cost
Rs.
Average
Inventory
(Units)
Carrying
Cost
Rs.
Price
Per
Units
Rs.
Purchase
Cost (Rs.)
(6)x3000
0
Total Cost
Rs.
(1) (2) =
3000/(1)
(3)=(2) x
Rs.2500
(4)=(1)/2 (5)=(4)x
Rs.4.50
(6) (7) (8)=3+5+
7
5000
10000
15000
20000
25000
5774(EOQ)
5
3
2
1.5 or 2
1.2 or 2
5.2 or 6
12500
7500
5000
5000
5000
15000
2500
5000
7500
10000
12500
2887
11250
22500
33750
45000
56250
12992
28.80
28.20
27.00
26.70
26.40
28.80
864000
846000
810000
801000
792000
864000
887750
876000
848750
851000
853250
891992
Minimum total cost of inventory and purchasing Rs. 848750 for order size 15000 units.
Hence, Optimal Order quantity is 15000 units.
Working Notes:
1. Prices with discount – at 4% =30 x .96 = Rs. 28.80; at 6% - 30 x .94 = Rs. 28.2 at-
10% - 30 x .90 = Rs. 27; at 11% - 30 x .89 = Rs. 26.7 & at 12 % - 30 x .88 = Rs. 26.4
2. EOQ without discount:
EOQ = √
= √
= 5774 units
34
Question 23
Prepare Bin Card from the following information:
Material Received Material Issued
Date G. R. No. Units Date Req. No. Units
2.3.16
14.3.16
20.3.16
27.3.16
101
112
209
304
2500
1900
3200
1100
8.3.16
15.3.16
18.3.16
24.3.16
28.3.16
222
283
338
436
572
1100
800
1300
600
1900
On 31st March, 2016 stock was verified and it revealed a shortage of 35 units in stock.
Answer
Bin Card
Description ...................................... Bin...............................................
Store Ledger Folio ............................ Code No. ...................................
Maximum Level.....................
Minimum Level......................
Re-Order Level........................
Date
March,
2016
Receipts Issues Balance
Quantity
(units)
Remarks G.R. No. or
M.R. No-
Quantity
(Units)
Requisition
No.
Quantity
(Units)
2-3-16 101 2500 - - 2500
Verified
By
8-3-16 - - 222 1100 1400
14-3-16 112 1900 - - 3300
15-3-16 - - 283 800 2500
35
18-3-16 - - 338 1300 1200
20-3-16 209 3200 - - 4400
24-3-16 - - 436 600 3800
27-3-16 304 1100 - - 4900
28-3-16 - - 572 1900 3000
31-3-16 - - Shortage 35 2965
Question 24
Baidhnath Chemicals Ltd. take a periodic inventory of their stock of chemical ‘CM’ at the
end of each month. The physical inventory taken on March 31st, 2016 shows a balance of
3500 litres of chemical ‘CM’ in hand @ Rs. 81 per litre.
The following purchases were made during April, 2016:
April 3 10000 litres @ Rs. 82 per litre
April 11 15000 litres @ Rs. 83 per litre
April 17 20000 litres @ Rs. 83.50 per litre
April 26 8000 litres @ Rs. 85 per litre
A physical inventory on 30th April, 2016 discloses that there is a stock of 14000 litres.
You are required to compute the value of inventory on April 30, 2016 by each of the
following method:
(i) First in First Out
(ii) Last in First Out
(iii) Weighted Average Cost Method.
Answer
(i) Valuation of inventory under FIFO Method
8000 Ltrs. @ Rs. 85 out of Purchase on 26th April
Rs.
680000
6000 Ltrs @ Rs. 83.50 out of Purchase on 17th April 501000
Value of closing inventory of 14000 Ltrs. on 30-04-2016 1181000
36
(ii) Valuation of inventory under LIFO Method
3500 Ltr @ Rs. 81 out of Opening Stock
Rs.
283500
10000 Ltr @Rs. 82 out of Purchase on 3rd April 820000
500 Ltr @ Rs. 83 out of Purchase on 11th April 41500
Value of closing inventory of 14000 Ltrs. on 30-04-2016 1145000
(iii) Valuation of inventory under Weighted Average Cost Method
Date Particulars Amounts (Rs.)
1-4-16 3500 Ltrs. @Rs. 81 283500
3-4-16 10000 Ltrs. @ Rs. 82 820000
11-4-16 15000 Ltrs. @ Rs. 83 1245000
17-4-16 20000 Ltrs. @ Rs. 83.50 1670000
26-4-16 8000 Ltrs. @ Rs. 85 680000
Total Cost of 56500 Ltrs. 4698500
Weighted Average Cost per Litre
=4698500/56500= Rs. 83.159
Value of Closing Inventory on 30th April, 2016
=14000 Ltrs x Rs. 83.159 = Rs. 11,64,226
Question 25
The following are the detail of receipts and issue of an item of stores for the month of
April, 2016:-
April, 2016
1 Received 1000 units @ Rs. 12 Per unit
5 Received 2000 units @Rs. 15 Per unit
10 Issued 1500 units
37
13 Received 1000 units @ Rs. 16 Per unit
15 Shortage 100 Units (As reported by Store verifier)
20 Received 2000 units @ Rs. 18 Per unit
25 Issued 2500 units
Prepare Stores Ledger Account:
(i) Charging Shortage as overhead, and
(ii) Inflating the price of remaining material on account of shortage. Materials are
charged to production department on the basis of weighted average price.
Answer
(i) Charging Shortage as overhead
Stores Ledger Account (Weighted average method)
Date
April,
2016
Receipts Issues Balance
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
Units Value
(Rs.)
Rate for
further issue
(Rs.)
1 1000 12 12000 - - - 1000 12000 12000/1000=
12
5 2000 15 30000 - - - 3000 42000 42000/3000=
14
10 - - - 1500 14 21000 1500 21000 14
13 1000 16 16000 - - - 2500 37000 37000/2500=
14.80
15 - - - 100
Short.
14.80 1480 2400 35520 14.80
20 2000 18 36000 - - - 4400 71520 71520/4400=
16.25
25 - - - 2500 16.25 40625 1900 30895 30895/1900=
16.26
38
Working Note
Rs. 1480 as cost of shortage will be added to factory overhead.
(ii) Shortage treated by Inflated Price Method
Stores Ledger Account ( Weighted average method )
Date
April,
2016
Receipts Issues Balance
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Rate for further issue
(Rs.)
1 1000 12 12000 - - - 1000 12000 12000/1000=12
5 2000 15 30000 - - - 3000 42000 42000/3000=14
10 - - - 1500 14 21000 1500 21000 14
13 1000 16 16000 - - - 2500 37000 37000/2500=14.80
15 - - - 100
Short.
- - 2400 37000 37000/2400 =15.42
20 2000 18 36000 - - - 4400 73000 73000/4400=16.59
25 - - - 2500 16.59 41475 1900 31525 31525/1900=16.59
Working Note
On April 13, 2016, balance was 2500 units costing Rs. 37000. Then on April 15, 2016,
shortage of 100 units was detected. So, by inflated price method, Rs. 37000 is taken as the
cost of remaining 2400 units only, and accordingly the issue rate of the material is
increased from Rs. 14.80 to Rs. 15.42 per unit.
Question 26
From the data given below, answer the following:
(a) What is the value of the balance of material X in stock at the close of the forth
week if issues are priced on LIFO basis ?
(b) What is the value of forth week's issue of material Y if they are priced on FIFO
basis?
39
(c) What is the simple average price of the four weeks’ receipts of material Y?
(d) What is the weighted average price of the four weeks’ receipts of material X?
Week
Received Issues
Material X Material Y Material X Material Y
Qty.
(Kg.)
Amount
(Rs.)
Qty.
(Kg.)
Amount
(Rs.)
Qty.
(Kg.)
Qty.
(Kg.)
I
II
III
IV
250
300
200
250
10000
12600
9000
10500
1250
1400
750
1600
18750
22400
12000
27200
175
250
300
300
1500
1200
1300
1100
Opening
Stock
200 7600 2000 29000 - -
Answer
(a) Value of the balance of material X in stock at the close of the forth week if issues are
priced on LIFO basis
Week
Receipts Issues Balance
Kg. Rate
(Rs.)
Amount
(Rs.)
Kg. Rate
(Rs.)
Amount
(Rs.)
Kg. Rate
(Rs.)
Rate for further
issue
Kg. (Rs.)
Opening
Balance
200 38 7600 - - - 200 7600 200 - 38
I Week 250 40 10000 175 40 7000 275 10600 200 - 38
75 - 40
II Week 300 42 12600 250 42 10500 325 12700 200 - 38
75 - 40
50 - 42
III Week 200 45 9000 200
50
50
45
42
40
13100 225 8600 200 - 38
25 - 40
IV Week 250 42 10500 250
25
25
42
40
38
12450 175 6650 175 - 38
Note : It is presumed that issues are made regularly per Week.
40
(b) Value of forth week's issue of material Y on FIFO basis .
Total receipts of Y = 2000+1250+1400+750+1600=7000 Kgs.
Total issues of Y = 1500+1200+1300+1100=5100 Kgs.
Value of Closing Stock of 1900 Kgs. (7000-5100):
1600 Kg.(IV Week) Rs. 27200
300 Kg. (III Week) Rs. (12000/750) x 300 = Rs. 4800
Total Value Rs. 32000
(c) Simple average price of the four weeks’ receipts of material Y
Week Kg. Amount (Rs.) Rate per Kg. Rs.
I 1250 18750 15
II 1400 22400 16
III 750 12000 16
IV 1600 27200 17
Simple average price =4
17 16 16 15 = Rs. 16 per Kg.
(d) Weighted average price of the four weeks’ receipts of material X .
Week Kg. Amount (Rs.)
I 250 10000
II 300 12600
III 200 9000
IV 250 10500
Total 1000 42100
Weighted average price = 1000
42100= Rs. 42.10 per Kg.
Question 27
A timber merchant purchased 10,000 c.ft. timber logs on 1st December, 2015 @ Rs. 720
per c.ft and stored them in his timber yard for four months for seasoning.
In the timber yard, the following items of expenses were incurred during the period of
seasoning :
41
(a) Rent of the yard (area 2,000 sq.ft.) @ Rs. 25,000 per month.
(b) Salaries of 5 watchmen and khalasis @ Rs. 5,000 each per month.
(c) Incidental expenses of maintenance, lighting etc. @ Rs. 2,500 per month.
(d) Annual share of general overhead expenses of the business Rs.. 200000.
(e) Insurance charges for the logs to be seasoned @ 1% on the value of he unseasoned
logs for the period of seasoning.
50% of the floor of the yard has been set apart for seasoning of timber and the remaining
floor area for stocking seasoned timber. Loss in volume of logs due to seasoning 10% .
Calculate the selling rate of the seasoned log per cubic ft. to the nearest rupee on 1st April,
2016, so that 10% profit on Sales may be eared.
Answer
Calculation of Selling Rate of Seasoned Logs
Particulars Qty. c.ft. Amount Rs.
Cost of timber logs @ Rs. 720 per c.ft.
Half of the rent of the yard for four months
@ Rs. 25,000 per month (25,000 x 4 x 50%)
Half of Salaries of 5 watchmen and khalasis
@ Rs. 5,000 each per month for four months
(5 x 5000 x 4 x 50%)
Half of incidental expenses for maintenance,
lighting etc. for four months @ Rs. 2,500 per
month
Half of four months general overhead
expenses
@ Rs. 2,00,000 a year
Insurance Charges @ 1% of the value of
unseasoned logs (Rs. 72,00,000)
Loss in volume of logs due to seasoning 10%
Cost of seasoned timber
Cost of seasoned timber per cubic ft. =
Rs.
Profit 10% on Sales (
)
Selling price per cubic ft.
Say selling Price per cubic ft.
10,000
1,000
9,000
72,00,000
50,000
50,000
5,000
1,00,000
72,000
74,77,000
830.78
92.31
923.09
923
42
Question 28
Following information relating to a particular material are available in the cost records of
Bhalu Ltd. for the month of April, 2016:
Purchases Units Rate per unit Freight Charges
(Rs.) (Rs.)
3 April 20000 15 15000
20 April 15000 16 13500
30 April 10000 18 11000
Opening inventory: 8000 units @ Rs. 15.50 including freight on 1st April, 2016
Closing inventory: 15000 units on 30th April
You are required to calculate (i) Value of closing stock, (ii) Cost of raw material consumed
by following
(a) FIFO, (b) LIFO, and (c) Weighted Average Cost Method of issue assuming that no issue
can be made on the last day of the month.
Answer
(i) Rate of purchase on 3rd April = 15+(15000/20000) = Rs. 15.75
Rate of purchase on 20th April =16+(13500/15000)=Rs.16.90
Rate of purchase on 30th April=18+(11000/10000)=Rs.19.10
(a) Value of closing stock under FIFO
Out of purchase on 30th April :10000 @ Rs. 19.10
Out of purchase on 20th April: (15000-10000) = 5000@ Rs. 16.90
Rs.
191000
84500
Value of closing stock 275500
(b) Value of closing stock under LIFO
Out of purchase on 30th April:10000 @ Rs. 19.10
Out of opening stock : (15000-10000) = 5000 @ Rs. 15.50
Rs.
191000
77500
Value of closing stock 268500
43
(a) Value of closing stock under Weighted Average
Out of purchase on 30th April:10000 @ Rs. 19.10
Remaining 5000 units valued at weighted average cost:
(8000x15.50)+(20000x15.75)+(15000x16.90)/(8000+20000+15000)
= (124000+315000+253500)/43000
= 692500/43000 = Rs.16.105
Hence, value of 5000 units @ Rs.16.105
Rs.
191000
80525
Value of closing stock 271525
(ii) Calculation of cost of raw material consumed
Particulars FIFO (Rs.) LIFO (Rs.) Weighted
Average (Rs.)
Opening stock:8000 @ Rs. 15.50
3rd April : 20000 @ Rs. 15.75
20th April : 15000 @ Rs. 16.90
30th April : 10000 @ Rs. 19.10
124000
315000
253500
191000
124000
315000
253500
191000
124000
315000
253500
191000
883500 883500 883500
Less : Closing Stock 275500 268500 271525
Cost of Raw Material Consumed 608000 615000 611975
Question 29
Pouru Ltd. needs quarterly 18150 units of raw material ‘X’ @ Rs. 75 per unit. Ordering cost
is expected Rs. 6250 per order. The company keeps safety stock of one month’s
requirement to meet emergency. The carrying cost is expected to be 10% per unit of
average inventory.
You are required to calculate:
(i) Minimum Inventory level
(ii) Economic Order Quantity
44
(iii) Maximum Inventory level
(iv) Average Inventory level
(v) Total Annual Ordering Cost
(vi) Total Annual Carrying Cost
(vii) Total Inventory Cost excluding purchase cost
Answer
Working Notes
1. Annual requirement of material = 18150 x 4 = 72600 units
2. Carrying Cost per units = 10% of Rs. 75 = Rs. 7.50 per unit
(i) Minimum inventory = Safety stock of one month’s requirement = 72600/12 =
6050 units
(ii) EOQ =√
= √
= √
= √
= 11000 units
(iii) Maximum inventory = minimum inventory + EOQ
= 6050 + 11000 = 17050 units
(iv) Average inventory = (minimum + maximum)/2
= (6050+17050)/2
= 11550 units
(v) Total annual ordering cost = 11000
72600or 6.6 order x Rs. 6250
= Rs. 41250
Or practically 6.6 or 7 orders x Rs. 6250 = Rs. 43750
(vi) Total Annual Carrying Cost = Average inventory x per unit carrying cost
= 11550 x 7.50
= Rs. 86625
Note = Average inventory = safety stock + ½ of EOQ
45
= 6050 + 11000 x ½
= 6050 + 5500 = 11550 units
(vii) Total inventory cost = 41250 + 86625 = Rs.127875
Or 43750 + 86625 = Rs. 130375
Question 30
The components X and Y are used as follows:
Minimum usage : 150 units per day
Maximum usage : 250 units per day
Normal usage : 200 units per day
Delivery Period : X – 3 to 7 days; Y – 2 to 4 days
Economic Order Quantity : X – 2000 units, Y – 1000 units
You are required to calculate for each component:
(i) Re – Order Level
(ii) Minimum Level
(iii) Maximum Level
(iv) Average level
Answer
Particulars X Y
(i) Re-order level
= (Max. usage x max. Re-order
Period)
250 X 7 = 1750 units 250 X 4 = 1000 units
(ii) Minimum level
= Re-order level – (Normal usage x
Normal Re-order period)
Note - Normal Re-order period
= (Min + Max)/2
1750 – (250 X 5)
= 750 units
(3+7)/2 = 5 days
1000 – (200 X 3 )
= 400 units
(2+4)/2 = 3 days
(iii) Maximum level = (ROL + ROQ) –
(Min. usage x Min. Re-order
period)
(Note – ROQ = EOQ )
(1750 +2000) – (150
x 3)
= 3750 – 450
= 3300 units
(1000 + 1000) – (150
x 2)
= 2000 – 300
=1700 units
46
(iv) Average level = (Min. level + Max.
level)/2 (or)
Min. level + ½ of ROQ
(750 + 3300 )/2 =
2025 units
(or)
750 +2000 X ½
= 1750 units
(400 + 1700)/2 =
1050 units
(or)
400 + 1000 X ½
= 900 units
Question 31
Prepare a store Ledger Account by using of Simple Average Price Method, from the
following information pertaining to a particular material:
01.4.16 Opening balance 2000 units @ Rs. 20 per unit
03.4.16 Purchase 1500 units @ Rs. 24 per unit
09.4.16 Issue 800 units
13.4.16 Issue 700 units
15.4.16 Purchase 1400 units @ Rs. 25 per unit
19.4.16 Issue 600 units
22.4.16 Issue 500 units
27.4.16 Purchase 2500 units @ Rs. 23 per unit
29.4.16 Issue 900 units
Answer
Stores Ledger Account
(Simple Average Price Method)
Date Receipts Issues Balance Rate for further issue
(Rs.)
Qty Rate
Rs.
Amount
Rs.
Qty Rate
Rs.
Amount
Rs.
Qty Amount
Rs.
1.4.16
3.4.16
9.4.16
13.4.16
15.4.16
19.4.16
22.4.16
27.4.16
29.4.16
-
1500
-
-
1400
-
-
2500
-
-
24
-
-
25
-
-
23
-
-
36000
-
-
35000
-
-
57500
-
-
-
800
700
-
600
500
-
900
-
-
22
22
-
23
24.5
-
24
-
-
17600
15400
-
13800
12250
-
21600
2000
3500
2700
2000
3400
2800
2300
4800
3900
40000
76000
58400
43000
78000
64200
51950
109450
87850
20
(20+24)/2=2
2
22
22
(20+24+25)/3=23
(24+25)/2=24.5
24.5
(24+25+23)/3=24
(25+23)/2=24
47
Question 32
The following receipts and issues were recorded in the books of Mogari Udyog Ltd.:
01.1.2016 Opening stock 1500 units @ Rs. 40 per unit
03.1.2016 Purchase 1000 units @ Rs. 45 per unit
06.1.2016 Issue 800 units
09.1.2016 Issue 500 units
13.1.2016 Purchase 1200 units @ Rs. 47 per unit
15.1.2015 Return from production department 50 units @ Rs. 40 per unit
17.1.2016 Issue 700 units
20.1.2016 Purchase 1000 units @ Rs. 48 per unit
22.1.2016 Issue 400 units
27.1.2016 Issue 600 units
You are required to (i) prepare a Stores Ledger Account showing how the values of issues
would be. Calculate under Weighted Average Cost Method if Base Stock of 500 units is
maintained. (ii) Find out value of closing stock on 31st January, 2016.
Answer
(i) Stores Ledger Account
(Base stock of 500 units under weighted Average cost method)
Date Receipts Issues Balance Rate for further issue
(Rs.)
Qty Rate
Rs.
Amount
Rs.
Qty Rate
Rs.
Amount
Rs.
Qty Amount
Rs.
1.1.16
3.1.16
6.1.16
-
1000
-
-
45
-
-
45000
-
-
-
800
-
-
42.5
-
-
34000
500
1000
500
2000
500
20000
40000
20000
85000
20000
Base stock 500-40
40000/1000=40
85000/2000=42.50
51000/1200=42.50
48
9.1.16
13.1.16
15.1.16
17.1.16
20.1.16
22.1.16
27.1.16
-
1200
50
(Return)
-
1000
-
-
-
47
40
-
48
-
-
-
56400
2000
-
48000
-
-
500
-
-
700
-
400
600
42.5
-
-
45.21
-
46.45
46.45
21250
-
-
31647
-
18580
27870
1200
500
700
500
1900
500
1950
500
1250
500
2250
500
1850
500
1250
51000
20000
29750
20000
86150
20000
88150
20000
56503
20000
104503
20000
85923
20000
58053
29750/700=42.50
86150/1900=45.34
88150/1950=45.21
56503/1250=45.20
104503/2250=46.45
85923/1850=46.45
58053/1250=46.44
(ii) Value of closing stock on 31st January, 2016; 500+1250=1750 units
At Rs. 78053 (20000 + 58053) .
Question 33
Prepare a Stores Ledger Account from the following information adopting LIFO method of
pricing of issues of materials:
01.4.2016 Opening balance 5000 kgs @ Rs. 20 per kg.
02.4.2016 Issued to Department A - 700 kgs
05.4.2016 Received from suppliers - 2000 kgs @ Rs. 19 per kg.
07.4.2016 Issued to Department B - 1400 kgs
10.4.2016 Issued to Department C - 1100 kgs
14.4.2016 Received from suppliers - 2500 kgs @ Rs. 22 per kg.
18.4.2016 Issued to Department D - 1750 kgs.
22.4.2016 Returned from department B (out of issue on 7.4.2016) - 50 kgs.
26.4.2016 Received from suppliers - 1000 kgs @ Rs. 23 per kg.
49
Answer
Stores Ledger Account
(LIFO Method)
Date Receipts Issues Balance
Qty Rate
Rs.
Amount
Rs.
Qty Rate
Rs.
Amount
Rs.
Qty Rate
Rs.
Amount
Rs.
1.4.16
2.4.16
5.4.16
7.4.16
10.4.16
14.4.16
18.4.16
22.4.16
26.4.16
-
-
2000
-
-
2500
-
50
1000
-
-
19
-
-
22
-
19
23
-
-
38000
-
-
55000
-
950
23000
-
700
-
1400
600
500
-
1750
-
-
-
20
-
19
19
20
-
22
-
-
-
14000
-
26600
21400
-
38500
-
-
5000
4300
4300
2000
4300
600
3800
3800
2500
3800
750
3800
750
50
3800
750
50
1000
20
20
20
19
20
19
20
20
22
20
22
20
22
19
20
22
19
23
100000
86000
124000
97400
76000
131000
92500
93450
116450
Question 34
Ritu Ltd. produces a product which has a quarterly demand of 15000 units. The product
requires a component ‘XE’ which is purchased at Rs.45 per unit. 3 units of component ‘XE’
are required to produce one unit of finished product. The ordering cost is Rs. 810 per order
and the carrying cost is 18% per annum of average inventory. You are required to:
(i) Calculate the Economic Order Quantity
50
(ii) If the minimum lot size to be supplied is 15000 units, what is the extra cost to be
born by the company?
(iii) What is the minimum Carrying Cost, the company has to incur?
Answer
Annual consumption of component ‘XE’ = 15000 x 4 x 3
= 180000 units
(i) Calculation of Economic Order Quantity
EOQ = √
= √
= √
= √
= 6000 units
(ii) Calculation of Extra Cost if minimum lot size is 15000 Units
Particulars If lot size is EOQ (6000 units) If lot size is 15000 units
No. of orders = 180000
units/
lot size
Average inventory = lot
size/2
Ordering Cost
Carrying Cost
30 Orders
3000 Units
Rs.
30 x 810 = 24300
3000 x 8.10 = 24300
12 Orders
7500 Units
Rs.
12 x 810 = 9720
7500 x 8.10 = 60750
Total Inventory Cost 48600 70470
Extra Cost = 70470 – 48600
= Rs. 21870
(iii) Minimum Carrying Cost = Carrying Cost at EOQ lot size = Rs. 24300.
51
Question 35
The following detail is collected form the cost records of Priya Ltd. for the year ending 31st
March,2016: Stock of raw materials on 1st April, 2015: 20000 Units at Rs. 270000
purchase of raw materials during the year: 172000 Units at Rs. 25,85,600 Raw material
returned to supplier during the year: 5000 units at Rs. 75400
Freight Inward : Rs. 165000
Rent of godown used for storage of materials : Rs. 240000
Salary of store-keeper : Rs. 180000
Demurrage charges levied by transporter for delay
in collection of materials : Rs. 31000
Normal loss due to shrinkage : 5% of material
purchased
Abnormal loss due to absorption of moisture
before receipt of material : 1670 units
Stock of raw material on 31st March, 2016 : 27000 units
Compute the value of closing stock of raw materials on 31st March, 2016
Answer
Computation of value of closing stock of Raw materials
Particulars Quantity (Units) Amount (Rs.)
Opening stock of raw materials
Add : Purchase of raw materials less purchase return
(172000 - 5000 = 167000 units and 2585600-
75400 = Rs. 2510200)
Add: Freight Charges
Add: Demurrage Charges
Less : Abnormal loss
(2510200+165000+31000 = 2706200 x
)
Less : Normal loss due to shrinkage 5% of 167000
20000
167000
(1670)
(8350)
270000
2510200
165000
31000
(27062)
Cost of raw materials 176980 2949138
Value of closing Stock
27000 449919
Note : Rent of godown and salary of store-keeper are not included in the cost of materials.
52
Question 36
The following information is provided by Mahi Ltd.:
Date Particulars Units Rate per Unit
(Rs.)
1-3-2016
8-3-2016
10-3-2016
15-3-2016
22-3-2016
26-3-2016
29-3-2016
31-3-2016
Opening Stock
Purchase
Issue
Purchase
Issue
Issue
Purchase
Issue
1100
1500
800
2000
600
1200
1500
900
35
40
38
45
You are required to calculate the (i) cost of raw material consumed and (ii) value of
closing inventory applying the Last in First Out method of pricing raw materials under the
Perpetual Inventory and Periodic Inventory Control System.
Answer
Particulars Units Perpetual Inventory
Method
Periodic Inventory Method
Date Units Rate
(Rs.)
Amount
(Rs.)
Units Rate
(Rs.)
Amount
(Rs.)
Raw Material
Consumed
(i)Cost of Raw
material
Consumed
10.3.16
22.3.16
26.3.16
31.3.16
800
600
1200
900
40
38
38
45
32000
22800
45600
40500
1500
2000
45
38
67500
76000
Total Cost 3500 140900 3500 143500
53
(ii)Value of Closing
Inventory
(6100–3500 =
2600 units)
1100
700
200
600
35
40
38
45
38500
28000
7600
27000
1100
1500
35
40
38500
60000
Value of Closing
Inventory
2600 101100 2600 98500
Question 37
Madhulika Ltd. Manufactures a product from a raw material, which is purchased at Rs. 90
per kg. The company incurs a handling cost of Rs. 820 plus freight of Rs. 680 per order. The
incremental carrying cost of inventory of raw material is Rs.1.25 per kg. Per month. In
addition, the cost of working capital finance on the investment in inventory of raw
material is Rs. 9 per kg. per annum. The annual production of the product is 100000 units
and one unit is obtained from 2 kg of raw material.
Required :
(1.) Calculate the economic order quantity of raw materials.
(2.) Advice, how frequently should orders for procurement be placed.
(3.) If the company proposes to rationalize placement of orders on quarterly basis, what
percentage of discount in the price of raw materials should be negotiated?
Answer
Annual requirement of raw material in kgs. = 2 kg. x 100000=200000 kgs.
Handling & freight cost per order = Rs. 820 x Rs. 680=Rs.1500
Carrying cost per unit per annum + Investment cost per Kg. per annum
= (1.25 x12months) + Rs.9 (Investment in inventory per kg. per annum)
= Rs.24 per kg.
(1.) E.O.Q. = √
= √
= 5000 kgs.
54
(2.) Frequency of orders for procurement :
Annual consumption = 200000kg.
Quantity per order = 5000kg.
No. of orders per annum = 200000/5000=40 Orders
Frequency of placing orders =12/40=0.3months OR 365/40=9 Days
(3.) Percentage of discount in the price of raw materials to be negotiated:
Quantity of Quarterly orders = (200000 kgs/4) = 50000 kgs. Per Order
No of orders = 4
Total cost
(when order size is 50000 kgs)
Order placing cost = (4 x 1500) = Rs. 6000
Carrying cost = (50000 x 24/2) = Rs. 600000
Rs. 606000
Total cost :
(When order size is equal to EOQ)
No of orders = 40
Order placing cost = 40 x 1500 = Rs. 60000
Carrying cost = 5000*24/2 = Rs. 60000
Total cost = (60000+60000) = Rs. 120000
Increase in cost to be compensated by discount =Rs. (606000-120000) = Rs. 486000
Reduction per kg. in the purchase price of raw material = (486000 / 200000) =
Rs. 2.43 per kg.
Percentage of discount in the price of raw material to be negotiated = 2.43 x 100/90
= 2.70%.
***
55
Question 1
Question 1
What is idle time? Discuss its treatment in cost accounting.
Answer
When workers are paid on time basis, there is usually a difference between the time for which the workers are paid and the time actually spent by them in production. The loss of time for which the employer pays but obtains no direct benefit is termed as idle time.
In other words, idle time cost represents the wages paid for the time lost, i.e. time during which the worker was idle.
Treatment of idle time in cost accounting
Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into the labour cost rates. In the case of indirect workers, normal idle time is spread over all the products or jobs through the process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as a separate item in the Costing Profit and Loss Account, so that normal costs are not disturbed.
Question 2
State the circumstances in which time rate system of wage payment can be preferred in a factory.
Answer
Circumstances in which time rate system of wage payment can be preferred:
1. Persons whose services cannot be directly or tangibly measured, e.g., general helpers, supervisory and clerical staff etc.
2. Workers engaged on highly skilled jobs or rendering skilled services, e.g., tool making, inspection and testing.
3. Where the pace of output is independent of the operator, e.g., automatic chemical plants.
Question 3
What do you understand by ‘Time keeping and Time booking’? State their objectives.
3
Labour Cost
56
Answer
Time-keeping is necessary for the purpose of recording attendance and for calculating wages. Time-booking means a record from the utilization point of view; the purpose is cost analysis and cost apportionment. Record keeping is correct when time – keeping and time –booking tally.
The objectives of time keeping are:
1. Pay –roll preparation;
2. Finding out the labour cost of a job/product/service;
3. Attendance records to meet statutory requirements;
4. Determining productivity and controlling labour cost;
5. Calculating overhead cost of a job, product or service;
6. To maintain discipline in attendance;
7. To distinguish between normal and over-time, late attendance and early leaving; and
8. To provide internal check against dummy workers.
The objectives of time-booking are:
1. To apportion overheads against jobs;
2. To calculate the labour cost of jobs done;
3. To ascertain idle time for the purpose of control;
4. To find out that the time during which a worker is in the factory is properly utilized;
5. To evaluate labour performance, to compare actual and budgeted time;
6. To determine overhead rates of absorbing overhead expenses under the labour hour and machine hour methods;
7. To calculate wages and bonus provided the system of payment depends on the time taken.
Question 4
What is overtime? State its treatment in cost accounting.
Answer
Overtime refers to the situation when a worker works beyond his normal working hours. The overtime rate is always higher than the normal rate and is usually double the normal rate. The Factories Act and Sops and Establishments Act have fixed the normal working hours, defined what constitutes overtime, the rate of overtime and maximum hours of overtime.
Overtime consists of two elements viz. the normal cost and the extra payment or premium. The premium is known as overtime cost. The normal cost is allocated to the production
57
order or cost centre/ unit on which the worker is working. The treatment of overtime cost varies according to the circumstances.
Treatment of Overtime premium in Cost Accounting:
In cost accounting the treatment of overtime premium will be as follows:
1. If the overtime is resorted to at the desire of the customer, than the entire amount of overtime including overtime premium should be charged to the job directly.
2. If it is due to a general pressure of work to increase the output, the premium as well as overtime wages may be charged to general overheads.
3. If it is due to the negligence or delay of workers of a particular department, it may be charged to the concerned department.
4. If it is due to circumstances beyond control, it may be charged to Costing Profit & Loss Account.
Question 5
What do you understand by ‘Labour Turnover’? What are the effects of Labour Turnover on cost of production? How is it measured?
Answer
Labour turnover is the ratio of the number of persons leaving in a period to the average number employed. It is the change in the composition of the labour force in an organization. It can be measured by relating the engagements and losses in the labour force to the total number employed at the beginning of the period. All the losses must be taken into account regardless of the cause for leaving.
Effects of Labour Turnover
It increases cost of production due to the following reasons:
1. Cost of selecting / replacing workers
2. Cost of training imparted to new workers
3. Production planning cannot be properly executed and this results in production loss
4. Loss due to defectives and wastage
5. Loss due to mishandling of tools, equipments, breakages, etc.
Measurement of Labour Turnover
Method Formula for Measuring Labour Turnover
Separation Rate Method
58
Net Labour Turnover Rate Method or Replacement Method
Labour Flux Rate Method (
) (
)
Question 6
Enumerate the remedial steps to be taken to minimize the labour turnover?
Answer
The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview may be arranged with each outgoing employee to ascertain the reasons of his leaving the organization.
(b) Job analysis and evaluation: to ascertain the requirement of each job.
(c) Organization should make use of a scientific system of recruitment, placement and promotion for employees.
(d) Organization should create healthy atmosphere, providing education, medical and housing facilities for workers.
Committee for handling workers grievances may be made comprising of members from
management and workers
Question 7
Describe briefly, how wages may be calculated under the following systems:
(1) Gantt task and bonus system
(2) Emerson’s efficiency system
(3) Rowan system
(4) Halsey system
(5) Barth system.
Answer
(1.) Gantt task and bonus system : As per this system, a higher standard is set and payment is made at time rate to a worker for production below the standard. If the standards are achieved or exceeded, the payment is made at a higher piece rate. The piece rate fixed also includes an element of bonus to the extent of 20%. Bonus is calculated over the time rate.
(2.) Emerson’s Efficiency System : Though minimum daily wages is guaranteed, efficiency is also rewarded. Standard is set based on the time and motion study. Bonus is payable when efficiency reaches 66-2/3% and increases as the output increases.
59
Under this system wages may be calculated as below:
Performance wages
Below 66 ⁄ % -- Time rate without any bonus
66 ⁄ % - 100% efficiency -- Bonus varies between 1% to 20%*
Above 100% efficiency -- Bonus of 20% of basic wages plus 1% for every 1% increase in efficiency.
*At 100% efficiency the bonus percentage will be 20%.
(3.) Rowan System: As per this system standard time allowance is fixed for the performance of a job and bonus is paid if time is saved.
Wages under Rowan System
Total wages = (Time taken x hourly rate) + (
)
(4.) Halsey System: Under this system a standard time is fixed for each job. If there is no saving on this standard time allowance, the worker is paid only his day rate. The bonus is 50% of the standard time saved.
Wages under Halsey System
Total wages = Time taken x hourly rate + (50% of time saved x hourly rate)
(5.) Barth System:
Earnings under Barth System = Hourly rate ×√
This scheme does not guarantee wages. Under this scheme total wages is higher for less efficient people. As the efficiency increases, the earnings decrease. Therefore this plan is particularly suitable for trainees and beginners and also for unskilled workers.
Question 8
Skilled workers in Rukmani Limited are paid a guaranteed wage rate of Rs. 90 per hour. The standard time per unit for a particular product is 8 hours. M an operator, has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of Rs. 112.50 on the manufacture of that particular product.
What could have been his total earnings and effective hourly rate, had he been put on Halsey Incentive Plan (50%)?
Answer
Let ‘H’ hours be the total time worked by the operator M;
Under Rowan Plan;
Total earnings = Normal wages + Bonus
= (Hours worked x Rate per hour) + (Time saved/Time allowed) x Time taken x Rate per hour
= 112.50 x H = (H x90) + {(8 - H)/8} x H x 90
60
112.50 = 90 + (720 – 90H)/8
22.50 = 90 – 11.25H
11.25H = 67.50
H = 6
Hence, Time taken = 6 hours
Under Halsey (50%) Plan:
Total earnings = Normal wages + Bonus
= (Hours worked x Rate per hour) + (Time saved x Rate per hour x 50%)
= (6 x 90) + (2 x 90 x 50%)
= 540 + 90
= Rs. 630
Effective hourly rate = Rs.630/6 = Rs. 105 per hour
Note: Time saved = Time allowed – Time taken
= 8 – 6 = 2 hours
Question 9
From the following information, calculate labour turnover rate and labour flux rate:
No. of workers as on April 1, 2015: 15400
No. of workers as on March 31, 2016:17300
During the year, 150 workers left while 720 workers were discharged 2770 workers were recruited during the year of these, 700 workers were recruited because of exits and the rest were recruited in accordance with expansion plans.
Answer
Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Separation Method: = (No. of workers left + No. of workers discharged) x 100/Average number of
workers
= (150 + 720) x 100/16350
= 87000/16350
= 5.32%
(ii) Replacement Method: = No. of workers replaced x 100/ Average number of workers
= 700 x 100/ 16350
= 4.28%
61
(iii) New Recruitment: = No. of workers newly recruited x 100/Average number of workers
= 2070 x100/16350
= 12.66%
Flux Method:
= (No. of separations + No. of accessions) x100/Average number of workers
= (870 + 2770) x 100/16350
= 364000/16350
= 22.26%
Note : Average number of workers = (15400 + 17300)/2 = 16350 workers
Question 10
The existing incentive system of Shyama Limited is as under:
Normal working week- 5 days of 8 hours each plus 2 late shifts of 3 hours each
Rate of wages- Day work: Rs.90 per hour; Late shift: Rs.135 per hour
Average output per worker for 46 hours week (including 2 late shift): 210 units
In order to increase output and eliminate overtime, it was decided to switch on to a system of wages payment by results. The following information is obtained:
Time rate (as usual) : Rs. 90 per hour
Basic time allowed for 18 units : 4.5 hours
Piece-work rate : Add 20% to basic piece-rate
You are required to prepare a statement showing hours worked, weekly earnings, number of units produced and labour cost per unit for one worker under the following systems:
(a) Existing time-rate
(b) Straight piece-work
(c) Rowan system
(d) Halsey 50% premium system
Assume that 240 units are produced in a 40-hour week under straight piece work, Rowan system, and Halsey premium system above.
Answer
Working Notes:
1. Earnings under Existing Time Rate: 40 hours @ Rs. 90 + 6 hours @ Rs. 135
= Rs. 3600 + Rs. 810
= Rs. 4410
62
2. Earnings under Piece Rate System:
(i) Wages rate per piece(unit):
Labour cost of 18 units = 4.5 hours x Rs. 90 or 405 + 20% of 405
= 405 + 81 = Rs. 486
Rate per unit = 486/18 = Rs.27
(ii) Earnings for the week = 240 units x Rs. 27
= Rs. 6480
3. Earnings under Rowan Premium System:
= (Time taken x Rate per hour) + (Time saved x Time taken/Time allowed) x Rate per hour
= (40x90) + (20x40/60) x 90
= 3600 + 1200
= Rs. 4800
4. Earnings under Halsey Premium System:
Earnings = Normal wages + bonus
= (Time taken x Rate per hour) + (Time saved x Rate per hour x 50%)
= (40x90) + (20x90x50%)
= 3600 + 900
= Rs. 4500
Table Showing Labour Cost Per Unit
Method of Payment Hours Worked
Weekly (Rs.) Earnings
No. of Units produced
Labour Cost Per Unit (Rs.)
Existing Time Rate
Piece Rate System
Rowan System
Halsey System
46
40
40
40
4410
6480
4800
4500
210
240
240
240
21
27
20
18.75
Question 11
The following information is collected from the personnel department of Richa Limited for the year ending 31st March, 2016:
Number of workers at the beginning of the year : 8000
Number of workers left the company during the year : 500
Number of workers discharged during the year : 100
63
Number of workers replaced due to left and discharged : 700
Additional workers employed for expansion during the year : 1500
You are required to calculate labour turnover rate by using separation method, replacement method and flux method.
Answer
Calculation of Labour Turnover Rate
1. Separation method:
Labour turnover rate =
x 100
=
x 100
= 6.82%
No. of workers separated during the year = workers left + workers discharged
=500 +100 =600
2. Replacement method:
Labour turnover rate =
x 100
=
x 100 =7.95%
3. Flux method:
Labour turnover rate =
x 100
=
x 100 = 14.77%
Working Note:
1. No. of workers at end of the year =8000+700 +1500 -500 -100 = 9600 2. Average no. of workers on roll during the year = (8000+9600)/2 = 8800
Question 12
Using Taylor’s differential piece rate system, find the earnings of A from the following particulars:
Standard time per piece
Normal rate for a 8 hours day
A produced
15 minutes
Rs. 450
37 units in the day
Answer
Standard output per day = 8x60/15 = 32 units
Actual output of ‘A’ = 37 units
Efficiency percentage = 37 x100/32 =115.625
64
Under Taylor’s differential piece rate method higher rate is based on 125% of the normal day rate and an incentive of 50% of the day rate.
Hence, earnings of A = Rs.450 x 125% + 50% Rs.450 = Rs.562.50 + Rs.225 = Rs. 787.50
Question 13
The time allowed to job J-101 is 250 hours. The job has been completed by Gyani in 130 hours, Jeetu in 180 hours and Makku in 220 hours. The bonus scheme applicable to the job is as follows:
Percentage of time saved to time allowed Bonus
Saving up to 20%
From 21% to 40%
From 41% to 60%
From 61% to 100%
10% of time saved
15% of time saved
20% of time saved
25% of time saved
The normal rate of wages is Rs.40 per hour. Calculate the total earnings of each worker and also the effective hourly rate of earnings.
Answer
Statement of total earnings and effective hourly rate of earnings
Particulars Gyani Jeetu Makku
(i) Standard time of Job (hours)
(ii) Time taken on the Job (hours)
250 hours
130 hours
250 hours
180 hours
250 hours
220 hours
(iii) Time saved(i - ii)
Percentage of time saved to time allowed (iii/i)
120 hours
48%
70 hours
28%
30 hours
12%
(iv) Bonus hours (refer to W. N. 1.) 16.5 8 3
(v) Total hours to be paid(ii +iv) 146.5 188 223
(vi) Wages rate per hour Rs.40 Rs.40 Rs.40
(vii) Total earnings(v x vi) Rs.5860 Rs.7520 Rs.8920
Effective rate per hour (vii/ii) Rs.45.08 Rs.41.78 Rs.40.55
Working Notes
1. Bonus hours as percentage of time saved: Gyani: 50 hours x 10% + 50 hours x 15% + 20 hours x 20%
65
= 5 + 7.5 + 4 = 16.5 hours
Jeetu : 50 hours x 10% + 20 hours x 15%
= 5 + 3 = 8 hours
Makku: 30 hours x 10% = 3 hours
Question 14
You are given the following information of a worker:
Worker’s name
Ticket No.
Work started
Work finished
Work allotted
Work done and approved
Time allowed & taken
Wage rate
Worker Dholu worked 9 hours a day
Dholu
101
01.04.2016
05.04.2016
Production of 4320 units
5400 units
8 hours in a day
Rs. 75 per hour
You are required to calculate the remuneration of the worker on the following basis:
(i) Halsey 50% Premium Plan (ii) Rowan Premium Plan
Answer
No. of days work done: 01.04.2016 to 05.04.2016 = 5 days
Standard time:
Standard output of 4320 units for 5 day period of 8 hours in each day or 5x8 = 40 hours
Hence, Standard time for actual output of 5400 units = 40 x 5400/4320 = 50 hours
Actual time taken = 5 x 8 = 40 hours
Hourly wage rate = Rs. 75
Time saved = 50 – 40 = 10 hours
(i) Calculation of remuneration under Halsey plan: Normal wages : 40 x Rs.75 = Rs. 3000
Bonus : 10 hours x Rs.75 x 50% = Rs. 375
Total wages = Rs.3375
(ii) Calculation of remuneration under Rowan Plan: Normal wages: 40 x Rs. 75 = Rs. 3000
66
Bonus: 10 x 40 x 75/50 = Rs. 600
Total wages = Rs. 3600
Question 15
Beeru executes a piece of work in 240 hours as against 300 hours allowed to him. His hourly rate is Rs. 40 and he gets a dearness allowance @ Rs. 250 per day of 8 hours worked in addition to his wages. You are required to calculate total wages received by Beeru under the following bonus schemes and state which of the following scheme is more beneficial to Beeru:
(i) Rowan Premium Plan, and (ii) Emerson’s Efficiency Plan.
Answer
Working Notes
1. Actual no. of days of work done = 240/8 = 30 days
2. Time saved = 300 – 240 = 60 hours
3. Efficiency percentage = (300/240)x100 = 125%
(i) Calculation of total wages under Rowan Plan :
Rs.
Normal wages : (240 x 40) 9600
Dearness Allowance :(30 days x Rs.250) 7500
Bonus : (Time saved x Time taken/Time allowed) x wage rate
(60x240/300)x 40 1920
Total wages 19020
(ii) Calculation of total wages under Emerson’s Efficiency Plan:
Rs.
Normal wages : (240 x 40) 9600
Dearness Allowance : (30 days x Rs.250) 7500
Bonus: 20%bonus up to 100% efficiency & 25% bonus for from 101% to 125% efficiency
Hence, total bonus = 45% of normal wages Rs. 9600 4320
Total wages 21420
Beeru has earned more money under Emerson’s Efficiency Plan in comparison of Rowan Plan. Hence, Emerson’s Efficiency Plan is more beneficial.
67
Question 16
Personnel Department of Dhoora Limited had computed labour turnover rates for the year ended 31st March, 2016 as 14%, 8% and 6% under Flux Method, Replacement Method and Separation Method respectively. If the number of workers replaced during the year 2015-16 is 900, find the following:
(i) The number of workers recruited and joined; and
(ii) The number of workers left and discharged.
Answer
Labour Turnover Rate (Replacement method) =
x 100 = 8%
Average No. of workers = 900 x 100/8 = 11250
Labour Turnover Rate (Separation method) =
x 100 = 6%
No. of workers separated x 100 = 6 x 11250
No. of workers separated = 67500/100 = 675
Labour Turnover Rate (Flux method) =
x 100 = 14%
675 + No. of accession = 14 x 11250/100
No. of accession = 1575 – 675 = 900
Hence,
(i) The number of workers recruited and joined = 900
(ii) The number of workers left and discharged = 675
Question 17
‘Under the Rowan Premium System, a less efficient worker can obtain same amount of bonus as a highly efficient worker.’ Discuss with suitable examples.
Answer
Bonus under Rowan System =
x Rate per hour
For example let time allowed for a job is 10 hours and wages rate is Rs. 60 per hour. If time taken by the less efficient worker-A is 6 hours and by the highly efficient worker-B is 4 hours then;
Bonus of worker-A = {(10 - 6) x 6/10} x Rs. 60 = Rs. 144
Bonus of worker-B = {(10 – 4) x 4/10} x Rs. 60 = Rs. 144
68
Question 18
Two workers A and B produce the same product using the same material. Their normal wage rate is also same. A is paid bonus according to Rowan Scheme while B is paid bonus according to Halsey Scheme. The time allowed to make the product is 10 days. A takes 6 days while B takes 8 days to complete the product. Factory overhead rate is Rs. 200 per person-day actually worked. The factory cost of product manufactured by B is Rs. 12000 and effective daily rate of earnings for A is Rs. 560.
You are required to:
(i) Compute the normal rate of wages.
(ii) Compute the cost of material.
(iii) Prepare a statement showing the factory coat of the product as made by two workers.
Answer
(i) Computation of the normal rate of wages:
Let x be the cost of material and y be the normal rate of wages per day.
Time saved by A = 10 – 6 = 4 days and time saved by B = 10 – 8 = 2 days
Total earnings for A = Time taken x effective daily rate of earnings
= 6 days x Rs. 560 = Rs. 3360
Total wages of worker-A under Rowan Scheme
= (Time taken x wage rate) + (Time saved x time taken/ time allowed) x wage rate
= 6y + (4 x6/10)y
= 6y + 2.4y
or 8.4y = 3360
y = 400
Hence, normal rate of wages is Rs. 400
(ii) Computation of the material cost
Factory cost of the product for B = material + labour cost + factory overhead
Material cost = x
Labour cost (under Halsey Scheme)
= (Time taken x wage rate) + (Time saved x wage rate x 50/100)
= (8 x 400) + (2 x 400 x50/100)
= 3200 + 400 = Rs. 3600
Factory overhead @ Rs. 200 per day for 8 days = Rs. 1600
Factory cost = x + 3600 + 1600 = 12000
X = 12000 – 5200 = 6800
Hence, Material cost (x) = Rs. 6800
69
(iii) Statement of factory cost
Particulars Worker-A (Rs.) Worker-B (Rs.)
Material cost
Labour cost
Factory overhead @ Rs. 200 per day
6800
3360
1200
6800
3600
1600
11360 12000
Question 19
A, B and C are three workers working in Goru manufacturing Limited and their output during a particular 40 hours week was 192; 222 and 252 units respectively. The guaranteed rate per hour is Rs. 40 per hour, low piece rate is Rs. 8 per unit, and high piece rate is Rs. 12 per unit. High task is 200 units per week. Compute the total earnings and labour cost per unit under Taylor, Merrick and Gantt Task Bonus Plan.
Answer
(a) Taylor Plan:
High task is 200 units
Worker A = Actual output is 192 units, which is less than the standard. This means he is inefficient and will get 80% of the normal piece rate Rs.12 per unit i.e.@ Rs.9.60 per unit. His wages will be Rs. 9.60 x 192 units = Rs.1843.20.
Worker B = Actual output is 222 units which is more than the standard. This means he is efficient and will get 120% of the normal piece rate Rs.12 ie. Rs.14.40 per unit. His wages will be 14.40 x 222 = Rs. 3196.80.
Worker C = Actual output is 252 units, more than the standard. This means his wages will be = Rs. 14.40 ×252 units = Rs.3628.80
(b) Merrick Plan:
Worker A = High task is 200 units, actual output is 192, this means that the efficiency level is 96%. As per Merrick Plan, wages of A will be 110% of normal piece rate which is Rs.13.20 per unit = Rs. 13.20 ×192 units = Rs. 2534.40
Worker B= High task is 200 units, actual output is 222 units, efficiency level is 111%. Y will be entitled for wages @ 120% of normal piece rate i.e. @ Rs.14.40 per unit. His wages will be, Rs.14.40 × 222 units = Rs.3196.80
Worker C = High task is 200 units, actual output is 252 units, efficiency level is 126%. C will get at higher piece rate @ Rs.14.40per unit. His wages will be Rs.14.40×252 units = Rs.3628.80
70
(c) Gantt Task and Bonus Plan:
Worker A = Rs.40× 40 hours = Rs.1600 [A will get guaranteed time rate as his output is below the high task]
Worker B = 12 ×222 units = Rs.2664 [High piece rate as output is above standard]
Worker C= 12 ×252 units = Rs.3024 [High piece rate as output is above standard]
Question 20
Calculate the total earnings and effective rate of earnings per hour of three workers under Rowan System and Halsey System from the following particulars. The standard time fixed for producing 100 units is 50 hours. The rate of wages is Rs.60 per hour. The actual time taken by three are as follows:-
A 45 hours
B 40 hours
C 30 hours.
Answer
Computation of Total Earnings of workers under Halsey Plan
Earnings under Halsey Plan = Hours worked × Rate per hour + (Time saved × Rate per hour x 50)
Worker Earnings(E) Effective Rate (Ef. R)
A E = (45 x 60) +(50-45) x 60x50/100 =Rs.2850 Ef. R =2850/45 = Rs.63.33
B E = (40 x60) + (50-40) x60 x 50/100 =Rs.2700 Ef. R =2700/40 = Rs.67.50
C E = (30 x 60) + (50-30) x60 x50/100 = Rs.2400 Ef. R =2400/30 =Rs.80
Computation of Total Earnings of workers under Rowan Plan
Earnings under Rowan Plan = Hours worked × Rate per hour + (Time allowed x Hours worked/ Time saved) x Rate per hour
Worker Earnings (E) Ef. R
A E= (45 x 60) + [50-45 / 50] 45 x 6 0 = 2700 + 270 = Rs.2970 Ef. R = Rs.2970/45
= Rs.66
B E = (40 x 60) + [50-40 / 50] 40 x 60 = 2400 +480 = Rs.2880 Ef. R =Rs.2880/40
= Rs.72
C E = (30 x 60) + [50-30 / 50] 30 x 60 = 1800 + 720 = Rs.2520 Ef. R =Rs.2520/30
= Rs.84
Question 21
A workman takes 20 hours to complete a job on daily wages and 14 hours on a scheme of payment by results. His wage rate is Rs. 45 per hour. The material cost of the product is Rs.
71
750 and factory overheads are recovered at 150% of the total direct wages. Calculate the factory cost of the product under following methods:-
(a) Time rate system (b) Halsey Plan (c) Rowan Plan.
Answer
Computation of factory cost under three systems
Time Rate Halsey Rowan System (Rs.) Plan(Rs.) Plan (Rs.)
(i) Material 750 750 750
(ii) Labour (working notes) 900 765 819
(iii) Overheads @ 150% of Labour cost 1350 1148 1229
Factory Cost (i+ii+iii) 3000 2663 2798
Working Notes
Calculation of labour cost under different plans
Time Rate Halsey Rowan System (Rs.) Plan(Rs.) Plan (Rs.)
Normal wages 20x45=900 14x45=630 14x45=630
Add : Bonus Nil (20-14) x 45 x 50% (20-14) x 14 x 45/20
_____ =135 =189
Labour cost 900 765 819
Question 22
A worker under the Halsey Premium Plan of remuneration has a wage rate of Rs. 2880 per week of 48 hours, plus a cost of living bonus of Rs.25 per hour worked. He is given 15 hours task to perform, which he performs in 10 hours, he is allowed 50% of the time saved as premium bonus. What would be his earnings under Halsey Plan and Rowan Plan?
Answer
Time saved= 15-10=5 hours
Normal wages rate per hour= 2880/48=Rs.60 per hour
Computation of earnings of worker under Halsey Plan:
Earnings under Halsey Plan = Normal wages+ Bonus
(Hours worked × Rate per hour)+ (50% × Time Saved × Rate per hour)
= (10 x 60) + 5 x 60x50% = Rs.750
(+) Cost of Living Bonus (10 x 25) = Rs.250
Total earnings under Halsey Plan = Rs.1000
72
Computation of earnings of worker under Rowan Plan:
Earnings under Rowan Plan= Normal wages+ Bonus
= (Hours worked × Rate per hour) + (Time saved x Hours worked/Time allowed) x Rate per hour
= (10x60) + (5 /15) × 10 ×60 = Rs. 800
(+) Cost of Living Bonus (10x25) = Rs. 250
Total earnings under Rowan Plan = Rs. 1050
Question 23
In a factory guaranteed wages at the rate of Rs.72 per hour are paid in a 48 hour week. Time allowed to manufacture one unit of a particular product is 20 minutes. During the week operator-P produced 180 units of the product. Calculate his wages under the following methods:
(a) Time Rate.
(b) Piece Rate with a guaranteed weekly wage.
(c) Halsey premium Bonus.
(d) Rowan Premium Bonus.
Answer
(a) Calculation of wages under Time Rate System
Total earnings = TR = 48 × 72 = Rs.3456
(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate
Time allowed for one unit = 20 minutes
No. of pieces per hour = 60/20 pieces. =3 pieces
Piece Rate = Hourly Rate / No. of pieces per hour
= 72/3=Rs.24
Earnings under Piece Rate = 180 x 24 = Rs.4320
(c) Calculation of wages under Halsey Premium Bonus
Standard time for actual production = 180 x 20 / 60 = 60 hours
Earnings under Halsey Plan = (48 x 72)+(60-48 )x 72x50%
= 3456+432 = Rs.3888
(d) Calculation of wages under Rowan Premium Bonus
Earnings under Rowan Plan = (48 x 72) + (60-48 / 60) x 48 x 72
= 3456 + 691.20
= Rs. 4147.20
73
Question 24
In a manufacturing concern the daily wage rate is Rs.300. The standard output in a 6 day week is 200 units. Bonus structure is payable on a graded scale as below:-
Up to 66
% efficiency : No Bonus
66
% to 82% efficiency : 5% Bonus
83 % to 90% efficiency : 9% Bonus
91 % to 100% efficiency : 20% Bonus
Further increase of 1% for every 1% further rise in efficiency. In a 6 day week A produced 120 units; B-160 units; C-200 units; D-230 units and E-176 units.
Calculate the earnings of these workers.
Answer
A’s efficiency = (120 / 200) x 100 = 60%
A’s Earnings = (6 x 300) = Rs. 1800
B’s efficiency = (160 / 200) x 100 = 80%
B’s Earnings = 1800 + 5% of 1800 = Rs. 1890
C’s efficiency = (200 / 200) x 100 = 100%
C’s Earnings =1800 + 20% of 1800 = Rs. 2160
D’s efficiency = (230 / 200) x 100 = 115%
D’s Earnings = 1800 + 35% of 1800 = Rs. 2430
E’s efficiency = (176 / 200) ×100 = 88%
E’s Earnings = 1800+9% of 1800 = Rs. 1962
Working Note : Normal wages for the week = 6 days x Rs.300 = Rs. 1800
Question 25
Milling section of a factory engages 21 direct workers during the month of April,2016 they were paid for 4,000 attendance hours at an average rate of Rs. 45 per hour. In addition they also worked for 400 overtime hours at double pay. The overtime was necessitated by abnormal circumstances in April, 2016. For the purpose of reckoning labour 30% for fringe benefits is to be added to gross wages.
From the following particulars:
(a) Work out the total labour cost and
(b) Allocate it to different cost elements etc.
i) Hours booked to jobs 3,500
ii) Allowed idle time 12½ %
74
iii) There was no incidence of abnormal idle time. Actual idle time was exactly in accordance with standard for the purpose.
Answer
(a) Basic wages (4000 x 45) = Rs.1, 80,000
Payment for Over Time (400 x 90) = Rs. 36,000
= Rs. 2,16,000
(+) 30% towards fringe benefits = Rs. 64,800
Total Labour Cost = Rs. 2,80,800
(b)
i) Time worked on jobs is charged to jobs and treated as direct wages.
Wages (3500 x 45) = Rs.1,57,500
(+) 30% Fringe benefits = Rs. 47,250
Rs.2,04,750
ii) Wages for idle time is included in indirect wages & included in fixed overheads:
Wages for idle time 4000 x 12.5% = 500 hours x 45 = Rs. 22500
(+) 30% towards fringe benefits = Rs. 6750
Total = Rs. 29250
iii) Cost for overtime occurred due to abnormal circumstances and therefore debited to Costing P & L A/c.
Overtime Wages (400 x 90) = Rs.36000
(+) 30% Fringe Benefits = Rs.10800
Total = Rs.46800
Question 26
In a factory two workmen W-I and W-II produce the same product using the same material. They are paid bonus according to Rowan System. The time allotted to the product is 40 hours. W-I takes 25 hours and W-II takes 30 hours to finish the product. The factory cost of the product for W-I is Rs. 7750 and for W-II Rs.8200. The factory overhead rate is Rs.40 per man-hour. Find the normal rate of wages and the cost of materials used for the product.
Answer
Let ‘M’ be the material cost and ‘R’ be the rate of wage per hour.
W-I — Earnings = (25 x R) + [(40-25) / 40] x 25R
= 25R + 9.375 R = 34.375 R
75
W-II — Earnings = (30 x R) + [(40-30) / 40] x 30R
= 30R + 7.5 R = 37.5 R
Factory cost= Material cost (M)+ Labour cost+ Factory overheads.
W-I = M + 34.375 R + 1000 = 7750
W-II = M + 37.5 R + 1200 = 8200
M + 34.375 R = 6750 .... (i)
M + 37.500 R = 7000 .... (ii)
Solving (i) & (ii) we get,
3.125 R = 250
R = 80
Normal rate of wage = Rs.80 per hour
M + 37.5 R + 1200 = 8200
M + 3000 + 1200 = 8200
M = 4000
Material cost = Rs.4000
Working Note
Factory overheads in case of W-I : 25 x 40 = Rs. 1000 and W-II 30 x 40=Rs. 1200
Question 27
Two workmen, Vikram and Viram, produce the same product using the same material. Their normal wage rate is also the same. Vikram is paid bonus according to the Rowan System, while Viram is paid bonus according to Halsey System. The time allowed to make the product is 40 hours. Vikram takes 24 hours while Viram takes 32 hours to complete the product. The factory overhead rate is 50% of direct labour cost. The factory cost for the product for Vikram is Rs.18200 and for Viram it is Rs. 18470.
You are required:-to
(a) Find the normal rate of wages;
(b) Find the cost of materials;
(c) Prepare a statement comparing the factory cost of the products as made by the two workmen.
Answer
Let ‘R’ be the wage rate and ‘M’ be the material cost.
Earnings of Vikram = 24 R + [(40-24) / 40] x [24R]
= 24R + 9.6R = 33.6R
Factory overhead= 50% of 33.6R= 16.8R
76
Material + Wages + Factory Overheads = Factory Cost.
M + 33.6R + 16.8R = 18200
⇒ M + 50.4 R = 18200 → (i)
Earnings of Viram = 32 R + 50% of (40-32) x R
= 32 R + 4 R
= 36 R
Factory overhead= 50% of 36R= 18R
Material + Wages + Factory Overheads = Factory Cost.
M + 36R + 18R = 18470
⇒ M + 54 R = 18470 → (ii)
By subtracting equation (i) & (ii):
M + 54 R = 18470 (ii)
M + 50.4R = 18200(i)
- - -
3.6R = 270
R = 75
Substitute the value of ‘R’ in Equation (ii), we get
M + 54 R = 18470
⇒ M + 54x75 = 18470
⇒ M + 4050 = 18470
⇒ M = 14420
Wages of Vikram = (24 x 75) + [(40-24) / 40] x [24 x 75]
= 1800 + 720 = Rs.2520
Wages of Viram = (32 x 75) + 50% (40 – 32) x 75
= 2400 + 300 = Rs.2700
(a) Normal Rate of wages =Rs.75
(b) Material Cost = Rs.14420
(c) Statement comparing the factory cost of the products as made by the two worksmen.
Particulars Vikram Viram
Rs. Rs.
Material 14420 14420
Labour 2520 2700
Overhead(@ 50% of labour) 1260 1350
Factory Cost 18200 18470
77
Question 28
From the particulars given below, calculate the earnings of two workers X and Y under Straight Piece Rate System and Taylor’s Differential Piece Rates System.
Standard time per unit: 2.5 minutes
Normal wages rate: Rs. 48 per hour
Differential rates to be applied: 80% of piece rate when below standard.
120% of piece rate when at, or above, standard.
The workers X and Y have produced on a day of 8 hours as follows:
X – 170 units; Y – 205 units
Answer
Standard Output per Hour = (
) units
Wages Rate per Unit = (
) (
)
Earnings under Straight Piece Rate System
Earnings = (Actual Output x Piece Rate)
Earnings of X = (170 units x Rs. 2) = Rs. 340
Y = (205 units x Rs. 2) = Rs. 410
Earnings under Taylor’s Differential Piece Rate System
1. Standard Output for Actual Hours = 24 x 8 = 192 units
2. Efficiency of Employee =
Efficiency of X = (
) = 88.54%;
Efficiency of Y = (
) = 106.77%;
3. Piece Rate, X = (Rs. 2 x 80%) = Rs. 1.60 [since the efficiency of X is less-than standard
(i.e., 88.54%), he is eligible for only 80% of piece rate].
Y = (Rs. 2 x 120%) = Rs. 2.40 [as the efficiency is above standard
i.e., 106.77%), he is eligible for 120% of piece rate]
4. Earnings = (Actual Output x Piece Rate)
Earnings of X = (170 x 1.60) = Rs. 272
Y = (205 x 2.40) = Rs. 492
78
Question 29
Shekhar Engineering Ltd., are thinking of introducing either Halsey Scheme or Rowan Scheme for the payment of premium bonus to the labour in addition to their normal time rate earnings. The standard time for a particular job A is 10 hours. The wages for this job are paid at Rs. 60 per hour. Calculate the wages and the effective rate of earnings per hour under both the schemes if the job is completed in (a) 8 hours, and (b) 6 hours.
Answer
Particulars If the Job is completed in
(a) 8 hours
(b) 6 hours
Halsey Scheme
Wages: (Hours Worked x Hourly Rate)
(8 hours x Rs. 60) and (6 hours x Rs. 60)
Bonus: (Hours Saved x Hourly Rate x 50%)
(2 hours x Rs. 60 x 50%) and (4 hours x Rs. 60 x 50%)
Total Wages
Effective Hourly Earnings = (Rs. 540 ÷ 8 hours) and (Rs. 480 ÷ 6 hours)
Rs.
480
60
Rs.
360
120
540
67.50
480
80
Rowan Scheme
Wages (as calculated above)
Bonus = (Time saved x Time taken / Time allowed) x Rate per hour
[(2 x 8/10) x 60] and [(4 x 6/10) x 60]
Total Wages
Effective Hourly Earnings = (Rs. 576 ÷ 8 hours) and (Rs. 504 ÷ 6 hours)
Rs.
480
96
Rs.
360
144
576
72
504
84
Question 30
Both direct and indirect labourers of steel furniture department in Tolli Ltd. are entitled to production bonus in accordance with a group incentive scheme, the outlines of which are as follows:
a. For any production in excess of the standard rate fixed at 20000 articles per month (of 25 days), a general incentive of Rs. 15 per article is paid in aggregate. The total amount payable to each separate group is determined on the basis of an assumed percentage of such excess production being contributed by it, viz., at 60% by Direct Labour, at 15% by Inspection Staff, at 15% by Maintenance Staff, and at 10% by Supervisory Staff,
79
b. Moreover, if the excess production is more than 20% above the standard, Direct Labour also gets a special bonus at Rs. 10 per article for all production in excess of 120% of standard,
c. Inspection Staff are penalized at Rs. 30 per article for any rejection by customers in excess of 1% of production, and
d. Maintenance Staff are also penalized at Rs. 40 per hour of machine breakdown.
From the above particulars for a month, work out the production bonus earned by each group. Other details are, (a) Actual working days = 21, (b) Production = 23000 articles, (c) Rejection by customers = 350 articles, and (d) Machine breakdown = 40 hours.
Answer
a. General Incentive Actual production (in 21 days) 23000 articles
Less : Standard Production [(20000 articles ÷ 25 days) x 21 days] 16800 articles
Excess Production 6200 articles
General Incentive = (6200 articles x Rs. 15 per article) = Rs. 93000. Of this Rs. 93000, the share of:
Rs.
Direct Workers = 60% = 55800
Inspection Staff = 15% = 13950
Maintenance Staff = 15% = 13950
Supervisory Staff = 10% = 9300
b. Special Bonus (to Direct Workers) = [(23000 – 120% of 16800) x 10] = (23000 – 20160) x 10 = 2840 articles x Rs. 10
= Rs. 28400
c. Penalty to Inspection Staff: = (350 articles – 1% of 23000 articles) x Rs. 30
= 350 – 230 = 120 x Rs. 30 = Rs. 3600
d. Penalty to Maintenance Staff:
= 40 hours x Rs. 40 = Rs. 1600
Production Bonus Earned by Each Group
Particulars Direct Labour
Rs.
Supervisory Staff Rs.
Inspection Staff Rs.
Maintenance Staff Rs.
General Incentive
Add : Special Bonus
Less : Penalty
55800
28400
---
13950
---
---
13950
---
(3600)
9300
---
(1600)
Net Bonus 84200 13950 10350 7700
80
Question 31
In Madhu Udyog Ltd., a category of workers is paid an average of Rs. 40 per hour with D. A. of Rs. 3600 p.m. Additional payments are: (a) Contribution to Employees State
Insurance (E.S.I.) 2%; (b) Contribution to Provident Fund (P.F.) 8
% (workers contribute
equal amount to both P.F. and E.S.I.); (c) Overtime according to Statutory Provisions. In addition, the factory maintains a subsidized canteen on which, on an average, Rs. 1865000 per month is spent. 2500 workers make use of the canteen. There are 300 working days of 8 hours each in a year but each worker is entitled to leave with pay for 15 days. Calculate hourly cost of per worker for the company.
Answer
Annual Wage Payments (Rs. in thousands)
Particulars Total Amount Per Worker (Total Amount/2500)
Basic Wage paid:
(300 days x 8 hours x Rs. 40 x 2500 employees)
Dearness Allowance:
(3600 per month x 12 months x 2500 employees)
Employer’s contribution towards:
a. ESI: (2% of Rs. 240000000)
b. PF: (8
% of 240000000)
Canteen Subsidy:(Rs.1865000 x 12 months)
Rs.
240000
108000
4800
20000
22380
Rs.
96
43.2
1.92
8
8.952
395180 158.072
1. Annual working hours per employee = [(300 days – 15 days leave) X 8 hours a day]
= 2280 hours per worker
Annual working hours for 2500 employees = (2280 hours per worker X 2500 workers)
= 5700000 hours
2. Hourly cost of per worker = (Annual Wages of an employee Rs. 158072 ÷ Annual Working hours per worker 2280) = Rs. 69.33
or
= (Rs. 395180000 ÷ 5700000 hours) = Rs. 69.33
81
Question 32
Compute the direct labour cost of job J-105 from the following data.
Time employed in hours
Worker A Worker B
Monday 10 8
Tuesday 9 10
Wednesday 10 11
Thursday 11 10
Friday 6 5
Saturday 6 4
a. Normal working hours on week days are 8 hours and on Saturdays 4 hours.
b. Overtime is paid for at double the normal rates.
c. Normal daily wages: A - Rs. 320 and B - Rs. 360
d. Four hours work on Saturdays is paid at fully day’s wage. Work on Saturday in
excess of 4 hours is treated as overtime and is paid for at 1 2
1 of normal wages up
to a total of 8 hours work and beyond that at double the normal rate.
e. Dearness allowances is to be paid to the total wages including overtime at 50% of wages.
Answer
Classification of Hours Worked into Normal and Overtime
Day Worker
A B
Hours Worked
Normal (hours)
Overtime Hours Worked
Normal (hours)
Overtime
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
10
9
10
11
6
6
8
8
8
8
6
2
1
2
3
-
8
10
11
10
5
4
8
8
8
8
5
-
2
3
2
-
-
Total 52 46 8 + 2 48 45 7
82
1. For four hours work on Saturday, full day’s wage is paid; and 2 hours worked in excess
of normal hours of 4 hours on Saturday, is paid at 1
times.
Calculation of total wages of worker A and worker B
Particulars A
Rs.
B
Rs. Basic Wages (W.N.2)
Add : Overtime Wages (W.N.3)
Add: Dearness Allowance (at 50%)
Therefore, Total Direct Labour Cost of Job J-105 = (3900 + 3983) = Rs. 7883
1840
760
2025
630
2600
1300
2655
1328
3900 3983
1. [46 hours x (Rs. 320 ÷ 8 hours)] and [45 hours x (Rs. 4 ÷ 8 hours)]
2. [8 hours x (Rs. 320 ÷ 8 hours) x 2] + [2 hours x (Rs. 3 ÷ 8 hours) x 1.5]
3. [7 hours x (Rs. 4 ÷ 8 hours) x 2]
Working Notes:
1. Hourly wages rate: For A – 320/8 = Rs. 40 per hour
For B – 360/8 = Rs. 45 per hour
2. Basic wages of A: 46 hours @ 40 = Rs. 1840
Basic wages of B:
45 hours @ 45 = Rs. 2025
3. Overtime wages of A: Double rate:- 8 hours @ 80 = Rs. 640
One & half (1
) Rate:- 2 hours @ 60 = Rs. 120
Rs. 760
Overtime wages of B:
Double rate : 7 hours @ 90 = Rs. 630
Question 33
The following are the particulars of work done by a worker during a certain week.
Time Allowed (hours) Time Taken (hours)
Job No. J-111 25 20
Job No. J-121 30 20
General duties - 8
Total 55 48
His time rate is Rs. 400 per day of 8 hours with D. A. @ 60% of wages including bonus. Calculate his earnings and labour cost of each job under: (a) Time Rate system (b) Piece Rate system (c) Halsey Premium system and (d) Rowan Premium system.
83
Answer
Wages per hour (Rs. 400 for 8 hours) = Rs. 50
Earnings of a Worker and the Labour Costs of Different Jobs
Particulars Job J-111 (Rs.)
Job J-121 (Rs.)
General (Rs.)
Total (Rs.)
Time Rate System
Wages (Hours Worked X Hourly Wages Rate Rs. 50)
DA @ 60% of wages
Total Earnings
Piece Rate System
Wages [Work Completed (i.e., Number of Standard Hours’ Work Completed) x Piece Rate (i.e., hourly rate)]
DA @ 60% of wages
Total Earnings
Halsey Premium System
Wages [Hours Worked x Hourly wage Rate]
Bonus [(Hours Saved x Hourly Wage and DA Rate) x 50%]
Wages including Bonus
DA @ 60% wages & bonus
Total Earnings
Rowan Premium System
Wages (Hours Worked x Rate )
Bonus
Wages + Bonus
DA @ 60% of Wages & Bonus
Total Earnings
1000
600
1000
600
400
240
2400
1440
1600 1600 640 3840
1250
750
1500
900
400
240
3150
1890
2000 2400 640 5040
1000
125
1000
250
400
-
2400
375
1125
675
1250
750
400
240
2775
1665
1800 2000 640 4440
1000
200
1000
333
400
-
2400
533
1200
720
1333
800
400
240
2933
1760
1920 2133 640 4693
Working Notes:
1. Assumed to be 8 hours (i.e., time allowed)
84
2. Piece rate = Rate per hour Rs. 50
3. Bonus under Halsey system:
[(5 hours x Rs. 50) x 50%]; [(10 hours x Rs. 50) x 50%];nil
For Job J-111 Rs. 125; Job J-121 Rs. 250 ; General - nil
4. Bonus under Rowan system:
5. [(Time Taken ÷ Time Allowed) x Time Saved x Time Rate]
(5 x 20 x 50/25); (10 x 20 x 50/30)
For Job J-111 Rs.200; Job J-121 Rs.333; General – nil
Question 34
Following particulars are given :
Workers engaged – WM and WN
Standard time allowed for Job. – 40 hours to each worker
Actual time taken – 32 hours by WM and 30 hours by WN
Wages rate - same for both
Wages payment system : Halsey 50% plan to WM and Rowan plan to WN,
Factory overhead recovered @ Rs. 120 per hour for time taken in both cases.
Factory cost for each of the worker is Rs. 41600.
You are required to:
(i) calculate the wages rate per hour and cost of material used, and
(ii) prepare the statement showing factory cost for each worker.
Answer
Factory Cost = Direct Material cost +Direct labour cost +works overhead
Let the material cost be ‘x’ and labour rate per hour be ‘y’
Thus , material cost for each of WM & WN = x
Labour cost for WM (under Halsey 50% plan)
= Normal wages +Bonus= 32y + (40-32) x y x
= 32y+4y =36y
Labour cost for WN (under Rowan plan)
= Normal wages : 30y+bonus = 30y + *
+
=> 30y+7.5y=37.5 y
Factory overhead for WM = 32 x 120 = 3840
Factory overhead for WN= 30 x 120 = 3600
Factory Cost :
For WM=x+36y+3840 =41600 or x+36y = 37760
For WN=x+37.5y+3600 =41600 or x+37.5y=38000
85
On Subtracting equation (ii) form (i) -1.5y= - 240
Or y =160
X+36 x 160=37760
Or x = 37760-5760 =32000
Therefore, Material cost (x) = Rs. 32000 and
Wage rate per hour (y) = Rs. 160 per hour.
Statement Showing Factory Cost
Particular In case of
WM (Rs.) WN (Rs.)
Direct Material Cost
Direct Labour Cost
WM : (32 x 160) + (40-32) x 160 x 50% = 5120 + 640
WN : (30 x 160) + (30 x 10/40) x 160 = 4800 + 1200
Factory overheads @ 120/- per hour – WM (32 x 120) :
WN - (30 x 120)
Factory Cost
32000
5760
-
3840
32000
-
6000
3600
41600 41600
Question 35
Calculate the total earnings and effective rate of earnings per hour of the following two workers under Rowan Premium Plan:
Worker A B
Time Allowed 50 hours 50 hours
Time Taken 40 hours 37 hours
Hourly wages rate per hour Rs.30 Rs.30
Answer A B
Normal wages: 40 x Rs. 30 =
Rs. 1200 37 x Rs.30 = Rs. 1110
Bonus *
+
= Rs. 240
Rs. 288.60
Total earnings Rs. 1440 Rs. 1398.60
Effective Hourly Rate
Rs.36
Rs. 37.80
***
86
Question 1
Question 1
Distinguish between fixed and variable overheads.
Answer
Fixed overhead expenses do not vary with the volume of production within certain limits. In other words, the amount of fixed overhead tends to remain constant for volumes of production within the installed capacity of plant. For example, rent of office, salary of works manger, etc.
Variable overhead cost varies in direct proportion to the volume of production. It increases or decreases in direct relation to any increase or decrease in output.
Question 2
Discuss the difference between allocation and apportionment of overhead.
Answer
The following are the differences between allocation and apportionment:
1. Allocation costs are directly allocated to cost centre. Overhead which cannot be directly allocated are apportioned on some suitable basis.
2. Allocation allots whole amount of cost to cost centre or cost unit where as apportionment allots part of cost to cost centre or cost unit.
3. No basis required for allocation. Apportionment is made on the basis of area, assets value, number of workers etc.
Question 3
What do you mean by re-distribution of service department overheads? Briefly explain the methods of re-distribution.
Answer
Normally products do not pass through service departments, but service departments do benefit the manufacturing of products. Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution.
4
Direct Expenses and Overheads
87
Methods of Re-apportionment or Re-distribution
At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department.
Following are the methods of re-distribution of service department costs to production departments:
(i) Direct distribution method : Under this method, the cost of service department are directly apportioned to production departments, without taking into consideration any service from one service departments to another service department.
(ii) Step method : In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.
(iii) Reciprocal service method : This method gives cognizance to the fact that where there are two or more service departments, they may render service to each other and therefore these inter-departmental services are to be given due weight in distributing the expenses of service departments. There are three methods available for dealing with inter service department transfer:
(a) Simultaneous equation method : Under this method, the true cost of service departments are ascertained first with the help of simultaneous equations. These are then distributed among the production departments on the basis of given percentages.
(b) Repeated distribution method : According to this method service department costs are apportioned over other departments, production as well as service according to the agreed percentages and this process is repeated until the total costs of the service departments are exhausted or the figures become to small to be considered for further apportionment.
(c) Trial and error method : In this method the cost of one service department is apportioned to another service department. The cost of another service department plus the share received from the first service department is again apportioned to first service department and this process is continued until the balancing figure becomes nil.
88
Question 4
Explain the treatment of over and under absorption of Overheads in Cost accounting.
Answer
Treatment of over and under absorption of overheads are:
(i) Writing off to costing P&L A/c : Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate : Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.
(iii) Carrying of overheads : The balance of under/over-absorbed overheads at the end of the year is transferred to an overhead reserve or suspense account and is carried forward to the next year account for absorption. This method is preferably applied when the normal business cycle is more than one year and in the case of new projects and schemes when the output is low in the initial stages of production and cannot bear the entire share of overhead.
Question 5
Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution expenses.
Answer
Selling expenses: Expenses incurred for the purpose of promoting, marketing and sales of different products.
Distribution expenses: Expenses relating to delivery and dispatch of goods/products to customers.
Accounting treatment for selling and distribution expenses.
Selling and distribution expenses are usually collected under separate cost account numbers.
These expenses may be recovered by using any one of following method of recovery.
1. Percentage on cost of production / cost of goods sold.
2. Percentage on selling price.
3. Rate per unit sold.
Question 6
Explain briefly the functional classification categories of overheads.
89
Answer
Functional Classification of Overheads:
Overheads can be divided in the following categories on functional basis:
(a) Manufacturing/production/factory overheads : Manufacturing overheads includes all indirect costs (indirect material, indirect labour and indirect expenses) incurred for operation of manufacturing or production division in a factory. It is also known as factory overheads, works overheads, factory cost or works cost etc.
(b) Administration overheads : It is the sum of those costs of general management, secretarial, accounting and administrative services, which cannot be directly related to the production, marketing, research or development functions of the enterprise. Administration overheads include the cost of formulating the policy, directing the organization and controlling the operations of an undertaking which is not related directly to production, selling, distribution, research or development activity or function.
(c) Selling and Distribution overheads : Selling overheads is the cost of seeking to create and stimulate demand and of securing orders. It comprises the cost to products of distributors for soliciting and recurring orders for the articles or commodities dealt in and of efforts to find and retain customers. Distribution overhead is the expenditure incurred in the process which begins with making the packed product available for dispatch and ends with the making the reconditioned returned empty package, if any, available for re-use. It includes expenditure incurred in transporting articles to central or local storage. It also comprises expenditure incurred in moving articles to and from prospective customer as in the case of goods on sale or return basis.
(d) Research and development overheads : Research overhead is incurred for the new product, new process of manufacturing any product. The development overhead is incurred for putting research result on commercial basis.
Question 7
What do you understand by direct expenses? Give some examples of direct expenses.
Answer
Direct expenses are those expenses which are directly chargeable to a job account. Direct expenses may be defined as those expenses which are easily identifiable and attributable to the individual units or jobs. All expenses other than the direct material or direct labour which are incurred for a particular product or process are termed as direct expenses. Expenses which can be identified with a territory, a customer or product can be considered as direct expenses. Expenses in relation to a department may be direct but are indirect in relation to the product.
90
Direct expenses are defined as “costs, other than materials or wages, which are incurred for a specific product or salable service.”
Some examples of Direct Expenses are as under:
(i) Royalties if it is charged as a rate per unit.
(ii) Hire charges of plant if used for a specific job.
(iii) Sub-contract or outside work, if jobs are sent out for special processing.
(iv) Salesman’s commission if it is based on the value of units sold.
(v) Freight, if the goods are handled by an outside carrier whose charges can be related to individual units.
(vi) Travelling, hotel and other incidental expenses incurred on a particular contract.
(vii) Cost of making a design, pattern for a specific job.
(viii) Cost of any special process not forming part of the normal manufacture like water proofing for canvas cloth.
Question 8
What do you understand by semi-variable overhead costs? Listed the methods of segregating semi-variable overhead costs into fixed and variable costs.
Answer
Semi-variable Overhead Costs
These overhead costs are partly fixed and partly variable. They are known as semi-variable overheads because they contain both fixed and variable element. Semi-variable overheads do not fluctuate in direct proportion to volume. They are also called Step Costs. It may remain fixed within a certain activity level, but once that level is exceeded, they vary without having direct relationship with volume changes. Examples are depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc.
Methods of segregating semi-variable costs into fixed and variable costs:
(i) Graphical presentation method
(ii) Least square method
(iii) High and low points method
(iv) Analytical method
(v) Comparison by period or level of activity method
91
Question 9
Arti Limited produces two products P-I and P-II. The following information is furnished:
Particulars Product P-I Product P-II
Opening Stock (Tonnes)
Sales (Tonnes)
Closing Stock (Tonnes)
Machine Hours Utilised (Hours)
Design Charges (Rs.)
Software development charges (Rs.)
25000
415000
32000
10000
1080000
1650000
21000
310000
28000
6000
650000
900000
Royalty paid on units produced @ Rs. 15 per tonne produced, for both the products. Wages paid to machine operators @ Rs. 75 per machine hour. Hire charges of equipment used in manufacturing process of product P-II only Rs. 510000.
You are required to calculate the direct expenses.
Answer
Computation of Direct Expenses
Particulars Product P-I Product P-II
Sales (Tonnes)
Add : Closing Stock (Tonnes)
Less : Opening Stock (Tonnes)
Production (Tonnes)
Royalty paid on production @ Rs. 15 per tonne
Design Charges
Software development charges
Hire charges of equipment
32000
415000
28000
310000
447000
25000
338000
21000
422000 317000
Rs.
6330000
1080000
1650000
-
Rs.
4755000
650000
900000
510000
Direct Expenses 9060000 6815000
Note : Machine Operators wages will be included in direct wages.
92
Question 10
The following information relates to the activities of a production department of Pooja offsets Limited for the month of April, 2016:
Raw Material Consumed Rs. 750000
Direct Wages Rs. 336000
Direct Expenses Rs. 21000
Production Overheads Rs. 420000
Direct Labour hours 10500 hours
Hours of machinery operation 2000 hours
On one order carried out in the department during April, 2016 the relevant data were:
Material used Rs. 15000; Direct wages Rs. 12500; Labour hours worked 163 hours; and Machine hours 51 hours.
You are required to prepare a statement showing factory cost of the order by five commonly used methods of absorption of factory overheads.
Answer
Statement Showing Factory Cost of the Order
Particulars % on Direct
Material Method
(Rs.)
% on Direct Labour
Method (Rs.)
% on Prime Cost
Method (Rs.)
Direct Labour
Hour Rate Method
(Rs.)
Machine Hour Rate
Method (Rs.)
Raw Material
Direct Wages
Prime Cost
Factory Overheads
Factory Cost
15000
12500
15000
12500
15000
12500
15000
12500
15000
12500
27500
8400
27500
15625
27500
10434
27500
6530
27500
10710
35900 43125 37934 34020 38210
Working Notes: Calculation of Chargeable Overheads:
1. % of production overhead on Direct Material = 100 x 750000
420000= 56%
Chargeable overheads to order = 15000 x 56% = Rs. 8400
2. % of production overhead on Direct Labour Cost = 100 x 336000
420000 = 125%
93
Chargeable overhead to the order = 12500 x 125% = Rs. 15625
3. % of production overhead on Prime Cost
= 100 x 21000) 336000 (750000
420000
= 100 x 1107000
420000 = 37.94%
Chargeable overhead to the order = 27500 x 37.94% = Rs. 10434
4. Direct Labour Hour Rate = hours 10500
420000 Rs. = Rs. 40 per labour hour
Chargeable overhead to the order = 163 hours x Rs. 40 = Rs. 6520
5. Machine Hour Rate = hours 2000
420000 Rs. = Rs. 210 per machine hour
Chargeable overhead to the order = 51 x Rs. 210 = Rs. 10710
Question 11
In Gunnu Limited the factory overheads are charged on a fixed percentage basis on direct wages and administrative overheads are calculated on the basis of percentage of factory cost. Find the rates of factory overheads and administrative overheads by using the following information (Assume there are no selling expenses):
Job – 121 Job – 141
(Rs.) (Rs.)
Direct Material 25000 28000
Direct Wages 30000 45000
Selling Price 96250 126060
Percentage of Profit on Cost 25% 20%
Answer
Let ‘x’ and ‘y’ be the % of factory overheads on direct wages and administrative overheads on factory cost respectively.
Particulars Job – 121 (Rs.) Job – 141 (Rs.)
Direct Material
Direct Wages
Prime Cost
Factory Overheads @ x% on
25000
30000
28000
45000
55000
300 x
73000
450x
94
Direct Wages
Factory Cost
Administrative Overheads @ y% on factory cost
Total Cost
100
x x 30000
100
x x 28000
55000 + 300x
550y + 3xy
73000 + 450x
730 y + 4.5xy
55000 + 300x + 3xy + 550y
73000 + 450x + 4.5xy + 730y
Actual total cost 96250 x 125
100 = 77000 126060 x
120
100 = 105050
So, 55000 + 300x + 3xy + 550y = 77000
Or 300x + 3xy + 550y = 22000 ------ (i)
73000 + 450x + 4.5xy + 730y = 105050
450x + 4.5xy + 730y = 32050 ------- (ii)
Equation (i) multiply by 1.5 and subtract from Equation (ii)
Or 450x + 4.5xy + 730y = 32050 ------- (ii)
450x ± 4.5xy ± 825y =33000 ------- (iii)
- 95y = - 950
Therefore, y = 95-
-950= 10
Substituting the value of y in Equation (i)
300x + 10 x 3x + 550 x 10 = 22000
Or 300x + 30x = 22000 – 5500
Or 330x = 16500
Or x = 330
16500= 50
Hence, The percentage of factory overheads on direct wages = 50%,
The percentage of administrative overhead on Factory Cost = 10%
Question 12
Following information relates to a particular production department of Kachari Limited:
Production Level (Units) Production overheads (Rs.) (Both Fixed and Variable)
5000 400000
95
11000 580000
16000 730000
You are required to calculate:
(i) Variable Overhead per unit.
(ii) Total Variable Overheads at the level of production of 16000 units.
(iii) Fixed Overheads.
(iv) Total production overheads at the level of production of 20000 units.
Answer
(i) Variable Overheads per unit = output levelLow - output level High
overhead levelLow - overhead level High
= 5000 - 16000
400000 - 730000
= 11000
330000 = Rs. 30 per unit
(ii) Total Variable Overhead for the level of 16000 units = 16000 X 30 = Rs. 480000
(iii) Fixed Overheads = Total Overheads at a particular level – Total Variable Overhead at that level
= Rs. 730000 - Rs. 480000 = Rs. 250000
(iv) Total Overheads at the level of 20000 units:
Rs.
Variable Overheads (20000 x 30) = 600000
Add : Fixed Overhead 250000
Total Overheads at 20000 units 850000
Question 13
Guddu Limited produces a single product and has adopted a policy to recover the production overheads of the factory by adopting a single blanket rate based on machine hours. The budgeted production overheads of the factory are Rs.1824000 and budgeted machine hours are 96000.
For the six months ending 30th September, 2015, following information extracted from the books:
Actual production overheads
Amount included in the production overheads:
Paid to workers as per court’s order
Rs.
1225000
155000
96
Expenses of previous year booked in current year
Paid to workers for strike period under an award
20000
45000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods
Works-in-progress
(60% complete in every respect)
Sale:
Finished goods
42800 units
16000 units
32000 units
The actual machine hours worked during the period were 46000 hours. It is revealed from the analysis of information that 30% of the under-absorption due to defective production planning and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
(ii) to show the accounting treatment of under-absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.
Answer
(i) Amount of under absorption of production overheads during the period of first six months ending 30th Sept. 2015:
Amount (Rs.)
Total production overheads actually incurred during the period
Less : Amount paid to worker as per Court’s order
Expenses of previous year booked
Wages paid for the strike period
155000
20000
45000
1225000
220000
1005000
Less : Production overheads absorbed: 46000 hours @ Rs. 19 per hour
Amount of under absorbed production overheads
874000
131000
97
Budgeted Machine hour rate = hours 96000
1824000 Rs.= Rs. 19 per hour
(ii) Accounting treatment of under absorbed production overheads:
As, 30% of the under absorbed overheads were due to defective production planning, this being abnormal, hence should be debited to Profit and Loss Account.
Amount to be debited to Profit and Loss Account = 131000 x 30% = Rs. 39300.
Balance of under absorbed production overheads should be distributed over Work in progress, finished goods and cost of sales by applying supplementary rate.
Amount to be distributed = 131000 – 39300 = Rs. 91700
Supplementary rate = units 52400
91400 Rs.= Rs. 1.75 per unit
(iii) Apportionment of under absorbed production overheads over WIP, finished goods and cost of sales:
Particulars
(1)
Equivalent completed units
(2)
Amount
(Rs.)
(3) = 2 x Rs. 1.75
Work-in-Progress (16000 units x 60%)
Finished goods (42800 – 32000) = 10800 units
Cost of sales (32000 units)
Total
9600
10800
32000
16800
18900
56000
52400 91700
Question 14
The cost of producing 5000 units of a commodity consists of: Rs.
Material 330000
Wages 220000
Overhead Charges (Fixed and Variable) 131000
The company produces 20000 units, sells it at Rs. 165 each and makes profit of Rs. 759000.
Find out the amount of fixed and variable overheads respectively.
98
Answer
Cost of 20000 Units Rs.
Sales Price of 20000 units @ Rs. 165 per unit 3300000
Less: Profit 759000
Total Cost for 20000 units 2541000
Less : Cost of Material & Labour
Material 20000 x 5000
330000= 1320000
Labour 20000 x 5000
220000 = 880000 200000
Total Overhead 341000
Fixed and Variable Overheads
Suppose fixed overhead is Rs. ‘a’ and variable overhead is Rs. ‘b’ per unit.
(i) a + 5000b = Rs. 131000
(ii) a + 20000b = Rs. 341000
Subtracting eq. (i) from eq. (ii) we get
15000b = Rs. 210000
Or b = Rs. 14
Variable overhead = Rs. 14 per unit
and fixed overhead = Rs. 131000 – 70000 (14 x 5000) = Rs. 61000
Question 15
The Kovid Limited has the following account balances and distribution of indirect charges on 31st March, 2016:
Particulars Total Production Depts.
Service Depts.
Machine Shop
Packing General Plant
Stores & Maintenance
Allocated Overheads: Rs. Rs. Rs. Rs. Rs.
Indirect Labour 1465000 400000 300000 200000 565000
Maintenance 502000 180000 70000 102000 150000
99
Material Misc. Supplies 175000 40000 100000 15000 20000
Superintendent’s Salary 400000 400000
Cost of Payroll Salaries 1000000 1000000
Unallocated Overheads:
Power 800000
Rent 1200000
Fuel and Heat 600000
Insurance 100000
Municipal Taxes 300000
Depreciation 5000000
Total 11542000 620000 470000 171700 735000
The following data were compiled by means of a factory survey made in the previous year:
Particulars Floor Space Radiator
Section
No. of Employees
Investments (Rs. in Lakhs)
Horse Power Hours
Machine shop
Packing
General plant
Stores & Maintenance
40000 sq.ft.
16000 sq.ft.
8000 sq.ft.
32000 sq.ft.
120
240
80
160
100
50
15
25
160
50
2.5
37.5
3500
500
----
1000
Total 96000 sq.ft. 600 190 250 5000
Expenses charged to the stores and maintenance departments are to be re-distributed to other departments by the following percentage:
Machine Shop 50% ; Packing 20%; General Plant 30%.
General Plant overheads are to be re-distributed on the basis of number of employees.
100
You are required to:
(i) Prepare an overhead distribution sheet with showing basis of apportionment of each item of expense to departments.
(ii) Show the allocation of Service department overheads to production departments by the method of continued distribution. Carry through 3 cycles show all calculations to the nearest rupee.
Answer
Overhead Distribution Sheet
Items Basis of Distribution
Production Departments
Service Departments
Machine Shop Rs.
Packing Rs.
General Plant
Rs.
Stores & Maintenance
Rs.
Allocated Overheads:
Indirect labour Allocation 400000 300000 200000 565000
Maintenance Allocation 180000 70000 102000 150000
Material Misc. Supplies
Allocation 40000 100000 15000 20000
Superintendent’s salary
Allocation ---- ---- 400000 ----
Cost and Payroll salaries
Allocation ---- ---- 1000000 ----
Unallocated Overheads:
Power Horse power (7:1:0:2)
560000 80000 ---- 160000
Rent Floor space
(5:2:1:4)
500000 200000 100000 400000
Fuel and Heat Radiator
(3:6:2:4)
120000 240000 80000 160000
101
Insurance Investment
(64:20:1:15)
64000 20000 1000 15000
Municipal Taxes Floor space
(5:2:1:4)
125000
50000 25000 100000
Depreciation Investment
(64:20:1:15)
3200000 1000000 50000 750000
Total 5189000 2060000 1973000 2320000
Distribution of Service Overheads:
I. Cycle:
Distribution of General Plant (4:2:1)
+1127429 +563714 -1973000 +281857
Distribution of Stores & Maintenance
(50:20:30)
---
+1300929
---
+520371
---
+780557
2601857
-2601857
II Cycle
Distribution of General Plant (4:2:1)
---
+446033
---
+223016
780557
-780557
---
+111508
Distribution of Stores and Maintenance
(50:20:30)
---
+55754
---
+22302
---
+33452
111508
-111508
III Cycle:
Distribution of General Plant (4:2:1)
---
+19115
---
+9558
33452
-33452
111508
-111508
Final Distribution of Stores & Maintenance (50:20)
----
+3414
----
+1365
----
----
4779
-4779
Grand Total 8141674 3400326 ---- ----
Question 16
A company has three production departments viz. P-1, P-2 & P-3. Besides, it has two service departments, viz. S-1 and S-2. Overheads are allocated as follows:
Production Departments: P-1 Rs. 150000; P-2 Rs. 75000; P-3 Rs. 60000
102
Service Departments: S-1 Rs. 210600; S-2 Rs. 270000
The expenses of service departments are charged as follows:
P-1 P-2 P-3 S-1 S-2
S-1 20% 40% 30% ---- 10%
S-2 40% 20% 20% 20% ----
Apportion the expenses of service departments among production departments by simultaneous equation method.
Answer
Let the total overhead of service department S-1 be X and Total overhead of service department S-2 be Y.
Then we get the equations
X = 210600 + 0.2Y …….. (i)
and Y = 270000 + 0.1X …….. (ii)
On multiplying both the equations by 10 to remove decimal
10X = 2106000 + 2Y ….... (iii)
and 10Y = 2700000 + X …….. (iv)
or 10X – 2Y = 2106000 …… (v)
and - X + 10Y = 2700000 ….. (vi)
on multiplying eq. (v) by 5 50X – 10Y = 10530000 …….. (vii)
Add eq. (vi) and (vii)
Then 49X = 13230000 or X = 270000
Put the value of X in eq. (ii)
Then Y = 270000 + 27000 = 297000
Thus, total overhead of department S-1 is Rs. 270000 and that of S-2 is Rs. 297000 including their charges on each other. On apportionment to production departments, total overhead of the departments will be as follows:
P-1
Rs.
P-2
Rs.
P-3
Rs.
S-1: 90% of Rs. 270000 = Rs. 243000 in 2:4:3
S-2: 80% of Rs. 297000 = Rs. 237600 in 4:2:2
Allocated overheads
Total overheads
54000
118800
150000
108000
59400
75000
81000
59400
60000
322800 242400 200400
103
Question 17
In a factory department a machine costs Rs. 565000. It is expected that it will work for about 20000 hours and its scrap value is estimated at Rs. 25000. The rent of the factory department is Rs. 25000 p.m. and 25% of the area of the department is utilized for conducting the operation of the machine. One foreman & one attendant are employed on a salary of Rs. 20000 & Rs. 6000 p.m. respectively, to work on one more machine of a similar type. The expenses of a particular month incurred in the department are as follows:
Light charges for the department Rs. 7200, having 16 points in all, out of which only 4 points are used at this machine. Total power used for two machines of equal horse-power Rs. 28000; indirect labour for the machine Rs. 3600 and repairs and renewals Rs. 1600.
You are required to find out the Machine Hour Rate for one month when it is expected to work for 40 hours a week.
Answer
Computation of Machine Hour Rate Running Hours: 160
Particulars Amount Amount
Standing Charges:
Rent
4
1 x 25000 Rs.
Lighting
16
1 x 7200 Rs.
Indirect Labour
Foreman’s Salary
2
1 x 20000 Rs.
Attendant’s Salary
Total Standing Charges
Rate per hour (Rs. 24650 ÷ 160)
Machine Expenses : (per hour)
Repairs and Renewals (Rs. 1600 ÷ 160)
Power [Rs. 28000 x (1/160 x ½)]
Depreciation (Rs. 565000 - Rs. 25000) ÷ 20000 hrs.
Machine Hour Rate
Rs.
6250
1800
3600
10000
3000
Rs.
154.0625
10.00
87.50
27.00
24650
278.5625
Working Note : It is assumed that there are 4 weeks in this month. Machine works for 40 hours in a week. Therefore total machine working hours in the month will be 40 x 4 = 160.
104
Question 18
Calculate Machine Hour Rate from the following particulars:
Cost of Machine Rs. 1960000
Expenditure on Installation of Machine Rs. 18000
Estimated Life 15000 hours
Estimated scrap value Rs. 103000
Estimated working hours per annum 2000
Estimated hours required for maintenance etc. 200
Setting-up time 5% to be treated as productive time
Power per hour 20 units @ Rs. 6.85 per unit. No Power is consumed during maintenance and setting-up time.
Cost of repairs and maintenance per annum Rs. 30000
No. of operators (looking after 3 other machines also) 2
Wages per operator per month Rs. 15000
Chemicals required for operating the machine Rs. 2000 (per month)
Overhead chargeable to the machine (per month) Rs. 3000
Insurance premium (per annum) 1% of the cost of machine.
Answer
Computation of Machine Hour Rate
Running Hours : 2000 – 200 = 1800
Items of Expenditure Amount
Rs.
Amount
Rs.
Standing Charges: (per annum)
Overhead Rs.3000 x 12
Insurance (1% of Rs. 1960000)
Wages of operators (2 x 15000 x 12/4)
Total
36000
19600
90000
145600
105
Hourly Rate of Standing Charges (Rs. 145600 ÷ 1800)
Machine Expenses:
Depreciation =
15000
103000 - 18000 1960000
Repairs = 1800
30000
Power = 1800
1710 x 6.85 x 20
Chemicals = 1800
12 x 2000
Machine Hour Rate
80.89
125.00
16.67
130.15
13.33
366.04
Working Notes :
(i) Time required for maintenance of machine is not a part of production time.
(ii) Setting up time (5% of 1800 = 90 hours) is a part of productive time.
(iii) Wages of operators has been treated as indirect labour.
(iv) Power is not consumed during the setting up time, so power will be used during 1710 hours only.
Question 19
Calculate Machine Hour Rate to recover the overhead expenses indicated below relating to a particular machine:
Per annum
Rs.
Rent of the department (Space occupied by the machine being 187500 one-fifth of the department)
Lighting (number of light points in the department 65, out of 29900 which 13 light points used for this machine)
Insurance etc. 18400
Cotton waste, oil etc. 13000
Salary of Foreman (one-fourth of his time is occupied by this 250000 machine and the remainder equally upon the other two machines.)
The cost of machine is Rs. 920000 and it has an estimated scrap value of Rs. 50000. It is assumed from past experience:
(a) That the machine will work 1800 hours per annum;
106
(b) That it will require expenditure of Rs. 115000 for repairs and maintenance during the whole working life;
(c) That it consumes 8 units of power per hour at the cost of Rs. 7.50 per unit; and
(d) That the working life of the machine will be 8 years.
Answer
Computation of Machine Hour Rate for the year
Machine Working Hours 1800
Items of Expenditure Amount (Rs.)
Rate per hour (Rs.)
(a) Standing Charges:
Rent = 5
187500
Lighting = 65
13 x 29900
Foreman’s salary = 4
250000
Cotton waste, Oil etc.
Insurance etc.
Total annual standing charges
Hourly rate for standing charges
(b) Machine Expenses:
Depreciation : 1800 x 8
50000 - 920000
14400
870000
Repairs and Maintenance: 1800) x (8
115000
Power (8 Units @ Rs. 7.50 per unit)
Machine Hour Rate
37500
5980
62500
13000
18400
76.32
60.42
7.99
60.00
137380
204.73
Question 20
Chandu Metals Limited uses 4 identical big and 6 identical small machines. The working hours of each of the machine are 1800 hours per year while the effective working life is taken to be 25000 hours for each big machine and 20000 hours for each small machine. The cost of each big machine is Rs. 1030000 and each small machine is Rs. 320000. Scrap values are Rs. 50000 and Rs. 20000 respectively.
Each big machine occupies 1/8th of the workshop area and small machine 1/12th of the workshop area. Each big machine employs 3 workers and small machine 2 workers. Big
107
Machine consumes 10 units of electric power per hour and small machine 3 units per hour, cost per unit being Rs. 7.50. Repairs and maintenance are estimated at Rs. 240000 and Rs. 55000 for each big and small machine respectively for the whole life. The works manager is paid Rs. 45000 per month. Half of his time is devoted to machine supervision, which is to be divided equally on all 10 machines.
Other expenses incurred during a particular month are as under:
Rent of the workshop Rs. 60000
Lighting (to be divided in the ratio of workers employed.) Rs. 6240
Insurance – Big Machine (each) Rs. 1720
- Small Machine (each) Rs. 540
Taking a period of one month as basis, calculate the machine hour rates for a big and a small machine separately.
Answer
Computation of Machine Hour Rate
Running hour = 1800 ÷ 12 = 150 per month
Items of Expenditure Per Big Machine Per Small Machine
Amount
(Rs.)
Per hour Rate (Rs.)
Amount
Rs.
Per hour Rate (Rs.)
(A) Standing Charges:
Manager’s Salary Rs. 45000 x ½ x 1/10
Rent
Lighting Expenses
Insurance
Total Standing Charges
Standing Charges per hour
(B) Machine Expenses:
Depreciation:
Big
25000
50000 - 1030000
Small
20000
20000 - 320000
2250
7500
780
1720
2250
5000
520
540
12250 8310
81.67
39.20
55.40
15.00
108
Power:
Big (10 x 7.50)
Small (3 x 7.50)
Repairs:
Big
25000
240000
Small
20000
55000
Machine Hour Rate
75
9.60
22.50
2.75
205.47 95.65
Working Notes
(i) Lighting expenses have been divided in the ratio of workers employed. There are in all 24 workers in the factory (12 on the 4 big machines and 12 on the 6 small machines). 3 workers at a time operate the big machine and 2 workers operate
the small machine. So lighting expenses will be charged Rs.
6240 of 24
3 i.e. Rs.
780 to the big machine, and Rs.
6240 of 24
2 i.e. Rs. 520 to the small machine.
(ii) Share in Rent of a big machine = 60000 x 8
1 = Rs. 7500 and
a small machine = 60000 x 12
1 = Rs. 5000
Question 21
The following particulars have been obtained from the cost records of Babali Tubes Ltd. for a machine installed in its factory. The number of effective hours is 1740 per annum. The machine was purchased on the Hire-purchase system and the work of the factory has been mostly carried on with the help of the machine:
Year of Running – Second
Cash down price Rs. 500000
Scrap value Rs. 40000
Cash down payment Rs. 78700
Number of Instalments for remaining Amount 3
Amount of each Instalment Rs. 200000
Annual rate of Interest 20 percent
Working Life of Machine 30000 hours
Other annual fixed overhead charges relating to the machine Rs. 38950
109
Power: 6 units per hour Rs. 6.75 per unit
Repairs and maintenance Rs. 12500 per annum
Calculate the machine hour rate. Interest included in instalment is to be treated as recoverable overhead.
Answer
Computation of Machine Hour Rate
Machine Working Hour: 1740
Particulars Total Amount
Rate per Hour
(a) Standing Charges:
Annual Interest included in hire purchase instalment
Other Overhead charges
Total Standing Charges
Rate per hour (Rs. 99862 ÷ 1740)
(b) Machine Expenses:
Power: 6 x 6.75
Depreciation:
Cost Price of Machine 500000
Less : Scrap Value 40000
Net Value to be written off 460000
Hourly rate of Depreciation (Rs. 460000 ÷ 30000)
Repairs and maintenance 12500/1740
Machine Hour Rate
Rs.
61112
38750
Rs.
57.39
40.50
15.33
7.18
99862
120.40
110
Working Note
Interest (for the second year) included in the Hire Purchase instalment has been calculated as follows:
Analytical Table
Instalment Opening Balance of Cash Price
Rs.
Total Payment
Rs.
Interest
Rs.
Payment of Cash Price
Rs.
Closing Balance of Cash Price
Rs.
Down Payment
I
II
500000
421300
305560
78700
200000
200000
NIL
421300 x 20% = 84260
305560 x 20% = 61112
78700
115740
138888
421300
305560
166672
Question 22
Compute machine hour rate from the following information:
Expenses per annum:
Power Rs. 394800
Light Rs. 28800
Supervision Rs. 324000
Repair & Maintenance Rs. 135650
Rent and Rates Rs. 210000
Insurance Rs. 111800
Depreciation Rs. 235500
There are 12 holidays other than Sundays in a year. Two of these are Saturdays. The factory normally works 8 hours a day except Saturdays which are half days. There are five machines of identical type in the shop and all work at 90% capacity throughout the year and normal breakdown is 10%.
Answer
Computation of Machine-Hour Rate for the year
Machine Working Hours: 8942
Particulars Amount (Rs.) Rate per Hour (Rs.)
(a) Standing Charges:
Rent & Rates
Lighting etc.
210000
28800
111
Supervision
Insurance
Total amount of standing charges
(b) Machine Expenses :
Power (394800/8942)
Depreciation (235500/8942)
Repairs & Maintenance (135650/8942)
Machine Hour Rate
324000
111800
75.44
44.15
26.34
15.17
674600
161.11
Working Notes:
Days
Working days in a year 365
Less : Sundays in a year 52
Holidays in the year (Including 2 Saturdays) 12
301
Less :
50 Saturdays in the year (which are half working days) 50
Number of whole working days 251
Total working hours (251 x 8) 2008
Working hours on 50 Saturdays (50 x 4) 200
Total working hours for one machine 2208
Total working hours for 5 machines (2208 x 5) 11040
Total working hours according to the capacity of machines
100
90 x 11040 = 9936
Less : 10% Provision for wear & tear
100
10 x 9936 = 994
Actual Working Hours 8942
Question 23
In a Factory, the following particulars have been extracted for the quarter ended 31st March, 2016. Compute the departmental overhead rate for each of the production departments, assuming that overheads are recovered as a percentage of direct wages.
Production Depts. Service Depts.
A B C X Y
Direct Wages (Rs.) 300000 450000 600000 150000 300000
Direct Material (Rs.) 150000 300000 300000 225000 225000
112
No. of workers 150 225 225 75 75
Electricity KWH 6000 4500 3000 1500 1500
Assets Value (Rs.) 600000 400000 300000 100000 100000
No. of Light points 20 32 8 12 8
Area Sq. Yards 300 500 100 100 100
The expenses for the period were: Rs.
Power 264000
Lighting 10000
Stores Expenses 8000
Staff Welfare Expenses 18000
Depreciation 270000
Insurance 36000
Canteen Expenses 23400
Rent and Taxes 60500
Apportion the expenses of Service Dept. Y according to direct wages and those of Service Department X in the ratio of 5:3:2 to the production departments.
Answer:
Statement Showing Apportionment of Overheads and calculation of overhead rates
Particulars Total Amount
(Rs.)
Basis
Production Depts. Service Depts.
A
Rs.
B
Rs.
C
Rs.
X
Rs.
Y
Rs.
Power 264000
KHW (4:3:2:1:1) 96000 72000 48000 24000 24000
Lighting
10000 Light Points (5:8:2:3:2)
2500
4000
1000
1500
1000
Stores Expenses
8000
Direct Material (2:4:4:3:3)
1000
2000
2000 1500
1500
Staff Welfare Exp.
18000
No. of workers (2:3:3:1:1)
3600
5400
5400
1800
1800
Depreciation 270000 Assets value (6:4:3:1:1)
108000
72000
54000
18000
18000
Insurance 36000 Assets value (6:4:3:1:1)
14400 9600
7200 2400
2400
Canteen Exp. 23400 No. of workers (2:3:3:1:1)
4680
7020
7020
2340
2340
Rent & Rates 60500 Area (3:5:1:1:1) 16500 27500 5500 5500 5500
113
Wages 450000 Actual ---- ---- ---- 150000 300000
Material 450000 Actual ---- ---- ---- 225000 225000
Distribution of Service
Departments Overheads:
1589900 246680 199520 130120 432040 581540
X 5:3:2 216020 129612 86408 -432040 ----
Y Direct Wages (2:3:4) 129231 193847 258462 -----
-581540
Total Departmental Overheads 591931 522979 474990 ---- ----
Departmental Direct Wages 300000 450000 600000
Overhead Rates as % on Direct Wages
= 100 x Wages Direct tal Departmen
Overhead tal Departmen
197.31% 116.22% 79.17%
Question 24
The Poova Industrial Corporation Ltd. has three producing departments A,B and C, two service Departments D and E. The following figures are extracted from the records of the Corporation:
Rs.
Rent and Rates 500000
General Lighting 60000
Indirect Wages 150000
Material Handling Expenses 240000
Power 150000
Depreciation on Machinery 1000000
Sundries 1000000
The following further details are available:
A B C D E
Floor Space (Sq.Mts.) 2,000 2,500 3,000 2,000 500
Light Points 10 15 20 10 5
Direct Wages (Rs.) 300000 200000 300000 150000 50000
H.P. of machines 60 30 50 10 --
Working hours 62260 40280 40660 -- --
Value of Material (Rs.) 600000 800000 1000000 -- --
114
Value of Assets (Rs.) 1200000 1600000 2000000 100000 100000
Service departments overheads are re-distributed as follows:
A B C D E
D 20% 30% 40% -- 10%
E 40% 20% 30% 10% --
Simultaneous Equation Method can be used for re-distribution of service department overheads.
What is the factory cost of an article if its raw material cost is Rs. 6500, labour cost Rs. 2200 and it passes through Departments A, B and C for 40, 50 & 30 hours respectively.
Answer
Statement showing apportionment of overheads to departments
Particulars Basis Total (Rs.)
A (Rs.) B (Rs.) C (Rs.) D (Rs.) E (Rs.)
Rent & Rates Floor Space (4:5:6:4:1)
500000 100000 125000 150000 100000 25000
Lighting Light Points (2:3:4:2:1)
60000 10000 15000 20000 10000 5000
Indirect wages
Direct wages (6:4:6:3:1)
150000 45000 30000 45000 22500 7500
Material Handing Exp.
Value of material (3:4:5)
240000 60000 80000 100000 ---- ----
Power Horse Power (6:3:5:1)
150000 60000 30000 50000 10000 ----
Depreciation Value of Assets (12:16:20:1:1)
1000000 240000 320000 400000 20000 20000
Sundries Direct wages (6:4:6:3:1)
1000000 300000 200000 300000 150000 50000
Wages Actual 200000 ---- ---- ---- 150000 50000
3300000 815000 800000 1065000 462500 157500
Re-distribution of service departments’ overheads by using simultaneous Equation Method:
Let total overhead cost of Service Department D be Rs.‘d’.
Let total overhead cost of Service Department E be Rs.’e’.
d = 462500 + 10/100 e
e = 157500 + 10/100 d
115
=> 100 d = 46250000 + 10 e
=> 100 d – 10e = 46250000 ……. (1)
=> 100 e = 15750000 + 10 d
-10 d + 100 e = 15750000 …….. (2)
Equ. (1) 100 d – 10e = 46250000
Equ. (2) x 10 -100 d + 1000e = 157500000
990e = 203750000
e = 203750000/990
= 205808
Substituting the value of ‘e’ in Equation (1), we get
100 d – 10 (205808) = 46250000
d = 48308080/100
d = 483081
Particulars A (Rs.) B (Rs.) C (Rs.) D (Rs.) E (Rs.)
Totals 815000 800000 1065000 462500 157500
Costs of D (2:3:4:1) (483081) 96616 144924 193233 (483081) 48308
Costs of E (4:2:3:1) (205808) 82323 41162 61742 20581 (205808)
Total Departmental Overheads
993939 986086 1319975 ---- ----
Working Hours 62260 40280 40660 ---- ----
Rate per hour 15.9643 24.4808 32.4637 ---- ----
Computation of Factory Cost of the Article
Particulars Amount (Rs.)
Material
Labour
Overheads
Dept. A (40 X 15.9643)
Dept. B (50 X 24.4808)
Dept. C (30 X 32.4637)
638.57
1224.04
973.91
6500
2200
2836.52
Factory Cost 11536.52
116
Question 25
Following information is collected from the records of Krishana Ltd. for the quarter ending 31st March, 2016:
Dept.1 Dept.2 Dept.3 Total
Direct labour cost (Rs.) 600000 200000 1000000 1800000
Direct labour hours 20000 5000 40000 65000
Machine hours 2000 6000 2000 10000
Indirect labour (Basis on direct wages) 720000
Overtime penalty (2% of indirect and direct labour for all departments)
Supervision — One supervisor for each department @ Rs. 100000 per supervisor
Dept.1 Dept.2 Dept.3 Total
Floor Space (Sq.ft) 2000 4000 4000 10000
Machinery value (Rs.) 200000 1500000 100000 1800000
Rent, Rates and Taxes (Rs.) 100000
Power usage (KWH) 1000 15000 500 16500
Power cost (Rs.) 330000
Sundries 40% 50% 10% 50000
Depreciation rate 10% of machinery value
Bonus (20% on total direct and indirect wages)
You are required to prepare a departmental factory expenses (to jobs distribution) showing the rate which would computed as per the following methods:-
a. Percentage of Direct Labour Method
b. Labour Hour Method
c. Machine Hour Method
Answer
Statement showing apportionment of overheads to departments and computation of overhead rates under different methods:
Particulars Basis Total Dept. 1 Dept. 2 Dept. 3
Direct wages Actual 1800000 600000 200000 1000000
Indirect wages Direct wages (3:1:5)
720000 240000 80000 400000
Total wages 2520000 840000 280000 1400000
117
Overheads :
Overtime Penalty (2% of total wages)
50400 16800 5600 28000
Indirect wages 720000 240000 80000 400000
Supervision (1:1:1) 300000 100000 100000 100000
Rent, Rates Floor space (1:2:2)
100000 20000 40000 40000
Power KWH (2:30:1) 330000 20000 300000 10000
Sundries (4:5:1) 50000 20000 25000 5000
Depreciation (10% of machinery value)
180000 20000 150000 10000
Bonus (20% of direct & indirect wages)
504000 168000 56000 280000
Departmental Overheads
2234400 604800 756600 873000
Particulars Dept. 1 Dept. 2 Dept. 3
1. % of overheads on direct wages
100 x 600000
604800 =
100.80%
100 x 200000
756600=
378.30%
100 x 1000000
873000 =
87.30%
2. Overhead rate per labour hour
(604800/20000) = Rs. 30.24
(756600/5000) = Rs. 151.32
(873000/40000) = Rs. 218.25
3. Overhead rate per machine hour
(604800/2000) = Rs. 302.40
(756600/6000) = Rs. 126.10
(873000/2000) = Rs. 436.50
Question 26
Anukulam Fans Ltd. is recovered to factory overheads at a predetermined rate of Rs. 15per man-hour. The total factory overhead incurred and the man-hours actually worked were Rs.4150000 and 255000 respectively. Out of the 60000 units produced during a period 45000 units were sold. There were also 10000 uncompleted units which may be reckoned at 50% complete.
118
On analyzing the reasons, it was found that 30% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase overhead costs.
How would unabsorbed overhead be treated in Cost Accounts?
Answer
Rs.
Overheads incurred = 4150000
Overheads absorbed (Actual man-hours x Rate or 255000 x Rs. 15) = 3825000
Under absorption = 325000
Treatment of under absorbed overheads in Cost Accounts:
(i) Out of above under-absorbed overheads Rs. 325000 X 30% = Rs. 97500 were due to defective planning. It to be treated as abnormal and thus be charged to Costing Profit and Loss Account.
(ii) The balance of under-absorbed overheads = 325000 – 97500 = Rs. 227500 were attributable to increase in overhead costs. These to be charged as below on the basis of supplementary overhead absorption rate:
Supplementary Rate = 227500/(45000 + 15000 + 10000 X 50%)
= 65000
227500= Rs. 3.50 per unit
Rs.
(a) To Cost of sales account = 45000 units x Rs. 3.50 = 157500
(b) To Finished stock account (60000 – 45000) = 15000 x Rs. 3.50 = 52500
(c) To Work-in-Progress account (50% of 10000) = 5000 x Rs. 3.50 = 17500 227500
Question 27
During the quarter ending 31st March, 2016, Nakul Ltd. has undertaken two jobs. The data relating to these jobs. The data relating to these jobs are as under:
Job 102 Job 108
Selling price
Profit as percentage on cost
Direct Material
Direct Wages
Rs. 205500
25%
Rs. 65000
Rs. 45000
Rs. 317400
15%
Rs. 102000
Rs. 80000
It is the policy of the company to charge Factory overheads as percentage on direct wages and Selling and Administration overheads as percentage on Factory cost.
119
The company has received a new order for manufacturing of a similar Job No. 121. The estimate of direct materials and direct wages relating to the new order are Rs. 48000 and Rs. 36000 respectively. A profit of 20% on sales is required.
You are required to compute
(i) The rates of Factory overheads and Selling and Administration overheads to be charged.
(ii) The Selling price of the new order.
Answer
Working Notes
1. Computation of total cost of jobs
Total cost of Job 102 when 25% is the profit on cost = 100 x 125
205500 Rs. = Rs. 164400
Total cost of Job 108 when 15% is the profit on cost = 100 x 125
205500 Rs. = Rs. 276000
2. Let Factory overheads be F% of direct wages
Selling & Administrative overheads be A% of factory cost
(i) Computation of rates of factory overheads and selling and administration overheads to be charged.
Jobs Cost Sheet
Particulars Job 102 Job 108
Direct materials
Direct wages
Prime cost
Add: Factory overheads
Factory cost
(Refer to Working note 2)
Add : Selling and Administration Overheads
(Refer to Working note 2)
Total cost
(Rs.)
65000
45000
110000
45000F
(110000 + 45000F)
(110000 + 45000F) A
(110000+45000F)(1+A)
(Rs.)
102000
80000
182000
80000F
(182000 + 80000F)
(182000 + 80000F) A
(182000+80000F)(1+A)
Since the total cost of jobs 102 and 108 are equal to Rs. 164400 and Rs. 276000 respectively, therefore we have the following equations (Refer to working note 1)
(110000 + 45000F) (1 + A) = 164400 (1)
120
(182000 + 80000F) (1 + A) = 276000 (2)
Or 110000 + 45000F + 110000A + 45000FA = 164400
182000 + 80000F + 182000A + 80000FA = 276000
Or 45000F + 110000A + 45000FA = 54400 (3)
80000F + 182000A + 80000FA = 94000 (4)
Equ. (3) multiply by 0.8 and Equ. (4) by 0.45 and later subtract
36000F + 88000A + 36000FA = 43520 (5)
36000F ± 81900A ± 36000FA = 42300 (6)
6100A = 1220
A = 0.2
45000F + 110000 x 0.2 + 45000 x 0.2F = 54400
Or 45000F + 22000 + 9000F = 54400
Or 54000F = 32400
Or F = 0.6
Hence, Factory overheads (F) = 0.6 or 60% of Direct wages and Selling & Adm. Overhead
(A) = 0.2 or 20% of Factory Cost
(ii) Selling price of the new order:
(Rs.)
Direct materials
Direct wages
Prime cost
Factory overheads:60% of Direct wages
Factory cost
Selling & Admn. Overheads: 20% of Factory Cost
Total cost
Profit : @ 20% on sales or 25% on Cost
Selling of the new order
48000
36000
84000
21600
105600
21120
126720
31680
158400
Question 28
Gyani Limited manufactures a single product and absorbs the factory overheads at a pre-determined rate of Rs. 45 per machine hour.
121
At the end of financial year 2015-16, it has been found that actual factory overheads incurred were Rs. 3050000. It included Rs. 260000 on account of ‘written off’ obsolete stores and Rs. 150000 being the wages paid for the strike period under an award.
The production and sales data for the year 2015-16 is as under:
Production:
Finished goods 54000 units
Work-in-progress 10000 units
(60% complete in all respects)
Sales:
Finished goods 42000 units
The actual machine hours worked during the period were 48000. It has been found that one-fourth of the under-absorption of factory overheads was due to lack of production planning and the rest was attributable to normal increase in costs.
You are required to:
(i) Calculate the amount of under-absorption of factory overheads during the year 2015-16; and
(ii) Show the accounting treatment of under-absorption of factory overheads.
(iii) Give journal entry of the above stated accounting treatment.
Answer
(i) Amount of under-absorption of factory overheads during the year 2015-16
(Rs.)
Total factory overheads actually incurred during the year 2015-16
Less : ‘Written off’ obsolete stores Rs. 260000
Wages paid for strike period Rs. 150000
Net factory overheads actually incurred: (A)
Factory overheads absorbed by 48000 machines hours @ Rs. 45 per hour: (B)
Amount of under-absorption of factory overheads: [(A) – (B)]
3050000
410000
2640000
2160000
480000
(ii) Accounting treatment of under absorption of factory overheads
It is given in the statement of the question that one-fourth of the under-absorbed overheads were due to lack of production planning and the rest were attributable to normal increase in costs.
122
(Rs.)
1. One-fourth of under-absorbed overheads were due to lack of production planning. This being abnormal, should be debited to the Profit and Loss A/c (480000 x 1/4)
2. Balance of under-absorbed overheads should be distributed over work-in-progress, finished goods and cost of sales by using supplementary rate (480000 – 120000)
Total under-absorbed overheads
120000
360000
480000
Apportionment of unabsorbed overheads of Rs. 360000 over, work-in-progress, finished goods and cost of sales.
(Rs.)
Work-in-progress (6000 units x Rs. 6)
Finished goods (12000 units x Rs. 6)
Cost of sales (42000 units x Rs. 6)
36000
72000
252000
360000
(iii) Journal entry of accounting treatment
Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Work-in-progress control A/c Dr.
Finished goods control A/c Dr.
Cost of Sales A/c Dr.
Profit & Loss A/c Dr.
To Overhead control A/c
36000
72000
252000
120000
480000
Working note :
1. Calculation of Equivalent Completed Units:
Units
Units sold 42000
Stock of finished goods (54000 – 42000) = 12000
WIP 10000 units x 60% = 6000
60000
123
2. Supplementary overheads absorption rate = units 60000
360000 Rs.= Rs. 6 per unit
Question 29
In a factory, normal working hours of a machine was 216 hours in the month of May, 2016. Out of which maintenance time and setting up time were 12 hours and 20 hours respectively.
The expense data relating to the machine are as under:
(Rs.)
- Cost of the Machine
- Estimated Scrap value
- Repairs and maintenance per annum
- Consumable stores per annum
- Rent of building per annum (The machine under reference occupies 1/6 of the area)
- Supervisor’s salary per month (Common to four machines) Wages of operator per month per machine (Treated as machine expenses)
- General lighting charges per month allocated to the machine
- Life of the machine
- Power 15 units per hour at Rs. 7.50 per unit
1830000
180000
106800
92400
210000
35000
18000
4500
10 years
Power is required for productive purposes only. Set up time, though productive, does not require power. The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) setting up time, and (b) running time, assuming the annual costs are allocated equal on the all months.
Answer
Working Notes
Calculation of effective hours: Hours
Normal working hours in the May, 2016 216
Less: Maintenance time 12
Effective hours for standing charges, depreciation and operators Wages 204
Less: Setting up time 20
Effective hours for power, repairs & maintenance and consumable stores 184
124
Computation of Two-tier Machine Hour Rate for the month of May, 2016
Particulars Total Amount
Rs.
Setting up time rate per hour for 20 setting up hours (Rs.)
Running time rate per hour
for 184 running hours (Rs.)
Standing Charges:
Supervisor’s Salary (35000/4)
General Lighting
Rent of building (210000 x 6
1 x
12
1)
Total Standing Charges
Hourly rate for standing charges (16167/204)
Machine Expenses:
Depreciation 12
1 x
10
180000) - (1830000
= 13750/204
Power (15 x Rs. 7.50)
Repairs & Maintenance : 106800/12 = 8900/184
Consumable Stores: 92400/12 = 7700/184
Operator’s Wages : 18000/204
Machine Hour Rate
8750
4500
2917
79.2484
67.4020
----
----
----
88.2353
79.2484
67.4020
112.50
48.3696
41.8478
88.2353
16167
234.8857 437.6031
Question 30
On April 1, 2016, Shiva Udyog Ltd. has purchased and installed a new machine of Rs. 1570000 to its fleet of 5 existing machines. The new machine has an estimated life of 10 years and is expected to realize Rs. 70000 as scrap at the end of its working life. Other relevant data are as follows:
(i) Budgeted working hours are 2504 based on 8 hours per day for 313 days. This includes 300 hours for plant maintenance and 104 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is Rs. 65000 per annum.
125
(iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of Rs. 400 each time. Assume 52 weeks in whole year.
(iv) Three operators control operation of 6 machines and the average wages per person amounts to Rs. 420 per day plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of Rs. 6.30 per unit. No power is used during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year 2015-16 was Rs. 115000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.
Answer
Computation of Machine hour Rate
Per Annum Per hour
If setting up time is
(unproductive)
Per hour
If setting up time is
(productive)
Running Hours
Standing charges
Operators wages
3 x 420 x 365
Add: Fringe Benefits 15%
Departmental and general overhead
(115000 + 11500)
Total Std. Charging for 6 machines
Std. Charges per Machine 655385/6
Std. Charges per Machine hour 109231/2100; and 109231/2204
Machine expenses
Depreciation (1570000 – 70000)/(10 x 2100)
459900
68985
2100 hrs.
52.01
71.43
2204 hrs.
49.56
528885
126500
655385
109231
126
(1570000 – 70000)/(10 x 2204)
Electricity Power (16 x 6.30) (16 x 6.30 x 2100)/2204
Special chemical solution 400 x 52/2100; and 400 x 52/2204
Maintenance (65000/2100);
(65000/2204)
Machine Hour Rate
100.80
9.90
30.95
265.09
68.06
96.04
9.44
29.49
252.59
Working Notes:
(i) Running hours if setting up time is unproductive = 2504 – 300 – 104 = 2100 hours
(ii) Running hours if setting up time is productive = 2504 – 300 = 2204 or 2100 + 104 = 2204
Question 31
Pooja Limited has three production departments P1, P2 and P3 and two service departments S1 and S2. The following data are extracted from the records of the company for the month of April, 2016:
Rs.
Rent and rates 625000
General lighting 75000
Indirect Wages 187500
Power 250000
Depreciation on machinery 500000
Insurance of machinery 200000
Other Information:
P1 P2 P3 S1 S2
Direct wages (Rs.)
Horse Power of Machines used
Cost of machinery (Rs.)
Floor space (Sq. ft)
Number of light points
Production hours worked
375000
60
3000000
2000
10
5750
250000
30
4000000
2500
15
4150
375000
50
5000000
3000
20
5600
187500
10
250000
2000
10
--
62500
--
250000
500
5
--
127
Expenses of the service departments S1 and S2 are reapportioned as below:
P1 P2 P3 S1 S2
S1
S2
20%
40%
30%
20%
40%
30%
--
10%
10%
--
Required:
(i) Compute overhead absorption rate per production hour of each production department by using simultaneous equation method for redistribution of service department overheads.
(ii) Determine the total cost of product X which is processed for manufacture in department P1, P2 and P3 for 15 hours, 13 hours and 14 hours respectively, given that its direct material cost is Rs. 5650 and direct labour cost is Rs. 4350.
Answer
Primary Distribution Summary
Item of cost Basis of apportionment
Total (Rs.)
P1 (Rs.) P2 (Rs.) P3 (Rs.) S1 (Rs.) S2 (Rs.)
Rent and Rates
General lighting
Indirect wages
Power
Depreciation of machinery
Insurance of machinery
Floor area 4:5:6:4:1
Light points 2:3:4:2:1
Direct wages 6:4:6:3:1
Horse Power of machines used 6:3:5:1
Value of machinery 12:16:20:1:1
Value of machinery 12:16:20:1:1
625000
75000
187500
250000
500000
200000
125000
12500
56250
100000
120000
48000
156250
18750
37500
50000
160000
64000
187500
25000
56250
83330
200000
80000
125000
12500
28125
16670
10000
4000
31250
6250
9375
--
10000
4000
1837500 461750 486500 632080 196295 60875
128
Overheads of service cost centres. Let S1 be the overhead of service cost centre S1 and S2 be the overhead of service cost centre S2.
S1 = 196295 + 0.10 S2
S2 = 60875 + 0.10 S1
Substituting the value of S2 in S1 we get
S1 = 196295 + 0.10 (60875 + 0.10 S1)
S1 = 196295 + 6088 + 0.01 S1
0.99 S1 = 202383
S1 = Rs. 204427
S2 = 60875 + 0.10 x 204427
= Rs. 81318
Secondary Distribution Summary
Particulars Total (Rs.) P1 (Rs.) P2 (Rs.) P3 (Rs.)
Allocated and Apportioned overheads as per primary distribution
S1: 90% of 204427(2:3:4)
S2: 90% of 813218(4:2:3)
1580330
183984
73186
461750
40885
32527
486500
61328
16264
632080
81771
24395
535162 564092 738246
Overhead rate per hour
P1 P2 P3
Total overheads cost
Production hours worked
Rate per hour (Rs.)
Rs. 535162
5750
Rs. 93.07
Rs. 564092
4150
Rs. 135.93
Rs. 738246
5600
Rs. 131.83
129
Cost of Product X
Direct material
Direct Labour
Prime cost
Production on overheads
P1 15 hours x Rs. 93.07 = 1396.05
P2 13 hours x Rs. 135.93 = 1767.09
P3 14 hours x Rs. 131.83 = 1845.62
Factory cost
Rs.
5650
4350
10000
5008.76
15008.76
Question 32
Kovid Ltd. has three production departments viz. A, B and C. Besides, it has two service departments viz.
X and Y. Allocated overheads are follows:
A B C X Y
Allocated overheads (Rs.) 250000 85000 175000 135000 165000
Direct Labour Hours (Hours) 25000 18000 13000 - -
The expenses of service departments are charged as follows:
A B C X Y
Service Department: X 20% 40% 30% - 10%
Y 30% 25% 25% 20% -
You are required to:
(1) Find the total overhead for each production department after apportionment of
service department overheads among them by using simultaneous equation
method.
(2) Calculate the Direct Labour Hour Rate for absorption of overheads for each
production department.
(3) Calculate the overhead to be charged to the Job No. 211 on the basis of following
details:
Production Departments A B C
Hours worked on Job No. 211 25 32 15
130
Answer
Let total overhead of department X be ‘a’ and department Y be ‘b’:
Then, a = 135000 + 0.2b
Or
10a – 2b = 1350000 ……. (i)
b = 165000 + 0.1a
-a + 10b = 1650000 …..(ii)
After solving equation (i) & (ii)
-a + 10b = 1650000 …….. (ii)
50a – 10b = 6750000 ….. (iii)
49a = 8400000
Or a = 171428.6
10 X 171428.6 – 2b = 1350000
Or -2b = 1350000 – 1714286
Or b = 2
364286
Or b = 182143
(1) Departmental overhead after apportionment of service Dept. overheads.
Particulars Production Departments Service Departments
A
Rs.
B
Rs.
C
Rs.
X
Rs.
Y
Rs.
Allocated Overheads
Distribution of Service
Dept. overheads:
X(a) Rs.171428.6 (20:40:30: :10)
Y(b) Rs.182143 (30:25:25:20:-)
Total Departmental Overhead
250000
34285
54643
85000
68572
45536
175000
51429
45536
135000
(-) 171428.6
+36428.6
165000
+17143
(-)182143
338928 199108 271965 NIL NIL
131
(2) Calculation of Direct Labour Hour Rate
Production Department A B C
Total Departmental Overhead (Rs.) 338928 199108 271965
Direct Labour Hours (Hours) 25000 18000 13000
Direct Labour Hour Rate
Hours Labour Direct
Overhead Dept. Rs.13.557; Rs.11.062; Rs.20.920
(3) Calculation of overhead charged to Job No. 211
Rs.
Dept. A: Rs.13.557 x 25 hours = 338.925
Dept. B: Rs.11.062 x 32 hours = 353.984
Dept. C: Rs.20.920 x 15 hour = 313.800
Chargeable overhead to Job No. 211 1006.709
***
132
Question 1
What is activity based costing? State its features.
Answer
Activity based costing is an accounting methodology that assigns costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & services that consume them.
CIMA defines “Activity Based Costing’ as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final products. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.”
The features of activity based costing are as under:
(i) Activity based costing is a two- stage product costing method that first assigns cost to activities and then allocates them to products based on the each product’s consumption of activities.
(ii) The cost pools in two-stage approach now accumulate activity-related costs.
(iii) An activity is any discrete task that an organization undertakes to make or driver a product or service.
(iv) Activity based costing is based on the concept that products consume activities and activities consume resources.
(v) Activity based costing can be used by any organization that wants a better understanding of the costs of the goods and services it provides, including manufacturing , service, and even non-profit organizations.
Question 2
Distinguish between ‘Activity Based Costing’ and ‘Traditional Absorption Costing’.
Answer
S. No. Activity Based Costing Traditional Absorption Costing
1. Overheads are first related to activities or grouped into cost pools
Overheads are first related to departments/ cost centres
5
Activity Based Costing
133
2. All levels of activities in the manufacturing cost hierarchy viz. Unit level, Batch level, Production level and facility level are identified.
Only two types of activities viz. Unit level activities and Facility level activities are identified.
3. This method relates overheads to the casual factor i. e. Driver. Thus, it is more realistic of cost behaviour.
This method relates to cost centres i. e. Locations. It is not realistic of the behaviour of costs.
4. Activity cost driver rates can be used to ascertain cost of products and also cost of other cost objects such as customer segments, distribution channels, etc.
Overheads rates can be used to ascertain cost of products only.
Question 3
State main objectives of activity based costing.
Answer
The main objectives of activity based costing are as under:
1. To improve product costing
2. To identify non-value adding activities in the production process which might be a suitable focus for attention or elimination
3. To provide required information for decision making
4. To reduce the frivolous (non-essential) use of common resources
5. To encourage managers to evaluate the efficiency of internally provided services
6. To calculate the full cost of products for financial reporting purposes and for determining cost-based prices.
Question 4
Discuss the deficiencies of traditional costing systems which lead to the discovery of the activity based costing.
Answer
The following are the deficiencies of traditional costing systems, which lead to the discovery of the activity based costing:
1. The present costing system has developed convenient overhead recovery basis and blanket overhead recovery are acceptable when valuing stocks for financial reporting, but they are inappropriate when used for decision making and typical product strategy decisions. Such decisions have implications over 3-5 years and over this period many fixed costs becomes variable.
134
2. It is easy to determine accurate costs of products or services when a company has only a few products. When companies expand their product offerings and these products use different amount of resources such as supervision, quality control, it is more difficult to determine accurate costs of products. This situation is the main reason why companies use activity based costing.
3. Traditional costing fails to capture cause and effect relationships, if focused on the cost incurred.
4. Traditional costing was confined merely to furnish information at product level. The new manufacturing technology demands the feedback of performance while production is still in progress rather than history.
Therefore, in order to overcome the inadequacies of traditional methods of overhead absorption, activity based costing has been devised.
Question 5
Write the importance of activity based costing.
Answer
The importance of activity based costing is as under:
(i) To link the cost to its casual factor-i.e. the cost driver.
(ii) To identify costs of activities rather than cost centers.
(iii) To ascertain product costs with greater accuracy by relating overheads to activities.
(iv) To overcome the inherent limitations of traditional absorption costing and use of blanket overhead rates.
(v) To assist managers in budgeting and performance measurement.
(vi) To provide the links between the activities, the organizational acts and the resources consumed, and illustrate the differences between resource consumption and resource provision.
(vii) To help in cost control and cost reduction, as well as improved profitability.
(viii) To provide valuable economic information to support a company’s operational improvement and customer satisfaction programs.
Question 6
Briefly explain each of the following categories in activity based costing by giving there examples:
(i) Unit level activities
(ii) Batch level Activities
(iii) Product level activities
(iv) Facility level activities
135
Answer
Types of Activity Examples
Unit level activities: These are activities for which the consumption of resources can be identified with the number of units produced. It is performed each time a unit is produced.
Use of indirect materials
Inspection or testing of every item produced
Indirect consumables
Batch level activities: The costs of some activities are driven by the number of batches of units produced. These are activities related to setting up of a batch or a production run. It is performed each time a batch is processed.
Material ordering
Inspection of products.
Machine set up costs
Product level activities: The cost of some activities are driven by the creation of a new product line and its maintenance.
Designing the product
Producing parts to a certain specifications and keeping technical drawing of products.
Advertisement cost, if it is for individual products
Facility level Activities: It must be carried out regardless of which produced. These are activities necessary for sustaining the manufacturing process and cannot be directly attributed to individual products
Plant Security,
Production Manager’s salary
Maintenance of buildings
Question 7
State the limitations of Activity based costing.
Answer
Limitations or disadvantages of Activity based costing are:
1. Implementing an ABC system requires substantial resources, which is costly to maintain.
2. Activity Based Costing is a complex system which need lot of record for calculations.
3. In small organization, mangers are accustomed to use traditional costing systems to run their operations and traditional costing system are often used in performance evaluations.
4. Activity based costing data can be easily misinterpreted and must be used with care when used in decision making. Managers must identify which costs are really relevant for the decisions at hand.
5. Reports generated by this systems do not conform to generally accepted accounting principles (GAAP).Consequently, an organization involved in activity based costing
136
should have two cost systems – one for internal use and one for preparing external reports.
Question 8
What is a cost driver? State its role in tracing cost to products.
Answer
A cost driver is a variable, which determines the work volume or work load of a particular activity. In other words, in an activity based costing system, the allocation basis that are used for applying costs to services or procedures are called cost drivers. It is a factor that causes a change in the cost of an activity. This is based on the factor that drives the consumption of the activity. In tracing the cost of the activities to products according to products demand for these activities during the production process. This requires calculating cost driver rate for each activity, just as an overhead absorption rate would be calculated in the traditional system.
Activity cost driver rate= Total cost activity/Activity driver
The activity driver rate can be used to cost products, as in traditional absorption costing, but it can also cost other cost objects such as customer/customer segments and distribution channels. The possibility of costing objects other than products is part of the benefit of activity based costing. The activity cost driver rates will be multiplied by the different amounts of each activity that each product/other cost object consumes.
Question 9
What are the benefits of activity based costing over traditional costing techniques?
Answer
Some significant benefits of Activity based costing over traditional costing techniques, are under:
(a) Most accurate data about product cost;
(b) More comprehensive cost information for performance measurement;
(c) Relevant data for management’s decision-making;
(d) More potential for sensitivity analysis;
(e) Providing a model prospect on value-adding organizational transactions and activities.
Question 10
Explain briefly the stages in developing activity based costing.
Answer
The following are the stages in developing activity based costing system:
Step 1. Identify resources:
Resources represent the expenditure of an organization. These are the same costs that are represented in a traditional accounting, activity based costing links these costs to products, customers or services.
137
Step 2. Identify activities:
Activities represent the work performed in an organization. Activity based costing accounts for the costs based on what activities caused them to occur. By determining the actual activities that occur in various departments it is then possible to more accurately relate these costs to customers, products and services.
Step 3. Identify cost objects:
Activity based costing provides profitability by one or more cost object. Cost object profitability is utilized to identify money-losing customers to validate separate divisions or business units. Defining outputs to be reviewed is an important step in a successful activity based costing implement action.
Step 4. Determine resource drivers:
Resource drivers provide the link between the expenditure of an organization and activities performed within the organization.
Step 5. Determine cost (activity) drivers:
Determination of cost drivers completes the last stage of the model. Cost drivers trace or links the cost of performing certain activities to cost objects.
Activity cost driver rate = Total cost of activity (cost pool)/No. of activity cost driver
Step 6. Assign costs to the cost objects:
We can use following formula for assigning costs to the cost objects:-
Costs = Resources consumed x Activity cost driver rate
Question 11
Why are conventional product costing system more likely to distort product costs in highly automated plants? How does Activity based costing system deals with such a situation?
Answer
The conventional product costing system was in vague when companies manufactured narrow range of products, overhead costs were relatively small and distortions arising from inappropriate overhead allocations were not significant. It used volume measures like direct labour hours or machine hours for charging overhead costs to products. In the case of a company using highly automated plant, direct labour is a small fraction of cost when compared with overheads (because of higher amount of depreciation). In case where such a company is multi product, overheads which are large in proportion to direct labour are influenced by number of set up, inspection, number of purchases etc. In these circumstances, the volume based method of recovery of overheads is no longer appropriate and such a measure will report inaccurate product costs. Hence, the traditional system of costing was found to cover cost high volume products and under cost low volume products. Activity based costing system aims at refining the cost system used in automated plants in the following manner:
(i) Activity based costing systems trace more costs as direct costs.
138
(ii) Activity based costing systems create homogeneous cost pools linked to different activities.
(iii) For each activity cost pool, ABC systems seek a cost allocation base that has a cause and-effect relationship with costs in the cost pool.
Question 12
Rukmani Limited uses activity based costing and accumulated overhead costs in the following cost pools:
(i) Shores receiving
(ii) Machine set up
(iii) Training employees
(iv) Designing product
(v) Testing of products
(vi) Material ordering
(vii) Parts management
(viii) Assembly department
(ix) Plant security
(x) Indirect material
You are to find out for each cost pool whether the cost pool would be unit level, batch level, product level or facility level activity.
Answer
Activity cost pool Type of activity
(i) Shores receiving Batch level activity
(ii) Machine set up Batch level activity
(iii) Training employees Facility level activity
(iv) Designing product Product level activity
(v) Testing of products Unit level activity
(vi) Material ordering Batch level activity
(vii) Parts management Product level activity
(viii) Assembly department Unit level activity
(ix) Plant security Facility level activity
(x) Indirect material Unit level activities
Question 13
Sukku Limited manufactures three products X, Y and Z which are similar in nature and are usually produced in production runs of 100 units. The overheads incurred during the year ended 31st March, 2016 are as under:
139
Rs.
Machine Shop expenses 8250000
Assembly Shop expenses 1344000
Setup costs 180000
Material handling costs 540000
Order processing and dispatch costs 413000
Inspection and Quality control costs 72000
The data related to the three products during the period are as under:
X Y Z
Units produced and sold 20000 16000 24000
Machine hours worked 15000 hrs. 24000 hrs. 27000 hrs.
Assembly hours worked (direct labour hours)
24000 hrs. 32000 hrs. NIL
Customers order executed (in numbers) 4500 4600 2700
Number of requisitions raised on the stores 220 180 140
You are required to:
Prepare a statement showing details of overhead costs allocated to each product type using activity based costing.
Answer
Calculation of Cost Driver Rates
Cost Pool Cost (Rs.)
[A]
Cost Driver
[B]
Cost Driver Rate (Rs.) [C] = [A]÷[B]
Machine Shop Expenses 8250000 Machine Hours (66000 hrs.) 125
Assembly Shop Expenses 1344000 Assembly Hours
(56000 hrs.)
24
Setup Cost 180000 No. of Production Runs (600) 300
Material handling Cost 540000 No. of Requisitions Raised on the Stores (540)
1000
Order Processing and Dispatch Cost
413000 No. of Customers Orders Executed (11800)
35
Inspection and Quality Control Cost
72000 No. of Production Runs (600) 120
Total (Rs.) 10799000
Number of Production Run is 600(200+160+240)
140
Statement Showing “Overheads Allocation”
Particulars of Cost Cost Driver X Y Z Total
Machine Shop Expenses
Machine Hours 1875000
(15000 x Rs.125)
3000000
(24000 x Rs.125)
3375000
(27000 x Rs.125)
8250000
Assembly Shop Expenses
Assembly Hours
576000
(24000 x Rs.24)
768000
(32000 x Rs.24)
NIL
1344000
Setup Cost No. of Production Runs
60000
(200 x Rs.300)
48000
(160 x Rs.300)
72000
(240 x Rs.300)
180000
Material handling Cost
No. of Requisitions Raised on the Stores
220000
(220 x Rs.1000)
180000
(180 x Rs.1000)
140000
(140 x Rs.1000)
540000
Order Processing and Dispatch Cost
No. of Customers Orders Executed
157500
(4500 x Rs.35)
161000
(4600 x Rs.35)
94500
(2700 x Rs.35)
413000
Inspection and Quality Control Cost
No. of Production Runs
24000
(200 x Rs.120)
19200
(160 x Rs.120)
28800
(240 x Rs.120)
72000
Overhead (Rs.) 2912500 4176200 3710300 10799000
Question 14
Following is the output and per unit direct cost structure of Pauru Limited of its different products:
Particulars Products
A B C
Output and Sales (Units) 10000 20000 30000
Direct Material
Direct Labour @ Rs. 30 per hour
Rs.
150
90
Rs.
140
120
Rs.
140
150
141
Total Production overheads were Rs. 5460000 which was charged to the output on the basis of direct labour hours. A newly appointed management accountant has suggested that the company should introduce Activity Based Costing System and identify cost drivers and cost pools as follows:
Activity Cost Pool Cost Driver Associated Cost (Rs.)
Stores Receiving
Inspection
Machine Setup
Dispatch
Purchase Requisitions
No. of Production Runs
No. of Setups
Orders Executed
294000
1356000
3600000
210000
The following information is also supplied:
Particulars Product-A Product-B Product-C
No. of Purchase Requisitions
No. of Production Runs
No. of orders Executed
No. of Setups
300
750
180
360
450
1050
270
390
500
1200
300
450
You are required to:
(i) Calculate direct labour rate for absorbing the production overheads.
(ii) Calculate product wise production cost per unit according to above (i).
(iii) Calculate different cost driver rates by using activity based costing
(iv) Ascertain the product wise production cost per unit by using activity based costing system.
Answer
(i) Calculation of Direct Labour Rate:
Direct Labour Hours Required:
For Product A: 10000 x 90/30 = 30000 hours
For Product B: 20000 x 120/30 = 80000 hours
For Product C: 30000 x 150/30 = 150000 hours
Total 260000 hours
Direct Labour Hour Rate = Rs. 5460000/260000 = Rs. 21 per hour
142
(ii) Calculation of Product wise cost on the basis of Direct Labour Hour Rate:
Labour hours required per unit
Direct Material
Direct Labour
Production Overhead @ Rs. 21 per Labour hour
Production Cost per unit
A
90/30 = 3
B
120/30 = 4
C
150/30 = 5
Rs.
150
90
63
Rs.
140
120
84
Rs.
140
150
105
303 344 395
(iii) Calculation of Cost Driver Rates:
Activity Cost Pool
Associated Cost (Rs.)
Cost Driver Cost Driver Rate (Rs.)
Stores Receiving
294000 300+450+500=1250 Requisition
294000/1250=235.20 per Requisition
Inspection 1356000 750+1050+1200=3000 Runs
1356000/3000=452 per run
Machine setup
3600000 360+390+450=1200 Setups
3600000/1200=3000 per setup
Despatch 210000 180+270+300=750 Orders
210000/750=280 per order
(iv) Calculation of Product wise cost on the basis of Activity Based Costing
Activity Product A (Rs.) Product B (Rs.) Product C (Rs.)
(a) Stores Receiving
300 x 235.20 = 70560
450 x 235.20 = 105840
500 x 235.20 = 117600
(b) Inspection 750 x 452=339000 1050 x 452=474600
1200 x 452=542400
(c) Machine setup 360 x 3000 = 1080000
390 x 3000 = 1170000
450 x 3000 = 1350000
143
(d) Dispatch 180 x 280=50400 270 x 280=75600 300 x 280=84000
(e) Total Activity Cost (a+b+c+d)
1539960
1826040 2094000
(f) Output (units) 10000 20000 30000
Rs. Rs. Rs.
Production overhead per unit (e÷f)
154 91.30 69.80
Add : Material Cost 150
140
140
Labour Cost 90 120 150
Production Cost per unit
394 351.30 359.80
Question 15
Gauru Limited manufactures several products and it uses a single overhead recovery rate based on direct labour cost. The overheads incurred by the Company for the year ending 31st March, 2016:
Rs.
Machine operation expenses 2025000
Machine maintenance expenses 375000
Salaries of technical staff 1275000
Wages and salaries of stores staff 525000
During this period, Gauru Ltd. introduced activity based costing system and the following significant activities were identified:
- receiving materials
- set up of machines for production runs
- quality inspection
It is determined that:
- The machine operation and machine maintenance expenses should be apportioned between stores and production activity in 30:70 ratio.
144
- The technical staff salaries should be apportioned between machine maintenance, set up and quality inspection in 20:50:30 ratio.
The consumption of activities during the period under review are as under:
- Direct labour hours worked 40000
- Direct wage rate Rs. 60 per hour
- Production set-ups 4992
- Material and component consignments received from suppliers 1500
- Number of quality inspections carried out 2500
The data relating to two products manufactured by the Gauru Ltd. during the year are as under:
Product P-1 Product P-2
Direct material costs (Rs.) 45000 3200
Direct labour hours 960 100
Direct material consignments received 48 52
Production runs 36 24
Number of quality inspections done 30 10
Quantity produced (units) 12000 4000
You are required to:
(i) Calculate the cost of product P-1 and P-2 based on the existing system of single overhead recovery rate.
(ii) Determine the cost of product P-1 and P-2 using activity based costing system.
Answer
(i) Computation of Cost of Product ‘P-1’ and ‘P-2’
(Based on the Existing System of ‘Single Overhead Recovery Rate’)
Product P-1 Product P-2
Units 12000 4000
Direct Material Cost
Rs.
45000
Rs.
3200
145
Direct Labour Cost 57600
(960 hours x Rs. 60)
6000
(100 hours x Rs. 60)
Overheads @ 175% of Direct Labour Cost
100800
10500
Total Cost of Products 203400 19700
Cost per unit 16.95 4.925
(ii) Statement Showing Computation of Cost of Products P-1 and P-2
(Using ‘Activity Based Costing System’)
Product P-1 Product P-2
Units 12000 4000
Direct Materials Cost (Rs.) 45000 3200
Direct Labour Cost (Rs.) 57600 6000
Receiving Cost (Rs.)
(Refer to W.N.4)
42288
(48 x 881)
45812
(52 x 881)
Setup Cost (Rs.)
(Refer to W.N.4)
18000
(36 x 500)
12000
(24 x 500)
Inspection Cost
(Refer to W.N.4)
4590
(30 x 153)
1530
(10 x 153)
Total Cost of Products (Rs.) 167478 68542
Cost per unit (Rs.) 13.9565 17.1355
Working Notes
1. Overhead Rate basis on Direct Labour Cost
= 100 x Cost Labour Direct Total
Company the by Incurred Overhead Total
= 100 x 60) Rs. x hrs (40000
4200000 Rs. = 175% on direct labour cost
146
2. Apportionment of ‘Technical Staff Salaries’ Over ‘Machine Maintenance’, ’Setup’ and ‘Quality Inspection’ in the Ratio of 20:50:30
Total Salaries
(Rs.)
Machine Maintenance
(Rs.)
Setup
(Rs.)
Quality Inspection
(Rs.)
Technical Staff Salaries
1275000 255000 637500 382500
3. Apportionment of ‘Machine Operation’ and ‘Machine Maintenance’ Between ‘Stores’ and ‘Production Activity (Setup)’
Total Expenses
(Rs.)
Stores/Receiving
(Rs.)
Setup
(Rs.)
Machine Operation (30:70) 2025000 607500 1417500
Machine Maintenance (30:70)
(375000+255000) (Refer to W.N.2)
630000 189000 441000
Wages and Salaries of Stores Staff
525000 525000 ---
Component of Setup Cost
(Refer to W.N.2)
637500 --- 637500
Total 3817500 1321500 2496000
4. Calculation of Activity Based Cost Driver Rates
Stores/ Receiving
(Rs.)
Setup
(Rs.)
Quality Inspection
(Rs.)
Total Overheads (Rs.) ---(A) 1321500 2496000 382500
Units of Activities Carried out ---(B) 1500 4992 2500
Rate per activity Cost Driver – A/B 881 500 153
Question 16
Dhoora Ltd. produces and sells four products P, Q, R and S. These products are similar and usually produced in production runs of 100 units and sold in a batch of 50 units. The
147
production & cost details of these products for the quarter ending 31st March, 2016 are as follows:
Products P Q R S
Production (units) 1000 1100 1200 1500
Cost per unit:
Direct material (Rs.) 300 400 350 450
Direct labour (Rs.) 250 300 300 400
Machine hours (per unit) 0.5 0.4 0.3 0.4
The manufacturing overheads during the period are as follows:
Rs.
Factory works expenses 900000
Stores receiving costs 324000
Machine set up costs 488000
Quality control costs 184000
Material handling costs 384000
2280000
The cost drivers for these overheads are detailed below:
Cost drivers
Factory works expenses Machine hours
Stores receiving costs Requisitions raised
Machine set up costs No. of production runs
Quality control costs No. of production runs
Material handling costs No. of orders executed
The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96, each order was in a batch of 50 units.
You are required to:
(i) Calculate total cost and per unit cost of each product assuming the absorption of overhead on machine hour rate basis.
(ii) Calculate total cost and per unit cost of each product assuming the absorption of overhead by using activity based costing; and
(iii) Show the difference of per unit costs between (i) and (ii).
148
Answer
(i) Calculation of Total Product Costs by using Machine Hour Rate for recovery of overheads
Particulars P Q R S
Output (Units)
Material Cost per unit
Labour Cost per unit
Manufacturing overheads @ Rs. 1200 per machine hour
(For 0.5; 0.4; 0.3 and 0.4 hours)
Total Cost per unit
Total Cost (Per unit cost x Units)
1000 1100 1200 1500
Rs.
300
250
600
Rs.
400
300
480
Rs.
350
300
360
Rs.
450
400
480
1150 1180 1010 1330
1150000 1298000 1212000 1995000
Working Note: Overhead recovery rate
= Hours Machine Total
Overhead Total
= 1900
2280000 Rs.
= Rs. 1200 per machine hour
(ii) Calculation of Cost Driver Rates under Activity Based Costing
Activity Activity cost
(Rs.)
Cost Driver Cost Driver Rate (Rs.)
Factory Works Exp.
Stores Receiving Costs
Machine Setup Costs
Quality Control Costs
Material Handling Cost
900000
324000
488000
184000
384000
Machine Hours
Requisitions raised
No. of Production runs
No. of Production runs
No. of orders executed
900000/1900=473.68 PMH
324000/100=3240 per Req.
488000/48=10166.67 per run
184000/48=3833.33 per run
384000/96=4000 per order
149
Calculation of Total Product Costs by using Activity Based Costing
Particulars P Q R S Total
(a) Output (units)
Machine hours per unit
1000
0.5
1100
0.4
1200
0.3
1500
0.4
4800
(b) Machine hours (Total) 500 440 360 600 1900
(c) No. of Production runs of 100 units each
10
11
12
15
48
(d) No. of Stores requisition 25
25
25 25
100
(e) No. of orders executed of 50 units each
20
22
24
30
96
(f) Direct Material per unit (Rs.)
300
400
350
450
(g) Direct Labour per unit (Rs.) 250 300 300 400
Rs. Rs. Rs. Rs.
Total Direct Material (a x f) 300000 440000 420000 675000
Total Direct Labour (a x g) 250000 330000 360000 600000
Manufacturing Overheads:
Factory works exp. (b x Rs.473.68)
236840
208419
170525
284208
Stores Receiving Costs (d x Rs.3240)
81000
81000
81000
81000
Machine Setup Costs (c x Rs.10166.67)
101667
111833
122000
152500
Quality Control Costs (c x Rs.3833.33)
38333
42167
46000 57500
150
Material Handling Costs (e x Rs.4000)
80000
88000 96000 120000
Total Cost 1087840 1301419 1295525 1970208
Cost per unit 1087.84 1183.11 1079.60 1313.47
(iii) Calculation of differences of per unit costs
P
(Rs.)
Q
(Rs.)
R
(Rs.)
S
(Rs.)
(i) Per Unit Cost under MHR
(ii) Per Unit Cost under ABC
Cost difference (i) – (ii)
1150
1087.84
1180
1183.11
1010
1079.60
1330
1313.47
62.16 -3.11 -69.60 16.53
Question 17
Jaggu Limited’s manufacturing operation has become increasingly automated with Computer-controlled robots replacing operators. The Company currently manufactures many products of varying levels of design complexity. A single plant wise overhead absorption rate, based on direct labour hours, is used to absorb overhead costs.
Company’s production overheads for the quarter ended 31st March, 2016 are as follows:
(Rs.”000)
Equipment operation Expenses 125
Equipment Maintenance Expense 25
Wages Paid to Technicians 85
Wages Paid to Store Men 35
Wages Paid to Dispatch Staff 40
During the quarter, the company reviewed the Overhead Absorbing System and concluded that absorbing overhead costs to individual products on a labour hour absorption basis is meaningless. Overhead costs should be attributed to products using an Activity Based Costing (ABC) system and the following was identified as the most significant activities:
(i) Receiving component consignments from suppliers
(ii) Setting up equipment for production runs
(iii) Quality inspections
151
(iv) Dispatching goods as per customer’s orders.
During the quarter:
(i) A total of 2000 direct labour hours were worked (paid at Rs. 60 per hr.)
(ii) 980 components consignments were received from suppliers
(iii) 1020 production runs were set up
(iv) 640 quality inspections were carried out
(v) 420 orders were dispatched to customers.
Equipment operation and maintenance expenses are apportioned as:
- Component stores 15%, manufacturing 70% and goods dispatch 15%.
Technician’s wages are apportioned as:
Equipment maintenance 30%, set up equipment for production runs 40% and quality inspections 30%.
Company’s production during the quarter included components X, Y and Z. The following information is available:
Component X
Component Y
Component Z
Direct Material Rs. 2400 Rs. 5800 Rs. 3600
Direct Labour hrs. worked 25 480 50
Component Consignments Recd. 42 24 28
Production Runs 16 18 12
Quality Inspections 10 8 18
Orders (goods) Dispatched 22 85 46
Quantity Produced 140 3200 600
You are required to:
(i) Calculate the unit of X, Y and Z components, using company’s existing cost accounting system.
(ii) Calculate the unit cost of components X, Y and Z using Activity Based System.
Answer
(i) Single Factory Direct Labour Hour Overhead Rate = 2000
310000 Rs.
= Rs. 155 per Direct Labour Hour
152
Computation of Unit Cost (Existing System)
X
(Rs.)
Y
(Rs.)
Z
(Rs.)
Direct Labour Cost @ Rs. 60 per hour 1500 28800 3000
Direct Material 2400 5800 3600
Overheads (Direct Labour Hours x Rs. 155 per Hour)
3875 74400 7750
Total Cost 7775 109000 14350
Quantity Produced (Nos.) 140 3200 600
Cost per unit 55.54 34.06 23.92
(ii) Apportionment of Equipment operation and maintenance expenses and technician’s wages:
(Rs. 000)
Particulars Receiving Supplies
(Rs.)
Setups
(Rs.)
Quality Inspection
(Rs.)
Dispatch
(Rs.)
Total
(Rs.)
Equipment Operation
Expenses (15%; 70%; NIL; 15%)
18.75 87.50 --- 18.75 125.00
Maintenance (15%; 70%; NIL; 15%)
3.75 17.50 --- 3.75 25.00
Technicians Wages [Share of Maintenance (30% of Rs. 85000 = Rs.25500)] (15%; 70%; NIL; 15%)
3.83 17.85 --- 3.82 25.50
Balance of Technicians
Wages of Rs. 59500 (Allocated to Setups and Quality Inspections; 4:3)
--- 34.00 25.50 --- 59.50
Stores Wages - Receiving 35.00 --- --- --- 35.00
Dispatch Wages - Dispatch --- --- --- 40.00 40.00
Total 61.33 156.85 25.50 66.32 310.00
153
Calculation of cost driver rates:
Receiving Supplies
tsConsignmen 980
61330 Rs. = Rs. 62.58 per Consignment
Performing Setups
Runs Production 1020
156850 Rs. = Rs. 153.77 per Setup
Dispatching Goods
Orders 420
66320 Rs. = Rs. 157.90 per Dispatch
Quality Inspection
sInspection 640
25500 Rs. = Rs. 39.84 per Quality Inspection
Statement showing product wise costs:
Particulars of Costs X
(Rs.)
Y
(Rs.)
Z
(Rs.)
Direct Labour 1500 28800 3000
Direct Materials 2400 5800 3600
Receiving Supplies 2628.36 1501.92 1752.24
Performing Setups 2460.32 2767.86 1845.24
Quality Inspections 398.40 318.72 717.12
Dispatching Goods 3473.80 13421.50 7263.40
Total Costs 12860.88 52610 18178
No. of Units Produced 140 3200 600
Cost per unit 91.86 16.44 30.30
Calculation of Components wise activity cost:
Particulars Component X Component Y Component Z
Receiving Supplies
Rs. 2628.36
(42 Receipts at Rs. 62.58)
Rs. 1501.92
(24 Receipts at Rs. 62.58)
Rs. 1752.24
(28 Receipts at Rs. 62.58)
Performing Setups
Rs. 2460.32
(16 Production Runs at Rs. 153.77)
Rs. 2767.86
(18 Production Runs at Rs. 153.77)
Rs. 1845.24
(12 Production Runs at Rs. 153.77)
154
Quality Inspections
Rs. 398.40
(10 Inspections at Rs. 39.84)
Rs. 318.72
(8 Inspections at Rs. 39.84)
Rs. 717.12
(18 Inspections at Rs. 39.84)
Dispatching Goods
Rs. 3473.80
(22 Orders at Rs. 157.90)
Rs. 13421.50
(85 Orders at Rs. 157.90)
Rs. 7263.40
(46 Orders at Rs. 157.90)
Question 18
Kovid Bank operated for years under the assumption that profitability can be increased by increasing Rupee volumes. But that has not been the case. Cost Analysis has revealed the following:
Activity Activity Cost (Rs.)
Activity Driver Activity Capacity
Providing ATM service 1000000 No. of transactions 500000
Computer processing 6000000 No. of transactions 4000000
Issuing Statements 1500000 No. of statements 1000000
Customer inquiries 960000 Telephone minutes 1200000
The following annual information on three services was also made available:
Checking Accounts
Loans Gold Visa
Units of service 80000 12000 30000
ATM transactions 380000 0 120000
Computer transactions 3000000 400000 600000
Number of statements 600000 100000 300000
Telephone minutes 650000 180000 370000
Required:
(i) Calculate rate for each activity.
(ii) Using the rates computed in requirement (i), calculate the cost of each service.
155
Answer
Calculation of Activity Rates
Activity Activity Cost [a] (Rs.)
Activity Driver No. of Units of Activity Driver [b]
Activity Rate [a]/[b]
(Rs.)
Providing ATM Service 1000000 No. of ATM Transactions 500000 2.00
Computer Processing 6000000 No. of Computer Transactions
4000000 1.50
Issuing Statements 1800000 No. of Statements 1000000 1.80
Customer Inquiries 960000 Telephone Minutes 1200000 0.80
Calculation of Cost of each Service
Activity Checking Accounts
(Rs.)
Loans (Rs.) Gold Visa
(Rs.)
Providing ATM Service
Computer Processing
Issuing Statements
Customer Inquiries
Total Cost Rs. [a]
Units of Service [b]
Cost of each unit of service [a]/[b]
760000
(380000 tr. x 2)
4500000
(3000000 tr. x 1.50)
1080000
(600000 tr. x 1.80)
520000
(650000 tr. x 0.80)
---
600000
(400000 tr. x 1.50)
180000
(100000 tr. x 1.80)
144000
(180000 tr. x 0.80)
240000
(120000 x 2)
900000
(600000 tr. x 1.50)
540000
(300000 x 1.80)
296000
(370000 tr. x 0.80)
6860000 924000 1976000
80000 12000 30000
Rs. 85.75 Rs. 77 Rs. 65.87
156
Question 19
S. Kumar Limited specializes in the distribution of superfine wheel bearings. It buys from manufactures and resells to each of the three different markets:
(i) General Supermarket chains
(ii) Whole Sellers
(iii) Retailers
The company plans to use activity based costing for analyzing the profitability of its distribution channels. The following data for the quarter ending 30th June, 2016 is given:
General supermarket
chains
Whole Sellers Retailers
Average sales per delivery
Average cost of goods sold per delivery
Number of deliveries
Total number of orders
Average number of cartons shipped per delivery
Average number of hours of shelf stocking per delivery
Rs. 80500
Rs. 78000
460
480
250
2
Rs. 32000
Rs. 31000
1650
1820
75
0.5
Rs. 8000
Rs. 7500
3890
4500
24
0.1
The following information is available in respect of operating costs (other than cost of goods sold) for the quarter ending 30th June, 2016:
Activity Area Cost driver Total cost
(Rs.)
Customer purchase order processing
Purchase order by customers 510000
Customer store delivery Number of deliveries 960000
Cartons dispatched to customer stores
Number of Cartons dispatched to customer stores
830275
Shelf stocking at customer store
Hours of shelf stocking 64020
Compute the operating income of each distribution channel for the quarter ending 30th June, 2016 using activity based costing.
157
Answer
Statement Showing Operating Income of Distribution Channels of S. Kumar Limited
Particulars General Supermarket Chains (Rs.)
Whole Sellers
(Rs.)
Retailers
(Rs.)
Total
(Rs.)
Sales
(Number of Deliveries x Average Sales per delivery)
37030000
(460 x 80500)
52800000
(1650 x 32000)
31120000
(3890 x 8000)
120950000
Less:
Cost of Goods Sold (Number of Deliveries x Average Cost of Goods Sold per delivery)
35880000
(460 x 78000)
51150000
(1650 x 31000)
29175000
(3890 x 7500)
116205000
Gross Margin 1150000 1650000 1945000 4745000
Less :
Operating Costs
424700
734625
1204970
2364295
Operating Income 725300 915375 740030 2380705
Workings:
Statement Showing Operating Cost of Distribution Channels of S. Kumar Limited
Particulars General Supermarket Chains (Rs.)
Whole Sellers
(Rs.)
Retailers
(Rs.)
Total
(Rs.)
Customer Purchase Order Processing
36000
(75 x 480)
136500
(75 x 1820)
337500
(75 x 4500)
510000
Customer Store Delivery
73600
(160 x 460)
264000
(160 x 1650)
622400
(160 x 3890)
960000
Cartons Dispatched to Customer Stores
287500
(2.50 x 115000)
309375
(2.50 x 123750)
233400
(2.50 x 93360)
830275
Shelf Stocking at Customer Store
27600
(30 x 920)
24750
(30 x 825)
11670
(30 x 389)
64020
424700 734625 1204970 2364295
158
Calculation of Cost Driver Rates
Activity Activity Cost [a]
(Rs.)
Activity Driver No. of Units of Activity Driver [b]
Cost Driver Rate [a]/[b]
(Rs.)
Customer Purchase Order Processing
510000 Purchase Order by Customers
6800 75.00
Customer Store Delivery
960000 Number of Deliveries 6000 160.00
Cartons Dispatched to Customer Stores
830275 Number of Cartons Dispatched to Customer Stores
332110 2.50
Shelf Stocking at Customer Store
64020 Hours of Shelf Stocking
2134 30.00
No. of Units of Activity Driver
Purchase Order by Customers = 480 + 1820 + 4500
= 6800
Number of Deliveries = 460 + 1650 + 3890
= 6000
Number of Cartons
Dispatched to Customer Stores = Number of Deliveries x Average Number of Cartons Shipped per delivery
= (460 x 250) + (1650 x 75) + (3890 x 24)
= 115000 + 123750 + 93360
= 332110
Hours of Shelf Stocking = Number of Deliveries x Average Number of Hours of Shelf Stocking per delivery
= (460 x 2) + (1650 x 0.5) + (3890 x 0.1)
= 920 + 825 + 389
= 2134
159
Question 20
The following information is provided by Jatin Limited for the quarter ending 31st March, 2016:
Activity Cost Driver Cost Driver Volume/Year
Cost Pool (Rs.)
Purchasing Purchase orders 3000 1500000
Setting Batches produced 14000 5600000
Materials handling Materials movements 12000 1440000
Inspection Batches produced 14000 3500000
Machining costs Machine hours 40000 1200000
During the period the company was produced Product ‘Nirmal’. The following particulars were related to the product:
Purchase orders 25
Output 15000 units
Production batch size 100 units
Materials movements per batch 6
Machine hours per unit 0.1
You are required to:
(i) Calculate the overhead costs for product Nirmal using absorption costing (absorb overhead using machine hours).
(ii) Calculate the overhead costs for product Nirmal using activity based costing principles.
(iii) How can the company reduce the ABC for Product Nirmal ?
Answer
(i) Calculation of Overheads Costs using Absorption Costing
Total Overheads = Rs. 13240000
(1500000 + 5600000 + 1440000 + 3500000 + 1200000)
Budgeted Absorption Cost per Machine Hour = Rs. 331
(13240000/40000 hours)
Machining Hours for Product Nirmal = 1500 hrs.
Absorbed Overhead (1500 hrs. X Rs. 331) = Rs. 496500
160
(ii) Computation of Cost driver rates
Activity Pool Cost Driver Cost [a]
(Rs.)
Cost Driver Volume/Year [b]
Cost/Unit of Cost Driver [a]/[b]
(Rs.)
Purchasing Purchase Orders
1500000 3000 500 per Purchase Order
Setting Batches Produced
5600000 14000 400 per Batch
Materials Handling
Material Movements
1440000 12000 120 per Movement
Inspection Batches Produced
3500000 14000 250 per Batch
Machining Machine Hours
1200000 40000 30 per Machine Hour
Computation of the ‘Volume of Cost Drivers’ consumed by ‘Product Nirmal’
Purchase Orders (given) = 25
Batches (15000/100) = 150
Materials Movement (150 batches x 6) = 900
Machine Hours (15000 units x 0.1) = 1500
Computation of the Overheads Cost for Product Nirmal using ABC
Activity Cost Driver Costing Rate/Cost Driver Rate
(Rs.)
Overhead Cost
(Rs.)
Purchasing Purchase Orders 500 12500
(25 Order X Rs. 500)
Setting Batches Produced
400 60000
(150 Batches X Rs. 400)
Material Handling Material Movements
120 108000
(900 Movement X Rs. 120)
Inspection Batches Produced
250 37500
(150 Batches X Rs. 250)
Machining Machine Hours 30 45000
(1500 Hours X Rs. 30)
Total 263000
161
(iii) Ways in which the company can reduce the ABC for ‘Product Nirmal’
- Reduce the number of batches by increasing the batch size which will then reduce the setting up overhead, materials handling and inspection costs.
- Reduce the number of purchase orders.
- Innovate ways of speeding up production so that the machining hours are reduced.
Question 21
Nikku Bearings Limited manufactures three types of products namely A, B and C. The data relating to the month of April, 2016 are as under:
Particulars A B C
Machine hours per unit 1 3 2
Direct Labour hours per unit @ Rs. 50 2 6 4
Direct Material per unit (Rs.) 190 180 120
Production (units) 3000 5000 20000
Currently the company uses traditional costing method and absorbs all production overheads @ Rs. 120 per machine hour.
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars A B C
Batch size (units) 150 500 1000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 40%
Machine operation costs 30%
Inspection costs 20%
Material procurement related costs 10%
You are required to:
(i) Calculate the cost per unit of each product using traditional method of absorbing all production overheads on the basis of machine hour rate.
(ii) Calculate the cost per unit of each product using activity based costing system.
162
Answer
(i) Calculation of cost per unit by using Machine Hour Rate:
Particulars A
(Rs.)
B
(Rs.)
C
(Rs.)
Direct Materials 190 180 120
Direct Labour [(2, 6, 4 hours) x Rs. 50] 100 300 200
Production Overheads [(1, 3, 2 hours) x Rs. 120] 120 360 240
Cost per unit 410 840 560
(ii) Calculation of Cost per unit by using Activity Based Costing:
Products A B C
Production (units) 3000 5000 20000
(Rs.) (Rs.) (Rs.)
Direct Materials (Rs. 190, Rs. 180, Rs. 120 per unit)
570000 900000 2400000
Direct Labour (Rs. 100, Rs. 300, Rs. 200 per unit)
300000 1500000 4000000
Machine Related Costs @ Rs. 36 per hour
Machine hours :-
(3000, 15000, 40000)
108000 540000 1440000
Setup Costs @ Rs. 6960 per inspection
Batches : (20, 10, 20)
1113600 556800 1113600
Inspection Costs @ Rs. 6960 per inspection
Inspections : (100, 40, 60)
696000 278400 417600
Purchase Related Costs @ Rs. 2175 per purchase
(60, 100, 160)
130500 217500 348000
Total Costs 2918100 3992700 9719200
Cost per unit (Total Cost ÷Units) 972.70 798.54 485.96
163
Working Notes
1. Calculation of Number of Batches, Purchase Orders, and Inspections:
Particulars A B C Total
A. Production (units) 3000 5000 20000
B. Batch Size (units) 150 500 1000
C. Number of Batches [A÷B] 20 10 20 50
D. Number of Purchase Order per batch
3 10 8
E. Total Purchase Orders [C x D] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C x F] 100 40 60 200
2. Calculation of Total Machine Hours Worked:
Particulars A B C
A. Machine Hours per unit 1 3 2
B. Production (units) 3000 5000 20000
C. Total Machine Hours [A x B] 3000 15000 40000
Total Machine Hours = 3000 + 15000 + 40000 = 58000
Total Production Overheads
= 58000 x Rs. 120
= Rs. 6960000
3. Calculation of Cost Driver Rates:
Cost Pool % Overheads (Rs.)
Cost Driver (Units)
Cost Driver Rate (Rs.)
Setup 40% 2784000 50 55680 per Setup
Inspection 20% 1392000 200 6960 per Inspection
Purchases 10% 696000 320 2175 per Purchase order
Machine Hours 30% 2088000 58000 36 per Machine Hour
Total 6960000
164
Question 22
Shobha Limited manufactures four products, namely A, B, C and D using the same plant and process. The following information relates to a production period:
Product A Product B Product C Product D
Output in units 720 600 480 504
Cost per unit: Rs. Rs. Rs. Rs.
Direct Material 420 450 400 480
Direct Labour @ Rs. 20 per hour
100 90 70 80
Machine hours per unit
4 hrs. 3 hrs. 2 hrs. 1hr.
The four products are similar and are usually produced in production runs of 24 units and sold in batches of 12 units. Using direct labour hour rate currently absorbs the production overheads. The total overheads incurred by the company for the period is as follows:
Rs.
Machine operation cost 460800
Setup costs 201600
Store receiving cost 150000
Inspection cost 98400
Material handling and dispatch cost 25920
During the period the following cost drivers are to be used for the production overhead cost:
Activity Cost Pool Cost Driver
Setup No. of production runs
Store receiving Requisition raised
Inspection No. of production runs
Material handling and dispatch Orders executed
Machine operation No. of Machine hours
165
It is also determined that:
- Number of requisition raised on store is 50 for each product and the no. of order executed is 192, each order being for a batch of 12 units of a product.
Required
(i) Calculate the total cost of each product, if all overhead costs are absorbed on direct hour rate basis.
(ii) Calculate the total cost of each product using activity base costing.
(iii) Comment briefly on differences disclosed between overhead traced by present system and those traced by activity based costing.
Answer
(i) Calculation of Cost of each product by using Direct Labour Hour Rate:
Particulars A
(Rs.)
B
(Rs.)
C
(Rs.)
D
(Rs.)
Direct Material 420 450 400 480
Direct Labour 100 90 70 80
Production Overheads @ Rs. 93.71 per labour hour for 5, 4.5, 3.5 or 4
468.55 421.70 327.99 374.84
Cost of Production per unit 988.55 961.70 797.99 934.84
Output in units 720 600 480 504
Total Cost 711756 577020 383035 471159
Working Note
Calculation of Direct Labour Hour Rate
Total Labour hours:
A: 100/20 or 5 x 720 = 3600
B: 90/20 or 4.5 x 600 = 2700
C: 70/20 or 3.5 x 480 = 1680
D: 80/20 or 4 x 504 = 2016
9996
Total production overheads = 460800 + 201600 + 150000 + 98400 + 25920= Rs. 936720
166
Direct Labour Hour Rate = Rs. 936720/9996 = Rs. 93.71
(ii)
Working Notes:
1. Cost Driver Rates
Activity Cost
(Rs.)
Drivers Nos Cost per unit of Driver (Rs.)
Setup 201600 Production Runs 96 2100
Store Receiving 150000 Requisitions Raised 200 750
Inspection 98400 Production Runs 96 1025
Material Handling and Disp.
25920 Orders 192 135
Machine operation 460800 Machine Hours 6144 75
2. No. of Production Runs: A (720/24) = 30
B (600/24) = 25
C (480/24) = 20
D (504/24) = 21
96
3. Machine Hours: A- 4 x 720 = 2880
B- 3 x 600 = 1800
C- 2 x 480 = 960
D- 1 x 504 = 504
6144
4. No. of orders executed:
A: 720/12 = 60
B: 600/12 = 50
C: 480/12 = 40
D: 504/12 = 42
192
167
5. Material Cost:
A: 420 x 720 = Rs. 302400
B: 450 x 600 = Rs. 270000
C: 400 x 480 = Rs. 192000
D: 480 x 504 = Rs. 241920
6. Labour Cost:
A: 100 x 720 = Rs. 72000
B: 90 x 600 = Rs. 54000
C: 70 x 480 = Rs. 33600
D: 80 x 504 = Rs. 40320
Calculation of cost of each product by using Activity Based Costing
Particulars A B C D
Output in units 720 600 480 504
Direct Material
Direct Labour
Rs.
302400
72000
Rs.
270000
54000
Rs.
192000
33600
Rs.
241920
40320
Production Overheads:
- Machine operation cost @ Rs. 75 per hour (2880; 1800; 960 & 504)
216000
135000
72000
37800
- Setup cost @ Rs. 2100 per run
(30; 25; 20 & 21)
63000 52500 42000 44100
- Store receiving @ Rs. 750 per requisition (50; 50; 50 & 50)
37500 37500 37500 37500
- Inspection @ Rs. 1025 per run (30; 25; 20 & 21)
30750 25625 20500 21525
- Material handling etc. @ Rs. 135 per order (60; 50; 40 & 42)
8100 6750 5400 5670
168
Total Cost 729750 581375 403000 428835
Cost per unit 1013.54 968.96 839.58 850.86
(ii)
Particulars A B C D
(a) Cost per unit (Traditional system)
(b) Cost per unit (ABC)
988.55
1013.54
961.70
968.96
797.99
839.58
934.84
850.86
Difference (b – a) 24.99 7.26 41.59 (83.98)
Maximum per unit cost difference is 83.98 in case of product D.
Question 23
Sevda Bank offers three services, viz., deposits, Loans and Credit Cards. The bank has selected 4 activities. Activity wise cost details for the year ending 31st March, 2016 were as follows:
Activity Pool Total Cost (Rs.)
Nature of Cost Cost Driver
1. ATM Services:
(a) Rent & Machine maintenance cost
(b) Currency Replenishment Cost
1200000
400000
Fixed
Semi variable
No. of ATM transactions
2. Computer Processing 2000000 Half of this amount is fixed and remaining semi variable
No. of computer transactions
3. Issuing Statements 2700000 Semi variable No. of statements
4. Customer Inquiries 500000 Semi variable Telephone minutes
169
Following estimations are made for the budget of next year 2016-17, in respect of utilization of different activities:
1. Currency Replenishment cost will be to double during the next year.
2. Semi-variable computer processing cost will be to increase to three times the current level.
3. For above mentioned statements, issuing cost will remain constant upto 500000 statements, after that it will be increased to Rs. 200000 for every increase of one lakh statements.
4. Customer inquiries costs will increase by 80%.
The Expected volumes of activity drivers for the year 2016-17 are as follows:
Activity Driver Deposits Loans Credit Cards
- No. of ATM Transaction
- No. of Computer Processing Transactions
- No. of Statement to be issued
- Telephone Minutes
420000
3500000
600000
580000
---
600000
50000
210000
80000
900000
150000
210000
The bank budgets a volume of 59816 deposit accounts, 17505 Loan accounts, and 29564 Credit Card accounts.
You are required to:
(i) Calculate the budgeted activity cost driver rates.
(ii) Find the budgeted cost per account for each service using activity based costing.
Answer
(i) Computation of Cost driver rates for the Budgeted Period
Activity Activity Driver
Budgeted No. of units of Activity Driver
Budgeted Activity Cost (Rs.)
Cost driver rate (Rs.)
ATM Service
No. of ATM Transactions
420000+NIL+
80000
500000 Rent etc.
+ Currency
400000 x 2
Total
1200000
800000
2000000
2000000/ 500000
= Rs. 4 per ATM
Transaction
Computer Processing
No. of Computer Transaction
3500000+600000+900000
5000000 Fixed
2000000 x ½
Semi-variable
1000000
4000000/ 5000000
= Rs. 0.80 per
transaction
170
1000000 x 3
Total 3000000
4000000
Issuing Statements
No. of Statements
600000+50000+ 150000
800000 Upto 500000 Statements
For Additional 3 lakh Statement
2 lakhs x 3 lakhs
Total
2700000
600000
3300000
3300000/ 800000
= Rs. 4.125 per
statement
Customer Inquiries
Telephone Minutes
580000+210000+
210000
1000000 500000 x 180%
900000 900000/1000000
= Rs. 0.90 per minutes
Total Budgeted Cost for 2016-17 10200000
(ii) Statement Showing Budgeted cost per account for each Service
Activity No. of Activity drivers Cost Driver Rate (Rs.)
Deposits
(Rs.)
Loans
(Rs.)
Credit Cards
(Rs.) Dep. Loans Credit
Cards
ATM Service
Computer Processing
Issuing Statements
Customer Inquiries
420000
3500000
600000
580000
---
600000
50000
210000
80000
900000
150000
210000
4.00
0.80
4.125
0.90
1680000
2800000
2475000
522000
---
480000
206250
189000
320000
720000
618750
189000
Total Cost 7477000 875250 1847750
Budgeted Units of Service (Units) 59816 17505 29564
Budgeted Cost per unit of service (Rs.) 125 50 62.50
171
Question 24
Krishna Food Ltd. Manufactures 4 types of biscuits, Super, Fine, Gold and Silver in a fully mechanized factory. The company has been following traditional method of costing and wishes to shift to Activity Based Costing System and therefore wishes to have the following data presented under both the systems for the quarter ended 31st March, 2016.
Rs.
Inspection Cost 771680
Machine-Repairs & Maintenance 1671750
Dye Cost 51500
Selling Overheads 1506800
Particulars Super Fine Gold Silver
Selling Priceper unit (Rs.) 50 40 30 20
Material Cost (Rs. per unit) 12 9 8 5
Labour Cost (Rs. per unit) 18 14 12 8
Gross Production units (per production run)
2520 2810 3010 4280
No. of Defective units (per production run)
20 10 10 40
Inspection:
No. of Hours per production run
3 4 4 3
Dye Cost per production run (Rs.) 200 300 250 300
No. of Machine Hours per production run
20 12 30 25
Sales-No. of units for the quarter 100000 224000 108000 148400
The following additional information is given:
(i) All manufacturing and selling overheads are conventionally allocated on the basis of units sold.
172
(ii) Only product Super needs advertisement. Advertisement costs included in the total selling overhead isRs. 225000.
(iii) Product Fine needs to be specially packed before being sold, so that it meets competition. Rs. 121000 was the amount spent for the quarter in specially packing ‘Fine’, and this has been included in the total selling overhead cost given.
You are required to:
Present product wise profitability under the traditional system and the activity based costing system and accordingly rank the products.
Answer
Statement Showing Product wise profitability and Rank by using traditional system
Particulars Super Fine Gold Silver Total
Sales (Units) 100000 224000 108000 148400 580400
Gross Margin (a)
Rs.
1976000
Rs.
3789600
Rs.
1072800
Rs.
1020600
Rs.
7859000
Manufacturing Overheads
(2494930/580400 = 4.2986 per unit)
Selling Overheads
(1506800/580400 = 2.59614 per unit)
429864
259614
962895
581536
464253
280383
637918
385267
2494930
1506800
Total Overheads (b) 689478 1544431 744636 1023185 4001730
Net Profit (a – b) 1286522 2245169 328164 (2585) 3857270
Ranking II I III IV
Statement Showing Product wise Profitability and Rank by using Activity Based Costing
Particulars Super Fine Gold Silver Total
Sales (Units) 100000 224000 108000 148400 580400
173
Gross Margin (a)
Rs.
1976000
Rs.
3789600
Rs.
1072800
Rs.
1020600
Rs.
7859000
Manufacturing overheads (W.N.5)
Selling overheads (W.N.5)
502400
425000
814400
569000
656280
216000
521850
296800
2494930
1506800
Total Overheads (b) 927400 1383400 872280 818650 4001730
Net Profit (a – b) 1048600 2406200 200520 201950 3857270
Ranking II I IV III
Working Notes:
1. Calculation of Different Cost Driver Numbers
Serial No.
Particulars Super Fine Gold Silver Total
(i) Gross production units per run
Less : Defective units per run
2520
20
2810
10
3010
10
4280
40
(ii) Good units per run 2500 2800 3000 4240
(iii) Sales (good units) 100000 224000 108000 148400 580400
(iv) No. of Production Runs (iii ÷ ii)
40 80 36 35 191
(v) Gross Production units [(i) x (iv)]
100800 224800 108360 149800
Material Cost per unit (Rs.)
Add: Labour cost per unit (Rs.)
12
18
9
14
8
12
5
8
(vi) Prime Cost per unit (Rs.)
30 23 20 13
(vii) Total Prime Cost (Rs.) ÷ (v) x (vi)
3024000 5170400 2167200 1947400 12309000
174
(viii) Inspection hours per run
3 4 4 3
(ix) Inspection hours: (iv) x (viii)
120 320 144 105 689
(x) Machine hours per run 20 12 30 25
(xi) Total machine hours: (iv) x (x)
800 960 1080 875 3715
(xii) Dye cost per run (Rs.) 200 300 250 300
(xiii) Total Dye Cost (Rs.): (iv) x (xii)
8000 24000 9000 10500 51500
2. Calculation of Product wise Gross Margin
Particulars Super Fine Gold Silver Total
(i) Sales (units)
(ii) Selling Price per unit (Rs.)
100000
50
224000
40
108000
30
148400
20
(iii) Sales Value (Rs.) (i) x (ii)
5000000 8960000 3240000 2968000 20168000
(iv) Price Cost (Rs.) [as above (vii)]
3024000 5170400 2167200 1947400 12309000
(v) Gross Margin (Rs.) (iii) – (iv)
197 6000 3789600 1072800 1020600 7859000
3. Total manufacturing overheads: Rs.
Inspection Cost 771680
Machine Exp. 1671750
Dye Cost 51500
2494930
4. Selling overhead according to activities Rs.
Advertisement cost associated only with Super 225000
Special Packing cost associated only with Fine 121000
Remaining selling overheads (1506800 – 225000 – 121000)
allocated on the basis of sold units 1160800
1506800
175
5. Statement Showing Allocation of Overheads on the Basis of Cost Drivers
Activity Super Fine Gold Silver Total
Inspection Cost:
(Inspection hours-120;320;144;105)
Machine-Repairs & Maintenance
(Machine Hours-800;960;1080;875)
Dye Cost (Refer W.N.1- xiii)
Rs.
134400
360000
8000
Rs.
358400
432000
24000
Rs.
161280
486000
9000
Rs.
117600
393750
10500
Rs.
771680
1671750
51500
Manufacturing overheads 502400 814400 656280 521850 2494930
Advertisement cost to Super
Special Packing Cost to Fine
Remaining (Sales Units basis)
225000
---
200000
---
121000
448000
---
---
216000
---
---
296800
225000
121000
1160800
Selling Overheads 425000 569000 216000 296800 1506800
Question 25
Mahi Cold Drinks Limited produces three product lines viz., Mango Fresh, Orange Malt and Lemon Test. It provides the following data for the quarter ended 31st March, 2016 for each product line:
Particulars Mango Fresh Orange Malt Lemon Test
Sales Revenue (Rs.)
Cost of goods sold (Rs.)
Cost of bottles returned (Rs.)
793500
600000
2100600
1500000
1209900
900000
12000
The Company also provides the following information about the store support costs for the period:
Activity Activity Cost Cost Driver No. of Cost Drivers
Mango Fresh
Orange Malt
Lemon Test
Placing of orders
Dispatching
Shelf Stocking
Customer Support
156000
252000
172800
307200
No. of purchase orders
No. of deliveries
Hours of shelf stocking
Items sold
36
30
54
12600
84
219
540
110400
36
66
270
30600
176
You are required:
(a) Calculate the product wise net operating income and find their percentage on product’s revenue. If the all support costs (including cost of bottles returned) are allocated to the product lines
(b) On the basis of the cost of goods sold of each product.
(c) On the activity based costing system.
(d) Compared the operating income percentage shown as above (a) (i) and (ii)
Answer
(a)(i) Traditional Costing System
Operating Income Statement:
Particulars Mango Fresh
Orange Malt
Lemon Test
Total
Revenue 793500 2100600 1209900 4104000
Less : Cost of Goods Sold 600000 1500000 900000 3000000
Less : Store Support Cost 180000 450000 270000 900000
Operating Income 13500 150600 39900 204000
Operating Income (%) 1.70 7.17 3.30 4.97
(i) ABC System
Calculation of Cost Driver Rates
Activity Total Costs (Rs.)
Quantity of Cost Allocation Base
Overhead Allocation Rate (Rs.)
Ordering 156000 156 Purchase Orders 1000
Delivery 252000 315 Delivering Orders 800
Shelf Stocking 172800 864 Self Stocking Hours
200
Customer Support 307200 153600 Items Sold 2.00
Calculation of Product-wise Store Support Costs
Particulars Cost Driver Mango Fresh
Orange Malt
Lemon Test
Total
Bottle Returns Direct 0 0 12000 12000
Ordering Purchase Orders
36000 84000 36000 156000
177
Delivery Deliveries 24000 175200 52800 252000
Self-Stocking Hours of time 10800 108000 54000 172800
Customer Support
Items Sold 25200 220800 61200 307200
Grand Total 96000 588000 216000 900000
Operating Income
Particulars Mango Fresh
Orange Malt
Lemon Test
Total
Revenue 793500 2100600 1209900 4104000
Less: Cost of Goods Sold 600000 1500000 900000 3000000
Less: Store Support Cost 96000 588000 216000 900000
Operating Income 97500 12600 93900 204000
Operating Income (%) 12.29 0.60 7.76 4.97
(b) Comparison
Particulars Mango Fresh
Orange Malt
Lemon Test
Total
Under Traditional Costing System
1.70% 7.17% 3.30% 4.97%
Under ABC System 12.29% 0.60% 7.76% 4.97%
The Orange Malt line drops sizeably when ABC is used. Although it constitutes 50% of ‘Cost of Goods Sold (COGS)’, it uses a higher percentage of total resources in each activity.
Question 26
Arti Chocolates Ltd. is engaged in production of a range of many types of chocolate products out of which three main products are Coco, Cream and Goldy. The following details are provided by the company for the year ending 31st March, 2016:
178
Particulars Coco Cream Goldy Other products
Direct material per unit (Rs.)
Direct labour per unit (Rs.)
No. of purchase orders
No. of deliveries
Shelf stocking hours
No. of items sold
Rs.
4
5
25
2000
1100
200000
Rs.
3
3
20
1500
1050
165000
Rs.
2
3
15
1100
1650
215000
Rs.
---
---
1650
98600
67400
2000000
You are required to:
(i) Calculate the cost of each of above mentioned three products if the company under traditional costing system, store support costs are charged @ 30% of prime cost.
(ii) Calculate the cost of each of the above mentioned three products by using activity based costing system if the activity costs are identified as follows:
Rs.
Order placing cost 1282500
Dispatching cost 25800000
Shelf stocking cost 8900000
Answer
(i) Statement showing cost of products under traditional costing system.
Particulars Coco Cream Goldy
Per Unit Cost:
Direct Material
Direct Labour
Prime Cost
Overheads @ 30% of Prime Cost
Cost of Production per unit
No. of items sold (Units)
Total Cost of each product (Rs.)
Rs.
4
5
Rs.
3
3
Rs.
2
3
9
2.70
6
1.80
5
1.50
11.70
200000
7.80
165000
6.50
215000
2340000 1287000 1397500
179
(ii) Statement showing cost of products under Activity Based Costing.
Product Items Sold Coco
200000
Cream
165000
Goldy
215000
Direct Material (@Rs. 4, 3 & 2)
Direct Labour (@Rs. 5, 3 & 3)
Store Support Costs:
Order placing cost
Despatching cost
Shelf stocking cost
Total Cost
Cost per Unit
Rs.
800000
1000000
18750
500000
137500
Rs.
495000
495000
15000
375000
131250
Rs.
430000
645000
11250
275000
206250
2456250 1511250 1567500
12.28 9.16 7.29
Working Note:
1. Calculation of activity costs driver rates
Activity Activity cost
Total No. of cost Drivers Cost Driver Rate(Rs.)
Ordering cost
Dispatching cost
Shelf stocking cost
1282500
25800000
8900000
25+20+15+1650=1710 Orders
2000+1500+1100+98600=103200 deliveries
1100+1050+1650+67400=71200 hours
1282500/1710 = 750 per order
25800000/103200 = 250 per delivery
8900000/71200 = 125 per hour
2. Calculation of Product wise activity costs
Particulars Coco Cream Goldy
No. of purchase orders
Orders placing cost @ Rs. 750 per order (Rs.)
No. of deliveries
Dispatching cost @ Rs. 250 per delivery (Rs.)
25
18750
2000
500000
20
15000
1500
375000
15
11250
1100
275000
180
Shelf stocking hours
Shelf stocking cost @ Rs. 125 per hour (Rs.)
1100
137500
1050
131250
1650
206250
Question 27
The overheads incurred and cost driver volumes of Bhalu Limited for the year ended 31st March, 2016 were as follows:
Cost Pool Overheads (Rs.)
Cost Driver Cost Driver Volume
Material procurement
Material handling
Set-up
Maintenance
Quality control
Machinery
1159500
500480
829920
1932000
352800
720000
No. of orders
No. of movements
No. of set ups
Maintenance hours
No. of inspection
No. of machine hours
2200
1360
1040
16800
1800
24000
During the period the company had produced a lot of 5200 components of CP-21, its material cost was Rs. 260000 and Labour cost Rs. 250000. The usage activities of the said batch were as follows.
Material orders-52, maintenance hours-690, material movements-36, set ups-50, machine hours-1800.
Calculate cost driver rates that are used for tracing appropriate amount of overheads to the said batch and ascertain the cost of batch of components using Activity Based Costing.
Answer
Computation of Cost Driver Rates
Particulars Amount (Rs.)
1. Material procurement 1159500/2200 527
2. Material handling 500480/1360 368
3. Set-up 829920/1040 798
181
4. Maintenance 1932000/16800 115
5. Quality control 352800/1800 196
6. Machinery 720000/24000 30
Computation of Cost of Component CP-21 (5200 Units)
Particulars Rs.
Material Cost 260000
Labour Cost 250000
Prime Cost 510000
Add : Overheads
Material orders 52 x 527 27404
Material handling 36 x 368 13248
Set-up 50 x 798 39900
Maintenance 690 x 115 79350
Quality Control 52 x 196 10192
Machinery 1800 x 30 54000 224094
Total Cost 734094
Question 28
Baidhnath Limited produces three types of products viz., A, B and C. The following data related to a period are as follows:
Particulars A B C
Production and Sales (Units)
Direct Material per unit (Rs.)
60000
500
40000
400
80000
220
182
Direct Labour (@ Rs. 60 per hour) per unit (Rs.)
Machine hours per unit
Size of one production run (Units)
No. of deliveries
No. of Receipts
No. of Production orders
150
2
600
500
20
60
240
1.5
800
300
10
20
120
1
1000
400
25
40
The company provides activity pool wise overhead costs for the period as under:
Rs.
Setup Cost (relating to production runs) 402500
Machine repairs and maintenance cost 10920000
Material receiving cost 137500
Dispatching cost 420000
Engineering cost (relating to production orders) 676800
Labour force related cost 2350000
Required:
(i) Calculate the per unit cost of each product based on direct labour hour recovery rate of overheads.
(ii) Calculate the per unit cost of each product using activity based costing.
Answer
(i) Calculate of cost of each product based on Direct Labour Hour Rate
Particulars A B C
Direct Material
Direct Labour
Overheads @ Rs. 31.72 per Labour hour for 2.5, 4 & 2 hours
Rs.
500
150
79.30
Rs.
400
240
126.88
Rs.
220
120
63.44
Per Unit Cost of each Product 729.30 766.88 403.44
Working Notes:
1. Total Overheads = 402500+10920000+137500+420000+676800+2350000
= Rs. 14906800
183
2. Total Direct Labour hours:
Product Per unit hours Output (Units) Total hours
A
B
C
150/60=2.5
240/60=4
120/60=2
60000
40000
80000
150000
160000
160000
Total Direct Labour hours 470000
3. Overhead recovery rate per Labour hour
= Rs. 14906800/470000
= Rs. 31.72 (approx.)
(ii) Calculation of Cost of each Product using Activity Based Costing.
Particulars A B C
Direct Material
Direct Labour
Overheads:
Setup Cost
Machines Cost
Material receiving cost
Dispatching cost
Engineering cost
Labour force cost
500 x 60000
150 x 60000
1750 x 100
42 x 120000
2500 x 20
350 x 500
5640 x 60
5 x 150000
Rs.
30000000
9000000
175000
5040000
50000
175000
338400
750000
400 x 40000
240 x 40000
1750 x 50
42 x 60000
2500 x 10
350 x 300
5640 x 20
5 x 160000
Rs.
16000000
9600000
87500
2520000
25000
105000
112800
800000
220 x 80000
120 x 80000
1750 x 80
42 x 80000
2500 x 25
350 x 400
5640 x 40
5 x 160000
Rs.
17600000
9600000
140000
3360000
62500
140000
225600
800000
Total Cost 45528400 29250300 31928100
Output (Units) 60000 40000 80000
Cost per unit (Rs.) 758.81 731.26 399.10
Working Note:
1. Calculation of Cost Driver Rates
Activity Activity Cost (Rs.) Cost Driver Cost Driver Rate
(Rs.)
Setup Cost 402500 No. of Production runs
402500/230=Rs. 1750 per run
Machines Cost 10920000 Machine hours 10920000/260000= 42 per M.H.
184
Material Receiving 137500 No. of Receipts 137500/55= 2500 per receipts
Dispatching 420000 No. of Deliveries 420000/1200= 350 per delivery
Engineering 676800 No. of Production orders
676800/120= 5640 per order
Labour force 2350000 Direct Labour
Hours
2350000/470000=
5.00 per DLH
2. Calculation of Total Nos. of Cost Drivers:
- No. of Production Runs: A: 60000/600 = 100
B: 40000/800 = 50
C: 80000/1000 = 80
230 Runs
- Machine Hours: A: 2 x 60000 = 120000
B: 1.5 x 40000 = 60000
C: 1 x 80000 = 80000
260000 hours
- No. of Receipts = 20+10+25= 55 Receipts
- No. of Deliveries = 500+300+400= 1200 Deliveries
- No. of Production Orders = 60+20+40= 120 Orders
- Direct Labour Hours [Refer to W.N.2 of (i)]
A: 150000; B: 160000 & C: 160000= 470000 hours
Question 29
Bajju Limited produces three types of products Viz., X, Y and Z. The following data related a period are as follows:
Production and sales (units)
Raw material costs (Rs.)
Machine hours
Products
X Y Z Total
60000 per unit
50
2.5
40000 per unit
40
2
16000 per unit
22
4
294000
185
Direct labour costs (Rs.)
No. of production runs
No. of deliveries
No. of receipts
No. of production orders
160
6
180
60
75
240
14
60
140
50
120
40
400
880
125
60
640
1080
250
Overheads: Rs.
Setup Cost 60000
Machines Cost 1520000
Stores Receiving Cost 870000
Dispatching Cost 500000
Engineering Cost 746000
The company operates a JIT inventory policy and receives each component once per production run.
You are required to:
i) Compute the per unit product cost based on Machine hour recovery rate of overheads.
ii) Compute the per unit product cost using activity based costing.
Answer
(i) Traditional Method of absorption of overhead i.e. on the basis of Machine Hour Rate
Machine Hour Rate = Hours Machine Total
Overheads Total
= 294000
3696000 = Rs.12.57 per machine hour
Calculation of cost of the products under Traditional Method of apportioning overheads:
X Y Z
Rs. Rs. Rs.
Raw Material 50.00 40.00 22.00
Direct Labour 160.00 240.00 120.00
Overheads(@Rs.12.57 per machine hour for 2.5,2 and 4)
31.43 25.14 50.28
Product cost per unit (Total) 241.43 305.14 192.28
186
(ii) Calculation of per unit product cost using ABC system
Particulars X Y Z
Raw material Cost
Direct Labour Cost
Overheads (refer to W.N.)
Rs.
50
160
19.91
Rs.
40
240
18.41
Rs.
22
120
110.33
Product Cost per unit 229.91 298.41 252.33
Working Note:
Calculation of Cost Driver Rates, Product wise cost
Activity Cost Driver Rate (Rs.)
X Y Z
Total (Rs.)
Per Unit (Rs.)
Total (Rs.) Per Unit (Rs.)
Total (Rs.)
Per Unit (Rs.)
Setup
60000/60= Rs. 1000 per production run
6000
0.10
14000 0.35
40000 2.50
Machines
1520000/ 294000 = Rs. 5.17 per hour
(5.17 x 2.50 x 60000)
12.93
(5.17 x 2 x 40000)
10.34
(5.17 x 4 x 16000)
20.68
Stores receiving
870000/1080 = Rs. 805.56 per receipt
(805.56 x 60)
0.81
(805.56 x 140)
2.82
805.56 x 880)
44.31
Despatching
500000/640= Rs. 781.25 per delivery
(781.25 x 180)
2.34
(781.25 x 60)
1.17
(781.25 x 400)
19.53
Engineering 746000/250= Rs. 2984 per production order
(2984 x 75)
3.73 (2984 x 50) 3.73 (2984 x 125)
23.31
Total per unit overheads using ABC
19.91 18.41 110.33
187
Question 30
Priya Udyog produces three products, viz., R, S and T. The data relating to these products for the year ended 31st March, 2016 are as follows:
R S T
Output (units)
Material cost per unit (Rs.)
Direct Labour Cost per unit (Rs.)
Machine hours per unit
No. of material receipts
No. of times materials handled
No. of Setup
No. of Spare parts
20,000
35
40
0.5
15
42
12
8
30,000
40
50
1.00
12
35
18
10
40,000
80
60
2.00
18
40
20
12
During the period manufacturing overheads are as under:
Rs.
Machines-operation cost
Material ordering cost
Material handling cost
Setup Cost
Cost relating to spare parts
2350000
81450
210600
32250
49200
You are required to:
(i) Select a suitable cost driver for each item of overhead cost and calculate the cost driver rates.
(ii) Compute the per unit cost of production of each product using activity based costing.
Answer
(i) Statement Showing Selection of Cost Drivers and Computation of Cost Driver Rates
Activity Pool Activity Cost (Rs.)
Cost Driver Nos. of Cost Driver
Cost Driver Rates (Rs.)
Machine Operation
2350000 Machine hours 100000
2350000/100000= 23.50 per hour
188
Material Ordering
81450 No. of Material receipts
45 81450/45= 1810 per receipt
Material handling
210600 No. of material handled
117 210600/117= 1800 per time
Setup 32250 No. of Set up 50 32250/50= 645 per setup
Spare parts 49200 No. of Spare parts
30 49200/30= 1640 per spare part
(ii) Statement Showing Cost of Production
Particulars R S T
1. Output (Units) 20000 30000 40000
Material Cost per Unit
Direct Labour
Rs.
35
40
Rs.
40
50
Rs.
80
60
2. Prime Cost per Unit 75 90 140
3. Total Prime Cost (1 x 2) 1500000 2700000 5600000
Overheads:
Machine operation @ Rs. 23.50 per hour for 10000; 30000 & 60000 hrs.
Ordering Cost @ Rs. 1810 for 15, 12 & 18 Receipts
Handling Cost @ Rs. 1800 for 42, 35 & 40 times
Setup @ Rs. 645 for 12, 18 & 20 Setups
Spare parts @ Rs. 1640 for 8, 10 & 12 parts
235000
27150
75600
7740
13120
705000
21720
63000
11610
16400
1410000
32580
72000
12900
19680
4. Total Overhead Cost 358610 817730 1547160
Total Cost of Production (3+4) 1858610 3517730 7147160
Cost of Production per Unit (4÷1) 92.9305 117.2577 178.679
189
Working Notes:
Machine hours:
Product R: 0.5 x 20000 = 10000 hrs.
Product S: 1.00 x 30000 = 30000 hrs.
Product T: 1.50 x 40000 =60000 hrs.
Total Machine hours 100000
Question 31
Mogari Limited produces a range of products and out of these, three products are named as ‘KC’, ‘JP’ and ‘ML’. Details of the three products for a period are as follows:
Output (Units)
Raw Material Cost per unit (Rs.)
Direct Labour hours per unit
Machine hours per unit
KC
11200
105
2
0.5
JP
18200
140
2.4
1.5
ML
31500
85
1.6
1.00
Direct wages @ Rs. 45 per labour hour and factory overheads are absorbed @ Rs. 180 per machine hour rate basis on total 257600 Machine hours for all products.
Further analysis shows that the total factory overheads can be divided into following manner:
Relating to machines 40%
Relating to material handling 20%
Relating to inspection 15%
Relating to setup 25%
Total Factory Overheads 100%
The following activities are identified relating to products for the period:
KC JP ML Other Products
No. of movements of material
No. of inspections
No. of setups
12
145
115
18
208
160
35
310
210
2511
16725
25275
190
You are required to:
(i) Calculate the cost per unit for each of the three products based on machine hour rate.
(ii) Calculate the cost per unit for each of the three products using activity based costing.
Answer
(i) Computation the per unit cost of three products based on M.H.R.
Particulars KC JP ML
Raw Material
Direct Labour @ Rs. 45 per hour for 2, 2.4 & 1.6 hours
Factory Overheads @ Rs. 180 per machine hour for 0.5, 1.5 & 1.00 hours
Rs.
105
90
90
Rs.
140
108
270
Rs.
85
72
180
Per Unit Cost of Products 285 518 337
(ii) Computation the per Unit Cost of the product using Activity Based Costing
Particulars KC JP ML
Raw Material
Direct Labour [as above (i)]
Factory Overheads (refer W.N. 6)
Rs.
105
90
49.66
Rs.
140
108
120.09
Rs.
85
72
82.94
244.66 368.09 239.94
Working Notes:
1. Total Factory Overheads = 257600 Machine hours @ Rs. 180 per hour = Rs. 46368000
2. Total Product wise machine hours:-
Relating to product ‘KC’= 11200 x 0.5 = 5600
Relating to product ‘JP’= 18200 x 1.5 = 27300
Relating to Product ‘ML’=31500 x 1.00 = 31500
64400
3. Allocation of factory overheads over different activities are:
Machines 46368000 x 40% = 18547200
191
Material handling 20% = 9273600
Inspection 15% = 6955200
Setup 25% = 11592000
4. Total No. of material movements = 12+18+35+2511 = 2576
Total No. of Inspections =145+208+310+16725 = 17388
Total No. of setup = 115+160+210+25275 = 25760
5. Calculation of Cost Driver Rates
Activity
(1)
Cost
Rs. (2)
Nos. of Cost
Driver (3)
Cost Driver Rate (Rs.)
(4)=(2)/(3)
Machines
Material Handling
Inspection
Setup
18547200
9273600
6955200
11592000
257600 Machine hour
2576 Movements
17388 Inspections
25760 Setups
72 per machine hour
3600 per movement
400 per inspection
450 per setup
6. Calculation of product wise factory overheads using ABC
Particular KC JP ML
-Machine relating [email protected] per hour for 5600, 27300 & 31500 hours
-Material handling [email protected] per movement for 12,18 & 35 movements
-Inspection Cost @ Rs. 400 per inspection for 145,208 & 310 inspection.
-Set up [email protected] per set up for 115,160 & 210 setups.
Rs.
403200
43200
58000
51750
Rs.
1965600
64800
83200
72000
Rs.
2268000
126000
124000
94500
Product wise total overhead 556150 2185600 2612500
Output (Units) 11200 18200 31500
Product wise overhead cost per unit 49.66 120.09 82.94
***
192
Question 1
What is Non-Integrated Accounting system? Write down the list of principal ledger maintained under Non-Integrated Accounting system?
Answer
It is a system of accounting under which separate ledgers are maintained for cost and financial accounts by Accountants. Under such a system the cost accounts restricts itself to recording only those transactions which relate to the product or service being provided. Hence items of expenses which have a bearing with sales or, production or for that matter any other items which are under the factory management are the ones dealt with in such accounts.
A special feature of the non-integrated system of accounts is its ability to deal with notional expenses like rent or interest on capital tied up in the stock. The accounting of notional rent facilitates comparisons amongst factories (some owned and some rented). Similarly, recognition of interest on capital tied up in stock could help make the stores and works managers aware of the money being blocked because of holding stock.
Non Integrated Accounting Systems contain fewer accounts when compared with financial accounting because of the exclusion of purchases, expenses and also Balance Sheet items like fixed assets, debtors and creditors. Items of accounts which are excluded are represented by an account known as cost ledger control account.
These are the list of principal ledger accounts maintained under Non-Integrated accounting systems:
(1) Stores ledger : It is used to record both the quantity and amount of receipts, issues and balance of materials and supplies. It consists of all store accounts.
(2) Payroll and wage analysis book : It is used to record the wages. The basis for recording the transactions are (a) clock cards,(b) time tickets, and (c) piece work tickets.
(3) Job ledger : It is used to record the material cost, wages, and overheads incurred in respect of a job.
(4) Finished goods stock ledger : It is used to record the receipt of finished goods from production department, the sale and stock of finished goods both in terms of quantity and value.
6
Cost Records
193
(5) Standing order ledger : It is used to record overheads incurred.
(6) Debtors’ Ledger : It contains personal accounts of all trade debtors.
(7) Creditors’ Ledger : It contains personal accounts of all trade creditors.
Question 2
What is integrated (integral) Accounting system ? Write down the essential characteristics of Integral Accounting?
Answer
Integrated Accounting is a system in which the accounts are integrated and only a single set of accounts are maintained for Cost & Financial records. It avoids maintenance of Accounts under cost accounting & financial accounting. This enables a firm to eliminate separate Profit & Loss Accounts under financial accounting and cost accounting system & only one Profit & Loss Accounts are prepared. It provides entire information for the ascertainment of cost of each unit as well as preparation of a balance sheet as per the legal requirement of the organization. It also provides necessary information as required by the costing and financial department. There is general Ledger Control A/c is prepared in this system.
Characteristics of Integral Accounting
The following are the important characteristics of an integral accounting system:
1. It records financial transactions not normally required for cost accounting be sided recording internal costing transactions prepayments and accruals are opened.
2. Stores transactions are recorded in the stores control accounts. This account is debited with the cost of stores purchased corresponding credit being given to cash or sundry creditors depending whether the purchase is made for cash or on credit.
3. Wages control account is debited with the wages paid, contra credit is taken in cash or bank accounts.
4. Overhead expenses are debited to the overhead control account, corresponding credit being given to cash or bank account or the sundry creditors.
5. Transactions relating to materials, labour cost overheads are posted in the stores wages and overhead control account after making suitable cost analysis and that the end of the period transfer of the totals is made to the work-in-progress accounts by crediting various control accounts. The day to day cost analysis made for this purpose is known as making third etc. These entries do not mean entries in the same sense a entry of transaction in the ledger but such entries are simply a sort of cash analysis.
6. All advances payments are credited and accruals debited to the respective control account by contra entries in the prepayments and accrual accounts.
7. Capital asset account is debited and respective control accounts are credited in the process of cost analysis of expenditure.
194
Question 3
Write short notes on:
(a) Cost Control Accounts
(b) Integral system of accounting
(c) Costing Profit and Loss Account
(d) Memorandum reconciliation account
(e) Reconciliation
Answer
(a) Cost Control Account : These are accounts maintained for the purpose of exercising control over the costing ledgers and also to complete the double entry in cost accounts.
(b) Integral System of Accounting : A system of accounting where both costing and financial transactions are recorded in the same set of books.
(c) Costing Profit and Loss Account : This account records the transfer of under or over recovered overheads, abnormal losses or gains and profit or loss transferred from sales account. The closing balance represents net profit or loss and transferred to General Ledger Adjustment Account.
(d) Memorandum reconciliation account : Reconciliation can be done by preparing a memorandum reconciliation account. This account is a memorandum account only and does not form part of double entry. When reconciliation is attempted through Memorandum Reconciliation Account, Profit to be taken as “base profit” is shown like opening balance in this account. All items of difference required to be deducted are debited and those to be added are credited to this account, the balancing figure of this account is the profit shown by other set of accounts.
(e) Reconciliation : In the non-integrated system of accounting, since the cost and financial accounts are kept separately, it is imperative that those should be reconciled; otherwise the cost accounts would not be reliable. The reason for differences in the cost and financial accounts can be purely of financial nature (Income and expenses) and notional nature.
Question 4
Write down the merit & limitations of Non-Integrated Accounting systems ?
Answer
The following are the main advantages of this accounting system:
1. This system tends to coordinate the functions of different selections of the accounts department since all efforts are integrated and directed towards achievement of one aim that is providing a high level of efficiency.
2. The accounting procedures can be simplified and the system can be centralised with the object of achieving a greater control over the organization.
195
3. The system creates conditions which are eminently suitable for the introduction of mechanized accounting.
4. There is no possibility of overlooking any expense under the system.
5. As cost accounts are posted straight from the books of original entry, there is no delay in obtaining the data.
6. There is automatic check on the correctness of the cost data. It ensures that all legitimate expenditure is included in Cost accounts and reliable and proved data is provided to the management for its decisions’.
7. Integrated accounting widens the outlook of the accountant.
8. It can be maintained according to convenience as it need not be statutorily maintained.
Limitations of Non-Integrated Accounting
The following are some of the limitations of this accounting system:
1. The Financial transactions other than cost incurred are not recorded in the system.
2. Transactions involving payment other than that of cost are not included in the system e.g: loss on fixed assets.
3. There is always a diff between the profits reported as per the Cost accounting system and the Financial Accounting System.
Question 5
What are the needs for Reconciliation of costing and financial profit?
Answer
In those concerns where there are no separate cost and financial accounts, the problem of reconciliation does not arises. But where cost and financial accounts are maintained independent of each other, it is imperative that periodically two accounts are reconciled. Though both sets of books are concerned with the same basic transactions but the figure of profit disclosed by the former does not agree with the disclosed by the later. Thus, reconciliation between the two sets of books is necessary due to the following reasons:
1. To find out the reason of the difference in the profit or loss in the cost and financial accounts to indicate the position clearly and to be sure that no mistakes pertaining to the accounts have been committed.
2. To ensure the mathematical accuracy and reliability of cost accounts in order to have cost ascertainment, cost control and to have a check on the financial accounts.
3. To contribute to the standardization of policies regarding stock valuation, depreciation and overheads.
196
4. To facilitate coordination and promote better cooperation between the activities of financial and cost sections of accounting department.
5. To place management in a better position to acquaint itself with the reasons for the variation in profits paving the way to more accurate internal control.
Question 6
A manufacturing company disclosed a Net Loss of Rs. 3,43,200 as per their Cost Accounts for the year ended March 31, 2015. The Financial Accounts however disclosed a Net Loss of Rs. 5,30,400 for the same period. The following information was revealed as a result of scrutiny of the figures of both the set of Books.
Rs
(i) Factory Overheads Over-absorbed 9,600
(ii) Administration Overheads under absorbed 14,400
(iii) Depreciation charged in Financial Accounts 1,32,000
(iv) Depreciation charged in Cost Accounts 1,47,000
(v) Interest on Investments not included in Cost Accounts. 38,400
(vi) Income Tax Provided 92,400
(vii) Interest on loan funds in Financial Accounts 1,57,800
(viii) Transfer fees (Credits in financial books) 9,600
(ix) Stores adjustment (Credit in financial books) 4,800
Prepare a Memorandum Reconciliation Statement.
Answer
Memorandum Reconciliation Account
Particulars Rs. Rs.
Net Loss as per Financial Books 5,30,400
Add: Factory overheads over absorbed in Cost Accounts 9,600
Interest on Investment not included in Cost Accounts 38,400
Depreciation over charged in Cost Accounts 15,000
Transfer fees in financial books 9,600
Stores Adjustment in financial books 4,800 77,400
6,07,800
Less: Administration overheads under recovered in Cost Accounts 14,400
197
Income Tax not provided in Cost Accounts 92,400
Interest on loan fund not included in Cost Accounts 1,57,800 2,64,600
Net Loss as per Cost Accounts 3,43,200
Question7
PQR Ltd., made a Net Profit of Rs. 3,99,700 during the year 2015 as per the their financial system. Whereas their cost accounts disclosed a profit of Rs. 5,44,040. On reconciliation, the following differences were noticed :
(1) Directors fees charged in financial account, but not in cost account Rs. 9,100.
(2) Bank interest credited in financial account, but not in cost account Rs. 420.
(3) Income Tax charged in financial account, but not in cost account Rs. 1,16,200.
(4) Bad and doubtful debts written off Rs. 7,980 in financial accounts.
(5) Overheads charged in costing books Rs. 1,19,000 but actual were Rs. 1,16,480.
(6) Loss on sale of old machinery Rs.14,000 charged in financial accounts.
Prepare a reconciliation Statement.
Answer
Reconciliation Statement
Particulars Amount (Rs.) Amount (Rs.)
Profits as per Financial Account 3,99,700
Add: Director fees charged in financial account but not in Cost account 9,100
Income Tax charged in financial account
but not in Cost Account 1,16,200
Bad and doubtful debts written off 7,980
Loss on sale of old machinery 14,000 1,47,280
5,46,980
Less : Bank interest credited in financial account
but not in Cost Account 420
Overheads over absorbed in Cost A/c (1,19,000 – 1,16,480) 2,520 2,940
Profit as per Cost Accounts 5,44,040
198
Question 8
ABC Ltd., has furnished you the following information from the financial books for the year ended 30th June, 2015 :
Profit and Loss Account (ended 30th June)
Particulars Amount Particulars Amount
Rs. Rs.
To Purchases 88,235 By Sales (25000 units at Rs.10.5) 2,62,500
Direct wages 36,750
Factory Overheads 42,455 Rent Received 910
Office & Administrative} Profit on sale of investment 8,190
Overheads 18,690 Closing Stock 14,280
Depreciation 3,850
Selling Expenses 24,850
Net Profit 71,050 ________
2,85,880 2,85,880
The cost sheet shows the costing profit of Rs. 69,195 and closing stock of Rs. 14,980. The factory overheads are absorbed at 100% of direct wages and Office and Administrative overheads are charged at Re. 0.70 per unit. Selling expenses are charged at 10% of Gross of sales. Depreciation in cost account absorbed was Rs. 2,800.
You are required to prepare:
(1) A statement showing as per cost account for the year ended 30th June, 2015.
(2) Statement showing the reconciliation of profit disclosed in cost accounts with the profit shown in the financial accounts.
Answer
Profit as per Cost Accounts
Particulars Amount (Rs.)
Purchases 88,235
Add: Direct Wages 36,750
Prime Cost 1,24,985
Add: Factory overhead at 100% on direct wages 36,750
1,61,735
Add: Depreciation 2,800
Factory cost or Works cost 1,64,535
Add: Office & Administrative overhead at Re. 0.70 Per unit 17,500
Cost of Production 1,82,035
Less: Closing stock of finished goods 14,980
Cost of goods sold 1,67,055
199
Add: Selling expenses at 10% of Rs. 2,62,500 26,250
Cost of Sales 1,93,305
Costing Profit 69,195
Sales 2,62,500
Reconciliation Statement
Particulars Amount Rs. Amount Rs.
Profits as Financial Account 71,050
Add: Over valuation of closing stock in Cost a/c 700
Under absorption of Factory overhead in Cost A/c 5,705
Under absorption of Office & Adm. Overhead in Cost A/c 1,190
Depreciation under absorbed in Cost A/c 1,050 8,645
79,695
Less: Over absorption of selling expenses in Cost A/c 1,400
Rent received charged in Financial A/c 910
Profit on sale of investment charged in Financial A/c 8,190 10,500
Profit as per Cost A/c 69,195
Question 9
XYZ & Co. operates separate Cost & Financial systems. The following is the list of Opening balances as on 01.04.2014 in the Cost Ledger :
Debit Credit
Rs. Rs.
Store Ledger Control Account 56,044
WIP Control Account 1, 09,825
Finished Goods Control Account 32,319
General Ledger Adjustment Account - 1, 98,188
Transactions for the quarter ended 30/06/2014 are given below:
Rs
Materials Purchased 28,035
Materials issued to Production 42,000
Materials issued for factory repairs 945
Factory wages paid 81,375
Production overhead incurred 99,960
Production overhead Under-absorbed and Written-off 3,360
Sales 2, 68,800
The company’s Gross Profit is 25% on Factory cost.
Prepare the relevant control accounts, Costing Profit & Loss Account and General Ledger Adjustment Account to record the above transactions for the quarter ended 30/06/2014.
200
Answer
General Ledger Adjustment Account
To Sales
To Balance c/d
Rs.
2,68,800
1,89,158
4,57,958
By Balance b/d
By Stores Ledger Control Account
By Wages Control Account
By Factory Overhead Control Account
By Costing Profit & Loss Account
Rs.
1,98,188
28,035
81,375
99,960
50,400
4,57,958
Stores Ledger Control Account
To Balance b/d
To General Ledger Adjustment Account
Rs.
56,044
28,035
_________ 84,079
By WIP Control Account
By Factory Overhead Control Account
By Balance c/d (Bal. Fig.)
Rs.
42,000
945
41,134
__________84,079
Wages Control Account
To General Ledger Adjustment Account
Rs.
81,375
81,375
Factory overhead control a/c
By WIP Control Account
Rs.
3875
77,500
81,375
Factory Overhead Control Account
To Stores Ledger Control Account
Wage control a/c
To General Ledger Adjustment Account
Rs.
945
3875
99,960
1,04,780
By WIP Control Account (Bal. Fig.)
By Costing Profit & Loss A/c
Rs.
1,01,420
3,360
1,04,780
201
Wip Control Account
To Balance b/d
To Stores Ledger Control Account
To Wages Control Account
To Factory Overhead Control Account
Rs.
1,09,825
42,000
77,500
1,01,420
3,30,745
By Finished Goods Control Account (Bal. Fig.)
By Balance c/d
Rs.
2,17,045
1,13,700
3,30,745
Finished Goods Control Account
To Balance b/d
To WIP Control Account
Rs.
32,319
2,17,045
2,49,364
By Cost of Sales A/c
(2,68,800-20% of 2,68,800)
By Balance c/d (Bal. Fig.)
Rs.
2,15,040
34,324
2,49,364
Cost of Sales Account
To Finished Goods Control A/c
Rs.
2,15,040
By Costing Profit & Loss A/c
Rs.
2,15,040
Sales Account
To Costing Profit & Loss A/c
Rs.
2,68,800
By General Ledger Adjustment A/c
Rs.
2,68,800
Costing Profit & Loss Account
To Factory Overhead Control Account
To Cost of Sales A/c
To General Ledger Adjustment A/c
Rs.
3,360
2,15,040
50,400
2,68,800
By Sales A/c
Rs.
2,68,800
2,68,800
202
Trial Balance
Stores Ledger Control Account
WIP Control Account
Finished Goods Control A/c
General Ledger Adjustment A/c
Rs.
41,134
1,13,700
34,324
1,89,158
Rs.
1,89,158
1,89,158
Question 10
The following is the Trading and Profit & Loss Account of RST Limited :
Dr. Cr.
Particulars Rs. Particulars Rs.
To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000
To Direct Wages 12,05,750 By Finished Goods Stock
To Production Overheads 6,92,250 (1,000 units) 1,30,000
To Administration Overheads 3,10,375 By Work-in-Progress :
To Selling & Distribution Overheads 3,68,875 Materials 55,250
To Preliminary Expenses written off 22,750 Wages 26,000
To Goodwill written off 45,500 Production
To Fines 3,250 Overheads 16,250 97,500
To Loss on Sale of Machine 16,250 By Dividends received 3,90,000
To Taxation 1,95,000 By Interest on Bank Deposits 65,000
To Net Profit for the year 3,96,500 ___________
55,57,500 55,57,500
RST Limited manufactures a standard unit.
The cost Accounting records of RST Ltd. Shows the following :
(i) Production overheads have been charged to work-in-progress at 20% on prime cost.
(ii) Administrative overheads have been recorded at Rs. 9.75 per finished unit.
(iii) Selling & Distribution overheads have been recorded at Rs. 13 per unit sold.
(iv) The under or Over absorption of Overheads has not been transferred to Costing P/L A/c.
203
Required :
(i) Prepare a Proforma Costing Profit & Loss Account, indicating Net Profit.
(ii) Prepare control accounts for production overheads, administration overheads and selling & distribution overheads.
(iii) Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial Accounts.
Answer
Statement of Cost and Profit
Rs.
Materials 23,01,000
Wages 12,05,750
Prime Cost 35,06,750
Production Overheads (20% of Prime Cost) 7,01,350
42,08,100
Less : Work-in-progress 97,500
Manufacturing Cost incurred during the year 41,10,600
Add : Administrative Overheads (Rs. 9.75 * 31,000) 3,02,250
- Cost of Production 44,12,850
Less : Closing Stock of Finished Goods [(44,12,850/31,000)*1,000] 1,42,350
Cost of Goods Sold 42,70,500
Add: Selling & Distribution Overheads (Rs. 13 * 30,000) 3,90,000
Cost of Sales 46,60,500
Profit 2,14,500
Sales 48,75,000
(ii) Production Overheads Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To General Ledger Adjustment A/c 6,92,250 By Work-in-Progress 7,01,350
To Balance c/d 9,100
7,01,350 7,01,350
204
Administrative Overheads Account Dr. Cr.
Particulars Rs. Particulars Rs.
To General Ledger Adjustment A/c 3,10,375 By Finished Goods A/c 3,02,250
By Balance c/d 8,125
3,10,375 3,10,375
Selling & Distribution Overheads Account Dr. Cr.
Particulars Rs. Particulars Rs.
To General Ledger Adjustment A/c 3,68,875 By Cost of Sales A/c 3,90,000
To Balance c/d 21,125
3,90,000 3,90,000
(iii) Reconciliation Statement
Rs. Rs.
Profit as per Cost Accounts 2,14,500
Add: Production overheads over recovered 9,100 Selling and distribution overheads over recovered 21,125
Dividend received 3,90,000
Interest on Bank Deposits 65,000 4,85,225 6,99,725
Less: Administrative overheads under recovered 8,125 Preliminary Expenses written off 22,750
Goodwill written off 45,500 Fines 3,250
Loss on sale of machine 16250
Taxation 1,95,000
Overvaluation of Finished Stock in cost accounts
(1,42,350-1,30,000) 12,350 3,03,225
Profit as per Financial Accounts 3,96,500
Question 11
The following information is available from the financial books of ABC LTD. having a normal production capacity of 60,000 units for the year ended 31st March, 2015:
(c) Sales Rs. 10,00,000 (50,000 units).
(ii) There was no opening and closing stock of finished units.
205
(iii) Direct material and direct wages cost were Rs. 5,00,000 and Rs. 2,50,000 respectively.
(iv) Actual factory expenses were Rs. 1,50,000 of which 60% are fixed.
(v) Actual administrative expenses were Rs. 47,000 which are completely fixed.
(vi) Actual selling and distribution expenses were Rs. 30,000 of which 40% are fixed.
(vii) Interest and dividends received Rs. 15,000.
You are required to:
(a) Find out profit as per financial books for the year ended 31st March, 2015;
(b) Prepare the cost sheet and ascertain the profit as per the cost accounts for the year ended 31st March,2015 assuming that the indirect expenses are absorbed on the basis of normal production capacity; and
© Prepare a statement reconciling profits shown by financial and cost books.
Answer
Working notes
Profit & Loss Account
Dr. (For the year ended 31st March, 2015) Cr.
Rs. Rs.
To Direct material 5,00,000 By Sales (50,000 units) 10,00,000
To Direct wages 2,50,000 By Interest and dividends 15,000
To Actual factory expenses 1,50,000
To Actual administrative expenses 47,000
To Actual selling and distribution
Expenses 30,000
To Profit 38,000
10,15,000 10,15,000
(a) Profit as per financial books for the year ended 31st March, 2015 is Rs. 38,000 .
(b) Cost Sheet
(For the year ended 31st March, 2015)
Rs.
Direct material 5,00,000
Direct wages 2,50,000
Prime cost 7,50,000
206
Factory expenses:
Variable - Rs. 60,000
Fixed - Rs. 75,000 1,35,000
Works cost 8,85,000
Administrative expenses: 37,500
Cost of production 9,22,500
Selling & distribution expenses:
Variable Rs. 18,000
Fixed Rs. 10,000 28,000
Cost of Sales 9,50,500
Profit 49,500
Sales Revenue 10,00,000
(c) Statement of Reconciliation
(Reconciling Profit shown by Financial and Cost Accounts)
Rs. Rs.
Profit as per cost account 49,500
Add : Income from interest and dividends 15,000 64,500
Less: Factory expenses under-charged in cost accounts 15,000
(Rs. 1,50,000 - Rs. 1,35,000)
Administrative expenses under-charged in cost accounts 9,500
(Rs. 47,000 – Rs. 37,500)
Selling & distribution expenses under-charged in cost accounts 2,000 26,500
(Rs. 30,000 – Rs. 28,000)
Profit as per Financial accounts 38,000
Question 12
The following figures, have been extracted from the financial accounts of a Devankit textiles for the first year of its operation:
Rs.
Direct material consumption 5,00,000
Direct wages 3,00,000
Factory overhead 1,60,000
Administrative overheads 70,000
207
Selling & distribution overheads 96,000
Bad debts 8,000
Preliminary expenses written off 4,000
Legal charges 1,000
Dividends received 10,000
Interest received on deposits 2,000
Sales (12,000 units) 12,00,000
Closing stock:
Finished goods (400 units) 32,000
Work-in-progress 24,000
The cost accounts for the same period reveals that the direct material consumption was Rs. 54,60,000. Factory overhead is recovered at 20% on prime cost. Administrative overhead is recovered at Rs. 6 per unit of production. Selling and distribution overheads are recovered at Rs. 8 per unit sold.
Prepare the Profit and Loss Account both as per financial records and as per cost records. Reconcile the profits as per the two records.
Answer
Profit and Loss Account
Dr. (As per financial records) Cr.
Rs. Rs.
To Direct material 5,00,000 By Sales (12,000 units) 12,00,000
To Direct wages 3,00,000 By Closing stock:
To Factory overheads 1,60,000 WIP 24,000
To Gross profit c/d 2,96,000 Finished goods (400 units) 32,000
12,56,000 12,56,000
To Administrative overheads 70,000 By Gross profit b/d 2,96,000
To Selling & Distribution overheads 96,000 By Dividend 10,000
To Bad debts 8,000 By Interest 2,000
To Preliminary expenses written off 4,000
To Legal charges 1,000
To Net Profit 1,29,000
3,08,000 3,08,000
208
Statement of Cost and Profit (As per Cost Records)
Total Rs.
Direct Material 5,60,000
Direct wages 3,00,000
Prime Cost 8,60,000
Factory Overhead 1,72,000
10,32,000
Less : Closing Stock (WIP) 24,000
Works Cost (12,400 unit) 10,08,000
Administration Overhead (12,400 units @ Rs. 6 p.u.) 74,400
Cost of Production (12,400 units) 10,82,400
Less : Finished goods (400 units @ Rs. 87.29) 34,916
Cost of goods sold (12,000 units) 10,47,484
Selling and distribution overhead (12,000 @ Rs. 8 p.u.) 96,000
Cost of Sales 11,43,484
Net profit 56,516
Sales Revenue 12,00,000
Statement of Reconciliation of Profit as Obtained Under Cost and Financial Accounts
Rs. Rs.
Profit as per Cost records 56,516
Add : Excess of material consumption 60,000
Excess factory overhead 12,000
Excess Administration overhead 4,400
Dividend Received 10,000
Interest Received 2,000 88,400
1,44,916
Less : Bad debts
Preliminary expenses written off 8000
Legal Charges 4000
Over-valuation of stock in cost book 1000
(Rs. 3,49,16–Rs. 3,20,00) 2916 15,916
Profit as per Financial records 1,29,000
209
Question 13
On 31st March, 2015 the following balances were extracted from the books of a Manufacturing Company
Dr. Cr.
Rs. Rs.
Stores Ledger Control A/c 35,000
Work-in-progress A/c 38,000
Finished goods Control A/c 25,000
Cost ledger control A/c _________ 98,000
98,000 98,000
The following transactions took place in April, 2015:
Rs. Raw materials:
Purchased 95,000
Return to suppliers 3,000
Issued to production 98,000
Return to stores 3,000
Productive wages 40,000
Indirect labour 25,000
Factory overhead expenses incurred 50,000
Selling and administrative expenses 40,000
Cost of finished goods transferred to warehouse 2,13,000
Cost of goods sold 2,10,000
Sales 3,00,000
Factory overheads are applied to production at 150% of direct wages, any under/over absorbed overhead being carried forward for adjustment in the subsequent months. All administrative and selling expenses are treated as period cost and charged off to the Profit & Loss A/c of the month in which they are incurred.
Show the following accounts:
(a) Cost ledger control A/c
(b) Stores ledger control A/c
(c) Work-in-progress control A/c
(d) Finished goods stock control A/c
(e) Factory overhead control A/c
(f) Costing profit and loss A/c
(g) Trial balance as at 30th April, 2015.
210
Answer
(a) Cost Ledger Control A/c
Dr. Cr.
Rs. Rs.
To costing profit and loss A/c 3,00,000 By balance b/d 98,000
To stores ledger control A/c 3,000 By stores ledger control A/c 95,000
To balance c/d 95,000 By wages control A/c 65,000
(Productive + Indirect)
By Factory overhead control A/c 50,000
By selling & administrative
Overhead expenses A/c 40,000
______ By costing profit and loss A/c 50,000
3,98,000 3,98,000
(b) Stores Ledger Control A/c
Dr. Cr.
Rs. Rs.
To balance b/d 35,000 By cost ledger control A/c 3,000
To cost ledger control A/c 95,000 By Work-in-progress A/c 98,000
To Work-in-progress A/c 3,000 By balance c/d 32,000
1,33,000 1,33,000
(c) Work-in-Progress Control A/c
Dr. Cr.
Rs. Rs.
To balance b/d 38,000 By stores ledger control A/c 3,000
To stores ledger control A/c 98,000 By Finished goods A/c 2,13,000
To wages control A/c 40,000 By balance c/d 20,000
To Factory overhead control A/c 60,000 ______
2,36,000 2,36,000
211
(d) Finished Goods Control A/c
Dr. Cr.
Rs. Rs.
To balance b/d 25,000 By cost of goods sold A/c 2,10,000
To Work-in-progress control A/c 2,13,000 By balance c/d 28,000
2,38,000 2,38,000
(e) Factory overhead control A/c
Dr. Cr.
Rs. Rs.
To wages control A/c 25,000 By Work-in-progress A/c 60,000
To cost ledger control A/c 50,000 By balance c/d 15,000
75,000 75,000
(f) Costing Profit and Loss A/c
Dr. Cr.
Rs. Rs.
To cost of goods sold A/c 2,10,000 By cost ledger control A/c
(sales) 3,00,000
To selling and administrative overhead A/c 40,000
To cost ledger control A/c (costing profit) 50,000 _______
3,00,000 3,00,000
(g) Trial Balance (as at 30th April, 2015)
Dr. Cr.
Rs. Rs.
Stores ledger control A/c 32,000
Work-in-progress control A/c 20,000
Finished goods control A/c 28,000
Factory overhead control A/c 15,000
Cost ledger control A/c ______ 95,000
95,000 95,000
212
Working notes:
(1) Wages control A/c
Dr. Cr.
Rs. Rs.
To cost ledger control A/c 65,000 By Work-in-progress control A/c 40,000
By Factory overhead control A/c 25,000
65,000 65,000
(2) Cost of goods Sold A/c
Dr. Cr.
Rs. Rs.
To Finished goods control A/c 2,10,000 By costing profit and loss A/c 2,10,000
2,10,000 2,10,000
(3) Selling & Administrative Expenses A/c
Dr. Cr.
Rs. Rs.
To cost ledger control A/c 40,000 By costing profit and loss A/c 40,000
40,000 40,000
Question 14
Journalise the following transaction assuming that the cost and financial transactions are integrated: Rs
Raw materials purchased 2,00,000
Direct materials issued to production 1,50,000
Wages paid (30% indirect) 1,20,000
Wages charged to production 84,000
Manufacturing expenses incurred 84,000
Manufacturing overhead charged to production 92,000
Selling and distribution costs 20,000
Finished products (at cost) 2,00,000
Sales 2,90,000
213
Closing stock Nil
Receipts from debtors 69,000
Payments to creditors 1,10,000
Answer
Journal Entries
Dr. Cr.
Rs. Rs.
Stores ledger control A/c Dr. 2,00,000
To Creditors’ A/c 2,00,000
(Materials purchased)
Work-in-Progress control A/c Dr. 1,50,000
To Stores ledger control A/c 1,50,000
(Materials issued to production)
Wages control A/c Dr. 1,20,000
To Bank A/c 1,20,000
(Wages paid)
Factory Overhead control A/c Dr. 36,000
To Wages control A/c 36,000
(30% of wages paid being indirectly charged to overhead)
Work-in-Progress control A/c Dr. 84,000
To Wages control A/c 84,000
(Manufacturing overhead incurred)
Work-in-Progress control A/c Dr. 92,000
To Factory overhead control A/c 92,000
(Manufacturing overhead charged to production)
Selling and distribution overhead control A/c Dr. 20,000
To Bank A/c 20,000
(Selling and distribution costs incurred)
Finished goods ledger control A/c Dr. 2,00,000
To Work-in-Progress control A/c 2,00,000
(Cost of finished goods)
Cost of Sales A/c Dr. 2,20,000
214
To Finished stock ledger control A/c 2,00,000
To Selling and distribution control A/c 20,000
(Costs of goods sold)
Sundry Debtors’ A/c Dr. 2,90,000
To Sales A/c 2,90,000
(Finished stock sold)
Bank A/c Dr. 69,000
To Sundry Debtors’ A/c 69,000
(Receipts from debtors)
Sundry Creditors’ A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Payment made to Creditors)
Question 15
The following balances were extracted from a company’s ledger as on 31st December, 2015:
Dr. Cr.
Rs. Rs.
Raw materials control A/c 48,836
Work-in-Progress control A/c 14,745
Finished stock control A/c 21,980
Nominal ledger control A/c 85,561
85,561 85,561
Further transactions took place during the following quarter as follows:
Rs.
Factory overhead-allocated to WIP 11,786
Goods finished-at cost 36,834
Raw materials purchased 22,422
Direct wages –allocated to WIP 18,370
Cost of goods sold 42,000
Raw materials-issued to production 17,000
Raw materials-Credited by suppliers 1,000
Inventory audit-raw material losses 1,300
WIP rejected (with no scrap value) 1,800
Customer’s return (at cost) of finished goods 3,000
215
Prepare all the ledger accounts in cost ledger.
Answer
General Ledger Adjustment A/c
Dr. Cr.
Rs. Rs.
To Raw material control A/c 1,000 By Balance b/d 85,561
To Raw materials control A/c 1,300 By Raw materials control A/c 22,422
To WIP control A/c 1,800 By wages control A/c 18,370
To Finished stock control A/c 42,000 By Factory overhead control A/c 11,786
To Balance c/d 95,039 By Finished stock control A/c 3,000
1,41,139 1,41,139
Raw Material Control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 48,836 By Work-in-Progress control A/c 17,000
To General Ledger Adjustment A/c 22,422 By General Ledger Adjustment A/c 1,000
(Purchase) (Returns)
By General Ledger Adjustment A/c 1,300
(Losses)
________ By Balance c/d 51,958
71,258 71,258
Work-in-Progress control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 14,745 By Finished stock control A/c 36,834
To Wages control A/c 18,370 By General Ledger Adjustment A/c 1,800
To Raw materials control A/c 17,000 (WIP Rejected)
To Factory overhead control A/c 11,786 By Balance c/d 23,267
61,901 61,901
216
Finished stock control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 21,980 By General Ledger Adjustment A/c 42,000
To WIP control A/c 36,834 (Cost of goods sold)
To General Ledger Adjustment A/c 3,000 By Balance c/d 19,814
(Returns at cost)
_____ _____
61,814 61,814
Question 16
Write down the advantages of Cost Ledger. Prepare a short note on Control Account.
Answer
The following are the advantages of maintaining a cost ledger:
(1) It helps the management in policy decisions as this ledger summarises all detailed information regarding cost in subsidiary records.
(2) It provides the basis for analysis of cost and preparation of accounts for each cost centre for cost ascertainment and control.
(3) It provides a proper control over materials and supplies, labour and overheads.
(4) Standards may be set to provide guidance for measuring and improving efficiency and cost ledger may furnish necessary accounts for submission to the management for control purposes.
(5) The maintenance of cost ledger helps in determining the values of closing stocks and work-in-progress without any delay and makes possible the prompt preparation of profit and loss account and balance sheet at regular intervals.
(6) It serves as a check on the transactions and records in financial accounts.
(7) It facilitates prompt preparation of costing profit and loss account helps management to know the results of operation of the firm.
(8) A system of internal check exists through the use of various control accounts. This helps in detecting errors and thus maintaining accuracy.
(9) When cost accounts are separately maintained, It is possible to maintain confidentiality of cost data.
(10) Maintenance of cost ledger serves to provide elaborate information for planning, control, evaluation of performance and decision-making by facilitating generation of internal reports.
217
Control Accounts
In order to facilitate handling of numerous transactions instead of being posted in general ledger are recorded in subsidiary ledgers. Transactions kept in detail in one or more accounts of the subsidiary ledgers are posted in totals at the end of the period to control accounts. Control accounts are the total accounts maintained in the cost ledger. Each total account represents a subsidiary ledger in which individual accounts are maintained. Stores ledger control account, for instance, represents the stores ledger in which individual stores card are maintained. Individual debits and credits in stock cards are abstracted, totaled and taken into control account in the cost ledger. At any time, the total balance in control account and aggregate of individual balances in subsidiary ledger accounts should agree. Such control accounts:
(i) facilitate compilation of final accounts and reconciliation with financial accounts;
(ii) give a summary of thousands of individual accounts; and
(iii) furnish the total position i.e., to know the value of pending jobs or of materials in hand, one need not list individual balances.
Question 17
A company operates separate cost accounting and financial accounting system. The following is the list of opening balances as on 1st April, 2015 in cost ledger:
Dr. Cr. Rs. Rs.
Stores ledger control A/c 53,375
WIP Control A/c 1,04,595
Finished goods control A/c 30,780
General ledger adjustment A/c 1,88,750
Transactions for the quarter ended 30th June, 2015 are as under:
Rs.
Materials purchased 26,700
Materials issued to production 40,000
Materials issued for factory repairs 900
Factory wages paid (including indirect wages Rs. 23,000) 77,500
Production overhead incurred 95,200
Production overheads under-absorbed and written off 3,200
Sales 2,56,000
The company’s gross profit is 25% on Factory Cost. At the end of the quarter, WIP stocks increased by Rs. 7,500.
Prepare the relevant control accounts, costing P & L A/c and General Ledger Adjustment A/c to record the above transactions for the quarter ended 30th June, 2015.
218
Answer
General Ledger Adjustment A/c
Dr. Cr.
Rs. Rs.
To Sales 2,56,000 By Balance b/d 1,88,750
To Balance c/d 1,80,150 By stores ledger control A/c 26,700
By wages control A/c 77,500
By Factory overhead control A/c 95,200
By Costing Profit & Loss A/c 48,000
4,36,150 4,36,150
Stores Ledger Control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 53,375 By WIP Control A/c 40,000
To General ledger adjustment A/c 26,700 By Factory overhead control A/c 900
By Balance c/d (Bal. Fig.) 39,175
80,075 80,075
Wages control A/c Dr. Cr.
Rs. Rs.
To General ledger adjustment A/c 77,500 By WIP Control A/c(Direct) 54,500
By Factory overhead control A/c 23,000
(Indirect)
77,500 77,500
Factory overhead control A/c Dr. Cr.
Rs. Rs.
To Stores ledger control A/c 900 By WIP Control A/c(Bal. Fig.) 1,15,900
To Wages control A/c 23,000 By Costing profit and loss A/c 3,200
To General ledger adjustment A/c 95,200
1,19,100 1,19,100
219
WIP Control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 1,04,595 By Finished goods control A/c 2,02,900
To stores ledger control A/c 40,000 (Bal. Fig.)
To wages control A/c 54,500 By Balance c/d 1,12,095
To Factory overhead control A/c 1,15,900 (Rs. 1,04,595 +Rs. 7,500)
3,14,995 3,14,995
Finished goods control A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 30,780 By Cost of sales A/c 2,04,800
To WIP Control A/c 2,02,900 (Rs.2,56,000 -20% of Rs.2,56,000)
By Balance c/d(bal. fig.) 28,880
2,33,680 2,33,680
Cost of Sales A/c
Dr. Cr.
Rs. Rs.
To Finished goods control A/c 2,04,800 By Costing Profit and Loss A/c 2,04,800
Sales A/c
Dr. Cr.
Rs. Rs.
To costing Profit and Loss A/c 2,56,000 By General ledger adjustment A/c 2,56,000
Costing Profit and Loss A/c
Dr. Cr.
Rs. Rs.
To Factory overhead control A/c 3,200 By Sales 2,56,000
To cost of sales A/c 2,04,800
To General ledger adjustment A/c 48,000 ______
2,56,000 2,56,000
220
Trial Balance
As on 30th June, 2015
Dr. Cr.
Rs. Rs.
Stores Ledger Control A/c 39,175
WIP Control A/c 1,12,095
Finished goods control A/c 28,880
General ledger adjustment A/c 1,80,150
TOTAL 1,80,150 1,80,150
Question 18
A company operate on historic job cost accounting system, which is not integrated with the financial accounts. At the beginning of a month, the opening balance in cost ledger were:
Rs.(in ‘lakhs)
Stores ledger control A/c 80
WIP Control A/c 20
Finished goods control A/c 430
Building Construction A/c 10
Cost ledger control A/c 540
During the month the following transactions took place :
Materials-Purchased 40
Issued to production 50
Issued to general maintenance 6
Issued to Building construction 4
Wages-Gross wages paid 150
Indirect wages 40
For building construction 10
Works overheads-Actual amount incurred (excluding items shown above) 160
Absorbed in building construction 20
Under absorbed 8
Royalty paid 5
Selling, distribution and administration overheads 25
Sales 450
At the end of the month, the stock of raw material and work-in-progress was Rs. 55 lakhs and Rs. 25 lakhs respectively. The loss arising in the raw material account is treated as
221
factory overheads. The building under construction was completed during the month. Company’s gross profit margin is 20% on Sales.
Prepare the relevant control accounts to record the above transactions in the cost ledger of the company.
Answer Cost Ledger
Dr. General Ledger Adjustment A/c Cr.
Rs. Rs.
To Sales A/c 450 By Balance b/d 540
To Balance c/d 527 By Stores ledger control A/c 40
By Wages control A/c 150
By Royalty A/c 5
By Production overhead control A/c 160
By Selling distribution and administration
overhead control A/c 25
By costing Profit & Loss A/c 57
977 977
Dr. Stores Ledger Control A/c Cr.
Rs. Rs.
To Balance b/d 80 By Work-in-progress control A/c 50
To General ledger adjustment A/c 40 By Production overhead control A/c 6
By Building construction A/c 4
By Production overhead control
A/c (Loss) 5
(Bal. Fig.)
By Balance c/d 55
120 120
Dr. Wages Control A/c Cr.
Rs. Rs.
To General ledger adjustment A/c 150 By Production overhead control A/c 40
By Building Construction A/c 10
By WIP Control A/c 100
150 150
222
Dr. Royalty Account Cr.
Rs. Rs.
To General ledger adjustment A/c 5 By WIP Control A/c 5
Dr. Production Overhead Control A/c Cr.
Rs. Rs.
To General ledger adjustment A/c 160 By WIP Control A/c (Bal. Fig. 183
To Stores ledger control A/c 6 By Building construction A/c 20
To Stores ledger control A/c (Loss) 5 By costing profit and loss A/c 8
To Wages control A/c 40 (Under Absorption)
211 211
Dr. Work-In-Progress Control A/c Cr.
Rs. Rs.
To Balance b/d 20 By Finished goods control A/c 333
To Stores ledger control A/c 50 (Bal. Fig)
To Wages control A/c 100 By Balance c/d 25
To Production overhead control A/c 183
To Royalty A/c 5
358 358
Dr. Finished Goods Control A/c Cr.
Rs. Rs.
To Balance b/d 430 By Cost of Sales A/c
To WIP Control A/c 333 (Rs. 450 – 1/2of Rs. 450) 360
By Balance c/d 403
763 763
Dr. Selling Distribution & Administration Overhead Control Account Cr.
Rs. Rs.
To General ledger adjustment A/c 25 By Cost of sales A/c 25
223
Dr. Cost of Sales Account Cr.
Rs. Rs.
To Finished goods control A/c 360 By Sales A/c 385
To Selling distribution & administration
Overhead control A/c 25
385 385
Dr. Sales Account Cr.
Rs. Rs.
To Cost of Sales A/c 385 By General ledger adjustment A/c 450
To Costing Profit and Loss A/c
(Gross Profit) 65 __
450 450
Dr. Costing Profit and Loss A/C Cr.
Rs. Rs.
To Production overhead control A/c 8 By Sales 65
To General ledger adjustment A/c 57 __
65 65
Dr. Building Construction A/c Cr.
Rs. Rs.
To Balance b/d 10 By Balance c/d 44
To Stores ledger control A/c 4
To Wages Control A/c 10
To Production overhead control A/c 20 __
44 44
Working Notes : Trial Balance
Dr.(Rs.) Cr.(Rs.)
Stores ledger control A/c 55 WIP Control A/c 25
Finished goods control A/c 403 Building Construction A/c 44
General ledger adjustment A/c __ 527
527 527
224
Question 19
A manufacturing company disclosed a net loss of Rs. 5,72,000 as per their cost accounts for the year ended 31st March, 2015. The following information was revealed as a result of scrutiny of the figures of both the sets of books:
Rs.
i) Factory overheads over-absorbed 16,000
ii) Administration overheads under-absorbed 24,000
iii) Depreciation charged in financial accounts 2,20,000
iv) Depreciation charged in cost accounts 2,45,000
iv) Interest on investments not included in cost accounts 64,000
v) Income tax provided 1,54,000
vii) Interest on loan funds in financial accounts 2,63,000
viii) Transfer fees (credit in financial books) 16,000
ix) Stores adjustment (Credit in financial books) 8,000
Prepare a Memorandum Reconciliation Account.
Answer
Dr. Memorandum Reconciliation Account Cr.
Rs. Rs.
To Net loss as per costing books 5,72,000 By Factory overheads over absorbed
To Administration overheads under- in cost accounts 16,000
Recovered in cost accounts 24,000 By Interest on investments not
To income tax no provided in included in cost accounts 64,000
cost accounts 1,54,000 By Depreciation over-charged in
To Interest on loan funds not included cost accounts 25,000
In cost accounts 2,63,000 By Transfer fees in financial
Accounts 16,000
By Stores adjustments in
financial books 8,000
By Net Loss as per financial books
Bal. Fig.) 8,84,000
10,13,000 10,13,000
225
Question 20
The net profit of Fatty Co. Ltd. Appeared at Rs. 41,800 as per financial records for the year ending 31st March, 2015. The cost books, however, showed a net profit of Rs. 1,11,900 for the same period. A scrutiny of the figures from both the sets of accounts revealed the following facts :
Rs.
Works overhead under-recovered in costs 1,500
Administrative overheads over-recovered in costs 850
Depreciation charged in financial accounts 5,600
Depreciation recovered in costs 6,250
Interest on investments not included in costs 3,000
Loss due to obsolescence charged in financial accounts 2,850
Income tax reserve made in financial accounts 20,150
Bank interest and transfer fees credited in financial books 370
Stores adjustment (credit) in financial books 230
Value of opening stock in : Cost accounts 24,800
Financial accounts 26,300
Value of closing stock in : Cost accounts 25,000
Financial accounts 23,000
Interest charged in cost accounts 2,000
Imputed rent charged in cost accounts 1,000
Goodwill written off 5,000
Loss on sale of furniture 600
Selling and distribution expenses not charged to cost accounts 10,000
Donations to Prime Minister’s Relief Fund 5,100
Transfer to Debenture Redemption Fund 9,000
Transfer to Dividend Equalization Fund 20,500
Prepare (i) a statement showing the reconciliation a Memorandum of net profit as per cost accounts and net profit as shown in the financial books; (ii) Memorandum Reconciliation Account.
226
Answer
(a) Reconciliation Statement
Rs. Rs. Rs.
Profit as per cost accounts 1,11,900
Add : (i) Administration overheads over-recovered in cost accounts 850
(ii) Depreciation overcharged in cost books:
Cost books 6,250
Financial books 5,600 650
(iii) Receipts and gains credited in financial books but not
Shown in cost books :
1. Interest on investments 3,000
2. Bank interest and transfer fees 370
3. Stores adjustments 230
(iv) Imputed rent charged in cost accounts 1,000
(v) Interest charged in cost accounts 2,000 8,100
1,20,000
Less : (i) Works overheads under-recovered in cost accounts 1,500
(ii) Expenses and Losses debited in Financial books
but excluded from cost books :
1. Income tax 20,150
2. Loss due to obsolescence 2,850
3. Goodwill written off 5,000
4. Loss on sale of furniture 600
5. Selling and distribution expenses not
charged in cost accounts 10,000
6. Donation to Prime Minister’s Relief Fund 5,100
7. Transfer to Debenture Redemption Fund 9,000
8. Transfer to Dividend Equalization Fund 20,500
(iii) Under-valuation of opening stock in cost accounts 1,500
(iv) Over-valuation of closing stock in cost accounts 2,000 78,200
Profit as per Financial Accounts 41,800
227
(b) Memorandum Reconciliation Statement
Rs. Rs. Rs. Rs.
To Work overhead under-recovered in cost books
1,500 By Profit as per Cost Accounts
1,11,900
To Expenses and losses debited in
By Administration overheads over-recovered in cost accounts
850
Financial books but excluded from cost books :
Income tax
20,150
By Depreciation overcharged in cost accounts (6,250 – 5,600)
650
By Receipts and gains credited in F.A but not in C.A Interest on investment
3,000
Loss due to Obsolescence
2,850
Goodwill written off 5,000 Bank Interest and transfer fees
370
Loss on sale of furniture 600 Stores adjustments 230 3,600
Selling & distribution exp.
10,000 By Imputed rent charged in cost accounts
1,000
Donation to Prime Minister’s Relief Fund
5,100 By Interest charged in cost accounts
2,000
Debenture Redemption Fund
9,000
Dividend Equalisation Fund
20,500 73,200
To under-valuation of opening stock
In cost accounts
1,500
To Over-valuation of closing stock
228
In cost accounts 2,000
To Profit as per Financial Accounts
41,800
1,20,000 1,20,000
Question 21
The financial records by Modern Manufacturers Ltd reveal the following data for the year ended 31st March, 2015:
(Rs. In thousands)
Sales (20,000 units) 4,000
Materials 1,600
Wages 800
Factory overheads 720
Office and Administration overheads 416
Selling and distribution overheads 288
Closing stock of Finished goods (1,230 units) 240
Work in Progress : (Closing) Rs.
Materials 48
Labour 32
Overheads (Factory) 32 112
Goodwill written off 320
Interest on capital 32
Dividend Received 10
Interest Received 5
In the costing records, factory overhead is charged at 100% of wages, administration overheads at 10% of works cost and selling and distribution overheads at Rs. 16 per unit sold.
Prepare statement of reconciling the profit as per cost records with the profit as per financial records of the company. All working should form part of your answer.
229
Answer
Statement of Cost and Profit
Rs.
Materials 16,00,000
Wages 8,00,000
Prime Cost 24,00,000
Add : Factory overheads (100% of Wages) 8,00,000
32,00,000
Less : Closing work-in-progress 1,12,000
Works Cost 30,88,000
Add : Administration overheads (10% of works cost) 3,08,800
Cost of Production 33,96,800
Less : Closing stock of Finished goods 1,96,800
[(1,230/21,230)*Rs. 33,96,800]
Cost of Goods Sold 32,00,000
Selling and Distribution overheads (Rs. 16 * 20,000) 3,20,000
Cost of Sales 35,20,000
Profit 4,80,000
Sales 40,00,000
Dr. Profit and Loss Account Cr.
Rs. Rs.
To Materials 16,00,000 By Sales 40,00,000
To Wages 8,00,000 By Finished Stocks 2,40,000
To Factory overheads 7,20,000 By Work-in-Progress 1,12,000
To Administration overheads 4,16,000 By Dividend Received 10,000
To Selling & distribution overheads 2,88,000 By Interest Received 5,000
To Goodwill 3,20,000
To Interest on Capital 32,000
To Net Profit 1,91,000 _
43,67,000 43,67,000
230
Reconciliation Statement
Rs. Rs.
Profit as per cost accounts 4,80,000
Add : Over-recovery of Factory overheads 80,000
Over-recovery of selling and distribution overheads 32,000
Under valuation of Finished goods in Cost accounts 43,200
Interest and dividend received (Rs. 10,000 + Rs. 5,000) 15,000 1,70,200
6,50,200
Less : Under-recovery of Administration overheads 1,07,200
Goodwill written off 3,20,000
Interest on Capital 32,000 459,200
Profit as per Financial Accounts 1,91,000
Question 22
The summarized Profit and Loss Account of a Company for the year ended 31st March, 2015 are given below :
Particulars Rs. Particulars Rs.
To Materials Consumed 44,00,000 By Sales (2,00,000 units) 1,00,00,000
To Wages 24,00,000 By Finished goods stock
To Factory overheads 14,00,000 C.B. (12,000 units) 5,00,000
To Administration overheads 5,20,000 By WIP : C.B.
To Selling and Distribution
Overheads 4,80,000 Materials 1,20,000
To Bad debts written off 40,000 Labour 80,000
To Preliminary Expenses written off 60,000 Factory overheads 40,000 2,40,000
To Net Profit 16,00,000 By Agricultural Income 32,000
____________ By Miscellaneous Receipts 1,28,000
1,09,00,000 1,09,00,000
The following additional information is also furnished :
(i) In cost accounts, factory overheads have been absorbed at 22% of prime cost.
(ii) In cost accounts, Administration overheads have been absorbed at a flat rate of Rs. 3 per unit.
(iii) In cost accounts, selling and distribution overheads have been absorbed at Rs. 2.50 per unit.
231
(iv) Closing WIP valued by the cost department has been incorporated in financial accounts.
(v) Valuation of finished goods (C.B.) has been independently made by the financial accounts branch.
You are required to prepare cost Profit and Loss Account and reconcile the profit as per cost profit and loss account with the profit as per financial accounts.
Answer
Dr. Costing Profit and Loss Account Cr.
Rs. Rs.
To Materials Consumed 44,00,000 By Sales (2,00,000 units) 1,00,00,000
To Wages 24,00,000 By Closing Stock :
To Factory overheads (1) 14,96,000 Finished Goods (2) 4,92,000
To Administrative overheads (1) 6,36,000 Work-in-Progress 2,40,000
To Selling and Distribution overheads
(Rs. 2.50 * 2,00,000) 5,00,000
To Net Profit 13,00,000
1,07,32,000 1,07,32,000
Reconciliation Statement
Rs. Rs. Rs.
Profit as per Cost Accounts 13,00,000
Add : Items of income not included in cost accounts :
Agricultural income 32,000
Miscellaneous Receipts 1,28,000 1,60,000
Under valuation of Closing stock in cost accounts (Rs. 5,00,000 – Rs. 4,92,000)
8,000
Over absorption in Cost Accounts :
Factory Overheads 96,000
Administration overheads 1,16,000
Selling and Distribution overheads 20,000 4,00,000
17,00,000
232
Less : Expenses not included in Cost Accounts :
Bad debts written off 40,000
Preliminary expenses written off 60,000 1,00,000
Profit as per Financial Accounts 16,00,000
Working Notes :
(1) Cost Sheet
Rs.
Materials Consumed 44,00,000
Wages 24,00,000
Prime Cost 68,00,000
Factory Overheads (22% of Prime Cost) 14,96,000
82,96,000
Less : Cost of Work-in-Progress (given) 2,40,000
Works Cost 80,56,000
Add : Administrative overheads @ Rs. 3 for 2,12,000 units 6,36,000
Cost of Production 86,92,000
Cost of Production per unit Rs. 86,92,000/2,12,000 = Rs. 41
(2) Value of Finished Goods Stock = 12,000 units * Rs. 41 = Rs. 4,92,000
Question 23
The following figures have been extracted from the cost records of a manufacturing unit :
Rs.
Stores : Opening Balance 32,000
Purchase of Materials 1,58,000
Transfer from Work-in-Progress 80,000
Issues to Work-in-Progress 1,60,000
Issues to Repair and Maintenance 20,000
Deficiencies found in stock taking 6,000
Work-in-Progress : Opening Balance 60,000
Direct wages applied 65,000
Works overheads applied 2,40,000
Closing Balance of WIP 45,000
233
Finished Products : Entire output is sold at a profit of 10% on actual cost Work-in-Progress. Wages incurred Rs. 70,000, works overheads incurred Rs. 2,50,000.
Items not included in cost records : Income from investment Rs. 10,000, Loss on sale of capital assets Rs. 20,000.
Draw up Store Control Account, Works overhead control Account, Work-in-Progress Control Account, Costing Profit and Loss Account, Profit and Loss Account and Reconciliation Statement.
Answer
In Cost Books
Stores Control Account
Rs. Rs.
To Balance b/d 32,000 By Work-in-Progress Control A/c
1,60,000
To General ledger adjustment A/c (Purchase)
1,58,000 By Works overheads Control A/c (Repairs and Maintenance)
20,000
To Work-in-Progress control A/c(Transfer)
80,000 By Costing Profit and Loss A/c (Shortage)
6,000
By Balance c/d (Balancing Figure)
84,000
2,70,000 2,70,000
Works Overhead Control Account
Dr. Cr.
Rs. Rs.
To General ledger adjustment A/c 2,50,000 By Work-in-Progress control A/c
2,40,000
To Stores Control A/c 20,000 By Costing Profit and Loss A/c (Under absorption)
30,000
2,70,000 2,70,000
234
Dr. Work-In-Progress Control Account Cr.
Rs. Rs.
To Balance b/d 60,000 By Stores control A/c 80,000
To Stores control A/c 1,60,000 By Costing P & L A/c (Cost of Sales)
4,00,000
To Wages control A/c (Direct) 65,000 By Balance c/d 45,000
To Works overhead control A/c 2,40,000
5,25,000 5,25,000
Dr. Costing Profit And Loss Account Cr.
Rs. Rs.
To Work-in-Progress Control A/c (Cost of Sales)
4,00,000 By General ledger adjustment A/c (Sales)
To Works overhead control A/c (Under Absorption)
30,000 Cost of Sales 4,00,000 Add : 10% Profit 40,000
4,40,000
To Stores control A/c (Shortage) 6,000
To Profit 4,000
4,40,000 4,40,000
Dr. Profit and Loss Account (In Financial Books) Cr.
Rs. Rs.
To Opening Stock : By Sales 4,40,000
Stores 32,000 By Closing Stock :
WIP 60,000 92,000 Stores 84,000
WIP 45,000
1,29,000
To Purchases 1,58,000 By Income from investment 10,000
235
To Wages Incurred 70,000 By Loss 11,000
To Overhead Incurred 2,50,000
To Loss on Sale of Capital Assets 20,000
5,90,000 5,90,000
Reconciliation Statement
Rs. Rs.
Profit as per Cost Accounts (See Costing P&L A/c) 4,000
Add : Income from Investments 10,000
14,000
Less : Under absorption of Wages in Cost Accounts 5,000
Loss on Sale of Capital Assets only included in Financial Accounts 20,000 (25,000)
Loss as per Financial Accounts (11,000)
Question 24
The following information is available from the Financial books of a company having a normal production capacity of 60,000 units for the year ended 31st March, 2015 :
(i) Sales Rs. 10,00,000 (50,000 units).
(ii) There was no opening and closing stock of finished units.
(iii) Direct Material and Direct Wages cost were Rs. 5,00,000 and Rs. 2,50,000 respectively.
(iv) Actual Factory expenses were Rs. 1,50,000 of which 60% are fixed.
(vi) Actual Administrative expenses were Rs.45,000 which are completely fixed.
(vii) Actual Selling and distribution expenses were Rs. 30,000 of which 40% are fixed.
(viii) Interest and Dividends Received Rs.15,000.
You are required to :
(a) Find out Profit as per financial books for the year ended 31st March, 2015 ;
(b) Prepare a statement of cost and profit to ascertain the profit as per cost accounts for the year ended 31st March, 2015 assuming that the indirect expenses are absorbed on the basis of normal production capacity ; and
(c) Prepare a statement reconciling profits shown by financial and cost books.
236
Answer
Profit and Loss Account
Dr. For the year ended 31st March, 2015 Cr.
Rs. Rs.
To Direct Materials 5,00,000 By Sales 10,00,000
To Direct Wages 2,50,000 By Interest & Dividends 15,000
To Factory Expenses 1,50,000
To Administrative Expenses 45,000
To Selling & Distribution Expenses
30,000
To Net Profit 40,000
10,15,000 10,15,000
Statement of Cost and Profit
(Normal output 60,000 units)
Rs.
Direct Materials 5,00,000
Direct Wages 2,50,000
Prime Cost 7,50,000
Factory Expenses : Variable (40% of Rs. 1,50,000) Rs.60,000
Fixed (Rs. 90,000 * 5/6) Rs.75,000 1,35,000
Works Cost 8,85,000
Administration Expenses (Rs. 45,000 *5/6) 37,500
Cost of Production 9,22,500
Selling and Distribution Expenses :
Variable Rs.18,000
Fixed (Rs. 12,000 * 5/6) Rs.10,000 28,000
Cost of Sales 9,50,500
Profit 49,500
Sales 10,00,000
237
Reconciliation Statement
Rs. Rs.
Profit as per Cost Accounts 49,500
Add : Interest and Dividends not recorded in Cost Accounts 15,000
64,500
Less : Expenses under-absorbed in Cost Accounts :
Factory Expenses 15,000
Administration Expenses 7,500
Selling and Distribution Expenses 2,000 24,500
Profit as per Financial Accounts 40,000
Question 25
The following is the Trading and Profit & Loss Account of Octagon Limited :
Dr. Cr.
Particulars Rs. Particulars Rs.
To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000
To Direct Wages 12,05,750 By Finished Goods Stocks (1,000 units)
1,30,000
To Production Overheads 6,92,250
To Administration overheads 3,10,375 By Work-in-Progress : Rs.
To Selling & Distribution overheads
3,68,875 Materials 55,250
To Preliminary Expenses written off
22,750 Wages 26,000
To Goodwill written off 45,500 Production
Overheads 16,250
97,500
238
To Fines 3,250 By Dividend Received 3,90,000
To Interest on Mortgage 13,000 By Interest on Bank Deposits
65,000
To Loss on Sale of Machine 16,250
To Taxation 1,95,000
To Net Profit for the year 3,83,500
55,57,500 55,57,500
Octagon Limited manufactures a standard unit.
The cost accounting record of Octagon Limited Show the following :
(i) Production overheads have been charged to work-in-progress at 20% on Prime Cost.
(ii) Administration overheads have been recovered at Rs. 9.75 per finished unit.
(iii) Selling & Distribution overheads have been recovered at Rs. 13 per unit sold.
(iv) The under or Over-absorption of Overheads has not been transferred to Costing P&L A/c.
Required :
(a) Prepare a Proforma Costing Profit and Loss Account, indicating net Profit.
(b) Prepare control accounts for production overheads, administration overheads and selling and distribution overheads.
(c) Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial Accounts.
Answer
Statement of Cost and Profit
Rs.
Materials 23,01,000
Wages 12,05,750
Prime Cost 35,06,750
Production overheads (20% of Prime Cost) 7,01,350
42,08,100
239
Less : Work-in-Progress 97,500
Manufacturing cost incurred during the year 41,10,600
Add : Administrative overheads (Rs. 9.75 * 31,500) 3,02,250
Cost of Production 44,12,850
Less : Closing Stock of Finished Goods [(Rs. 44,12,850/31,000)*1,000] 1,42,350
Cost of Goods Sold 42,70,500
Add : Selling and distribution overheads (Rs. 13*30,000) 3,90,000
Profit 2,14,500
Sales 48,75,000
Dr. Production Overheads Account Cr.
Rs. Rs.
To General ledger adjustment A/c
6,92,250 By Work-in-Progress A/c 7,01,350
To Balance c/d 9,100
7,01,350 7,01,350
Dr. Administrative Overheads Account Cr.
Rs. Rs.
To General ledger adjustment A/c
3,10,375 By Finished Goods A/c 3,02,250
By Balance c/d 8,125
3,10,375 3,10,375
Dr. Selling and Distribution Overheads Account Cr.
Rs. Rs.
To General ledger adjustment A/c
3,68,875 By Cost of Sales A/c 3,90,000
To Balance c/d 21,125
3,90,000 3,90,000
240
Reconciliation Statement
Rs. Rs.
Profit as per Cost Accounts 2,14,500
Add : Production overheads over-recovered 9,100
Selling and distribution overheads over-recovered 21,125
Dividend Received 3,90,000
Interest on Bank Deposits 65,000 4,85,225
6,99,725
Less : Administrative Overheads under-recovered 8,125
Preliminary Expenses written off 22,750
Goodwill written off 45,500
Fines 3,250
Interest on Mortgage 13,000
Taxation 1,95,000
Loss on sale of machine 16250
Overvaluation of Finished stock in Cost Accounts (Rs. 1,42,350 – Rs. 1,30,000)
12,350 3,16,225
Profit as per Financial Accounts 3,83,500
Question 26
26. Jain Road Concern has. two sizes of Machine components, Size X and Size Y. The following data refer to the year ended 31st March, 2015 :
Size X Size Y
Production 125 units 400 units
Sales 120 units 360 units
Wages cost per unit Rs. 40 Rs. 30
Material cost per unit Rs. 15 Rs. 12
241
Sales Price per unit Rs. 125 Rs. 90
All expenses other than wages and materials are analysed under ‘works overheads’ which during the year amounted to Rs. 9,000 and ‘office overheads’ which amounted to Rs. 10,000.
In fixing the selling price it was estimated that works overheads should be taken at 50% on wages and office overhead expenses at 33.33% on works cost.
You are required to compute the following :
(a) The total cost of each unit on the basis of the above overhead percentages ;
(b) The net profit for the year shown by the financial accounts, valuing unsold stocks at actual material and wages cost plus works overheads at 50% on wages ; and
(c) The reconciliation of net profit in (b) above with estimated total net profit based on cost figures.
Answer
Statement of Cost And Profit
Size 'X' (125 units) Size 'Y' (400 units)
Total of 'X' + 'Y'(Rs.)
Per unit (Rs.)
Total Cost (Rs.)
Per unit (Rs.)
Total Cost (Rs.)
Materials
15.00
1,875.00
12.00
4,800.00
6,675.00
Wages
40.00
5,000.00
30.00
12,000.00
17,000.00
Prime Cost
55.00
6,875.00
42.00
16,800.00
23,675.00
Works Overheads (50% on wages)
20.00
2,500.00
15.00
6,000.00
8,500.00
Works Cost
75.00
9,375.00
57.00
22,800.00
32,175.00
Office Overheads (33.33% of works cost)
25.00
3,125.00
19.00
7,600.00
10,725.00
Cost of Production
242
100.00 12,500.00 76.00 30,400.00 42,900.00
Less : Closing stock on Current Cost Basis -
500.00
-
3,040.00
3,540.00
Cost of Goods Sold
100.00
12,000.00
76.00
27,360.00
39,360.00
Profit
25.00
3,000.00
14.00
5,040.00
8,040.00
Sales
125.00
15,000.00
90.00
32,400.00
47,400.00
Profit as per Cost books =Rs. 8,040.
Profit and Loss Account
Particulars Rs. Particulars Rs.
To Materials : Rs. By Sales : Rs.
X 1875 X 15000
Y 4800
6,675.00 Y 32400
47,400.00
To Wages : By Closing Stock :
X 5000 X 375
Y 12000
17,000.00 Y 2280
2,655.00
To Works Expenses
9,000.00
To office Expenses
10,000.00
To Net Profit
7,380.00
50,055.00 50,055.00
243
Reconciliation Statement
Particulars Rs. Amount
(Rs.)
Profit as per Cost Accounts
8,040.00
Add: Office overheads over-recovered in cost books
725.00
Cost books 10,725.00
Financial books 10,000.00
8,765.00
Less : Under recovery of works overheads in cost books
500.00
Cost books 8,500.00
Financial books 9,000.00
8,265.00
Less : Over-valuation of closing stock in cost books
885.00
Cost books 3,540.00
Financial books 2,655.00
Profit as per Financial Accounts
7,380.00
Question 27
As at 31st March 2015, the following balances existed in a company’s cost ledger :
Dr. Cr.
Stores Ledger Control A/c 6,02,870
Work-in-Progress Ledger Control A/c 2,44,730
Finished Stock Ledger Control A/c 5,03,890
Manufacturing Overhead Control A/c 21,050
Cost Ledger Control A/c ____________ 13,30,440
13,51,490 13,51,490
244
During the next three months the following items arose : Rs. 4Rs
(1) Raw materials purchased 2,46,000
(2) Materials returned to suppliers 5,800
(3) Materials issued to production 2,54,630
(4) Factory wages 1,01,060
(5) Manufacturing overheads incurred 1,83,020
(6) Indirect labour 43,330
(7) Manufacturing overheads charged to production 1,54,400
(8) Cost of Sales 3,71,780
(9) Sales returns at cost 10,760
(10) Finished product at cost 4,21,670
Pass the necessary entries, open ledger accounts and prepare trial balance.
Answer
Journal Entries
Dr.(Rs.) Cr.(Rs.)
Stores ledger Control A/c Dr. 2,46,000
To General Ledger Adjustment A/c 2,46,000
(Being materials purchased)
General Ledger Adjustment A/c Dr. 5,800
To Stores Ledger Control A/c 5,800
(Being entry for material returned to suppliers)
Work-in-Progress Ledger Control A/c Dr. 2,54,630
To Stores Ledger Control A/c 2,54,630
(Entry for issue of materials for production)
Wages Control A/c Dr. 1,01,060
To General Ledger Adjustment A/c 1,01,060
(Entry for direct wages incurred)
245
Work-in-Progress Ledger Control A/c Dr. 1,01,060
To Wages Control A/c 1,01,060
(Entry for wages charged to production)
Works Overhead Control A/c Dr. 1,83,020
To General Ledger Adjustment A/ c 1,83,020
(Entry for works overhead incurred)
Works Overhead Control A/c Dr. 43,330
To General Ledger Adjustment A/c 43,330
(Entry for indirect wages incurred)
Work-in-Progress Ledger Control A/c Dr. 1,54,400
To Works Overhead Control A/c 1,54,400
(Entry for overhead charged to production)
General Ledger Adjustment A/c Dr. 3,71,780
To Finished Stock Ledger Control A/c
(Entry for Cost of Sales)
3,71,780
Finished Stock Ledger Control A/c Dr. 10,760
To General Ledger Adjustment A/c
(Entry for Sales returns)
10,760
Finished Stock Ledger Control A/c Dr. 4,21,670
To Work-in-Progress Ledger Control A/c
(Entry for finished goods transferred)
4,21,670
246
Dr. General Ledger Adjustment Account Cr.
Rs. Rs.
To Stores Ledger Control A/c 5,800 By Balance b/d 13,30,440
To Finished Stock Ledger Control A/c
3,71,780 By Stores Ledger Control A/c
2,46,000
To Balance c/d 15,37,030 By Wages Control A/c 1,01,060
By Works Overhead Control A/c
1,83,020
By Works Overhead Control A/c
43,330
By Finished Stock Ledger Control A/c
10,760
19,14,610 19,14,610
Dr. Stores Ledger Control Account Cr.
Rs. Rs.
To Balance b/d 6,02,870 By General Ledger Control A/c
5,800
To General Ledger Adjustment A/c
2,46,000 By Work-in-Progress Ledger
Control A/c
2,54,630
By Balance c/d 5,88,440
8,48,870 8,48,870
247
Dr. Works Overhead Control Account Cr.
Rs. Rs.
To General Ledger Adjustment A/c
1,83,020 By Balance b/d 21,050
To General Ledger Adjustment A/c
43,330 By Work-in-Progress Ledger Control A/c
1,54,400
By Balance c/d 50,900
2,26,350 2,26,350
Dr. Work-In-Progress Ledger Control Account Cr.
Rs. Rs.
To Balance b/d 2,44,730 By Finished Stock Ledger Control A/c
4,21,670
To Stores Ledger Control A/c 2,54,630 By Balance c/d 3,33,150
To Wages Control A/c 1,01,060
To Works Overhead Control A/c 1,54,400
7,54,820 7,54,820
Dr. Finished Stock Ledger Control Account Cr.
Rs. Rs.
To Balance b/d 5,03,890 By Cost Ledger Control A/c
3,71,780
To Work-in-Progress Ledger Control A/c
4,21,670 By Balance c/d 5,64,540
To General Ledger Adjustment A/c
10,760
9,36,320 9,36,320
248
Trial Balance
Dr. Cr.
Stores Ledger Control A/c 5,88,440
Work-in-Progress Ledger Control A/c 3,33,150
Finished Stock Ledger Control A/c 5,64,540
Manufacturing Overhead Control A/c 50,900
Cost Ledger Control A/c 15,37,030
TOTAL 15,37,030 15,37,030
Question 28
The following is a summary of the Trading and profit and loss account of a manufacturing company for the year ending 31st March, 2015 :
(Rs. In Thousands)
Dr. Cr.
Rs. Rs.
To Material Consumed 27,400 By Sales (1,20,000 units)
60,000
To Wages 15,100 By Finished Stock (4,000 units)
1600
To Factory Expenses 8300 By Work-in-Progress :
To Administration expenses 3820 Materials 640
To Selling and distribution expenses
4500 Wages 360
To Preliminary expenses written off
400 Factory expenses 200 1200
To Goodwill written off 200 By Dividend Received 180
To Net Profit 3260
62,980 62,980
249
In the cost accounts, the following allocations have been made:
i) Factory expenses at 20% on Prime Cost.
ii) Administration expenses at Rs. 30 per unit of Production.
iii) Selling and distribution expenses at Rs. 40 per unit of Sales.
You are required to prepare a costing profit and loss account of the company and to reconcile the profit disclosed with that shown in the financial account.
Answer
Costing Profit and Loss Account As on 31st March, 2015
(Rs. ‘000)
Materials Consumed 27,400
Wages 15,100
Prime Cost 42,500
Factory expenses (20% of Prime Cost) 8,500
Total works cost 51,000
Less : Closing work-in-progress
Materials 640
Wages 360
Factory expenses 200 1,200
Works Cost (Completed units) 49,800
Add : Administration expenses @ Rs. 3 (for sales and closing stock)
i.e. Rs. 30 (1,20,000 +4,000) 3720
Cost of Production 53,520
Less : Closing Finished Stock [(Rs. 5,3520/1,24,000)*4,000] 1730
Cost of Goods Sold 51790
Add : Selling and distribution expenses (1,20,000 @Rs. 40 per unit) 4800
Cost of Sales 56,590
Net Profit 3,410
Sales (1,20,000 units @ Rs. 500) 60,000
Note : Figures are rounded off to the nearest thousands.
250
Reconciliation Statement
(Rs. ‘000)
Profit as per Cost Accounts 3410
Add : Over absorption of factory expenses (Rs. 8500 – Rs. 8300) 200
Over absorption of selling expenses (Rs. 4800 – Rs. 4500) 300
Dividend Received 180 680
4090
Less : Under absorption of administration overheads (Rs. 3820 – Rs. 3720) 100
Preliminary expenses written off 400
Goodwill written off 200
Difference in valuation of finished stock 130 830
Profit as per Financial Accounts 3260
Question 29
The audited final accounts showed a profit of Rs. 1,00,500 whereas costing records showed a profit of Rs. 1,02,500. From the following additional information, reconcile the two accounts.
Profit and Loss Account
For the year ended 31st March, 2015
Dr. Cr.
Rs. Rs.
To Opening Stock 5,05,000 By Sales 7,80,000
To Purchase 1,75,000 By Closing Stock 1,80,000
To Direct Wages 80,000
To Factory Overheads 45,000
To Gross Profit c/d 1,55,000
9,60,000 9,60,000
To Administration Expenses 20,300 By Gross Profit b/d 1,55,000
To Selling Expenses 24,500 By Interest Received 1,000
To Distribution Expenses 11,200 By Dividend Received 500
To Net Profit 1,00,500
1,56,500 1,56,500
251
The cost accounts showed the following :
1. Stock balance of Rs. 1,85,000
2. Direct wages absorbed Rs. 82,500
3. Factory overheads absorbed Rs. 42,000
4. Administration expenses charged @ 3% of sales value
5. Selling expenses charged @ 3% of sales value.
Answer
Reconciliation of Profit Between Cost and Financial Accounts
Particulars Rs. Rs. Rs.
Profit as per Financial Accounts 1,00,500
Add : Difference in valuation of Closing stock 1,85,000
1,80,000 5,000
Factory overheads under absorbed in cost accounts 45,000
42,000 3,000
Selling expenses under charged in Cost Accounts 24,500
(3% on Rs. 7,80,000) 23,400 1,100 9,100
1,09,600
Less : Direct wages over absorbed in cost accounts 82,500
80,000 2,500
Administration overheads over-absorbed in cost accounts
23,400
(3% on Rs. 7,80,000) 20,300 3,100
Interest and Dividend received but not included in Cost Accounts
1,500 7,100
Profit as per Cost Accounts 1,02,500
252
Question 30
M/s JRC Ltd. have furnished the following information from financial books for the year ended 31st March, 2015 :
Trading and Profit & Loss Account for the year ended 31st March, 2015
Rs. Rs.
To Opening Stock (500 units at Rs. 35 each)
17,500 By Sales (10,250 units) 7,17,500
To Materials Consumed 2,60,000 By Closing Stock
(250 units at Rs. 50 each)
12,500
To Wages 1,40,000
To Gross Profit 3,12,500 _________
7,30,000 7,30,000
To Factory Overheads 94,700 By Gross Profit 3,12,500
To Office overheads 1,06,000 By Interest 250
To Selling expenses 55,000 By Rent 10,000
To Bad debts 4,000
To Goodwill written off 5,000
To Net Profit 58,050
3,22,750 3,22,750
The cost sheet shows the following :
a) Cost of materials at Rs. 26 per unit and labour cost Rs. 15 per unit produced.
b) Factory overheads are absorbed at 60% of labour cost.
c) Office overheads are absorbed at 20% of factory cost.
d) Selling expenses are charged at Rs. 6 per unit.
e) Opening stock of finished goods is valued at Rs. 45 per unit and closing stock as in financial books.
You are required to prepare:
i) A statement showing cost and profit as per cost accounts for the year ended 31st March, 2015 and
253
ii) Statement showing the reconciliation of profit disclosed in cost accounts with the profits shown in financial accounts.
Answer
i) Cost Statement for the year ending 31st March, 2015
Rs.
Cost of materials (10,000 units @ Rs. 26 per unit) 2,60,000
Labour cost (10,000 units @ Rs. 15 per unit) 1,50,000
Prime Cost 4,10,000
Factory overheads (60% of labour cost) 90,000
Factory Cost 5,00,000
Office overheads (20% of factory cost) 1,00,000
Cost of Production 6,22,500
Add : Opening Stock : 500 units at Rs. 45 each 22,500
6,03,300
Less : Closing Stock : 250 units at Rs. 50 each 12,500
Cost of Goods Sold 6,10,000
Selling overheads (Rs. 6 unit on 10,250 units) 61,500
Cost of Sales 6,71,500
Sales 7,17,500
Profit 46,000
ii) Reconciliation Statement
Rs. Rs.
Profit as per Cost Accounts 46,000
Add : i) Income items, i.e. interest and rent not included in cost accounts
10,250
ii) Over-valuation of opening stock in cost accounts (500 x 10)
5,000
iii) Over-recovery of selling overheads in cost accounts (61500 – 55000)
6,500 21,750
67,750
254
Less : i) Loss items i.e. bad debts and goodwill written off not included in cost accounts
9,000
ii) Under - recovery of factory over heads in cost accounts
4,700
iii) Under-recovery of office overheads in cost accounts
6,000 19,700
Profit as per Financial Accounts 48,050
Question 31
During the year ended 31st March, 2015, the profit of a company stood at Rs. 3645 as per financial records. The cost books, however, showed a profit of Rs. 5195 for the same period. You are required to reconcile the profit as shown by two sets of accounts:
Rs.
i) Opening stock overstated in cost accounts 350
ii) Closing stock understated in cost accounts 460
iii) Factory overheads under recovered in cost accounts 250
iv) Administration expenses over recovered in cost accounts 75
v) Selling and distribution expenses under-recovered in cost accounts 165
vi) Depreciation over-recovered in cost accounts 150
vii) Interest on investment not included in cost accounts 500
viii) Obsolescence loss in respect of machineries charged in financial accounts 245
ix) Income tax provided in financial accounts 2500
x) Bank interest credited in financial accounts 150
xi) Stores adjustments (Debit in financial book) 70
Answer
Reconciliation Statement
Particulars Rs. Rs.
Net Profit as per Financial Accounts 3,645
Add : Items not debited in cost accounts :
i) Obsolescence loss 245
255
ii) Income tax provisions 2,500
iii) Stores adjustments 75
2,820
Under recovery of factory overheads in cost accounts 250
Under recovery of Selling and distribution expenses in cost accounts
165 3,235
6,880
Less : Items not credited in cost accounts :
i) Interest on investment 500
ii) Bank interest in financial accounts 150 650
Over recovery of administration expenses 75
Over recovery of Depreciation 150
875
Difference in value of stock :
i) Opening stock overstated in cost accounts 350
iii) Closing stock understated in cost accounts 460 1685
Net Profit as per Cost Accounts 5195
The same solution is presented in memorandum from:
Dr. Memorandum Reconciliation Account Cr.
Particulars Rs. Particulars Rs.
To Interest on investment 500 By Net profit as per financial accounts
3,645
To Bank interest 150 By Obsolescence loss 245
To Over-recovery of Administration exp.
75 By Income tax provisions 2,500
To Over-recovery of depreciation 150 By Stores adjustments 75
256
To Over-statement of opening stock 350 By Under-recovery of factory overhead
250
To Under-statement of closing stock 460 By Under-recovery of selling and distribution expenses
165
To Net Profit as per cost accounts 5,195
6,880 6,880
Question 32
A manufacturing, trading, profit and loss and profit and loss appropriation accounts of Rhizonix Limited for the year ending 31st March, 2015 are as follows :
Rs. Rs. Rs. Rs.
To Raw Materials : By Cost of goods
Opening stock 5,680 Manufactured 64,600
Add : Purchases 27,080
32,760
Less : Closing stock 5,960 26,800
To Wages 23,200
To Factory overheads :
Indirect wages 2,800
Rent and Rates 1,200
Power and fuel 2,400
Depreciation 4,400
Other expenses 4,160 14,960
Works cost 64,960
Less : Work-in-Progress
Closing stock 4,280
Less : Opening stock 3,920 360
64,600 64,600
257
To Finished Goods : By Sales 96,000
Opening stock 4,160
Manufactured 64,600
68,760
Less : Closing stock 4,600 64,160
To Gross Profit c/d 31,840 ________
96,000 96,000
To Administration overheads : By Gross Profit b/d
31,840
Office Salaries 6,200 By Dividend Received
400
Office expenses 1,600 7,800
To Selling and Distribution
Overheads :
Salesman’s salaries 2,400
Selling expenses 400
Distribution expenses 1,200 4,000
To Loss on sale of machinery 320
To Fines 120
To Net Profit for the year 20,000
32,240 32,240
To Income tax 4,000 By Balance b/d 12,080
To General reserve 2,000 By Net Profit for the year
20,000
To Dividend 4,800
To Goodwill written off 1,200
To Balance c/d 20,080
32,080 32,080
258
The cost accounts revealed a profit of Rs. 27,830. In preparing this figure stocks have been valued in cost accounts as follow :
Opening stock Closing stock
Raw materials 5,640 5,980
Work-in-Progress 3,950 4,240
Administration overhead has been ignored in cost accounts. Prepare a reconciliation statement.
Answer
Reconciliation Statement
Particulars Rs. Rs.
Profit as per Cost Accounts 27,830
Add : Dividend Received not credited in cost accounts 400
Difference in stock :
Work-in-Progress – Opening 30
Work-in-Progress – Closing 40 470
28,300
Less : Administration expenses not charged in cost accounts
7,800
Loss on sale of machinery 320
Fines 120
Difference in stock :
a) Raw materials – Opening 40
b) Raw materials – Closing 20 8,300
Profit as per Financial Accounts 20,000
***
259
Question 1
What is Cost Sheet? In what respect it differs from production account?
Answer
Cost sheet is a document which provides for the assembly of the detailed cost of a cost centre or cost unit. It is a periodical statement of cost designed to show in detail the various components of cost of goods produced like prime cost, factory cost, cost of production, total cost and cost per unit.
The following are the points of distinction between cost sheet and production account:
Cost Sheet Production Account
It is prepared as a statement. It is prepared as an account.
Expenses are classified to ascertain prime cost,
factory cost, total cost, etc. Expenses are not classified.
To enable comparison, figures of previous
period are provided. No figures of previous period are provided.
Hence no comparison is possible.
It is based on actual and estimated figures of
expenses. It is based on actual figures.
It is prepared for each job and sometimes
for the whole factory.
It is prepared for each production department.
Question 2
What are the uses of the Cost sheet? Which items are excluded from the preparation of the
cost sheet? Give at least five examples.
Answer
The following are the uses of Cost sheet:
1. It gives total cost and cost per unit for a particular period.
2. It gives information to management for cost control.
7
Costing Systems
260
3. It provides comparative study of actual current costs with the cost of corresponding periods, thus causes of inefficiencies and wastage can be known and suitably corrected by management.
4. It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the selling price.
The following items are of financial nature and thus not included while preparing a cost sheet.
(i) Cash discount
(ii) Interest paid
(iii) Preliminary expenses written off
(iv) Goodwill written off
(v) Provision for taxation
(vi) Provision for bad debts
(vii) Transfer to reserves
(viii) Donations
(ix) Income tax and dividend paid
(x) Profit/loss on sale of assets.
Question 3
What do you mean by job costing? Give five advantages of job costing ?
Answer
Job costing may be defined as a system of costing in which the elements of cost are accumulated separately for each job or work order undertaken by an organization. Industries which manufacture products or render services against specific orders use job costing or job order method of cost accounting. In the job costing system, an order or a unit, lot or batch of product may be taken as a cost unit, i.e. a job. Job costing is a method of costing in which cost units can be separately identified and need to be separately costed. The primary purpose of job costing is to bring together all the costs incurred for completing a job.
Advantages of job costing :
(i) It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs.
(ii) The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison, to control the efficiency of operations, materials and machines
(iii) The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages
261
(iv) Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals
(v) Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs
Question 4
What is batch Costing and in which industries the batch costing system is being used? Give
three differences between batch costing and job costing.
Answer
Batch Costing is a form of job costing which is adopted in case of manufacturing of a large number of components of machines or of other articles. Since a large number of them are manufactured together and pass through the same process of manufacture, it is convenient to collect their cost of manufacture together. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batch wise, the direct labour is engaged batch wise and the overheads are also recovered batch wise. Cost of each component in the batch is then determined by dividing the total cost by the number of articles manufactured.
It is generally used in manufacturing industries like. Readymade garment, toys, tyre & tube etc.
Differences between batch costing and job costing:
Job Costing Batch Costing
1. It is carried out or a product is produced by specific orders.
2. It is determined for each job.
3. Each job is separate and independent of other jobs.
1. The process of producing the product has a continuous flow and product is homogeneous.
2. It is compiled on time basis.
3. Product loses their individuality as they are manufactured in a continuous flow.
Question 5
What is cost plus contract? Explain few advantages of cost plus contract.
Answer
Cost plus contract is a contract in which the value of the contract is ascertained by adding a certain percentage of profit over the total cost of the work. This is used in case of those contracts whose exact cost cannot be correctly estimated at the time of undertaking a work. The profit to be paid to the contractor may be a fixed amount or it may be a particular percentage of cost or capital employed. These types of contracts are undertaken for production of special articles not usually manufactured and is generally employed, when Government happens to be a contractee. Generally, in such contract, contractor and
262
contractee have clear agreement about the items of cost to be included, type of material to be used, labour rates for different grades, normal wastages to be permitted and the rate or amount of profit.
Advantage of cost plus contract:
(i) Cost plus contract ensures that a reasonable profit accrues to the contractor even in risky projects.
(ii) It simplifies the work offering tenders and quotations. (iii) It provides escalation clauses and thus covers the contractor from fluctuations in
price and utilization of elements of production. (iv) The customer is assured of paying only reasonable amount of profit. (v) The customer has the right to conduct cost audit so that he can ensure that he is
not being cheated by the contractor.
Question 6
Differentiate between job costing and process costing?
Answer
The main points of distinction between job costing and process costing may be summarized
below :
Job Costing Process Costing
1. Goods are manufactured only against
specific orders. Production is of like units in continuous
flow.
2. Costs are accumulated and applied to
specific jobs. Costs are accumulated and applied process-
wise or department-wise
3. Costs are computed after every job is
completed. Costs are computed after the expiry of a
particular cost period.
4. Different jobs are independent of each
other. Productions being in a continuous flow,
products are intermingled in such a manner
that lots are not distinguishable.
5. Products are normally not transferred
from one job to another except in the
case of surplus work or excess
production.
Costs are normally transferred from one
process to another. Generally the finished
product of the process becomes the raw
material of the next process until the goods
are completely manufactured.
6. From the point of view of managerial
control, more attention is needed
because production is not in continuous
flow and each job is different.
Because of the standard, mass and
continuous production, managerial control
is easier.
7. Different jobs may or may not have
opening or closing work-in-progress. As the production is in continuous flow
there is always an opening and closing
balance of work-in progress.
263
Question 7
Explain the below given terms used in process costing?
a) Normal Loss
b) Abnormal Loss
c) Abnormal Gain.
Answer
a) Normal Loss
Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. If the normal loss units can be sold as a scrap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then the cost of rectification is debited in the process account. The cost per unit of a process is calculated after adjusting the normal loss.
b) Abnormal Loss
Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal (or) unexpected conditions. Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.
c) Abnormal Gain
The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain calculated in the similar manner of abnormal loss. The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real gain.
Question 8
Explain the term service costing and its uses in industries?
Answer
Service Costing or operation costing is normally used in service sector. Public utility services like transport, water supply, electricity supply, hospitals are the best example for
264
service costing. Thus Service costing is a method of cost accumulation which is designed to determine the cost of services. Service costing is a method of ascertaining the cost of providing or services a service. It is also known as operation costing CIMA London, defines Service Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking”.
Service costing is very useful in determining the cost of providing services which becomes a base for ascertaining the price of services. Service costing is extensively used in Transport industries. Hotel industries, electricity company etc. Service costing helps an organization in ascertaining Inter-departmental service prices, Service cost to be charged from outside clients, benchmarking the processes/operations, Tracking and controlling the excess cost.
Question 9
Explain the term cost unit and give few examples of units which are used in hospital costing?
Answer
Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing.
Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In certain cases a composite unit is used i.e. Passenger –Kilometer in a transport company.
Following units are used in hospital costing:
i) Out-patient department - per out patient
ii) Casualty - per patient
iii) Wards - per patient - bed per day
iv) Radiotherapy - per course of treatment per day or per person.
v) Laundry - per 100 articles laundered.
Question 10
Explain the different non-cost or sale value method of accounting for by-product ?
Answer
Following are the non-cost or sale value method of accounting for by-product:
a. Other income method: In this method the sales value of by-products is credited to profit and loss account, treating it as other miscellaneous income.
b. By-products sales deducted from total cost: Under this method the sale proceeds of the by-products are treated as deductions from total costs. The sales value is deducted either from the production costs or cost of sales.
265
c. By-product sales added to the main product sales: In this case all costs incurred on main and byproducts are deducted from the combined sales of the main product and by-products.
d. Crediting sales value less administration, selling and distribution expenses: In this method, a portion of the administration, selling and distribution overhead incurred for disposing of the by-product is deducted from the sale value for credit to process account.
e. Crediting sales value less the costs incurred on by-products after split off point: In certain cases it becomes necessary to perform some further operations on by-products after the split off point, in order to make it saleable. Credit is given to the process account for sale value less the cost after split off point.
f. Reverse cost method: Under this method, an estimated profit from the sale of by-products, selling and distribution expenses and further processing cost, after the split off points are deducted from the sale value of by-products and the net amount is credited to the main product.
Question 11
Explain the different cost method of accounting for by-product ?
Answer
Following are the cost method of accounting for by-product:
a. Opportunity or replacement cost method: This method is adopted where by-products are utilized by the factory itself as input material for some other process. The opportunity cost or replacement cost which otherwise would have been incurred if the by-products were to be purchased from outside suppliers is taken as the basis for costing by-products. The process account is credited with the value of by-products so ascertained.
b. Standard cost method: A standard cost is set on the basis of technical assessment for each byproduct and credit is given to the process account on this basis. Because of the stability of this method, effective control would be exercised on the cost of the main product.
c. Apportionment on suitable basis: Where by-products are of major significance, cost should be apportioned on the most suitable basis, i.e. physical measurement, market value etc.
Question 12
Explain the Contribution margin method and Market value method of accounting for joint-product?
Answer
Accounting of joint products implies the assignment of a portion of the joint cost to each of the joint product. Unless the joint costs are properly and reasonably apportioned to
266
different joint products produced, the cost of joint products will vary considerably and this will affect valuation of inventory, pricing of products and profit or loss on sale of different products.
Contribution margin method
According to this method, joint costs are segregated into two parts-variable and fixed. The variable costs are apportioned over the joint products on the basis of units produced (average method) or physical quantities. In case the products are further processed after the point of separation, then all variable costs incurred be added to the variable costs determined earlier. In this way total variable cost is arrived at which is deducted from their respective sales values to ascertain their contribution. The fixed costs are then apportioned over the joint products on the basis of the contribution ratios.
Market value method
This is the most popular and convenient method because it makes use of a realistic basis for apportioning joint costs. Under this method joint costs are apportioned after ascertaining “what the traffic can bear”. In other words, the products are made to bear a proportion of the joint costs on the basis of their ability to absorb the same. Market value means weighted market value i.e. units produced x price of a unit of joint product. This consists of three sub methods like. Market value at the point of separation or relative market value method,
Market value after further processing, net realizable value method.
Question 13
Meaning of the term process costing? Give advantages and limitations of process costing.
Answer
Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.
Advantages of Process Costing
i. Costs are computed periodically at the end of a particular period.
ii. It is simple and involves less clerical work than job costing
iii. It is easy to allocate the expenses to processes in order to have accurate costs.
iv. Use of standard costing systems in very effective in process costing situations.
v. Process costing helps in preparation of tender, quotations
vi. Since cost data is available for each process, operation and department, good managerial control is possible.
Limitations of Process Costing:
i. Cost obtained at each process is only historical cost and are not very useful for effective control.
267
ii. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.
iii. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.
iv. The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.
v. Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.
Question 14
What are the features of process costing and in which industries the process costing
system is being used?
Answer
Following are the features of process costing
i. The production is continuous
ii. The product is homogeneous
iii. The process is standardized
iv. Output of one process become raw material of another process
v. The output of the last process is transferred to finished stock
vi. Costs are collected process-wise
vii. Both direct and indirect costs are accumulated in each process
viii. If there is a stock of semi-finished goods, it is expressed in terms of equivalent units
ix. The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.
Process costing is being used by following Industries as under:
i. Identical Products Industries
ii. Industries with Multiple Departments
iii. Industries with Interchangeable Parts
iv. Industries with Varying Product Features
v. Innovative Industries
Question 15
How are profits from incomplete contract computed?
268
Answer
It is always desirable to take into account a reasonable proportion of the notional profit on uncompleted contracts depending upon the completion stage subject to the following principles:
i. Profit should be considered in respect of work certified only; work uncertified
should always be valued at cost.
ii. No profit should be taken into consideration if the amount of work certified is
less than 1/4th of the contract price because in such a case it is not possible to
foresee the future clearly.
iii. If the amount of work certified is 1/4th or more but less than 1/2 of the contract
price, 1/3rd of the profit disclosed as reduced by the percentage of cash received
from the contractee, should be taken to the profit and loss account or Profit
=1/3 x Notional Profit x {Cash received / Work certified}. The balance is
allowed to remain as a reserve.
iv. If the amount of work certified is 1/2 or more of the contract price, 2/3rd of the
profit disclosed, as reduced by the percentage of cash received from the
contractee, should be taken to the profit and loss account. Profit = 2/3 x
Notional Profit x {Cash received / Work certified}. The balance should be
treated as reserve.
v. In case the contract is very much near to completion, if possible the total cost of
completing the contract should be estimated. The estimated total profit on the
contract then can be calculated by deducting the estimated cost from the
contract price. The profit and loss account should be credited with that
proportion of total estimated profit on cash basis, which the work certified bears
to the total contract price. Profit=Estimated total profit x {Work certified /
Contract price}.
vi. The whole of loss, if any, should be transferred to the profit and loss account.
Question 16
ALFA LTD. which generates its own power for the purpose of using the same for running the factory gives the following information:
a. Coal-consumed 600 quintals @ Rs. 20 per quintal.
Oil-25 quintals @ Rs. 1,000 per quintal.
Water - 50,000 litres @ Rs. 2.00 per 1,000 lts.
Cost of steam boiler Rs. 1,20,000, which has a residual value of Rs. 12,000 and a life of 10 years.
269
b. Salaries and wages for generating plant:
3 skilled workers @ Rs. 1,000 p.m.
3 unskilled workers @ Rs. 500 p.m.
c. Generating plant cost Rs. 2, 50,000 and Depreciation @ 10%.
d. Share of administrative charges Rs. 2,050 per month
e. Allocation of expenses other than administrative charges for this department Rs. 5,000 per month.
f. Salaries and wages for the Boiler House:
5 men @ Rs. 500 p.m.
4 women @ Rs. 600 p.m.
g. Repairs and maintenance of steam boiler and generating plant Rs. 60,000 p.a.
h. No. of units generated 4,00,000 p.m.
i. 1/10 of units generated were used by Generating Department itself.
Calculate cost per unit of electricity generated.
Answer
Cost Sheet of Generating Electricity
Rs. Per month
Coal used 600 quintals @ Rs. 20 per quintal 12,000
Oil 25 quintals @ Rs.1,000 per quintal 25,000
Water 50,000 Lts. @ Rs. 2.0 per 1,000 Lts. 100
37,100
Depreciation of steam boiler
12 * 10
12,000 - 1,20,000 900
38,000
Salaries and wages for generating plant
3 skilled workers @ Rs. 1,000 p.m. 3,000
3 unskilled workers @ Rs. 500 p.m. 1,500 4,500
Salaries and wages for the Boiler House
5 men @ Rs. 500 p.m. 2,500
270
4 women @ Rs. 600 p.m. 2,400 4,900
Repairs and maintenance
(60,000/12) 5,000
Depreciation on generating plant
12 * 10
2,50,000 2,083
Share of administrative charges 2,050
Other Allocation of expenses 5,000
61,533
Add : Cost of electricity used in generation 6,837 *
Consumed by ALFA LTD. = 4, 00,000 units 68,370
Cost per unit 0.17 paise
Working Notes:
*Calculation of Cost of Electricity used in Generation.
Let A be cost of Electricity used and B the total cost of Generation:
B = 61,533 +0 .10(61,533+A)
A=0 .10B
A= 0.10 [61,533 +0 .10(61,533+A)]
100A= 6, 15,330 + 61,533A
99A= 6, 76,863
A= 6, 76,863/99
A= Rs. 6,837
Question 17
Following are the information given by Star hotel. You are requested to advice him that what rent should be charged from his customers per day so that he is able to earn 20 % on cost other than interest.
1. Staff salaries Rs.50,000 per annum
2. Room attendant’s salary Rs.10 per day. The salary is paid on daily basis and services of room attendant are needed only when the room is occupied. There is one room attendant for one room.
271
3. Lighting, heating and power. The normal lighting expenses for a room if it is occupied for the whole month is Rs.80. Power is used only in winter and normal charge per month if occupied for a room is Rs. 120.
4. Room Cleaning charges Rs. 1 per room day weather the room is occupied or not.
5. Repairs to building Rs.2,000 per month
6. Sundries Rs. 5,000 per annum
7. Interior decoration and furnishing Rs.20,000 annually
8. Cost of building Rs. 5,00,000; rate of depreciation 10 %
9. Other equipments Rs.4,00,000; rate of depreciation 15 %
10. Interest @ 5% may be charged on its investment of Rs. 9, 00,000 in the building and equipment.
11. There are 100 rooms in the hotel and 80 % of the rooms are normally occupied in summer and 30% of the rooms are busy in winter. You may assume that period of summer and winter is six month each. Normal days in a month may be assumed to be 30.
Answer
Operating Cost Statement
Particulars Amount in Rs. Total in Rs.
Staff salaries
Room attendant’s salary (Working note # 1)
Lighting, heating and power (Working note # 2)
Room Cleaning charges (100*30*12*1)
Repairs to building (2,000*12)
Sundries
Interior decoration and furnishing
Depreciation (Working note # 3)
Interest on investment (9,00,000*5%)
Add. 20% profit on cost other than interest
(5,62,400-45,000)*20%
50,000
1,98,000
74,400
36,000
24,000
5,000
20,000
1,10,000
45,000
5,62,400
1,03,480
Total Cost 6,65,880
272
Working note # 1
For summers - 100×80%×30×6×10 = Rs. 1,44,000
For winter – 100 ×30%×30×6×10 = Rs. 54,000
Total = Rs. 1,98,000
Working note # 2
Lighting
Summer - 80×6×100×80% = Rs.38,400
Winter - 80×6×100×30% = Rs.14,400
Power - 120×6×100×30% = 21,600
Total = Rs.74,400
Working note # 3
Depreciation
Building - 5, 00,000* 10%=50,000
Other Equipments – 4, 00,000*15%=60,000
Total Depreciation= 1, 10,000
Question 18
The quantity specified on a production order was 2,000 units of an article in the manufacture of which three operations were involved. The piece-rates for these four operations were in sequence. Rs. 20, 25 and 30 per unit. The company recovered factory overhead expenses on the basis of direct labour cost and the current overhead rate is 80%. The entire quantity of material authorized for the order, viz. 1,000 kgs. @ Rs. 100 per kg. was issued to the shop.
At the year end, the order was incomplete; only 200 units were fully completed and transferred to finished stock. Stock-taking of the work-in-progress revealed the following position:
Materials in process 650 kgs.
Material in hand, in shop (unprocessed) 250 kgs.
Production in partly completed stage 1,300 units
Extent of work performed:
Upto the first operation 600 units
Upto the second operation stage 400 units
Upto the third operation stage 300 units
Calculate the cost of the work-in-progress at the year end.
273
Answer
Cost sheet showing cost of work-in progress Amount in Rs. Total in Rs.
Material Cost:
Material in hand (250 k.g. @ Rs.100)
Material in process (650 k.g. @ Rs.100 )
Labour Cost
Operation I - 600 units @ Rs. 20
Operation II - 400 units @ Rs.45
Operation III - 300 units @ Rs.75
Factory overhead 80% on direct labour
25,000
65,000
12,000
18,000
22,500
90,000
52,500
42,000
Total cost of work-in-progress 1,84,500
Question 19
From the following particulars belongs to Astor Ltd. compute estimated profit on contract
and profit to be transferred to contract profit and loss A/C.
Total expenditure till date Rs. 5,00,000
Estimated further expenditure to complete the contract Rs. 1,50,000
Contract price Rs. 8,50,000
Work certified Rs. 6,00,000
Work uncertified Rs. 1,50,000
Cash received Rs. 6,50,000
Answer
Calculation of estimated profit:
Total expenditure till date Rs. 5,00,000
Add : Estimated further expenditure to complete the contract Rs. 1,50,000
Rs. 6,50,000
Estimated profit Rs. 2,00,000
Contract price Rs. 8,50,000
Profit to be transferred to contract profit and loss A/C:
= Estimated profit*(Cash Received/ Contract Price)
= 2,00,000*(6,50,000/8,50,000)
= Rs. 1,52,941
274
Question 20
From the following particulars of M/S. Jyoti Associates prepare contract account.
Following are the expenditure made on the contract till date:
(Figures in Rs.)
Material Purchased 1,20,000
Material issued from store 80,000
Direct wages 1,40,000
Direct expenses 1,70,000
Apportioned expenses 2,00,000
Plant value at the beginning of the period 5,00,000
Depreciation for the period @ 10%
Additional information:
Contract Value: 15,00,000
Work completed and certified: 10,00,000
Cash received: 9,00,000
Work uncertified: 1,00,000
Material on site: 40,000
Answer
Contract Accounts of M/S. Jyoti Associates (Figures in Rs.)
Dr. Cr.
Particulars Amount Particulars Amount
To. Material purchased
Material (store)
Direct wages
Direct expenses
Apportioned
expenses
Depreciation
Notional profit c/d.
Profit & loss A/C.*
WIP Reserve
1,20,000
80,000
1,40,000
1,70,000
2,00,000
50,000
3,80,000
By. Work in Progress:
Work certified
Work uncertified
Material in hand
Notional profit b/d.
10,00,000
1,00,000
40,000
11,40,000 11,40,000
2,28,000
1,52,000
3,80,000
3,80,000 3,80,000
275
Profit & loss A/C.*
= 3,80,000*(2/3)*(9,00,000/10,00,000)
= 2,28,000
Question 21
From the following particulars of M/S. Maa Shakti private limited prepare contract A/C.
for the period 1st April 2015 to 31st March 2016.
Following are the information as on 31st March 2016 :
(Figures in Rs.)
Material Purchased 5,00,000
Salary to Foreman 90,000
Direct wages 2,40,000
Direct expenses 2,70,000
Apportioned expenses 4,00,000
Plant value at the beginning of the period 4,50,000
Depreciation for the period @ 10%
Additional information:
Contract Value: 22, 00,000
Work completed: 2/3 of contract value
Work certified: 50% of contract value
Cash received: 10, 00,000
Material on site as on 31st March 2016: 90,000
The plant has been used for the contract for a period of 150 days and one supervisor devote 1/4th of his time for this contract who has taken a salary of Rs. 10,000 pm during the period of the contract. You may assume 360 days as one year.
276
Answer
Contract Accounts of M/S. Maa Shakti private limited
(Figures in Rs.)
Dr. Cr.
Particulars Amount Particulars Amount
To. Material purchased
Salary to Foreman
Direct wages
Direct expenses
Apportioned expenses
Depreciation
Supervisor Salary
Work cost
Notional profit
5,00,000
90,000
2,40,000
2,70,000
4,00,000
18,750
30,000
By. Material in hand
Works cost
Work certified
Work
uncertified@
90,000
14,58,750
15,48,750 15,48,750
14,58,750
6,010
11,00,000
3,64,760
14,64,760 14,64,760
Work uncertified@
= Cost of 66.67 % (2/3) of the contract is Rs.14, 58,750
= Cost of 100% is [14, 58,750*(100/66.67)] = Rs.21, 88,125
= Cost of 16.67% (work uncertified) is Rs. 21, 88,125*(16.67/100)
= Rs. 3, 64,760
Question 22
JK Transporter obtained a permit to run a bus on a route of 10 k.m long.
From the following information calculate the bus fare to be charged from each passenger.
Bus cost Rs. 5, 00,000. Insurance cost @ 2% of cost of bus p.a., road tax Rs. 12,000 p.a,
Garage rent Rs. 4,800 p.a. and annual maintenance cost Rs.12,000. The life of the Bus is 5
years and the residual value is Rs. 20,000. Driver salary Rs.4,000 p.m. and cleaner salary
Rs.2,000 p.m. and 10% of total collection as commission which will share equally by both.
Other administrative charges Rs.500 p.m.
277
Fuel and lubricant cost Rs.400 per hundred kilometers. The bus will make 2 rounds trips,
40 passengers per trip. Assume 25 working days in a month and 10% profit on taking from
customer.
Answer
Working Note No. 1
Calculation of Depreciation:
= (Cost of Bus – Residual Value )/life
= (5,00,000 -20,000)/5
= 96,000 p.a.
= 96,000/12
= 8,000 p.m.
Working Note No. 2
Calculation distance travelled and passenger-k.m. per Month
Total Distance= 2 trips x 2 x 10.k.m x 25 days = 1,000 k.m.
Total passenger- k.m= 1000 k.m. x 40 per each trip= 40,000 passenger k.m.
Statement showing the operating cost per passenger -km
Particulars Amounts in Rs. Amounts in Rs.
Depreciation
Insurance (5,00,000 *2%)/12
Road tax (12,000/12)
Garage rent (4,800/12)
Annual maintenance (12,000/12)
Driver salary
Cleaner Salary
Other administrative charges
Fuel and lubricant cost
(40,000 Passenger-k.m./100)*400
Total Cost before Commission
Driver Commission
Cleaner Commission
Total Cost
Add. Profit
8,000
833
1,000
400
1,000
4,000
2,000
500
1,60,000
1,77,733
11,108
11,108
1,99,949
22,216
Total Collection 2,22,165
278
Working Note No. 3
Calculation of commission
Total Cost before Commission = 1,77,733
Commission 10% and profit 10% means
100%-(10% + 10%)= 80%=1,77,733
TOTAL COLLECTION = 1,77,733*(100/80)= 2,22,166
Commission = 2,22,166*10%=22,216
Driver share= 22,216*50%= 11,108
Cleaner share= 22,216*50%= 11,108
Profit = 2,22,166*10%= 22,216
Working Note No.4
Calculation of Fare per passenger-k.m.
=Total Collection/Total passenger-K.m
=2, 22,165/40,000
=Rs.5.55
Question 23
In an Iron manufacturing unit, raw material passes through four processes, I, II, III, and IV and the output of each process is the input for the subsequent process. The losses in the four processes are respectively 20%, 15%, 5% and 5% respectively for I, II, III and IV processes of the input. At the end of the process IV 20,000 kg of Iron being produced. What is the quantity of raw material required to be fed at the beginning of Process I and the cost of the same at Rs. 10 per kg?
Answer
Suppose the output in Process I is 100 kg.
Statement of Production in Different Processes
Particulars Process I Process II Process III Process IV
Input in kg 100 80 68 61.2
Loss % 20 15 10 5
Loss in kg 20 12 6.8 3.06
Output in kg 80 68 61.2 58.14
If output in process IV is 58.14 kg, input in process I = 100 kg
If output in process IV is 20,000kg, input in process I
= (20,000 X 100)/58.14 = 34,399.72 kg
279
Cost of raw material required = 34,399.72 kg X Rs. 10 = Rs. 3,43,997 Approx.
Question 24
The raw material processed in three stages and is produced in three grades in Mehta
Processing Ltd. The information relating to processes are available as below.
Particulars Process I Process II Process III
Raw material
2000 tons
Rs. 2,00,000
Wages Rs. 50,000 Rs. 40,000 Rs.30,000
Direct expenses Rs. 60,000 Rs.20,000 Rs.60,000
Weight lost [% of input] 5% 10% 20%
Scrap [sales price of Rs.100 per
ton]
50 ton 40 ton 20 ton
Sale price/ton finished goods Rs.300 Rs.500 Rs.700
Management expenses were Rs. 20,500 and selling expenses Rs.20,000. 90% of output of process I and 50% of the output of process II is passed to the next process and remaining is sold. The entire output of process III is sold. Prepare Process Accounts and Statement of Profit.
Answer Process I Account
Dr. Cr.
Particulars Units Amount Rs. Particulars Units Amount
Rs.
Materials 2000 2,00,000 Loss in weight 100
Wages 50,000 Sales (Scrap) 50 5000
Direct Expenses 60,000 Sales of output* 185 55,500
Profit 24,992 Transfer to Process II @
Rs.164.86 per unit **
1665 2,74,492
Total 2000 3,34,992 Total 2000 3,34,992
280
*Output in Process I is 2,000 – [100 + 50] = 1850 tons, 10% sold i.e. 185 sold
**Cost of output = Rs.2, 00,000 [material] + Rs. 50, 000 [labour]
+ Rs.60, 000[Labour] – Rs. 5,000 [scrap sale]/1850 units
=Rs. 164.86 per unit
Process II Account
Dr. Cr.
Particulars Units Amount
(Rs.)
Particulars Units Amount
(Rs.)
From Process I 1665 2,74,492 Loss in weight 166.5
Wages 40,000 Sales (Scrap) 40 4,000
Direct
Expenses
20,000 Sales of output* 729.25 3,64,625
Profit 1,99,381 Transfer to Process III
@ Rs.226.60 per unit **
729.25 1,65,248
Total 1665 5,33,873 Total 1665 5,33,873
*Output in Process II is 1665 – [166.5 + 40] = 1458.5 tons, 50% sold i.e. 729.25 sold
**Cost of output = Rs.2, 74,492 [material] + Rs. 40, 000 [labour]
+ Rs.20, 000[Labour] – Rs. 4,000 [scrap sale]/1458.5 units
=Rs. 226.60 per unit
Process III Account
Dr. Cr.
Particulars Units Amount (Rs.) Particulars Units Amount
(Rs.)
From Process II 729.25 1,65,248 Loss in weight 145.85
Wages 30,000 Sales (Scrap) 20 2,000
Direct Expenses 60,000 Sales of output* 583.4 4,08,380
Profit 1,55,132
Total 729.25 4,10,380 Total 729.25 4,10,380
281
Statement of Profit:
Profit from Process I: Rs. 24,992
Profit from Process II: Rs. 1, 99,381
Profit from Process III: Rs. 1, 55,132
Total profits: Rs. 3, 79,505
Less:
Mgt. expenses: Rs. 20,500
Selling expenses: Rs. 20,000
Total expenses: Rs. 40,500
Profit: Rs. 3,39,005
Question 25
From the following particulars, prepare the following in the books of Meghna Private Ltd.
I. Statement of equivalent production
II. Statement of apportionment of cost
III. Process Account
Opening stock as on 1st April: 300 units @ Rs. 5 per unit,
Degree of completion: Materials 100%, Labour and Overheads: 50%
Units introduced during the Month: 1,000 units
Output transferred to the next process: 1,100 units
Closing stock: 300 units
Degree of completion: Materials 100%, Labour and Overheads: 80%
Other information regarding the process:
Materials: Rs.4, 400
Labour: Rs.5, 950
Overheads: Rs.7, 140
Answer
Statement of equivalent production
Input Units Particulars Output
Units
Material
E.Units
% of
Completion
Labour &
Overheads
E.Units
% of
Completion
300 Opening
Stock
282
1000 Units
introduced
Output
Completion of work on opening stock
300 150 50
Units introduced and completed
800 800 100 800 100
Closing stock
300 300 100 240 80
1300 1400 1100 1190
Statement of Cost of Each Element
Element of Cost Cost in Rs. Equivalent
Production
Cost Per Unit in Rs.
Material 4400 1100 4
Labour 5950 1190 5
Overheads 7140 1190 6
Total 17,490 15
Statement of Apportionment of Cost
Particulars Elements Equivalent
Production
Cost Per
Unit Rs.
Cost Rs. Total Rs.
Cost incurred to
complete the work on
Opening Stock
Material
Labour
Overheads
-
150
150
-
5
6
-
750
900
1650
Units introduced and
completed
Material
Labour
Overheads
800
800
800
4
5
6
3200
4000
4800
12000
283
Closing Stock Material
Labour
Overheads
300
240
240
4
5
6
1200
1200
1440
3840
17,490
Process Account
Dr. Cr.
Particulars Units Amount
(Rs.)
Particulars Units Amount (Rs.)
Opening Stock 300 1,500 Transfer to next
Process #
1100 15,150
Unit
Introduced
1000 Closing Stock WIP 300 3,840
Materials 4,400
Labour 5,950
Overheads 7,140
Total 1400 18,990 Total 1400 18,990
Transfer to next process is calculated as shown under:
Cost incurred on opening stock already: Rs. 1, 500
Add. Cost incurred to complete the opening WIP: Rs. 1, 650
Add. Cost of completion of units introduced in this process: Rs. 12, 000
Total Cost Rs.15, 150
Question 26
Fortune Ltd. uses a job costing system. The following data are available from the books at the year ending on 31st March 2015.
Particulars Amount (Rs.)
Direct Materials 10,00,000
Direct Wages 8,00,000
Profit 5,00,000
Selling and Distribution Overheads 4,00,000
284
Administrative Overheads 3,00,000
Factory Overheads 2,00,000
a. Prepare a job cost sheet showing the prime cost, works cost, production cost, cost of sales and sales value.
b. In the year 2015-16, the factory has received an order for a number of jobs. It is estimated that the direct materials would be Rs. 2,40,000 and direct labour would cost Rs.1, 50,000. What would be charge for the price for these jobs if the factory intends to earn the same rate of profit on sales, assuming that the selling and distribution overheads have gone up by 10%. The factory recovers factory overhead as a percentage of direct wages and administrative and selling and distribution overhead as a percentage of works cost, based on the cost rates prevalent in the previous year.
Answer
Job Cost Sheet of Fortune Ltd.
For the year ended 31st March, 2015
Particulars Amount in Rs. Amount in Rs.
Direct Materials
Add. Direct Wages
Prime Cost
10,00,000
8,00,000
18,00,000
Add. Factory Overheads 2,00,000
Works Cost 20,00,000
Add. Administrative Overheads 3,00,000
Cost of Production 23,00,000
Add. Selling and Distribution Overheads 4,00,000
Cost of Sales 27,00,000
Add. Profit 5,00,000
Sale 32,00,000
% of Factory Overheads to Direct Wages:
285
(Rs.2, 00,000/8,00,000)*100 = 25%
% of Administrative Overheads to Works Cost:
(Rs.3, 00,000/20,00,000)*100 = 15%
% of Selling and Distribution Overheads to Works Cost:
(Rs.4, 00,000/20,00,000)*100 =20%
Statement showing Price Quotation for a Job
Particulars Amount in Rs. Amount in Rs.
Direct Materials
Add. Direct Wages
Prime Cost
2,40,000
1,50,000
3,90,000
Add. Factory Overheads 25% of D. Wages 37,500
Works Cost 4,27,500
Add. Administrative Overheads
15% of work cost
64,125
Cost of Production 4,91,625
Add. Selling and Distribution Overheads
30% of work cost
1,28,250
Cost of Sales 6,19,875
Add. Profit ( 18.52% on cost) 1,14,801
Sale 7,34,676
Question 27
Creative Builders have entered into a contract to build an office building complex for Rs.550 lakhs. The work started in April 2015 and it is estimated that the contract will take 15 months to be completed. Work has progressed as per schedule and the actual costs charged till March 2016 was as follows.
Particulars Amount Rs.(in Lakhs)
Materials 120
Labour 100
Hire charges and other expenses 50
Establishment charges 20
286
The following information is available:
Particulars Amount Rs. (in Lakhs)
Material in hand 31st March 2016 20
Work certified [of which Rs.400 lakhs have
been paid] as on 31st March 2016
450
Work not certified as on 31st March 2016 50
As per Management estimates, the following further expenditure will be incurred to complete the work.
Materials: Rs.10 lakhs
Labour: Rs.12 lakhs
Sub-contractor: Rs.10 lakhs
Equipments hire and other charges: Rs.3 lakhs
Establishment charges: Rs.6 lakhs
You are required to compute the value of work-in-progress as on March 31st, 2016 after considering a reasonable margin of profit and show the appropriate accounts. Make a provision for contingencies amounting to 5% of the total costs.
Answer
Contract A/C
Dr. Cr.
Particulars Amount in Rs. Particulars Amount in Rs.
To. By.
Materials 1,20,00,000 Stock of materials 20,00,000
Labour 1,00,00,000 Work-in-progress
Work certified:
Work uncertified:
4,50,00,000
50,00,000
Hire charges 50,00,000
Establishment
charges
20,00,000
287
Profit c/d 2,30,00,000 ______________
Total 5,20,00,000 Total 5,20,00,000
Profit & Loss A/c * 65,07,177 Profit b/d 2,30,00,000
Reserve (Transfer) 1,15,07,177
Total 2,30,00,000 Total 2,30,00,000
Contractee’s A/C Dr. Cr.
Particulars Amount in Rs. Particulars Amount in Rs.
To By
Contract A/c 4,50,00,000 Bank A/c 4,00,00,000
Balance c/d 50,00,000
Total 4,50,00,000 Total 4,50,00,000
Amount of profit to be taken to the Profit and Loss A/c has been computed as shown below*
Particulars Amount in Rs. Amount in Rs.
Expenditure up to 31st March 2016
(2,90,00,000-20,00,000)
2,70,00,000
Add: Estimated expenditure to complete
Materials:
30,00,000
Labour 12,00,000
Sub-contractor 10,00,000
Hire charges on equipment 3,00,000
Establishment charges 6,00,000
Total 61,00,000
Add: 5% on total cost for contingencies 17,42,105
288
=3,31,00,000*5/95
Total cost – estimated 3,48,42,105
Total profit – estimated 2,01,57,895
Contract price 5,50,00,000
Profit to be taken to the Profit and Loss A/c = Total Estimated Profits * Work Certified/Contract
= Rs. 2,01,57,895 * Rs.4,50,00,000 /Rs.5,50,00,000
= Rs.1,64,92,823
Question 28
Apex Ltd. undertook a contract for Rs.6,00,000 as on 1st July 2014. On 30th June 2015, when the accounts were closed, the following details about the contract were gathered.
Particulars Amount in Rs.
Materials purchased 1,10,000
Wages 55,000
General expenses 12,000
Plant purchased 60,000
Materials on hand on 30th June 2015 30,000
Wages accrued on 30th June 2015 8,000
Work certified 3,50,000
Cash received 2,50,000
Work uncertified 50,000
Depreciation of plant 10%
As per the escalation clause ‘In the event of materials and rates of wages increase by more than 4% the contract price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case’.
It was found that since the date of signing the agreement, the prices of materials and wage rates increased by 25%. The value of work certified does not take into account the effects of the above clause. Prepare Contract Account.
289
Answer
Contract A/c for the Year Ended 30th June 2015
Dr. Cr.
Particulars Amount in Rs. Particulars Amount in Rs.
To. By.
Materials 1,10,000 Work-in-progress:
Wages 55,000 Work certified 3,50,000
Wages outstanding 8,000 Work uncertified 50,000
General Expenses 12,000 Materials on hand 30,000
Depreciation of Plant 6,000 Contract escalation * 22,880
Balance c/d (Notional
profit)
2,61,880
Total 4,02,880 Total 4,52,880
Profit & Loss A/c # 1,24,705 Balance b/d 2,61,880
Reserve (Transfer) 1,37,175
Total 2,61,880 Total 2,61,880
* Escalation:
Materials /wages increased by 25%
Increase in material price [Rs.110000 – Rs.30000] *25/125 = Rs.16, 000
Increase in wages Rs.63, 000 *25/125 = Rs.12, 600
Total Increase = [a] + [b] = Rs.28, 600
This increase is more than 4% of the contract price.
Hence, as per escalation clause added amount of Escalation
= 28600 - 25% of [Rs.28, 600 – Rs.5, 720] = Rs.22, 880
# Amount of profit to be credited to Profit and Loss A/c:
= 2/3 * Cash Received/Work Certified *Notional Profit
2/3 * Rs.2, 50, 000/3, 50,000 * Rs. 2, 61,880 = Rs.1, 24,705
Question 29
BBSL Ltd. undertook a contract for construction of a Complex. The construction work commenced on 1st April 2014 and the following data are available for the year ended on 31st March 2015.
290
Particulars Amount in Rs.
Contract price 3,40,00,000
Work certified 2,10,00,000
Progress payment received 2,00,00,000
Materials issued 74,00,000
Administration Cost 10,00,000
Direct wages 50,00,000
Materials returned 5,00,000
Hire charges 15,00,000
Site costs 4,00,000
Apportioned expenses 2,50,000
Direct expenses 7,00,000
Work not certified 30,00,000
The contractors own a plant which originally cost Rs.30 lakhs has been continuously in use in many contract throughout the year. The residual value of the plant after 5 years of life is expected to be Rs.5 lakhs. Straight-line method of depreciation is in use. Only 1/3rd of the time has been allotted to this contract as per site supervisor estimate. As on 31st March 2015, the direct wages due and payable amounted to Rs. 2,50, 000 and the materials at site were estimated at Rs. 3 00,000.
Prepare:
Prepare the contract account for the year ended 31st March 2015
Show the calculation of profits to be taken to the Profit and Loss A/c of the year
Answer
Contract A/C for the year ended 31st March 2015
Dr. Cr.
Particulars Amount in Rs. Particulars Amount in Rs.
To. By.
Materials 74,00,000 Stock of materials 3,00,000
Direct wages 50,00,000 Materials returned 5,00,000
Administration Cost 10,00,000 Work-in-progress
291
Work certified:
Work uncertified:
2,10,00,000
30,00,000
Hire charges 15,00,000
Site costs 4,00,000
Apportioned expenses 2,50,000
Direct expenses 7,00,000
Depreciation 1/3rd of
total depreciation #
1,66,667
Profit c/d 73,83,333
Total 2,38,00,000 Total 2,38,00,000
Profit & Loss A/c * 46,87,830 Profit b/d 73,83,333
Reserve (Transfer) 26,95,503
Total 73,83,333 Total 73,83,333
# Depreciation Calculation:
=[ (30,00,000-5,00,000)/5]*1/3
=1, 66,667
Since the contract completion is between 50% and 90%, 2/3rd of the notional profit subject to the proportion of cash received and work certified will be taken into consideration with the help of the following formula.
= Notional Profit *2/3 *Cash Received/Work Certified
Rs. 73,83,333 *2/3 * Rs. 2,00,00, 000/Rs. 2,10,00,000 = Rs. 46,87,830
Question 30
ABC Ltd. manufactures Product A, which yields two by-products B and C. The actual joint expenses of manufacture for a period were Rs.10, 000. It was estimated that the profits on each product as a percentage of sales would be 20%, 25% and 10% respectively. Subsequent expenses were as follows:
Amount in Rs.
Particulars Product A Product B Product C
Materials 120 90 85
Wages 300 70 75
Overheads 150 85 60
Total 570 245 220
Sales 8000 7000 5000
292
Prepare a statement showing the apportionment of the joint expenses of manufacture over the different products. Also presume that selling expenses are apportioned over the products as a percentage to sales.
Answer
Statement showing the Apportionment of Cost
Particulars Product A Product B Product C
Sales 8000 7000 5000
Less : Profit [20%, 25%, 10%
respectively]
1600 1750 1500
Cost of Sales 6400 5250 3500
Less : Selling Expenses * 1647 1440 1029
Cost of Production 4754 3810 2472
Less: Subsequent Expenses [As given] 570 245 220
Apportionment of Joint Costs 4184 3565 2252
Selling expenses are apportioned in the following manner
Total cost of sales:
= 6400+5250+3500=15,150
Total cost of production
[Total joint cost Rs. 10,000 + subsequent expenses Rs. 1035] =11,035
Selling Expenses= 15,150-11,035= 1,115
Apportioned in the ratio of sales= 8:7:5
Question 31
In the course of manufacture of the main product A, B and C also emerge. The joint expenses of manufacture amount to Rs.2,00,000. All the products are processed further after separation and sold as per details given below.
Particulars Product A Product B Product C
Sales 1,20,000 90,000 70,000
Cost after split off point 8,000 7,000 5,000
Profit as percentage of sales 25% 20% 15%
293
Selling and administration overheads Rs. 10,000 which are absorbed as a percentage of cost
of sales. Prepare a statement showing the apportionment of joint cost to the main product
and by-products.
Answer
Statement showing the Apportionment of Joint Costs
Particulars Product A Product B Product C Total
Sales 1,20,000 90,000 70,000 2,80,000
Less : Profit [25%, 20%, 15%
respectively]
30,000 18,000 10,500 58,500
Cost of Sales 90,000 72,000 59,500 2,21,500
Less: Selling Expenses as % of Cost of
Sale
4,063 3251 2686 10,000
Cost of Production 85,937 68,749 56,814 2,11,500
Less: Subsequent Expenses [As given] 8,000 7,000 5,000 20,000
Value at split off point 77,937 61,749 51,814 1,91,500
Question 32
The accounts of the Archana Engineering Company Ltd. show the following cost figures for
2015: Materials consumed Rs. 70,000
Direct wages Rs.54,000
Works overhead expenses Rs. 16,200
General overhead expenses Rs.11,216
Show the work cost and the total cost of manufacture, the percentages that the works overheads bear to the direct labour cost and the percentage that the general overheads bear to the works cost.
What price should the company quote to manufacture a refrigerator which is estimated to require on expenditure of Rs. 1,440 in materials and Rs. 1,200 in wages so that it will yield a profit of 20% on the selling price?
Answer
Job Cost Sheet
Expenses Amount (Rs.) Amount (Rs.)
Materials consumed 70,000
Direct labour cost 54,000
294
Direct expenses ---
Prime cost (1) --- 1,24,000
Add : Factory or work overhead 16,200
Works cost (2) 1,40,200
Add : General overhead expenses 11,216
Total cost of production (3) 1,51,416
Percentage of works overhead on Direct Manual & Machine
Labour Cost =16,200 / 54,000 x 100 = 30%
Percentage of general overhead on works cost = 11,216 /1,40,200 x 100 = 8%
Statement showing the quotation price for the refrigerator
Expenses Amount (Rs.) Amount (Rs.)
Materials Wages 1,440
Direct Expenses 1,200
Prime Cost (1) 2,640
Add : Works overheads 30% on wages [1,200 x 30% ] 360
Factory or works Cost (2) 3,000
Add : General overheads 8% on works cost [3,000 x 30% ] 900
Total cost of production 3,900
Profit 20% on selling price i.e., 25% on total cost 975
Sales price 4,875
Question 33
Following information relates to the manufacturing of a component A in a cost centre :
Cost of materials 5 paise per component
Operator's wages 75 paise an hour
Machine hour Rs. 1.50
Setting up time of the machine 2 hours and 20 minutes
Manufacturing time 10 minutes per component
Prepare cost sheets showing both production and setting up costs-total and per unit when a batch consists of 1,000 components.
295
Answer
Cost Sheet for a Batch of 1000 Components
Particulars Amount Amount
Rs. Rs.
Setting up Costs :
Operator's wages for 2 hrs and 20 mts @ 75 Paise an hour 1.75
Machine overheads for 2 hrs and 20 mts @ Rs.I.50 an hour 3.50
Total Setting up costs 0.005 5.25
Add : Production Costs :
Material cost for 1,000 units @ 5 paise per unit 0.05 50
Operator's wages for 10,000 Minutes (1000 x 10) @0.75/hr. 0.125 125
Machine Overheads for 10,000 minutes @ Rs.1.50 an hour 0.250 250
Total Production Costs 0.425 425
Total Costs (Setting up Costs + Production Cost) 0.430 430.25
Question 34
Product A is obtained after it passes through three distinct processes. You are required to
prepare Process accounts from the following information:
Process Total X Y Z
Rs. Rs. Rs. Rs.
Material 12,067 4,160 3,168 4739
Direct Wages 14,400 3,200 4,800 6,400
Production Overheads 14,400
1,000 Units @ Rs. 4.8 Per Unit were introduced in Process X. Production overhead to be distributed as 100% on Direct Wages.
Actual Output
Unit Normal Loss Value of Scrap per unit Rs.
Process X 950 5% 3.2
Process Y 840 10% 6.4
Process Z 750 15% 8
296
Answer
Dr. Process X Account Cr.
Units Amount Units Amount Rs. Rs.
Material Introduced Normal Loss 50 160
@ Rs. 4.8 per unit 1,000 4,800 Transferred to
Material 4,160 Process Y @ Rs. 16 per unit 950 15,200
Direct Wages 3,200
Production Overheads 3,200 -
1,000 15,360 1,000 15,360
Dr. Process Y Account Cr.
Units Amount Units Amount Rs. Rs.
Transferred from Normal Loss 95 608
Process X 950 15,200 Abnormal Loss 15 480
Material 3,168 Transferred to
Direct Wages 4,800 next Process@
Production Overheads 4,800 Rs. 32 per unit 840 26,880
950 27,968 950 27,968
Dr. Process Z Account Cr.
Units Amount Units Amount Rs. Rs.
Transferred from Process Y 840 26,880 Normal Loss 126 1,008
Material 4,739 Transferred to
Direct Wages 6,400 next Process@
Production Overheads 6,400 Rs. 32 per unit 750 45,600
Abnormal Gain
@ Rs.60.8 per unit 36 2,189
876 46,608 876 46,608
297
Dr. Abnormal Loss Account Cr.
Rs. Rs.
To Process Y 480 By Cash (sale of Scrap of Abnormal 96
Loss units)
By Costing Profit And Loss A/c 384
480 480
Dr. Abnormal Gain Account Czr.
Rs. Rs.
To Process Z a/c 288 By Process Z a/c 2,189
To Costing Profit & Loss Account 1,901 ____
2,189 2,189
Working Note :
Process Y:
(a) Normal Loss =950*10% =95 Units
Scrap Value =95 x 6.4 = Rs. 608
(b) Abnormal Loss Units
Normal Production (950 – 95) 855
Actual Production 840
Abnormal Loss 15
(c) Cost of Normal Production. = 27,968 - 608 = 27,360
Cost of Normal Production per unit = 27,360/845= Rs. 32 per unit
Cost of Abnormal Loss = 32 x 15 = 480
Abnormal Loss has been credited with Rs.96 being the amount realised from the sale of scrap and Abnormal Loss.
Process Z:
(a) Normal Process. 15% of 840 units.
=840 x 15/ 100 = 126 units
Sale of scrap = 126 x Rs. 8 = Rs. 1,008
(b) Abnormal Gain. Units
Actual Production 750
Estimated Production 714
36
298
Abnormal Gain A/c has been debited with Rs.288 being less amount, recovered on the sale
of loss of units which were 90 units instead of normal 126 units. i.e., 36 x 8 = Rs. 288.
Question 35
How much profit. if any, you would allow to be considered in the following case?
Contract cost Rs. 28,000
Contract value Rs. 50,000
Cash received Rs. 27,000
Uncertified work Rs. 3,000
Deduction from bills by way of security deposit is 10%?
Answer
Cash Received = 100 - 10% = 90% of work certified
Work Certified = Cash Received x 100/90
= 27,000 x 100/90
= Rs. 30,000
Value of work certified = 30,000
Notional Profit = Work in progress - Contract cost
= (30,000 + 3,000) - 28,000
= 5,000
Calculation of % of Work Certified
= 30,000 /50,000 x 100 = 60%
60% of work certified is more than 50% of the contract value.
= Notional Profit x 2/3 x cash received /work certified
= 5,000 x 2/3 x27,000/30,000
= Rs.3,000
Question 36
The following is the ledger balance of ABC Construction Company engaged on the
execution of A1 Apartments for the year ending 31st March 2015.
Direct Wages 12,500
Bank Balances 6,650
299
Rates and Taxes 750
Direct Expenses incurred 250
General overhead allocated 600
Fuel and power expenses 6,250
Materials issued to contract 70,000
Furniture 3,000
Plant and Machinery (60% at site) 1,25,000
Land and Building 1,15,000
The A1 Apartments was commenced on 1st April 2014. ABC paid up capital of Rs. 2,50,000.
The contract price was Rs. 3,00,000. Cash received on account of contract up to 31 st
March 2015 was Rs. 90,000 (being 90% of the work certified). Work completed but not
certified was estimated at Rs. 5,000. As on 31st March 2015 materials at site was
estimated at Rs. 1,500. Machinery at site costing Rs. 10,000 was returned to stores and
wages outstanding were Rs. 250. Plant and machinery at site is to be depreciated at 5%.
Prepare the Contract Account and Balance sheet.
Answer
ABC Construction Ltd.
Contract Account
(For the year ended 31st March 2015)
Particulars Amount Particulars Amount
Rs. Rs.
To Materials 70,000 By Materials at site 1,500
To Direct wages 12,500 By Machine returned
To Wages outstanding 250 (Rs.1,00,000 - 5 % of 9,500
To Plant & Machinery 1,00,000)
as site (60%) 75,000 By Plant & Machinery as site
To Fuel and Power 6,250 (65,000 – 5% of 65,000) 61,750
To Direct expenses 250 By work in progress 600
To General Overheads 600 Rs. 90,000 x 100/90
To Rates & Taxes 750 = 1,00,000
To Notional profit c/d 12,150 Uncertified 5,000 1,05,000
1,77,750 1,77,750
300
To Profit and Loss By National Profit bid 12,150
[12,150 x 1/3x90/100 ] 3,645
To Work in Progress (Reserve) 8,505 ________
12,150 12,150
Balance Sheet
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital 2,50,000 Land and Building 1,15,000
Profit and Loss a/c 3,645 Plant and Machinery at site 61,750
Wages Outstanding 250 Plant and Machinery (store) 59,500
Furniture 3,000
Bank Balances 6,650
Work in Progress:
Work Certified 1,00,000
Work Uncertified 5,000
1,05,000
Less: Cash Received 90,000
15,000
Less : Reserve 8,505 6,495
Materials at site 1,500
2,53,895 2,53,895
Question 37
The finished product of a factory passes through two processes. The entire material being
placed in process at the beginning of the first process. From the following production and
last data relating to the first process, work out the value of the closing inventory and the
value of the materials transferred to the second process.
Process I Rs.
Opening inventory 8,000
Material 22,000
Labour 40,000
Manufacturing Overheads 32,000
(Units)
Opening inventory (25 percent complete) 3,200
Put into Process 9,600
301
Transferred to II Process 8,000
Closing inventory (20 percent completed) 4,000
Spoilage during process 800
Answer
Process-1 a/c
Particulars UNITS Amount
Rs.
Particulars UNITS Amount
Rs.
To Opening stock 3200 8,000 BY process 2 a/c 8,000
92,600
To Material 9600 22,000
To Labour 40,000 By Normal Loss 800 -------
To Manufacturing
Overheads
32000
By Closing stock
4,000
9,400
12,800 1,02,000 12,800 1,02,000
Statement of Equivalent Production Units
Particulars Output Material Labour Overheads
Qty. % Qty. % Qty. %
Opening Stock process 3200 2400 75 2,400 75 2,400 75
Processed completely 4,800 4,800 100 4800 100 4800 100
Normal Loss 800 ---- ----- ------ ----- ------ ------
Closing Inventory 4000 800 20 800 20 800 20
12,800 8,000 8,000 8,000
Statement of Element of Cost on the basis of Equivalent Production
Particulars Cost Rs Equivalent
Units
Cost
per Unit Rs
Material 22,000 8,000 2.75
Labour 40,000 8,000 5.00
Overheads 32,000 8,000 4.00
Total 11.75
302
Statement of Apportionment of Cost
Particulars Elements Equivalent
Units
Cost Per
Unit Rs.
Cost
Rs.
Total cost
Rs.
Op. Stock
Processed
Material 2,400 2.75 6,600 28,200
Labour 2,400 5.00 12,000
Overheads 2,400 4.00 9,600
Completely
Processed
Material 4,800 2.75 13,200 56,400
Labour 4,800 5.00 24,000
Overheads 4,800 4.00 19,200
Closing
Inventory
Material 800 2.75 2,200 9,400
Labour 800 5.00 4,000
Overheads 800 4.00 3,200
Total 94,000
Value of goods transferred to next process
Units Rs.
Value of opening stock 8,000
Additional cost on opening stock 3,200 28,200
Value of completely processed units 4,800 56,400
8,000 92,600
***
303
Question 1
What is Marginal Costing? State its features.
Answer
Marginal costing is defined as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”. Marginal costing is not a separate costing. It is only a technique used by accountants to aid management decision.
Marginal cost is the cost of one unit of product or service which would be avoided if that unit were not produced or provided.
According to CIMA Terminology Marginal Costing is the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs in this technique of costing only variable costs are charged to operations, processes or products leaving all indirect costs to be written off against profits in the period in which they arise.
Thus marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making. It is a technique of applying the existing methods in a particular manner in order to bring out the relationship between profit and volume of output.
Features of Marginal Costing
(a) Costs are separated into the fixed and variable elements and semi-variable costs are also differentiated like wise.
(b) Only the variable costs are taken into account for computing the value of stocks of work-in-progress and finished products.
(c) Fixed costs are charged off to revenue wholly during the period in which they are incurred and are not taken into account for valuing product cost/inventories.
(d) Prices may be based on marginal costs and contribution but in normal circumstances prices would cover costs in total.
(e) It combines the techniques of cost recording and cost reporting.
(f) Profitability of departments or products is determined in terms of marginal contribution.
8
Marginal Costing
304
(g) The unit cost of a product means the average variable cost of manufacturing the product.
Question 2
Explain briefly the advantages of Marginal Costing.
Answer
Advantages of Marginal Costing
(1) Cost-volume-profit relationship data wanted for profit planning purposes is readily obtained from the regular accounting statements. Hence management does not have to work with two separate sets of data to relate one to the other.
(2) The profit for a period is not affected by changes in absorption of fixed expenses resulting from building or reducing inventory. Other things remaining equal (e.g. selling prices, costs, sales mix), profits move in the same direction as sales when direct costing is in use.
(3) Manufacturing cost and income statements in the direct cost form follow management’s thinking Lesson 8 Marginal Costing 323 more closely than does the absorption cost form for these statements. For this reason, management finds it easier to understand and use direct cost reports.
(4) The impact of fixed costs on profits is emphasised because the total amount of such cost for the period appears in the income statement.
(5) Marginal income figures facilitate relative appraisal of products, territories, classes of customers, and other segments of the business without having the results obscured by allocation of joint fixed costs.
(6) Marginal costing lies in with such effective plans for cost control as standard costs and flexible budgets.
(7) Marginal costing furnishes a better and more logical basis for the fixation of sales prices as well as tendering for contracts when business is at low ebb.
(8) Break-even point can be determined only on the basis of marginal costing.
Question 3
What do you understand by break-even-analysis or Cost-volume profit analysis? Explain briefly its objectives.
Answer
The differentiation of costs into “variable” and “fixed” elements and their relationship with sales and profits has been developed as “break-even analysis”. This break even analysis is also known as Cost–volume– profit (CVP) analysis. In break even analysis or CVP analysis an activity level is determined at which all relevant cost are recovered and there is a situation of no profit or no loss. This activity level is called breakeven point.
The break-even point in any business is that point at which the volume of sales or revenues exactly equals total expenses or the point at which there is neither a profit nor loss under
305
varying levels of activity. The break-even point tells the manager what level of output or activity is required before the firm can make a profit; reflects the relationship between costs, volume and profits. In another words breakeven point is the level of sales or production at which the total costs and total revenue of a business are equal.
Objectives of Break Even Anaysis/Cost-Volume-Profit Analysis
The objectives of cost-volume profit analysis are given below:
(1) In order to forecast profit accurately, it is essential to know the relationship between profits and costs on the one hand and volume on the other.
(2) Cost-volume-profit analysis is useful in setting up flexible budgets which indicate costs at various levels of activity.
(3) Cost-volume-profit analysis is of assistance in performance evaluation for the purposes of control. For reviewing profits achieved and cost incurred the effects on costs of changes in volume are required to be evaluated.
(4) Pricing plays an important part in stabilizing and fixing up volume. Analysis of cost-volume-profit relationship may assist in formulating price policies to suit particular circumstances by projecting the effect which different price structures have on costs and profits.
(5) As predetermined overhead rates are related to a selected volume of production, study of cost volume relationship is necessary in order to know the amount of overhead costs which could be charged to product costs at various level of operation.
Question 4
What are the different uses of cost-volume-profit analysis?
Answer
Uses of Cost-Volume-Profit Analysis
1. C.V.P. analysis helps in forecasting costs and profits as a result of change in volume.
2. It helps fixing a sales volume level to earn or cover a given revenue, return on capital employed, or rate of dividend.
3. It assists determination of effect of change in volume due to plant expansion or acceptance of an order, with or without increase in costs or in other words a quantum of profit to be obtained can be determined with change in volume of sales.
4. C.V.P. analysis helps in determining relative profitability of each product, line, project or profit plan.
5. Through cost volume-profit analysis inter-firm comparison of profitability can be done intelligently.
6. It helps in determining cash requirements at a desired volume of output, with the help of cash breakeven charts.
306
7. Break-even analysis emphasises the importance of capacity utilisation for achieving economy.
8. From break-even analysis during severe recession, the comparative effects of a shut down or continued operation at a loss is indicated.
9. The effect on total cost of a change in the fixed over-head is more clearly demonstrated through break-even analysis and cost- volume-profit charts.
10. The conditions of a business such as profit potentialities, requirements of capital, financial stability and incidence of fixed and variable costs can be gauged from a study of the position of the breakeven point and the angle of incidence in the break-even chart.
Question 5
What is ‘Profit-Volume Ratio’? State its significance.
Answer
Profit-Volume Ratio
The ratio or percentage of contribution margin to sales is known as P/V ratio. This ratio is also known as marginal income ratio, contribution to sales ratio, or variable profit ratio. P/V ratio, usually expressed as a percentage, is the rate at which profit increases with the increase in volume.
Significance of Profit-Volume (P/V) Ratio
Profit volume (or contribution-sales) ratio is a logical extension of marginal costing. It is the study of the interrelationships of cost behaviour patterns, levels of activity and the profit that results from each alternative combination. The significance of profit volume ratio may be enumerated from the following applications which are as under:
(a) Ascertainment of profit on a particular level of sales volume.
(b) Determination of break-even point.
(c) Calculation of sales required to earn a particular level of profit.
(d) Estimation of the volume of sales required to maintain the present level of profit in case selling prices are to be reduced by a stipulated margin.
(e) Useful in developing flexible budgets for cost control purposes.
(f) Identification of minimum volume of activity that the enterprise must achieve to avoid incurring losses.
(g) Provision of data on relevant costs for decisions relating to pricing, keeping or dropping product lines, accepting or rejecting particular orders, make or buy decision, sales mix planning, altering plant layout, channels of distribution specification, promotional activities etc.
(h) Guiding in fixation of selling price where the volume has a close relationship with the price level.
(i) Evaluation of the impact of cost factors on profit.
307
Question 6
Explain the concept of key factor.
Answer
Key Factor
The product giving the greatest contribution will be the most profitable. To maximise profit, resources should be mobilised towards that product which gives the maximum contribution. But contribution is not the only criterion for deciding profitability. In real life, there may be several factors which may put a limit on the number of units to be produced even if the products give a high contribution. These factors are equally important for arriving at managerial decisions because these factors limit the volume of output at a particular point of time or over a period. these are called key factors, scarce factors, limiting factors, principal budget factors or governing factors. The limiting factors may be sale, raw material, labour, plant capacity and availability of capital e.g., for a concern established in a relatively new town, labour may be a key factor or the concern may find it difficult to acquire an unlimited quantity of raw material because of scarcity or the quota system, etc. In the later case material will be the key factor. The extent of influence of these factors should be carefully examined before arriving at a particular decision. Contribution per unit of key factor should be considered and that course of action should be adopted which gives the highest contribution per unit of key factor.
Question 7
Distinguish between absorption costing and marginal costing.
Answer Difference between Absorption Costing and Marginal Costing
Absorption costing Marginal costing
(i) Fixed production overheads are charged to the product to be subsequently released as a part of goods sold i.e., it is included in cost per unit.
Fixed production costs are regarded as period cost and are charged to revenue along with the selling and administration expenses, i.e., they are not included while computing cost per unit.
(ii) Profit is the difference between sales and cost of goods sold.
Profit in marginal costing is ascertained by establishing the total contribution and then deducting therefrom the total fixed expenses. Contribution is the excess of sales over variable cost.
(iii) Costs are seldom classified into variable and fixed. Although such a classification is possible, it fails to establish a cost-volume profit relationship.
Cost-volume profit relationship is an integral part of marginal costing studies. Costs have to be classified into fixed costs and variable costs.
308
(iv) If inventories increase during a period, this method will reveal more profit than marginal costing. When inventories decrease, less profits are reported because under this method closing stock is valued at higher figures. Since inventories are valued at total cost, a portion of fixed overheads are also included in inventories.
If inventories increase during a period, this method generally reports less income than absorption costing; but when inventories decrease this method reports more net income. The difference in the net income is due to difference in accounting for fixed manufacturing costs as compared to inventory valuation
(v) Arbitrary apportionment of fixed costs may result in under or over recovery of overheads.
Since fixed costs are excluded, there is no question of arbitrary apportionment of fixed overheads and thus under or over absorption of overheads.
Question 8
Write down the assumptions regarding break-even chart.
Answer
Assumptions regarding Break-Even Charts are as under:
(i) Costs are bifurcated into variable and fixed components.
(ii) Fixed costs will remain constant and will not change with change in level of output.
(iii) Variable cost per unit will remain constant during the relevant volume range of graph.
(iv) Selling price will remain constant even though there may be competition or change in volume of production.
(v) The number of units produced and sold will be the same so that there is no operating or closing stock.
(vi) There will be no change in operating efficiency.
(vii) In case of multi-product companies, it is assumed that the sales mix remains constant. A break-even chart can be presented in different forms.
Question 9
Explain briefly profit-volume graph.
Answer
Profit-volume Graph
Profit volume graph is the graphical representation of the relationship between profit and volume. Separate lines for costs and revenues are eliminated from the P/V graph as only profit points are plotted. It is based on the same information as is required for the
309
traditional break-even chart and is characterised by the same limitations. The steps in the construction of profit volume graph are as follows:
(i) Profit and fixed costs are represented on the vertical axis.
(ii) Sales are shown on the horizontal axis.
(iii) The sale line divides the graph into two parts both horizontally and vertically. The area above the horizontal line is the ‘profit area’ and that below it is the ‘loss area’ at which fixed costs are represented on the vertical axis below the sale line and profits on the same axis above the sale line.
(iv) Profits and fixed costs are plotted for corresponding sales volume and the points are joined by a line which is the profit line.
Question 10
The following information is provided:
Sales Rs. 80 lakhs; Variable Costs Rs. 48 lakhs; Fixed Costs Rs. 16 lakhs.
The company is thinking of expanding the plant. The increase in fixed costs, with plant expansion will be Rs. 8 lakhs. It is estimated that the maximum production in the new plant will be, in sale value, worth Rs. 48 lakhs and the variable costs to sales ratio will be same as above. You are required to determine:
(i) BEP (in value) before expansion;
(ii) Sales required to earn additional profit of Rs. 1 lakh;
(iii) Sales needed to obtain net income of Rs. 1.4 lakh (after tax), tax rate is 30%.
(iv) BEP (in value) after expansion;
Answer
(i) BEP before expansion
P/V Ratio = S
VS x 100 =
lakhs 80 Rs.
lakhs 48 Rs. - lakhs 80 Rs. x 100 = 40%
BEP = F ÷ P/V Ratio = Rs. 16 lakhs ÷ 100
40 = Rs. 40 lakhs
(ii) Sales required to earn additional profit after tax of Rs. 1 lakhs
F = Rs. 16 lakhs; Desired profit = Rs. 16 lakhs + Rs. 1 lakhs = Rs. 17 lakhs
Required Sales = RatioP/V
Profits Desired Cost Fixed =40%
lakhs 17 Rs. lakhs 16 Rs. = Rs. 82.50 lakhs
(iii) Required Sales = Fixed Cost + RatioP/V
Rate) Tax - (1 Profit Desired
= 40%
.3)] -(1 / lakhs [1.4 lakhs 16 Rs. =
40
lakhs 2 lakhs 16 Rs. x 100 = Rs. 45 lakhs
310
(iv) BEP after expansion:
F (Fixed Costs) = Rs. 16 lakhs + 8 lakhs = Rs. 24 lakhs
BEP = F ÷ P/V Ratio = Rs. 24 lakhs ÷ 100
40 = Rs. 60 lakhs
Working Note:
Profit at given level = (Sales x P/V Ratio) – Fixed Cost
= (Rs. 80 lakhs x 40%) - Rs. 16 lakhs = Rs. 16 lakhs
Question 11
Nakul Limited provides the following data:
Product Selling Price per unit (Rs.)
Variable Cost in % of sales
Percentage of Sales Revenue
A
B
C
40
50
80
75
80
60
20
40
40
At 100 percent capacity: Total sales Rs. 35000000 and Fixed Cost Rs. 5800000.
You are required to calculate:
(i) BEP in rupees
(ii) Profit or Loss at 80% capacity level sales.
Answer
(i) Statement showing contribution – Product wise and as a whole
Particulars A B C Total
i. Selling price per unit(Rs.)
ii. Variable cost ratio (%)
iii. P/V Ratio (100 – V.C. Ratio)
iv. Sales Revenue (%)
v. Sales Revenue (Rs.)
vi. Contribution on (Rs.) [(v) x (iii)]
40
75
25%
20
7000000
1750000
50
80
20%
40
14000000
2800000
80
60
40%
40
14000000
5600000
----
----
----
100
35000000
10150000
P/V Ratio as whole = Sales Total
onContributi Total x 100
= 35000000 Rs.
10150000 Rs. x 100
= 29%
311
BEP = RatioP/v
Cost Fixed
= 29%
5800000 Rs.
= Rs. 20000000
(ii) Profit or Loss at 80% capacity:
Sales revenue at 80% capacity = 35000000 x 80% = Rs. 28000000
Profit = (Sales x P/V Ratio) – Fixed Cost
= (Rs. 28000000 x 29%) – Rs. 5800000
= Rs. 8120000 – Rs. 5800000
= Rs. 2320000
Question 12
The following information is provided by Mogari Limited for the year ended 31st March, 2016:
Particulars First 6 Months (Rs.) Last 6 Months (Rs.)
Sales
Total Cost
5400000
4800000
6000000
5160000
You are required to calculate:
(i) P/V Ratio
(ii) Fixed Cost for the year
(iii) Break-even Point for the year
(iv) Margin of Safety
(v) Profit earned when sales are Rs. 15000000
(vi) Sales required to earn a profit of Rs. 2000000.
Answer
(i) P/V Ratio = sales in Increase
profit in Increase x 100
= 5400000) - (6000000
600000) - (840000 x 100
= 600000
240000 x 100
= 40%
312
(ii) Fixed Cost = (Sales x P/V Ratio) – Profit
= (11400000 x 40%) – 1440000
= 4560000 – 1440000
= Rs. 3120000
(iii) BEP = RatioP/v
F
= 40%
3120000 Rs.
= Rs. 7800000
(iv) Margin of Safety = Sales – BEP
= Rs. 11400000 – Rs.7800000
= Rs. 3600000
Or M. S. = RatioP/V
Profit
= 40%
1440000
= Rs. 3600000
(v) Profit earned at sales Rs. 15000000
= (Sales x P/V Ratio) – Fixed Cost
= (15000000 x 40%) – 3120000
= 6000000 – 3120000
= Rs. 2880000
(vi) Required Sales = RatioP/V
D.P.) (F
= 40%
2000000) (3120000
= 40%
5120000
= Rs. 12800000
Working Note:
1. Profit for first 6 months = 5400000 – 4800000 = Rs. 600000
Profit for last 6 months = 6000000 – 5160000 = Rs. 840000
Profit for the year = 600000 + 840000 = Rs. 1440000
2. Sales for the year = 5400000 + 6000000 = Rs. 11400000
313
Question 13
The following data are given by S. Kumar Limited:
Sales (32000 Units) Rs. 9600000; Variable Cost Rs. 6720000; Profit Rs. 1080000.
You are required to calculate:
(i) P/V Ratio
(ii) BEP in units
(iii) Profit at sales volume of Rs. 7200000
(iv) Required sales to achieve same contribution if P/V Ratio is 40%.
(v) If the selling price is reduced by 20%, the new BEP in units will be.
Answer
Working Note:
Calculation of Contribution and Fixed Cost
Particulars 32000 Units (Rs.) Per Unit (Rs.)
Sales
Less : Variable Cost
Contribution
Less : Profit
Fixed Cost
9600000
6720000
300
210
2880000
1080000
90
---
1800000 ---
(i) P/V Ratio = s
C x 100
= 100
90 x 100
= 30%
(ii) BEP in Units = unit per -C
F
= 90 Rs.
1800000 Rs.
= 20000 Units
(iii) Profit at Sales Volume of Rs. 7200000
Profit = (Sales x P/V Ratio) – Fixed Cost
= (7200000 x 30%) – 1800000
314
= 2160000 – 1800000
= Rs. 360000
(iv) Required sales to same contribution (Rs. 2880000) if P/V Ratio is 40%:
Required Sales = RatioP/V
C
= 40%
2880000 Rs.
= Rs. 7200000
(v) BEP at reduced price:
Reduced Price = 300 – 20% of 300 = 300 – 60 = Rs. 240 per unit
Contribution per unit = 240 – 210 = Rs. 30
BEP in Units at reduced price
= Fixed Cost/new C-per unit
= Rs. 1800000/Rs.30
= 60000 units
Question 14
Following figures are related to MD Limited for the year ended 31st March, 2016:
Rs.
Selling price per unit 50
Variable cost per unit 30
Fixed factory overheads 4500000
Fixed administrative overheads 2500000
Fixed selling and distribution overheads 2000000
You are required to calculate:
(i) Break-even point in Units
(ii) Units to be sold to earn a target net income of Rs. 175000 per month during a year.
(iii) Number of units to be sold to earn a net income of 25% on cost.
(iv) New selling price per unit if break-even point is to be brought down by 20% of present BEP.
(v) New selling price to earn a profit of 20% on sales by selling only 330000 units.
Answer
(i) BEP in units =units per onContributi
cost Fixed
315
= 20 Rs.
9000000 Rs.
= 450000 units
Fixed Cost (F) = 4500000+2500000+2000000
= Rs. 9000000
Contribution (C) per unit = Selling price – Variable cost
= Rs. 50 – 30
= Rs. 20 per unit
(ii) Units to be sold for a net income of Rs. 175000 x 12 = Rs. 2100000 per annum:
Sales (Units) = unit per - C
Profit Desired F
= 20 Rs.
2100000 9000000 Rs.
= 20 Rs.
11100000 Rs.
= 555000 Units
(iii) No. of units to be sold to earn a net income of 25% on cost or 20% on sales
Let sales be S and desired profit be 0.2S
S = RatioP/V
Profit Desired F
S =40%
0.2S 9000000 Rs.
0.4S – 0.2S = Rs. 9000000
S = 9000000/0.2 = 45000000
Required Sales Units = 45000000/50 = 900000 units
P/V Ratio = S
V) - (S x 100
=50
30) - (50 x 100
= 40%
(iv) New selling price if BEP is to be brought down by 20%. Hence, new BEP = 450000 units – 20% of 450000
= 450000 units – 90000 units
= 360000 units required C – per unit = BEPNew
F
= Rs.9000000/360000 units
316
= Rs.25 per unit
New selling price per unit = VC + C – per unit
= Rs. 30 + Rs. 25
= Rs. 55 per unit
(v) Required selling price to earn a profit of 20% on sales if sales quantity is 330000 units:
Rs.
Variable Cost: 330000 x Rs. 30 = 9900000
Add : Fixed Cost = 9000000
Total cost of 330000 units 18900000
Cost per unit: 18900000/330000 57.27
Add: Profit @ 20% on sales or 25% on cost 14.32
Required selling price per unit 71.59
Question 15
The following data are provided by Jaggu Limited:
Year ended 31st March
2015 2016
Rs. Rs.
Sales @ Rs. 20 per unit 60000000 95000000
Profit/(Loss) (4000000) 10000000
You are required to calculate:
(i) Fixed cost
(ii) Variable cost of each year
(iii) Break-even point
(iv) Required sales to earn a profit of Rs. 16000000
Answer
(i) Fixed cost = (Sales x P/V Ratio) – Profit
= (Rs. 95000000 x 40%) - Rs. 10000000
= 38000000 – 10000000
= Rs. 28000000
317
P/V Ratio =Sales in Increase
Profit in Increasex 100
= 60000000) - (95000000
](-4000000) - [10000000 x 100
= 35000000
14000000 x 100
= 40%
(ii) Variable cost of each year:
P/V Ratio is 40%. Hence, V.C. Ratio = 100 – 40 = 60%
VC for 2014-15 = 60000000 x 60% = Rs. 36000000
VC for 2015-16 = 95000000 x 60% = Rs. 57000000
(iii) Break-even Point = RatioP/V
F
= 40%
28000000 Rs.
= Rs. 70000000
(iv) Required sales to earn a profit of Rs. 16000000
Req. sales = RatioP/V
Profit Desired F
= 40%
16000000 28000000 Rs.
=40%
44000000 Rs.
= Rs. 110000000
Question 16
The following figures are given: (Rs. in Lakhs)
Particulars Year ended 31st March
2015 (Rs.) 2016 (Rs.)
Profit/(Loss)
Cost
25
155
(15)
95
You are required to calculate:
(i) P/V Ratio
(ii) Fixed Cost
318
(iii) Break-even Point in units if selling price is Rs. 250 per unit.
(iv) Required sales to earn a profit of 25% on cost.
Answer
Working Notes:
Sales = Cost + Profit or Cost-Loss
Sales for 2014-15 = Rs. 155 lakhs + 25 lakhs = Rs. 180 lakhs
Sales for 2015-16 = Rs. 95 lakhs – 15 lakhs (Loss) = Rs. 80 lakhs
(i) P/V Ratio = Sales in Change
Profit in Change x 100
= 80-180
(-15) - 25 x 100
= lakhs 100
lakhs 40 x 100
= 40%
(ii) Fixed Cost = (Sales x P/V Ratio) – Profit/+ loss
= (180 lakhs x 40%) – 25 lakhs
= 72 lakhs – 25 lakhs
= Rs. 47 lakhs
Alternatively
F. C. = (80 lakhs x 40%) + 15 lakhs (loss)
= 32 + 15 = Rs. 47 lakhs
(iii) BEP in units = unit per - C
F
= 100 Rs.
4700000 Rs.
= 47000 units
Contribution per unit = Selling price per unit x P/V Ratio
= Rs. 250 x 40%
= Rs. 100 per unit
(iv) Required Sales to earn a profit of 25% on cost or 20% on sales.
Let required sales be ‘x’ then desired profit be 0.2x
Required Sales (Rs.) = RatioP/V
Profit Desired FC
319
x = 40%
0.2x 4700000
0.4x – 0.2x = 4700000
x = 4700000/0.2
Required sales (x) = Rs. 23500000
Question 17
Jaiyesh Limited produces single product which sells 20000 units at Rs. 120 per unit. Variable cost is Rs. 90 per unit and margin of safety is Rs. 900000.
You are required to calculate:
(i) Profit earned
(ii) Break-even Point in units
(iii) Selling price per unit to bring BEP down to 10000 units
(iv) Margin of safety if profit is Rs. 325000.
Answer
(i) Profit = Margin of Safety x P/V Ratio
= Rs. 900000 x 25%
= Rs. 225000
P/V Ratio = S
V)-(S x 100
= 120
90) - (120 x 100
=120
30 x 100
= 25%
(ii) BEP in Units = Total sales units – Margin of safety in units
= 20000 units – (Rs.900000/120)
= 20000 units – 7500 units
= 12500 units
(iii) Selling price to down BEP to 10000 units
S = V + BEPNew
F
= Rs. 90 + units 10000
375000 Rs.
= Rs. 90 + Rs. 37.50
320
New Selling price = Rs. 127.50 per unit
Fixed cost = (S x P/V Ratio) – Profit
= (20000 x 120 x 25%) – Rs.225000
= Rs. 600000 – Rs.225000
= Rs. 375000
(iv) Margin of Safety = RatioP/V
Profit
= 25%
325000 Rs.
= Rs. 1300000
Question 18
The Margin of Safety is 40 percent of sales and P/V Ratio is 30 percent. The firm sold 50000 units at a price of Rs. 450 per unit.
You are required to calculate:
(i) Break-even Point in units.
(ii) Profit earned
(iii) Number of units to be sold to earn a profit of 10% on sales.
(iv) Break-even sales in units if selling price is reduced by 10 percent
Answer
(i) BEP:
Sales = 50000 units x Rs. 450 = Rs. 22500000
BEP = (100 – M. S. in %) = 100 – 40 = 60% of sales
= 60% of Rs. 22500000
= Rs. 13500000
BEP (Units) = 13500000/450 = 30000 units
(ii) Profit = Margin of Safety x P/V Ratio
= (40% of 22500000) x 30%
= Rs. 2700000
(iii) No. of units to be sold to earn a profit of 10% on sales:
Let sales = x and desired profit = 0.10x
x = RatioP/V
Profit Desired F
321
x = 30%
0.10x 4050000
0.3x – 0.1x = 4050000
x = 0.20
4050000
x = 20250000
Required sales units = 20250000/450 = 45000 units
(iv) Present Contribution (C)-per unit = 30% of 450 = Rs. 135; and VC = Rs. 450 – 135 = Rs. 315 per unit
Reduced selling price = 100 – 10 = 90% of 450 = Rs. 405
New C-per unit = 405 – 315 = Rs. 90
New BEP = unit per - CNew
F
= 90 Rs.
4050000 Rs.
= 45000 units
Working Notes:
1. Fixed Cost = (Sales x P/V Ratio) – Profit (M.S. x P/V Ratio)
= (22500000 x 30%) – [(40% of 22500000) x 30%]
= 6750000 – 2700000
= Rs. 4050000
Or FC = BEP x P/V Ratio
= 13500000 x 30%
= Rs. 4050000
Question 19
The following figures are provided by Geeta Limited for the year ending 31st March, 2016:
- P/V Ratio 40%
- Break-even Point at 60% of sales
- Sales @ Rs. 250 per unit for Rs. 15625000
You are required to calculate:
(i) BEP in units
(ii) Fixed cost
(iii) Profit earned
322
(iv) Margin of safety in rupees
(v) Units to be sold to earn a net profit (after tax) of Rs. 2800000 if corporate tax rate is 30%.
(vi) Selling price per unit if BEP is to be brought down to 50% of sales units.
Answer
(i) BEP in units = 60% of sales units 15625000/250
= 60% of 62500 units
= 37500 units
(ii) Fixed cost (F) = BEP in units x C-per unit
= 37500 units x (40% of Rs. 250)
= 37500 x Rs. 100
= Rs. 3750000
(iii) Profit earned = (Sales x P/V Ratio) – F
= (15625000 x 40%) – Rs.3750000
= Rs. 6250000 – Rs.3750000
= Rs. 2500000
(iv) Margin of safety = Sales – BEP Sales
= Rs. 15625000 – (37500 x Rs. 250)
= Rs. 15625000 – 9375000
= Rs. 6250000
Or Margin of Safety = 100% - BEP 60% = 40% of sales Rs. 15625000
= Rs. 6250000
(v) Required sales (units) = Unit per - C
Profit Desired F
= 100 Rs.
.3) - (1 / 2800000 Rs. 3750000 Rs.
= 100
4000000 3750000
= 100
7750000
= 77500 Units
(vi) Selling price if BEP is to be brought down to 50% of sales units:
VC = Present SP – Present C-per Unit
= 250 – 100 = Rs. 150 per Unit
New BEP = 50% of 62500 Sales units
= 31250 Units
323
New selling price = VC + Units in BEPNew
FC
= Rs. 150 + Units 31250
3750000 Rs.
= Rs. 150 + Rs. 120
= Rs. 270 per Units
Question 20
Jatin Limited produces and sells 150000 units at Rs. 30 per unit. The variable cost per unit is Rs. 18 and fixed overheads are Rs. 65000 per month.
You are required:
(i) Calculate P/V Ratio; Profit and Break-even-Point in rupees for the year.
(ii) If selling price is reduced by 20 percent, Find out BEP and what additional sales would be needed to maintain the old level of profit.
(iii) If on account of reduction in selling price, sales increase to 210000 units, what profit would result?
Answer
(i) P/V Ratio =S
V - Sx 100
= 30
18 - 30 x 100
= 30
12 x 100
= 40%
Profit = (Sales x P/V Ratio) – F
= (150000 x 30 x 40%) – (Rs. 65000 x 12)
= 1800000 – 780000
= Rs.1020000
BEP = RatioP/V
F
= 40%
12 x 6500 Rs.
= 40%
780000 Rs.
= Rs. 1950000
(ii) Reduced selling price = 30 – 20% of 30
= 30 – 6 = Rs. 24 per unit
324
New P/V Ratio = S
V-Sx 100
= 24
18 - 24x 100
= 24
6 x 100
= 25%
New BEP = RatioP/V New
F
= 25%
780000 Rs.
= Rs. 3120000
Required sales to maintain the same level of profits Rs. 1020000:
Req. Sales (Units) =unit per - CNew
Profit Desired F
=18 Rs. - 24 Rs.
1020000 Rs. 780000 Rs.
= 6 Rs.
1800000 Rs.
= 300000 Units
Additional Sales = 300000 Units – 150000 Units
= 150000 Units
(iii) Profit if sales are 210000 units at reduced price:
Profit = (Sales Units x C-per Unit) – Fixed cost
= (210000 units x Rs. 6) – Rs.780000
= Rs. 1260000 – Rs.780000
= Rs. 480000
Question 21
Vikash Limited budgets for a production of 250000 units. Per unit variable cost and fixed costs are Rs. 24 and Rs. 6 respectively. The company fixes its selling price to fetch a profit of 20 percent on selling price.
You are required to:
(i) Ascertain P/V Ratio
(ii) Ascertain Break-even Point
325
(iii) If the selling price is reduced by 10 percent, how will it affect the P/V Ratio and the BEP?
(iv) If a profit desired 10% more than the budgeted total profit, what should be the sales at reduced price?
Answer
(i) P/V Ratio =S
C x 100
= 37.50
13.50 x 100
= 36%
(ii) BEP in units = unit per - C
F
= 13.50 Rs.
1500000 Rs.
= 111111 units approx.
Or BEP in Rupees = RatioP/V
F
= 36%
1500000 Rs.
= Rs. 4166667
(iii) P/V Ratio and BEP after reduction in selling price.
Reduction selling price = Rs. 37.50 – 10% of 37.50 = Rs. 33.75
Revised C-per unit = 33.75 – 24 = Rs. 9.75
Revised P/V Ratio = S
C x 100
= 33.75
9.75 x 100
= 28.89%
Revised BEP = C Revised
F
= 9.75 Rs.
1500000 Rs.
= 153846 units approx.
326
Or 28.89%
1500000 Rs. = Rs. 5192108
(iv) Sales at reduction price:
Desired profit = Rs. 1875000 x 110%
= Rs. 2062500
Required sales = price reduced at unit per - C
Profit Desired F
= 9.75 Rs.
2062500 Rs. 1500000 Rs.
= 9.75 Rs.
3562500 Rs.
= 365384.62 or 365385 units
Working Note
1. Budgeted selling price: Rs.
Variable Cost per unit 24
Add : Fixed Cost per unit 6
Total Cost 30
Add: Profit @ 20% on sales or 25% on Cost 7.50
Selling Price per unit 37.50
2. Budgeted Fixed Cost = 250000 units x Rs. 6
= Rs. 1500000
3. Contribution per unit = S – V = Rs. 37.50 – 24
= Rs. 13.50 per unit
4. Budgeted Profit = 250000 units x Rs. 7.50
= Rs. 1875000
Question 22
Gyani Limited has purchased a machine to produce a new product, the estimated cost data for which are given below:
Estimated annual sales
Estimated Cost:
Direct Material
120000 Units
26 per unit
327
Direct Labour
Variable Overheads:
Factory
Administrative
Selling and Distribution
Fixed overheads: Factory, Administrative and selling
Desired Profit @ 20% on sales
25 per unit
9.20 per unit
2.60 per unit
7% of sales
2100000
You are required to calculate:
(i) Selling price per unit
(ii) P/V Ratio
(iii) BEP in units
(iv) Required sales units to earn a profit of Rs. 2100000.
Answer (i) Selling Price: let selling price be Rs. x per unit
Particulars Cost per unit (Rs.)
Direct Material
Direct Labour
Variable Factory Overheads
Variable Administrative Overheads
Variable Selling Overheads (7% of sales)
Fixed Overheads (2100000/120000)
Desired Profit @ 20% on sales
Selling Price
26
25
9.20
2.60
0.07x
17.50
0.20x
80.30+0.27x
x = 80.30 + 0.27x
x – 0.27x = 80.30
x = 0.73
80.30
x = 110
Hence, Selling price (x) = Rs. 110 per unit
(ii) Calculation of Contribution per unit:
Selling price per unit
Less: Variable costs per unit:
Direct Material
Rs.
26
Rs.
110
328
Direct Labour
Variable Factory Overheads
Variable Adm. Overheads
Variable Selling Overheads @ 7% of Selling price Rs. 110
Contribution per unit (S – V)
25
9.20
2.60
7.70
70.50
39.50
P/V Ratio = S
Cx 100
= 110
39.50 x 100
= 35.91%
(iii) BEP in units = unit per - C
F
= 39.50 Rs.
2100000 Rs.
= 53164.56 or 53165 units
(iv) Required sales units to earn a profit of Rs. 2100000
Req. sales = unit per - C
Profit Desired F
= 39.50 Rs.
2100000 2100000
= 39.50
4200000
= 106329 units approx.
Question 23
The following information is provided by Shyama Limited:
Particulars Products
P-1 P-2 P-3
Unit selling price (Rs.) 500 400 250
329
Unit variable cost (Rs.)
Proportion of output quantity (%)
300
20
280
50
125
30
Total fixed costs are Rs. 8937500.
You are required to work out the overall break-even point quantity and the product wise break up of such quantity.
Answer
Suppose total quantity of all products produced is ‘x’
Particulars Products
P-1 P-2 P-3
(i) Selling Price per unit (Rs.)
(ii) Variable Cost per unit (Rs.)
(iii) Contribution per unit (Rs.) [(i) – (ii)]
(iv) Production in units
(v) Total Contribution (Rs.) [(iii) x (iv)]
500
300
400
280
250
125
200
0.2x
40x
120
0.5x
60x
125
0.3x
37.50x
At the level of BEP, Total Contribution = Fixed Cost
40x + 60x + 37.50x = 8937500
137.50x = 8937500
x = 65000
Hence, Break-even Point quantity = 65000 units
Product wise break-up:
Product: P-1 = 65000 x 20% = 13000 units
P-2 = 65000 x 50% = 32500 units
P-3 = 65000 x 30% = 19500 units
Question 24
If margin of safety is Rs. 48 lakhs (30% of sales) and P/V Ratio is 40%.
You are required to calculate:
(i) Break-even sales
(ii) Fixed cost
(iii) Profit earned
(iv) Amount of profit on sales of Rs. 240 lakhs.
330
Answer
(i) Break-even Sales:
Margin of safety at 30% of Sales = Rs. 48 lakhs
Then, Total Sales = 48 lakhs x 30
100
= Rs. 160 lakhs
BEP = 100 – 30 = 70% of Sales
= 160 lakhs x 70%
= Rs. 112 lakhs
(ii) Fixed Cost = BEP x P/V Ratio
= Rs. 112 lakhs x 40%
= Rs. 44.80 lakhs
(iii) Profit = Margin of safety x P/V Ratio
= Rs. 19.20 lakhs
Or Profit = (S x P/V Ratio) – Fixed Cost
= (Rs. 160 lakhs x 40%) – 44.80 lakhs
= Rs. 64 lakhs – 44.80 lakhs
= Rs. 19.20 lakhs
(iv) Profit on sales of Rs. 240 lakhs:
Profit = (Sales x P/V Ratio) – Fixed Cost
= (Rs. 240 lakhs x 40%) – Rs.44.80 lakhs
= Rs. 96 lakhs – Rs.44.80 lakhs
= Rs. 51.20 lakhs
Question 25
The following data are given:
Margin of safety (40000 units) Rs. 2400000
Total Cost of Production Rs. 7140000
No. of units produced and sold 140000 units
You are required to calculate:
(i) Unit selling price
(ii) Profit earned
331
(iii) P/V Ratio
(iv) Fixed Cost
(v) Break-even Point in units
(vi) Sales units required to earn a target net profit of Rs. 2800000 after tax, assuming corporate tax rate to be 30%.
Answer
(i) Unit selling price =Units in safety of Margin
Rupees in safety of Margin
= Units 40000
2400000 Rs.
= Rs. 60 per Unit
(ii) Total sales = 140000 x Rs. 60
= Rs. 8400000
Profit = Sales – Total Cost
= Rs. 8400000 – 7140000
= Rs. 1260000
(iii) P/V Ratio =Safety of Margin
Profit x 100
= 2400000 Rs.
1260000 Rs. x 100
= 52.50%
(iv) Fixed Cost = (S x P/V Ratio) – Profit
= (Rs. 8400000 x 52.5%) – Rs.1260000
= Rs. 4410000 – Rs.1260000
= Rs. 3150000
Or FC = BEP x P/V Ratio
= Rs. 6000000 x 52.50%
= Rs. 3150000
(v) BEP (Units) = 140000 units – 40000 units (M.S.)
= 100000 units
BEP (in Rs.) = Rs. 8400000 (sales) – Rs. 2400000 (M.S.)
= Rs. 6000000
Or BEP (in Rs.) = RatioP/V
F
332
= 52.50%
3150000 Rs.
= Rs. 6000000
(vi) Required sales for desired profit after tax of Rs. 2800000:
Req. sales = unit per - C
T)-(1 / Profit Desired F
= 60 Rs. of 52.50%
0.3)-(1 / 2500000 Rs. 3150000 Rs.
= 31.50 Rs.
4000000 Rs. 3150000 Rs.
= 226984 units approx.
Question 26
The Babli Ltd. provides the following data relating to its single produced for a year
Selling Price
Variable Cost
Salesman’s Commission
Total Variable Cost
Annual Fixed Expenses are:
Production
Administration
Selling
Distribution
Per Unit (Rs.)
300
195
15
210
Rs.
600000
2000000
800000
200000
3600000
Required:
(a) Calculate the annual Break-even Point in units and in value. Also determine the profit or loss if 35000 units are sold.
(b) The sales commissions are proposed to be discontinued, but instead fixed amount of Rs. 900000 is to be incurred in fixed salaries. A reduction in selling price of 5% is also proposed. What will be the Break-even Point in units?
333
(c) It is proposed to pay the store’s manager Rs. 5 per unit as further commission. The selling price is also proposed to be increased by 5%. What will be the Break-even Point in units?
(d) Refer to the original data. If the store’s manager will be paid Rs. 3 commission on each unit sold in excess of the current Break-even sales, what will be the store’s net profit if 50000 units were sold?
Answer
Calculation of contribution per unit and P/V Ratio:
Contribution per unit = Rs. (300 – 210) = Rs. 90
P/V Ratio = 300
90 x 100 = 30%
Fixed Cost (Given) = Rs. 3600000
Situation (a) From Original Data:
(i) BEP (Units) = unit per onContributi
Cost Fixed =
90 Rs.
3600000 Rs. = 40000 units
(ii) BEP (Value) = RatioP/V
Cost Fixed =
30%
3600000 Rs. = Rs. 12000000
(iii) Profit or Loss on Sale of 35000 units:
Profit = (Contribution – Fixed Cost)
= (35000 x 90) – (3600000)
= Rs. 3150000 – 3600000
= (-)Rs. 450000 or Loss Rs. 450000
Situation (b) From Proposed Data: Rs.
Selling Price per Unit = (95% of Rs. 300) 285
Less : Variable Cost per Unit (Rs. 210 – Rs. 15) 195
Contribution per unit 90
Fixed Cost = (Rs. 3600000 + Rs. 900000) = Rs. 4500000
So, BEP (in Units) = (Rs. 4500000 ÷ Rs. 90) = 50000 Units
Hence, break-even point in situation (b) is available at 50000 units.
Situation (c) From Proposed Data: Rs.
Selling Price per Unit (300 x 105 ÷ 100) = 315
Less: Variable Cost per Unit = (210 + 5) = 215
Contribution per Unit = 100
334
(Units) = (Rs. 3600000 ÷ Rs. 100) = Rs. 36000 Units
Situation (d): From Proposed Data:
Actual Sales = 50000 Units
BEP Sales = 40000 Units
Excess Sales = 10000 Units
Original Contribution in Profit on excess Sale = (10000 x 90) = Rs. 900000
Store’s Net Profit after commission @ Rs. 3 per unit on Excess sale
= Rs. 900000 – (10000 x 3) or Rs. 900000 – Rs. 30000 = Rs. 870000
Question 27
The following information is obtained from the cost records of Patta Limited for the year ended 31st March, 2016: Rs.
Sales 25 Lakhs
Variable Costs 15 Lakhs
Fixed Costs 6 Lakhs
(a) Find the P/V Ratio, Break-even Point, and Margin of Safety at this level.
(b) Calculate the effect of:
(i) 20% decrease in fixed costs;
(ii) 10% increase in fixed costs;
(iii) 10% decrease in variable costs;
(iv) 10% increase in selling price;
(v) 10% increase in selling price together with an increase of fixed overheads by Rs. 120000;
Answer
(a) At the existing level:
P/V Ratio = S
V - S x 100
= lakhs 25 Rs.
lakhs 15 Rs. - lakhs 25 Rs.
= lakhs 25 Rs.
lakhs 10 Rs. x 100 = 40%
BEP = RatioP/V
F
= 40%
lakhs 6 Rs. = Rs.15 lakhs
335
Margin of safety = Sales – BEP Sales = Rs. 25 lakhs – Rs. 15 lakhs = Rs. 10 lakhs
Or Margin of Safety = RatioP/V
Profit =
40%
6) - 15 - (25 =
40%
lakhs 4 = Rs. 10 lakhs
(b) (i) 20% decrease in fixed costs:
P/V Ratio = 40%, Decreased fixed cost
= 6 lakhs – 20% of 6 lakhs = Rs. 4.8 lakhs
BEP = RatioP/V
F =
40%
lakhs 4.8 = Rs. 12 lakhs
Margin of safety = Sales–BEP Sales = Rs. 25 lakhs – Rs. 12 lakhs = Rs. 13 lakhs
(ii) 10% increase in fixed costs:
P/V Ratio = 40%, Increased fixed cost = Rs. 6.6 lakhs
BEP =RatioP/V
F=
40%
lakhs 6.6 Rs. = Rs. 16.50 lakhs
Margin of Safety = Sales – BEP Sales = Rs. 25 lakhs – Rs. 16.5 lakhs = Rs. 8.50 lakhs
(iii) 10% decrease in variable costs:
P/V Ratio = lakhs 25 Rs.
lakhs) 13.50 Rs. - lakhs 25 (Rs. x 100
= lakhs 25 Rs.
lakhs 11.50 Rs. x 100 = 46%
BEP = 46%
lakhs 6 Rs. = Rs. 1304348
Margin of Safety = (Sales – BEP Sales) = Rs. 2500000 - Rs. 1304348 = Rs. 1195652
(iv) 10% increase in selling price:
P/V Ratio = lakhs 27.50 Rs.
lakhs 15 Rs. - lakhs 27.50 Rs. x 100
= lakhs 27.50 Rs.
lakhs 12.50 Rs. x 100 = 45.45%
BEP = 45.45%
lakhs 6 Rs. = Rs. 1320132
Margin of Safety = Rs. 2750000 – Rs. 1320132
= Rs. 1429868
(v) 10% increase in selling price with increase in fixed overhead by Rs. 120000:
P/V Ratio = lakhs 27.50 Rs.
lakhs 15 Rs. - lakhs 27.50 Rs.
= 45.45%
336
BEP = 45.45%
720000 Rs. = Rs. 1584158
Margin of Safety = Sales – BEP Sales = Rs. 2750000 – Rs. 1584158
= Rs. 1165842 Question 28
Savitri Limited produces calculators. Due to competition, the company proposes to reduce the selling price. If the present level of profit is to be maintained, indicate the number of calculators to be sold if the proposed reduction in selling price is:
(i) 5 percent;
(ii) 10 percent; and
(iii) 15 percent.
The following additional information is available:
Present annual production and sales 125000 calculators
Rs.
Cost of manufacturing: Variable 5625000
Fixed 1875000
Administrative and Selling Cost: Variable 1625000
Fixed 1375000
Profit earned 2625000
Answer
Working Note:
1. Calculation of per unit variable cost, selling price and total fixed cost.
Particulars Total Amount
Rs.
Per unit
Rs.
Variable: Manufacturing Cost
Adm. & Selling Cost
Total Variable Cost (A)
Fixed Cost : Manufacturing
Adm. & Selling
Total Fixed Cost (B)
Total Cost (A + B)
Add: Profit earned
Sales
5625000
1625000
45
13
7250000 58
1875000
1375000
15
11
3250000 26
10500000
2625000
84
21
13125000 105
337
2. Computation of contribution per unit at various prices.
Particulars Present Price (Rs.)
Price at a Reduction (Rs.)
5% 10% 15%
Selling Price
Less: Variable Cost
Contribution per unit
105
58
99.75
58
94.50
58
89.25
58
47 41.75 36.50 31.25
3. Total Contribution Required = Total fixed cost + Present Profit
= Rs. 3250000 + Rs. 2625000 = Rs. 5875000
Computation of units required to produce for meet out the total contribution Rs. 5875000:
At the present price: Rs. 5875000/Rs.47 = 125000 Units
At a price reduced by 5%: Rs. 5875000/Rs.41.75 = 140719 Units
At a price reduced by 10%: Rs.5875000/Rs.36.50 = 160959 Units
At a price reduced by 15%: Rs.5875000/Rs.31.25 = 188000 Units
Question 29
KCS Limited has production capacity of 500000 Units per annum at its full capacity. Company’s Cost structure is as under:
Rs.
Variable production cost per unit 32
Variable selling expenses per unit 9.60
Fixed production cost per annum 3000000
Fixed selling expenses per annum 2000000
During the year ended 31st March, 2016, the company worked at 80 percent of its capacity. The operating data for the year are as follows:
Production 400000 Units
Sales @ Rs. 64 per Unit 387500 Units
Opening stock of finished goods 50000 Units
Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are recovered on the basis of period.
You are required to prepare statements of Cost and Profit for the year ending 31st March, 2016:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing.
338
Answer
(i) Statement of Cost and Profit under Marginal Costing
for the year ending 31st March, 2016
Output = 400000 units
Particulars Amount (Rs.) Amount (Rs.)
Sales: 387500 units @ Rs. 64
Less: Marginal cost/variable cost:
Variable cost of production (400000 x Rs. 32)
Add : Opening stock 50000 units @ Rs. 32
Less: Closing Stock
[(400000 + 50000 – 387500)
= 62500 units @ Rs. 32]
Variable cost of production of 387500 units
Add: Variable selling expenses @ Rs. 9.60 per unit
Contribution (sales – variable cost)
Less: Fixed production cost
Fixed selling expenses
Actual profit under marginal costing
12800000
1600000
24800000
16120000
14400000
2000000
____________
12400000
3720000
3000000
2000000
8680000
5000000
3680000
(ii) Statement of Cost and Profit under Absorption Costing
for the year ending 31st March, 2016
Output = 400000 units
Particulars Amount (Rs.) Amount (Rs.)
Sales: 387500 units @ Rs. 64
Less : Cost of sales:
Variable cost of production
(400000 @ Rs. 32)
Add : Fixed cost of production absorbed
400000 units @ Rs. 6 (refer W.N. 1)
12800000
2400000
24800000
339
Add : Opening Stock: 50000 x 400000
15200000
Less : Closing Stock: 62500 x 400000
15200000
Production cost of 387500 units
Selling expenses:
Variable: Rs. 9.60 x 387500 units
Fixed
Unadjusted profit
Less : Overheads under absorbed: (refer W.N. 2)
Fixed production overheads
Actual profit under absorption costing
1900000
20445000
17100000
2375000
14725000
3720000
2000000
4355000
600000
3755000
Working Notes:
1. Absorption rate for fixed cost of production = 500000
3000000 Rs.
= Rs. 6 per unit
2. Fixed production overhead under absorbed = Rs. (3000000–2400000)
= Rs. 600000
Question 30
Dafali Limited reports the following cost structure at two capacity levels:
80% capacity 60% capacity
Output (Units) 30000 22500
Production overhead I
Production overhead II
Rs. 30 per unit
Rs. 45 per unit
Rs. 40 per unit
Rs. 45 per unit
If the selling price, reduced by direct material and labour is Rs. 120 per unit, what would be its break-even point?
340
Answer
Computation of Break-even point in units:
Output (Units) 30000 22500
Production Overhead I : Fixed Cost (Rs.)
Selling price – Material and labour (Rs.) (A)
Production Overhead II (Variable Overhead) (B)
Contribution per unit (A) – (B)
900000
(30000 unit x Rs. 30 per unit)
120
45
75
900000
(22500 unit x Rs.40 per unit)
120
45
75
Break-even point = unit per onContributi
Cost Fixed =
75
900000 = 12000 Units
Question 31
Following are the data relating to budgeted unit cost structure in N. Ram Limited:
(Rs.)
Direct material 162
Direct labour 3 hrs. @ Rs. 45 135
Variable factory overhead 3 hrs. @ Rs. 11 33
Fixed factory overhead 3 hrs. @ Rs. 15 45
375
Selling and administrative costs:
Variable Rs. 20 per unit
Fixed Rs. 725000
During the year ended 31st March, 2016 the company has the following activity:
Units produced = 25000
Units sold = 21500
Opening stock NIL
Unit selling price = Rs. 530
Direct labour hours worked = 75000
Actual fixed factory overhead was Rs. 148000 less than the budgeted fixed factory overhead. Budgeted variable factory overhead was Rs. 120000 less than the actual variable factory overhead. The company used an expected activity level of 75000 direct labour hours to compute the predetermine overhead rates.
341
Required:
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
(iii) Reconcile the difference between the total income under absorption and marginal costing.
Answer
(i) Computation of Unit Cost & Total Income
Unit Cost Absorption Costing (Rs.)
Marginal Costing (Rs.)
Direct Material
Direct Labour
Variable Factory Overhead
Fixed Factory Overhead
Unit Cost of Production
162
135
33
45
375
162
135
33
----
330
Income Statement
Absorption Costing
Sales (21500 Units @ Rs. 530)
Less : Cost of goods sold (21500 x 375) 8062500
Less : Over Absorption 28000
Less : Selling & Distribution Expenses (20 x 21500) + 725000
Profit under absorption costing
11395000
8034500
3360500
1155000
2205500
Marginal Costing
Sales
Less : Cost of goods sold (21500 x 330) 7095000
Add: Under Absorption 120000
11395000
7215000
4180000
342
Less: Selling & Distribution Expenses (21500 x 20)
Contribution
Less: Fixed Factory and Selling & Distribution Overhead
(977000 + 725000)
Profit under marginal costing
430000
3750000
1702000
2048000
(ii) Under or over absorption of overhead: (Rs.)
Budgeted Fixed Factory Overhead
75000 hrs. x Rs. 15 1125000
Less : Actual Overhead was less than Budgeted Fixed Overhead 148000
Actual Fixed Factory Overhead 977000
Budgeted Variable Factory Overhead
75000 hrs. x Rs. 11 825000
Add : Actual Overhead was higher than Budgeted 120000
Budgeted 945000
Both Fixed & Variable Factory Overhead applied
75000 x Rs. 26 1950000
Actual Overhead (977000 + 945000) 1922000
Over Absorption 28000
(iii) Reconciliation of Profit
Difference in Profit: Rs. 2205500 – Rs. 2048000 = Rs. 157500
Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing not in Marginal Costing.
Therefore,
Difference in Profit = Fixed Factory Overhead Rate (Production – Sale)
Rs. 48 (25000 – 21500) = Rs. 157500
Question 32
The following details provides by the Gargi Limited:
Ratio of variable cost to sales 60 percent
Break-even point at 70 percent of the capacity sales
Fixed cost Rs. 1330000
343
You are required to calculate:
(i) Break-even Point in rupees.
(ii) Sales at full capacity.
(iii) Profit earned at 75 percent of capacity sales.
(iv) Sales capacity needed to earn a profit of Rs. 450000.
Answer
(i) BEP = RatioP/V
F
=% 40
1330000 Rs.
= Rs. 3325000
Note: P/V Ratio = 100 – V/C Ratio = 100 – 60
(ii) Sales at full capacity = level sales - BEP
rupees in BEP
= 70%
3325000 Rs.
= Rs. 4750000
(iii) Profit at 75% capacity sales:
Profit = (Full Capacity Sales x 75% x P/V Ratio) – Fixed Cost
= (Rs. 4750000 x 75% x 40%) – Rs. 1330000
= Rs. 1425000 – Rs. 1330000
= Rs. 95000
(iv) Sales needed for a profit of Rs. 450000
Sales Required = RatioP/V
Profit Desired F
= 40%
450000 Rs. 1330000 Rs.
= 40%
1780000 Rs.
= Rs. 4450000
Hence, Sales capacity = 4750000
4450000 x 100
= 93.68%
344
Question 33
Priyanshu Limited has furnished the following data:
Particulars Year ended 31st March
2015 2016
Sales
Margin of Safety as a % of total sales
P/V Ratio
Rs. 2500 Lakhs
30%
40%
?
22%
36%
There has been substantial saving in fixed cost in the year ended 31st March, 2016 due to the restructuring process. The company could maintain its sales quantity level of 2014-15 in 2015-16 by reducing selling price.
You are required to calculate for the later year:
(i) Sales
(ii) Profit
(iii) Fixed Cost
(iv) Break-even Sales
Answer
Workings:
Variable Cost ratio = 100 – P/V Ratio
V.C. Ratio in 2014-15 = 100 – 40 = 60%
Variable Cost for the year 2014-15 = 60% of sales Rs. 2500 Lakhs = Rs. 1500 Lakhs
(i) Sales for 2015-16:
Sales quantity has same as in 2014-15. Thus variable cost in 2015-16 is Rs. 1500 Lakhs.
P/V Ratio in 2015-16 = 36%
Thus, Variable Cost Ratio = 100 – 36 = 64%
Sales in 2015-16 = Ratio VC
VC
= 64%
Lakhs 1500 Rs.
= Rs. 2343.75 Lakhs
(ii) Profit for 2015-16:
Profit = Margin of Safety x P/V Ratio
= (22% of Rs. 2343.75) x 36%
= Rs. 185.625 Lakhs
345
(iii) Fixed Cost for 2015-16:
Fixed Cost = (Sales x P/V Ratio) – Profit
= (Rs. 2343.75 x 36%) – Rs. 185.625
= 843.75 – 185.625
= Rs. 658.125 Lakhs
Or BEP x P/V Ratio
= 1828.125 x 36%
= Rs. 658.125 Lakhs
(iv) BEP for 2015-16:
BEP = Sales – Margin of Safety
= 100 – 22 = 78% of sales
= 2343.75 x 78%
= Rs. 1828.125 Lakhs
Or BEP = RatioP/V
F
= 36%
658.125 Rs.
= Rs. 1828.125 Lakhs
Question 34
The following particulars are provided by Durga Limited:
Period I Period II
Production and Sales 20000 Units 50000 Units
Selling price per unit Rs. 45 Rs. 45
Profit/Loss per unit Loss Rs. 15 Profit Rs. 12
You are required to:
(i) Calculate the break-even point both in terms of rupees as well as in units.
(ii) Income Statement under marginal costing for both the period.
346
Answer
W.N.: 1. Let per unit variable cost be ‘a’ and fixed cost be ‘b’
We know that S – V = F + P
For the Period-I
(20000 x 45) – 20000a = b + (-15 x 20000)
900000 – 20000a = b – 300000
-20000a – b = -1200000
20000a + b = 1200000 --------- (i)
For the Period-II
(50000 x 45) – 50000a = b + (12 x 50000)
2250000 – 50000a = b + 600000
50000a + b = 1650000 (ii)
Subtracting (i) from (ii) 20000a ± b =1200000 (i)
30000a = 450000
Or a = 450000/30000
Variable cost per Unit (a) = Rs. 15
After putting the value “a = 15” in Equ. (i)
20000 x 15 + b = 1200000
b = 1200000 – 300000
Fixed Cost (b) = Rs. 900000
2. C-per Unit = S – V = Rs. 45 – 15 = Rs. 30 per unit
(i) BEP in Units = Unit per - C
F
= 30 Rs.
900000 Rs.
= 30000 Units
BEP in Rupees = 30000 Units x Rs. 45
= Rs. 1350000
347
(ii) Income Statement under Marginal Costing
Particulars Period-I Period-II
Output and Sales
Sales @ Rs. 45 per unit
Less: Variable Cost @ Rs. 15 per unit
Contribution
Less: Fixed Cost
Profit or (Loss)
Profit/Loss per unit
20000 Units 50000 Units
Rs.
900000
300000
Rs.
2250000
750000
600000
900000
1500000
900000
(300000) 600000
(15) 12
Question 35
M. Lal Limited produces single product and sells its product at Rs. 240 per unit. In 2015-16, the company operated at a margin of safety of 40%. The fixed costs amounted to Rs. 1728000 and the variable cost ratio to sales was 70%.
In 2016-17, it is estimated that the variable cost will go up by 10% and the fixed cost will increase by 5%.
Find the selling price required to be fixed in 2016-17 to earn the same P/V ratio as in 2015-16.
Assuming the same selling price of Rs. 240 per unit in 2016-17, find the number of units required to be produced and sold to earn the same profit as in 2015-16.
Answer
1. Per Unit Contribution and P/V Ratio in 2015-16
Rs.
Selling price per unit 240
Variable cost (70% of Selling Price) 168
Contribution 72
P/V Ratio = 100 – 70% or 72/240 = 30%
2. No. of units sold in 2015-16
Break-even point = Fixed cost ÷ Contribution per unit
= Rs. 1728000 ÷ Rs. 72 = 24000 units.
Margin of safety is 40%. Therefore, break-even sales will be 60% of units sold.
348
No. of units sold = Break-even point in units/60%
= 24000/60%
= 40000 units
3. Profit earned in 2015-16
Rs.
Total contribution (40000 x Rs. 72) 2880000
Less : Fixed cost 1728000
Profit 1152000
Selling price to be fixed in 2016-17
Revised variable cost (Rs. 168 x 1.10) 184.80
Revised fixed cost (1728000 x 1.05) 1814400
P/V Ratio (Same as of 2015-16) 30%
Variable cost ratio to selling price 70%
Therefore revised selling price per unit = Rs. 184.80/70% = Rs. 264
No. of units to be produced and sold in 2016-17 to earn the same profit
We know that Fixed Cost plus profit = Contribution
Rs.
Profit in 2015-16 1152000
Fixed cost in 2016-17 1814400
Desired contribution in 2016-17 2966400
Contribution per unit = Selling price per unit – Variable cost per unit.
= Rs. 240 – Rs. 184.80
= Rs. 55.20
No. of units to be produced in 2016-17 = Rs. 2966400/55.20 = 53739 Units approx.
Question 36
Roshan Limited has the capacity to produce 10000 units per month. The company has current production and sales level of 84000 units per annum. The current domestic market price per unit is Rs. 350.
The cost data for the year ending 31st March, 2016 is as under:
(Rs. in Lakhs)
Variable costs (that vary with units produced):
Direct Material
Direct Labour
Variable costs (that vary with number of batches):
Set-ups; Receiving; and Inspection (560 batches @ Rs. 4500 per batch)
Rs.
105.00
71.40
25.20
349
Fixed Costs:
Manufacturing
Administrative
Selling
21.00
8.00
4.60
Roshan Limited has received a special one-time export order for 36000 Units at Rs. 270 per unit. The company manufactures units for its existing customers in batch size of 150 units but the special export order for 36000 units requires, the company to manufacture in batches of 100 units per batch.
You are required to answer the following:
(i) Should Roshan Limited accept the special export order? Why?
(ii) Suppose the plant capacity is 9000 units instead of 10000 units per month. The special order must be taken either in full or rejected totally.
Should the company accept the order? Why?
Answer
Working Notes
1. Calculation of Present Contribution on 84000 Units
(Rs. in Lakhs)
Sales Revenue: 84000 units @ Rs. 350 per unit
Less : Variable Costs
Direct Material: 10500000/84000 = @ Rs. 125 p.u.
Direct Labour: 7140000/84000 = @ Rs. 85 p.u.
Setup, Receiving: and Inspection: 560 batches @ Rs. 4500 per batch)
Total Contribution Margin
Contribution per unit = 9240000/84000 = Rs. 110 p.u.
Rs.
105
71.40
25.20
Rs.
294
201.60
92.40
350
(i) Calculation of contribution on Accepting the Special Export order of 36000 units
(Rs. in Lakhs)
Sales Revenue: 36000 units @ Rs. 270 per unit
Less : Variable Costs:
Direct Material (@Rs. 125 per unit)
Direct Labour @ Rs. 85 per unit
Set-ups; Receiving; and Inspection costs
(36000/100= 360 batches @ Rs. 4500 per batch)
Contribution
Rs.
45
30.60
16.20
Rs.
97.20
91.80
5.40
Decision : Roshan Limited should accept the special export order since its acceptance would increase the operating profit of the company by Rs. 540000.
(ii) Calculation of Loss/Gain on accepting of special Export order when the capacity is 9000 units per month:
Gain in Contribution margin due to special order
Less : Loss of contribution on reduction of 12000 Units (9000 x 12 = 108000 – 36000 = 72000 – 84000) sales in the internal/domestic market (Rs. 110 x 12000)
Loss of Contribution
Rs.
540000
1320000
(780000)
Decision:
When the capacity is reduced to 9000 units per month, then the special export order of 36000 units should not be accepted since this decision will result in a loss of contribution by Rs. 780000.
Question 37
On the basis of the following information in respect of Toli Engineering Limited, determine the product-mix which will give it highest profit:
Particulars Products
X Y Z
Maximum possible sales (in units) 24000 16000 12000
351
Per unit cost:
Raw Material @ Rs. 20 per kg. (Rs.)
Direct Labour @ Rs. 50 per hour (Rs.)
Selling price per unit (Rs.)
200
150
550
120
100
400
300
200
775
Variable overheads are charged @ 50% of direct labour.
Total fixed overheads are Rs. 2150000.
Maximum Labour hours and raw materials are available 140000 hours and 475000 kgs. Respectively.
Answer
Statement showing product-wise contribution and Ranks
Particulars Products
X Y Z
(i) Selling price per unit
Variable costs per unit:
Raw Material
Direct Labour
Variable Overheads @ 50% Labour
(ii) Total Variable Cost
(iii) Contribution per unit [(i) – (ii)]
(iv) Material required per unit
Contribution per kg. (iii)/(iv)
Rank based on above
(v) Labour hours required per unit
Contribution per Labour hour (iii)/(v)
Rank based on above
Rs.
550
Rs.
400
Rs.
775
200
150
75
120
100
50
300
200
100
425 270 600
125 130 175
20
200=10kg.
Rs. 12.50
II
50
150=3hrs.
Rs. 41.67
III
20
120=6kg.
Rs. 21.67
I
50
100=2hrs.
Rs. 65
I
20
300=15kg.
Rs. 11.67
III
50
200 =4hrs.
Rs. 43.75
II
352
On the basis of above analysis first priority should be given to produce the product Y. 16000 x 6 = 96000 kgs Materials and 16000 x 2 = 32000 Labour hours would be used for the manufacturing of 16000 units of product Y and remaining Materials 475000 – 96000 kgs = 379000 kgs and Labour hours 140000 hrs. – 32000 hrs. = 108000 hours would be utilised for the production of product X and Z as follows:
Production of Product X be ‘a’ and of product Z be ‘b’
Material required for X and Z
10a + 15y = 379000 (i)
Labour hours required for X and Z
3a + 4b = 108000 (ii)
Equ. (i) multiplied by 0.3 and subtracted from Equ. (ii)
3a + 4b = 108000 (ii)
3a + 4.5b = 113700 (iii)
-0.5b = -5700
Or b = 11400
After putting the value of ‘b’ in Equ. (i)
10a + 15 x 11400 = 379000
10a = 379000 – 171000
a = 208000/10 = 20800
Hence, Output of Product X = 20800 Units
Output of Product Z = 11400 Units
The best product-mix and highest profit will be as follows:
Particulars Output (Units) Contribution per Unit (Rs.)
Total Product-wise Contribution (Rs.)
Product X
Product Y
Product Z
20800
16000
11400
125
130
175
2600000
2080000
1995000
Total Contribution
Less : Fixed Cost
Profit
6675000
2150000
4525000
353
Question 38
The production manager of Murliwala Limited, while reviewing the order for 15000 Units at Rs. 75 each unit, found that he gets more than the cost incurred to produce them and he presented the following supporting data:
Particulars Before Accepting the order (Rs.)
After Accepting the order (Rs.)
Variable Cost
Fixed Cost
6250000
11250000
6600000
12162000
Total Cost 17500000 18762000
Cost per Unit (Rs.) 70 70.80
You are required to analyse the above data and advice whether the production manager accept this order?
Answer
Comparative Cost Statement
Particulars Cost before Accepting the order (Rs.)
Cost after Accepting the order (Rs.)
Differential Cost of 15000 Units (Rs.)
Variable Costs
Fixed Cost
Total Costs
Output (Units) (W.N.)
Cost per Unit (Rs.)
6250000
11250000
6600000
12162000
350000
912000
17500000 18762000 1262000
250000 265000 15000
70 70.80 84.13
Advice : This is not a profitable proposition. Because, the incremental revenue will be 15000 x 75 = Rs. 1125000 and the differential cost will be Rs. 1262000, then profit would be reduced by Rs. 137000 (1125000 – 1262000).
Hence, Order should not be accepted.
Working Note :
Calculation of output units:
Before accepting order = Rs.17500000/Rs.70 = 250000 Units
After accepting order = Rs.18762000/Rs.70.80 = 265000 Units
***
354
Question 1
Question 1
What do you understand by ‘Standard Cost’ and ‘Standard Costing’?
Answer
Standard costs are the scientifically pre-determined costs of manufacturing a single unit or a number of units of product or of rendering a service during a specified future period. The Chartered Institute of Management Accountants, London, defines standard cost as “a standard expressed in money. It is built up from an assessment of the value of cost elements. Its main uses are providing bases for performance measurement, control by exception reporting, valuing stock and establishing selling prices.
The term ‘standard cost’ consists of two parts, viz., ‘standard’ and ‘cost’. ‘Standards’ can be established in respect of quantities and qualities like materials and labour. Cost involves the expression of the standard so established in values.
CIMA defines standard costing as “a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance”. The technique of standard costing may be summarised as follows:
(i) Pre-determination of technical data related to production, i.e. details of materials and labour operations required for each product, the quantum of losses, level of activity, etc.
(ii) Pre-determination of standard costs, in full details for each element of cost viz. material, labour and overhead.
(iii) Comparison of the actual performances and costs with the standards and working out the variances i.e., the difference between the actuals and the standards.
(iv) Analysis of the variances in order to determine the reasons for deviations of actuals from the standards, and
(v) Presentation of information to the appropriate level of management for suitable action.
Question 2
What are the applications of standard costing?
9
Standard Costing
355
Answer
Applications of standard costing
Standard costing is quite useful to the management in its functions like planning, controlling etc. and most important in decision making and performance evaluation. Standard costing can be used for:
1. Projecting the profit level of the business at any level of production.
2. To help in execution of management’s function effectively i.e. planning and controlling of cost.
3. To analyse the impact of cost if sales volume increase/decrease by certain percentage.
4. To measure the efficiency of production.
5. To measure the performance of each segment.
6. To identify and measure of variances between standards and actuals.
7. To design performance measurement systems to encourage employees to participate for the betterment of the Organisation.
Question 3
Explain briefly the following:
(a) Basic Standard
(b) Current Standard
(c) Ideal Standard
Answer
(a) Basic Standard
This is a “standard” which is established for use, unaltered over a long period of time. Standards are fixed scientifically and hence it is more of a technical job. These standards are supposed to remain unchanged so long as quality requirements are constant. Moreover, if forward contracts are entered into regarding materials and labour pact signed for a certain period, the costs can be planned accordingly. Such costs, i.e., basic standards may, however, have to be adjusted for changes in circumstances in a period.
(b) Current Standard
In practice, standards are fixed on the basis of scientific studies but adjusted for current subjective factors. A standard, therefore, is made realistic to reflect the anticipated conditions affecting operations; it is not too idealistic. Such a standard would bring to sharp focus the avoidable causes for variances, leading to control action. A current standard is a standard for a certain period, for certain condition and for certain circumstances. Basic standards are more idealistic whereas current standards are more realistic. Most companies use current and not basic standards.
356
(C) Ideal Standard
This standard refers to the target which can be attained under most ideal conditions. Hence, it is more idealistic and less realistic. It is defined by the Terminology as: “The standard which can be attained under the most favourable conditions, with no allowance for normal losses waste and machine down time”.
Question 4
Give the steps which are involved in the installation of a standard costing system.
Answer:
The installation of a standard costing system involves the following steps:
• To set the predetermined standards for sales margin and production costs
• To ascertain and collect the actual results
• To compare the actual performance with pre-determined standards
• To determine the variances
• To analyze and investigate the variances
• To ascertain the causes of variance
• To take corrective action where necessary.
• To adjust the budget in order to make the standards more realistic
Question 5
State the features of a standard costing system.
Answer
Features of a standard costing system are:
• The fact that standards are based on estimates.
• Standards will change according to conditions.
• It provides continual incentive for employee to keep costs and performance in line with predetermined standard.
• A standard cost system helps focus management’s attention on the following questions and their causes:
(a) Were materials purchased at prices above or below standard?
(b) Were materials used in quantities above or below standard?
(c) Is labour being paid at rates above or below standard?
(d) Is labour being used in amounts above or below standard?
Question 6
What is material price variance? What are causes of arising the material price variance?
357
Answer
Material Price Variance
This is that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid. Material price variance is that portion of the direct materials cost variance which is the difference between the standard price specified and actual price paid for the direct materials used. This is an “incurring” variance. This reflects the extra price paid on the units purchased. While making this calculation standard consumption of units should not be given any consideration. It is computed by multiplying the actual quantity by the difference between the standard price and the actual price. In other words, material price variance is the difference between ‘what it actually cost and what it would have cost if the actual usage had been paid for at the standard price’.
Causes of Material Price Variance :
The reasons for material price variance may be one or more of the following:
(i) Changes in market price of materials used;
(ii) Changes in quantity of purchase or uneconomical size of purchase order resulting in a different price;
(iii) Failure to obtain cash and/or trade discounts which were provided while setting standards;
(iv) Rush order to meet shortage of supply;
(v) Failure to take advantage of off-season price, or failure to purchase when price is cheaper;
(vi) Emergency purchase on the request of production/sales manager;
(vii) Changes in issue price due to differences in changes related to store-keeping, materials handling, carriage inward expenses etc.;
(viii) Changes in the amount of taxes and duties;
(ix) Changes in quality or specification of materials purchased;
(x) Use of substitute material having a higher or lower unit price;
(xi) Changes in the pattern or amount of taxes and duties.
Question 7
State the accounting treatment of variances in cost accounting.
Answer
Accounting Treatment of Variances
The cost records maintained and entries made under a system of standard costing vary from company to company depending upon the information that is desired from cost records, and the intended use of standard cost and variance analysis. Variances which
358
emerge in standard costing and recorded in the cost books may be disposed of in any of the following ways:
(i) Transfer to costing profit and loss account : In this method, the stock of work-in-progress, finished goods and cost of sales are maintained at standard cost and all variances are charged to costing profit and loss account at the end of the accounting period. This method is favoured because standard costs facilities prompt inventory valuation and also variances are separated out so as to attract the attention of the management.
(ii) Allocation of variances to finished stock, work-in-progress and cost of sales account under this method the variances are distributed over stocks of finished goods, work-in-progress and to cost of sales account in proportion to the closing balances (value) of each account depending upon the type of variance.
(iii) Transfer to reserve account : In this method favourable variances are carried forward as deferred credits until they are set-off by adverse variances. It is considered that controllable variances according to method (ii).
Question 8
Following particulars are given for the month of April, 2016:
Standard quantity of material required for one unit of output 30 kgs
Standard price of materials Rs. 25 per Kg.
Actual quantity of material purchased 3000 kg.
Value of material purchased Rs. 91500
Opening stock of material NIL
Closing stock of material 600 kg.
Actual output during the period 82 Units
You are required to compute:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance
Answer
Working Notes:
1. Standard Quantity (SQ) for actual output of 82 units= 82 x 30 kg= 2460 kg.
2. Actual Quantity (AQ)= 3000kgs – 600kgs (closing stock)= 2400 kg.
359
3. Actual price per kg = kgs 3000
91500 Rs.
= Rs. 30.50 per kg
(i) MCV = (SQ x SP) - (AQ x AP)
= (2460x25)-(2400x30.50)
= 61500 – 73200
= Rs.11700 (A)
(ii) MPV = AQ(SP-AP)
= 2400kgs (25-30.50)
= Rs.13200 (A)
(iii) MUV = SP(SQ-AQ)
= Rs.25 (2460-2400)
= Rs.1500 (F)
Question 9
The following data is obtained from the cost record of Priyanshu Limited:
Standard Mix
Material X : 120 kg. @ Rs. 25
Material Y : 80 kg. @ Rs. 50
200 kg.
Less: Loss 30% 60 kg.
Output 140 kg.
Actual Mix
Material X : 110 kg. @ Rs. 30
Material Y : 90 kg. @ Rs. 45
200 kg.
Less: Loss 25% 50 kg.
Output 150 kg.
You are required to find out the following material variances:
(i) Cost Variance;
(ii) Price Variance;
(iii) Usage Variance;
(iv) Mix Variance; and
(v) Yield Variance.
360
Answer
Working Notes
1. Calculation of Total Standard Material Cost (TSC) or (SQxSP):
Rs.
Material X : 120 x 25 = 3000
Material Y : 80 x 50 = 4000
TSC for std. output of 140kgs = 7000
Hence, TSC for Actual Output 150 kg = 140
7000 x 150 = Rs.7500
Per unit standard cost of output = 7000/140 or 7500/150= Rs.50
2. Total Actual Cost (TAC) or (AQ x AP)
Material X : 110x 30 = Rs. 3300
Material Y : 90 x 45 = Rs. 4050
TAC = Rs. 7350
3. (AQ x SP):
Material X : 110 x 25 = Rs. 2750
Material Y : 90 x 50 = Rs .4500
Rs. 7250
4. Revised Standard Quantity (RSQ)
For Material X = Total AQ 200 x 200
120 = 120 kg.
RSQ for Material Y = 80 kg.
5. (RSQ x SP):
Material X : 120 x 25 = Rs.3000
Material Y : 80 x 50 = Rs.4000
Rs.7000 Variances:
(i) MCV= TSC – TAC
= Rs.7500 – Rs.7300 = Rs.150 (F)
(ii) MPV= AQ(SP-AP) or (AQ x SP)-(AQ x AP)
= Rs.7250 – Rs.7350 = Rs.100 (A)
(iii) MUV= SP(SQ-AQ)or (SPxSQ)- (SP x AQ)
= Rs.7500 – Rs.7250 = Rs.250 (F)
361
(iv) MMV= SP (RSQ-AQ) or (SP x RSQ)-(SP x AQ)
= Rs.7000 – Rs.7250 = Rs.250 (A)
(v) MYV = SC per unit (AY – SY)
= Rs.50 (150-140) = Rs.500 (F)
Question 10
The standard material cost for a mix of one tonne of final product is based on the following:
Material Usage (kg.) Price per kg (Rs.)
A 250 12
B 450 15
C 600 20
During the month of May, 2016, 12 tonnes of final product were produced from the following:
Material Usage (tonnes) Cost (Rs.)
A 3.50 45500
B 6.10 85400
C 6.5 143000
You are required to calculate the material variances and verify them.
Answer
Working Notes
1. Total standard cost (TSC)= (SQ x SP)
Rs.
Material A: 250 x12 = 3000
Material B: 450 x 15 = 6750
Material C: 600 x 20 = 12000
TSC for one tonne of final output 21750
TSC for actual output of 12 tonnes = 21750 x 12= Rs.261000
2. Total Actual Cost (TAC) and Actual Price (AP):
Material AQ (kg)
(tonnes x1000 kg)
Cost (Rs.) AP=(Cost/AQ)
(per kg Rs.)
A
B
C
3500
6100
6500
45500
85400
143000
13
14
22
TAC 16100 273900
362
Rs.
3. AQ x SP : Material A: 3500 x 12 = 42000
Material B: 6100 x 15 = 91500
Material C: 6500 x 20 = 130000
= 263500
4. Revised Standard Quantity (RSQ)= Total Actual Quantity divide into standard mix ratio.
RSQ : for A= 16100 kg x 250/1300 = 3096 kg.
: for B= 16100 kg x 450/ 1300= 5573 kg.
: for C= 16100 kg x 600/ 1300= 7431 kg.
5. (RSQ x SP) : Material A = 3096 x 12 = 37152
: Material B = 5573 x 15 = 83595
: Material C = 7431 x 20 = 148620
269367
6. Standard yield (SY) by using actual Quantity one tonne SY from 250+450+600=1300 kg
SY from Actual Quantity = 16100/1300=12.3846 tonnes.
Calculation of Material Variances:
1. MCV = TSC –TAC or (SQ x SP) - (AQ x AP)
= Rs.261000 – Rs.273900 = Rs.12900 (A)
2. MPV = AQ (SP-AP) or (AQ x SP)-(AQ x AP)
=Rs.263500 – Rs.273900 = Rs.10400 (A)
3. MUV = SP (SQ - AQ) or (SP x SQ) - (SP x AQ)
= Rs.261000 – Rs.263500 = Rs.2500 (A)
4. Material Mix Variance (MMV)
= SP (RSQ-AQ) or (SP x RSQ) - (SP x AQ)
= Rs.269367 – Rs.263500 = Rs.5867 (F)
5. Material Sub Usage Variance (MSUV)
= SP (SQ – RSQ) or (SP x SQ) – (SP x RSQ)
= Rs.261000 – Rs.269367 =Rs.8367 (A)
6. Material Yield Variance (MYV)
= SC per unit (AY – SY)
= Rs.21750 (12- 12.3846) = Rs.8365 (A)
363
Verification:
(i) MCV = MPV + MUV
Rs.12900 (A) = Rs.10400 (A) + Rs.2500 (A)
OR
Rs.12900 (A) = Rs.12900 (A)
(ii) MUV = MMV + MSUV
Rs.2500 (A) = Rs.5865 (F) + Rs.8365 (A)
OR
Rs.2500 (A) = Rs.2500 (A)
(iii) MSUV = MYV
Rs.8365 (A) = Rs.8365 (A)
Question 11
The standard and actual figures of Meenakshi Limited are as under:
Standard time for the job : 800 hours
Standard rate per hour : Rs.60
Actual wages paid : Rs.50688
Actual rate per hour : Rs.64
You are required to:
(i) Compute Labour Cost Variance; Labour Rate Variance; and Labour Efficiency Variance
(ii) Verify the above Variances as (i).
Answer
(i) Computation of Variances:
Labour Cost Variance (LCV) = TSC-TAC or (SH x SR) – (AH x AR)
= (800 x 60) – (792 x 64)
= 48000 – 50688 = Rs.2688 (A)
Labour Rate Variance (LRV) = AH (SR – AR)
= 792(60 – 64)
= Rs.3168(A)
Labour Efficiency Variance (LEV) = SR(SH – AH)
= Rs.60(800 – 792)
= Rs.480 (F)
Note: Actual Hours Worked (AH) = Rs.50688/Rs.64=792 hours
364
(ii) Verification:
LCV = LRV + LEV
Rs.2688 (A) = Rs.3168 (A) + Rs.480 (F)
Or Rs.2688 (A) = Rs.2688 (A)
Question 12
The following standards have been set by Shivam Limited to manufacture a particular product:
Direct material Rs.
A -2 units @ Rs.30 per unit 60
B -3 units @ Rs.20 per unit 60
C-15 units @ Rs.15 per unit 225
345
Direct Labour : 6 hrs. @ Rs.45 per hour 270
Total standard prime cost 615
The company manufactured and sold 5800 units of the product during the year. Direct material costs were as follows:
12,500 units of A at Rs.35 per unit
18,000 units of B at Rs.18 per unit
88,500 units of C at Rs.16 per unit
The company worked 32600 direct labour hours during the year. For 4500 of these hours, the company paid at Rs.50 per hour while for the remaining, the wages were paid at standard rate. Calculate materials price variance and usage variance and labour rate and efficiency variances.
Answer
For Material Cost Variances
Actual cost of material used (AQ x AP) Rs.
A 12500 units x Rs.35 = 437500
B 18000 units x Rs.18 = 324000
C 88500 units x Rs.16 = 1416000
= 2177500
Standard cost of material used (AQ x SP) Rs.
A 12500 units x Rs.30 = 375000
B 18000 units x Rs.20 = 360000
C 88500 units x Rs.15 = 1327500
2062500
Standard material cost of production: (SQ for actual production x SP) or (SP x SQ)
= 5800 units x Rs.345 = Rs.2001000
365
Variances:
MPV = AQ(SP – AP) or (AQ x SP) – (AQ x AP)
= Rs.2062500 – Rs.2177500
= Rs.115000 (A)
MUV = SP (SQ – AQ) or (SP x SQ) – (SP x AQ)
= Rs.2001000 – Rs.2062500
= Rs.61500 (A)
For Labour Cost Variance
Actual wages paid to workers (AH x AR) Rs.
4500hrs.x Rs.50 = 225000
28100 hrs.x Rs.45 = 1264500
= 1489500
Standard cost for actual hours (AH x SR)
= 32600 hours x Rs.45 = Rs.1467000
Standard labour cost of output achieved (Actual output x SR of labour per unit) or SR x SH
= 5800 units x Rs.270 = Rs.1566000
LRV = AH(SR – AR) or (AH x SR) – (AH x AR)
= Rs.1467000 – Rs.1489500
= Rs.22500 (A)
LEV = SR (SH – AH) or (SR x SH) – (SR x AH)
= Rs.1566000 – Rs.1467000
= Rs.99000 (F)
Question 13
The following data are given:
Standards: 100 kg material for 70 kg finished product @ Rs.25 per kg.
Actuals: 25000 kg.material used at a cost of Rs.606250 for output of 17080 kg.
You are required to calculate:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance
(iv) Material Yield Variance
366
Answer
(i) MCV = (SQ x SP) – (AQ x AP)
= (24400 x Rs.25) – (25000 x Rs.24.25)
= Rs.610000 – Rs.606250
= Rs.3750 (F)
Note: SQ for actual output of 17080 kg= 70
100 x 17080=24400kg.
AP = 25000
606250 = Rs.24.25 per kg.
(ii) MPV = AQ(SP – AP)
= 25000(25 – 24.25)
= Rs.18750 (F)
(iii) MUV = SP (SQ – AQ)
= Rs.25 (24400 – 25000)
= Rs.15000 (A)
(iv) MYV = SC per unit (AY – SY)
= Rs.35.7143 (17080 – 17500)
= Rs.15000 (A)
Note: SC per unit = units 7080
610000 Rs. = Rs.35.7143 per unit
Standard yield (SY) by using actual quantity =25000x70/100= 17500 Units
Question 14
Minkya Limited manufactures a standard product. The standard mix of it is:
Material X : 60% at Rs.15 per kg.
Material Y : 40% at Rs.10 per kg.
Normal loss in output is 20 percent of input due to shortage of material Y. The actual results for May, 2016 were:
Material X : 210 kg at Rs.16 per kg.
Material Y : 190 kg at Rs.10.50 per kg.
Actual output : 330 kg.
You are required to calculate:
(i) Material Cost Variance
(ii) Material Price Variance
367
(iii) Material Usage Variance
(iv) Material Mix Variance
(v) Material Yield Variance
Answer
Working notes:
1. Total SQ for actual output= 330x 100/80= 412.50 kg.
SQ for X = 412.50 x 60% = 247.5 kg.
SQ for Y = 412.50x 40 % = 165 kg.
2. RSQ = TAQ x Standard proportion
RSQ for X =210 + 190 or 400 x 60%= 240 kg.
RSQ for Y = 400x40%= 160 kg.
3. Standard Yield (SY) by using actual quantity: 400kg x 80%= 320 kg.
(i) MCV = (SQ x SP) – (AQ x AP)
For material X : (247.5x15) –(210x16)
= 3712.50 – 3360 = Rs. 352.50 (F)
For material Y : (165 x 10) – (190 x 10.50)
= 1650 – 1995 = Rs. 345 (A)
MCV = Rs. 7.50 (F)
(ii) MPV = AQ(SP – AP)
For X : 210 (15 – 16) = Rs.210 (A)
For Y : 190 (10 – 10.50) = Rs.95 (A)
MPV = Rs.305 (A)
(iii) MUV = SP (SQ – AQ)
For X : 15 (247.50 – 210) = Rs.562.50 (F)
For Y : 10 (165 – 190) = Rs.250.00 (A)
MUV = Rs.312.50 (F)
(iv) MMV = SP (RSQ – AQ)
For X : 15 (240 – 210) = Rs.450 (F)
For Y : 10 (160 – 190) = Rs.300 (A)
MMV = Rs.150 (F)
(v) MYV = SC per unit (AY – SY)
= Rs.16.25 (330 – 320)
= Rs.162.50(F)
Note : Standard Cost (SC) per unit:
368
X : 247.50 x 15 = Rs. 3712.50
Y : 165 x 10 = Rs. 1650.00
TSC for 330 units of output = Rs.5362.50
SC per unit = 330
5362.50 Rs. = Rs.16.25
Question 15
Calculate the Material Mix Variance from the following data:
Standard mix for one unit of a product is:
Material A – 100 kg. @ Rs.15 per kg.
Material B – 150 kg. @ Rs.25 per kg.
Actual mix was used for one unit of the product as:
Material A – 120 kg @ Rs.13 per kg
Material B – 140 kg @ Rs.27 per kg.
Answer
Material Mix Variance (MMV) = SP (RSQ – AQ)
For A = Rs.15 (104 – 120) = Rs.240 (A)
For B = Rs.25 (156 – 140) = Rs.400 (F)
MMV = Rs.160 (F)
RSQ = TSQ
TAQx SQ
TAQ = 120+140 = 260 kg.
TSQ= 100 +150 = 250 kg.
RSQ for A : 250
260 x 100 = 104 kg.
RSQ for B : 250
260 x150 = 156 kg.
Question 16
The standards and actuals for a 50 hourly week are as under:
Standards:
Skilled : 100 workers @ Rs.60 per hour
Unskilled : 200 workers @ Rs.40 per hour
369
Actuals:
Skilled : 130 workers @ Rs.55 per hour
Unskilled : 215 workers @ Rs.30 per hour
You are required to compute Labour Mix Variance.
Answer:
Total Standard Time / Hours
Skilled : 100 x 50 = 5000 hours
Unskilled :200 x 50 = 10000 hours
Total = 15000 hours
Total Actual Time / Hours
Skilled : 130 x 50 = 6500 hours
Unskilled : 215x50 = 10750 hours
Total = 17250 hours
RSH for Skilled = 15000
5000 x 17250= 5750 hours
RSH for unskilled = 15000
10000 x 17250= 11500 hours
Labour Mix Variance (LMV)= SR (RSH – AH)
For skilled = Rs.60 (5750 – 6500) = Rs.45000 (A)
For Unskilled = Rs.40 (11500 – 10750) = Rs.30000 (F)
Total = Rs.15000(A)
Question 17
The following details relating to a month are given:
Standard
Grade A : 120 workers @ Rs.90 per hour
Grade B : 160 workers @ Rs.40 per hour
Budgeted hours for one month 200.
Budgeted production 5000 units less standard loss 20 %
Actual
Grade A : 110 workers @ Rs.80 per hour
Grade B : 184 workers @ Rs.45 per hour
Actual hours during the month 200.
Actual production 4250 units
370
You are required to calculate:
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Gang (mix) Variance
(v) Labour Yield Variance
Answer
Working note:
1. Calculation of Standard: (SH x SR)
Hours Rate (Rs.) Amount (Rs.)
Grade A : 120x 200 = 24000 90 2160000
Grade B : 160x 200 = 32000 40 1280000
56000 3440000
TSC for 5000 x 80 % = 4000 units
TSC for Actual output = 4250 units
= 4000
3440000 x 4250 = Rs.3655000
2. Calculation of Actual:
AH AR (Rs.) (AH x AR) (Rs.)
Grade A : 110x 200 22000 80 1760000
Grade B : 184x 200 36800 45 1656000
58800 3416000
3. Rs.
SR x AH: A - Rs.90 x 22000 = 1980000
B - Rs.40 x 36800 = 1472000
3452000
4. Calculation of RSH and RSH x SR
RSH SR RSH x SR (Rs.)
Grade A
Grade B
56000
24000x 58800 = 25200
56000
32000 x 58800 = 33600
90
40
2268000
1344000
Total 3612000
371
5. SC per Unit = Rs.3440000/4000 Units
= Rs. 860 per Unit
6. Std. yield (SY) from actual hours
56000
4000 x 58800 = 4200 Units
Calculation of Variances:
1. LCV = (SH x SR) – (AH x AR)
= Rs. 3655000 – Rs.3416000
= Rs. 239000 (F)
2. LRV = AH (SR – AR) or (AH x SR) – (AH x AR)
= Rs. 3452000 – Rs.3416000
= Rs. 36000 (F)
3. LEV = SR (SH – AH) or (SR x SH) – (SR x AH)
= Rs. 3655000 – Rs.3452000
= Rs. 203000 (F)
4. LMV = SR (RSH – AH) or (SR x RSH) – (SR x AH)
= Rs. 3612000 – Rs.3452000
= Rs. 160000 (F)
5. LYV = SC per Unit (AY – SY)
= Rs. 860 (4250 – 4200)
= Rs. 43000 (F)
Question 18
Calculate Labour Yield Variance from the following details:
Standard Actual
Skilled 180 workers @ Rs. 80 per hour 160 workers
Unskilled 120 workers @ Rs. 40 per hour 140 workers
Budgeted hours for one month 200. Actual hours during the month 180; Budgeted production 6000 units less standard loss 20%, Actual production 4600 units.
372
Answer
Standard production (yield) = 6000 units less 1200 (Loss) = 4800 units
Actual production = 4200 units
Total standard hours and actual hours have been calculated as follows:
Calculation of Standard Calculation of Actuals
Budgeted No. of Total Actual No. of Total Hours Workers Hours Hours Workers Hours
Skilled 200 180 36000 180 160 28800
Unskilled 200 120 24000 180 140 25200
Total 300 60000 300 54000
Standard yield or SY = Total actual time x time standard Total
mix Std. from Yield Std.
= 54000 Hours x hours 60000
units 4800 = 4320 units
Standard rate per unit (SR) has been calculated as follows:
Standard Wages:
Skilled workers = 36000 Hours x Rs. 80 = Rs. 2880000
Unskilled workers = 24000 Hours x Rs. 40 = Rs. 960000
Total = Rs. 3840000
Standard rate per unit (SR) = Rs. 4800
840000= Rs. 800
Now, Labour Yield Variance = (AY – SY) x Standard rate per unit
= (4600 – 4320) x Rs. 800
= Rs. 224000 (F)
Question 19
Calculate (i) Labour Cost Variance, (ii) Labour Rate Variance, (iii) Labour Efficiency Variance, (iv) Labour Mix Variance, and (v) Labour Idle Time Variance, from the following:
Standard: Rs.
Workman A: 20 hours @ Rs. 30 600
Workman B: 20 hours @ Rs. 70 1400
40 hours 2000
Actual: Rs.
Workman A: 30 hours @ Rs. 40 1200
373
Workman B: 25 hours @ Rs. 60 1500
55 hours 2700
In actual production, 4 hours (included in above) have been lost on account of machine breakdown.
Answer
(i) Labour Cost Variance = Total Standard Labour Cost – Total Actual Labour Cost
= Rs. 2000 – Rs. 2700 = Rs. 700 (A)
(ii) Labour Rate Variance =
(Standard rate per hour – Actual rate per hour) x Actual time paid for
For A = (Rs. 30 – Rs. 40) x 30 Hours = Rs. 300 (A)
For B = (Rs. 70 – Rs. 60) x 25 Hours = Rs. 250 (F)
= 50(A)
(iii) Labour Efficiency Variance = (Standard time – Actual time) x SR per hour
For A = (20 hours – 26 hours) x Rs. 30 = Rs. 180 (A)
For B = (20 hours – 21 hours) x Rs. 70 = Rs. 70 (A)
= Rs.250 (A)
(iv) Before Labour Mix Variance, we have to calculate revised standard time as follows:
Revised std. time = workers all by taken time Std. Total
worker particular a by taken time Std.x Total Act. time Taken
For A = hours 40
hours 20 x 47 hours = 23.5 Hours
For B = hours 40
hours 20 x 47 hours = 23.5 Hours
Labour Mix Variance = (Revised standard time – Actual time) x SR per hour
For A = (23.5 hours – 26 hours) x Rs. 30 per hour = Rs. 75 (A)
For B = (23.5 hours – 21 hours) x Rs. 70 per hour = Rs. 175 (F)
Rs. 100 (F)
(v) Labour Idle Time Variance = Idle Time x Standard Rate per hour
For A = 4 hours x Rs. 30 per hour = Rs. 120 (A)
For B = 4 hours x Rs. 70 per hour = Rs. 280 (A)
= Rs.400 (A)
Working Note: Actual production hours
A: 30 hours – 4 idle hours = 26 hours
B: 25 hours – 4 idle hours = 21 hours
47 hours
374
Question 20
The following is the standard mix to produce 10 units of a product:
A: 12 Units @ Rs. 150; B: 16 Units @ Rs. 200; C: 20 Units @ Rs. 250;
During the month of April, 2016, ten mixes were completed but the actual output obtained was only 90 units. Calculate Material Cost Variance, Material Price Variance, Material Mix Variance and Material Yield Variance if the actual consumption of material was as follows:
A: 128 Units @ Rs. 200; B: 192 Units @ Rs. 150; C: 168 Units @ Rs. 300;
Answer
As actual output is 90 units, SQ will be
A: 12 x 10
90 = 108 Units;
B: 16 x 10
90 = 144 Units; and
C: 20 x 10
90 = 180 Units.
Total Standard Cost will be
TSC =
A : 108 x 150 = Rs. 16200
B : 144 x 200 = Rs. 28800
C : 188 x 250 = Rs. 45000
= Rs. 90000
Total Actual Cost will be
TAC =
A : 128 x 200 = Rs. 25600
B : 192 x 150 = Rs. 28800
C : 168 x 300 = Rs. 50400
= Rs. 104800
MCV = Rs. 90000 – Rs. 104800 = Rs. 14800 (A)
Material Price Variance = AQ (SP – AP)
A : 128 (150-200) = Rs. 6400 (A)
B : 192(200 – 150) = Rs. 9600 (F)
C : 168 (250 – 300) = Rs. 8400 (A)
= Rs. 5200 (A)
375
Material Mix Variance = SP (RSQ – AQ)
First RSQ will be calculated as follows:
RSQ (Revised Standard Quantity =
A: 12 x 48
488 = 122 Units; B: 16 x
48
488 = 162.67 Units; C: 20 x
48
488 = 203.33 Units;
Now Material Mix Variance will be:
A: 150 (122 – 128) = Rs. 900 (A)
B: 200 (162.67 – 192) = Rs. 5867 (A)
C: 250 (203.33 – 168) = Rs. 8833 (F)
Rs. 2066 (F)
Material Yield Variance = SC per unit (AY – SY)
SY = 10 x 48
488 = 101.667 Units
SC per unit = Rs. 90000 ÷ 90 = Rs. 1000 per unit
Hence, Material Yield Variance = Rs. 1000 (90 – 101.667)
= Rs. 11667 (A)
Verification:
Material Cost Variance = Price Variance + Mix Variance + Yield Variance
Or 14800 (A) = 5200 (A) + 2066(F) + 11667 (A)
Or 14800 (A) = Rs. 14801 (A)
Question 21
Calculate Labour Variances from the following data:
Standard
Number in the gang 80 Men and 40 Women
Wage Rate per hour: Rs. 45 for man and Rs. 40 for woman
Output per gang hour: 50 Units
Gang-hours in a five day week: 40
Actual
Number in the gang: 64 Men and 56 Women
Wage Rate per hour: Rs. 50 for man and Rs. 25 for woman
Actual gang hours paid for: 40
Actual gang hours worked: 39
Actual output: 2400 Units
376
Answer
Labour Cost Variance (LCV) : TSC – TAC
Standard Labour Cost of 50 Units:
Men : 80 x 45 = Rs. 3600
Women : 40 x 40 = Rs. 1600
= Rs. 5200
Standard Labour Cost of 2400 Units = 2400 x 50
5200 = Rs. 249600
Actual Labour Cost of 2400 Units:
Men : 64 x 40 x 50 = Rs. 128000
Women : 56 x 40 x 25 = Rs. 56000
= Rs. 184000
LCV = Rs. (249600 – 184000) = Rs. 65600 (F)
Labour Rate Variance (LRV): (SR – AR) x AH
Men : (45 –50) x (64 x 40) = Rs. 12800 (A)
Women : (40 – 25) x (56 x 40) = Rs. 33600 (F)
= Rs.20800 (F)
Labour Efficiency Variance (LEV) = (SH – AHW*) x SR
Standard hours (SH i.e., Actual Output in terms of standard hours):
Man Hours : 50
2400 or 48 x 80 = 3840
Woman Hours: 48 x 40 = 1920
Actual Hours paid (AH): Men 40 x 64 = 2560 Hours
Women: 40 x 56 = 2240 Hours
LEV :
Men : (3840 – 2496) x Rs. 45 = Rs. 60480 (F)
Women : (1920 – 2184) x Rs. 40 = Rs. 10560 (A)
= Rs. 49920 (F)
* AHW means Actual Hours Worked – Idle Hours
Labour Idle Time Variance (LITV) = Idle Hours x SR
Men : 1 x 64 x 45 = Rs. 2880 (A)
Women : 1 x 56 x 40 = Rs. 2240 (A)
= Rs. 5120 (A)
377
Labour Mix Variance (LMV) = (RSH – AH) x SR
Actual Hours (AH) worked:
Men : 39 x 64 = 2496 Hours
Women : 39 x 56 = 2184 Hours
= 4680 Hours
Required Standard Hours (RSH) i.e., Standard Proportion (2:1) of 4680 Hours
Men : 4680 x 3
2 = 3120 Hours
Women: 4680 x 3
1 = 1560 Hours
LMV:
For Men : (3120 – 2496) x 45 = Rs. 28080 (F)
For Women : (1560 – 2184) x 40 = Rs. 24960 (A)
= Rs. 3120 (F)
LYV = SC per unit (AY – SY)
= Rs.104 (2400 – 1950) = Rs. 46800 (F)
SY = Time Standard Total
Output Standard x Total Actual Time excluding Idle Time
= 4800
2000 x 4680 = 1950 Units
SC per unit = 2400
249600 Rs. = Rs. 104
Question 22
Following data are given by Mogary Limited:
Standards
Grade A: 120 workers @ Rs. 60 per hour
Grade B: 80 workers @ Rs. 40 per hour
Budgeted hours: 1000
Production: 5000 units less standard loss 20 percent.
Actuals
Grade A: 110 workers @ Rs. 70 per hour
Grade B: 90 workers @ Rs. 42 per hour
Actual hours: 900
378
Actual loss 900 units
You are required to compute Labour Variances.
Answer
Working Notes:
1. Standard Output = 5000 Units – 20% of 5000
= 4000Units
Actual Output or yield (AY) = 5000 – 900 = 4100 Units
2. Calculation of Total Standard Cost TSC or (SH x SR)
Grade No. of Workers Budgeted hours
Total hours (SH)
Rate (SR) Rs.
SH x SR Rs.
A
B
120
80
1000
1000
120000
80000
60
40
7200000
3200000
Total 200000 10400000
TSC for actual output 4100 units
= 4000
10400000 x 4100 = Rs. 10660000
Standard Cost (SC) per unit = 4000
10400000 or
4100
10660000 = Rs. 2600 per unit
3. Total Actual Cost: TAC or (AH x AR)
Grade No. of workers
Actual hours
Total hours (AH)
Rate (AR) Rs.
AH x AR Rs.
A
B
110
90
900
900
99000
81000
70
42
6930000
3402000
Total 180000 10332000
4. Standard Cost for actual hours (AH x SR)
Grade AH SR (Rs.) AH x SR (Rs.)
A
B
99000
81000
60
40
5940000
3240000
Total 9180000
379
5. Revised Standard Hours (RSH) and RSH x SR
Grade RSH SR (Rs.) RSH x SR (Rs.)
A
B
200000
120000 x 180000 = 108000
200000
8000 x 180000 = 72000
60
40
6480000
2880000
Total 9360000
Calculation of Labour Variances:
(i) LCV = TSC – TAC
= Rs. 10660000 – Rs. 10332000
= Rs. 328000 (F)
(ii) LRV = AH (SR – AR) or (AH x SR) – (AH x AR)
= Rs. 9180000 – Rs. 10332000
= Rs. 1152000 (A)
(iii) LEV = SR (SH – AH) or (SH x SR) – (AH x SR)
= Rs. 10660000 – Rs. 9180000
= Rs. 1480000 (F)
(iv) LMV = SR (RSH – AH) or (RSH x SR) – (AH x SR)
= Rs. 9360000 – Rs. 9180000
= Rs. 180000 (F)
(v) LYV = SC per Unit (AY – SY)
= Rs. 2600 (4100 Units – 3600 Units)
= Rs. 1300000 (F)
Note: Standard yield (SY) by using Actual Hours
= 200000
4000 x 180000
= 3600 Units
Verification:
LCV = LRV + LEV
Rs. 328000 (F) = Rs. 1152000 (A) + Rs. 1480000 (F)
Or Rs. 328000 (F) = Rs. 328000 (F)
380
LEV = LMV + LYV
Rs. 1480000 (F) = Rs. 180000 (F) + Rs. 1300000 (F)
Or Rs. 1480000 (F) = Rs. 1480000 (F)
Question 23
Standard Wage Rate (Original) Rs. 50 per hour
Standard Wages Rate after award, 20% increase
Actual for the month:
Output equivalent to 1850 standard hours, Hours worked 2000 hours;
Labour Cost Rs. 128000.
You are required to calculate the following on the basis of revised standard rate:
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
Answer
(i) LCV = (SH x SR) – (AH x AR)
= (1850 x 60) – 128000
= Rs. 111000 – 128000
= Rs. 17000 (A)
(ii) LRV = AH (SR – AR)
= 2000 (60 – 64)
= Rs. 8000 (A)
(iii) LEV = SR (SH – AH)
= 60 (1850 – 2000)
= Rs. 9000 (A)
W.N.:
1. Revised Standard Rate = Rs.50 + 20% of 50 = Rs. 60 per hour
2. Actual Wages Rate = 2000
128000 Rs. = Rs.64 per hour
Question 24
Compute the missing data indicated by the question marks from the following information:
Particulars A B
Standard Price/Unit (SP) Rs. 24 Rs. 30
Actual Price/Unit (AP) Rs. 30 Rs. 40
381
Standard Input (kgs.) (SQ) 100 kg. ?
Actual Input (kgs.) (AQ) ? 140
Material Price Variance (MPV) ? ?
Material Usage Variance (MUV) ? Rs. 1200 (A)
Material Cost Variance (MCV) ? ?
Material mix variance of both materials together was Rs. 180 adverse.
Answer
If standard quantity of material B is assumed x then material usage variance will be as follows:
MUV = SP (SQ – AQ)
= 30 x (x – 140) = -1200
= 30x – 4200 = -1200
= 30x = -1200 + 4200
= 30 x= 3000 or x = 100
From the given and calculated information, variances of ‘B’ may be calculated as follows:
MPV = AQ (SP – AP)
= 140 (30 – 40) = Rs. 1400 (A)
MCV = SP x SQ – AP x AQ
= (30 x 100) – (40 x 140) = Rs. 2600 (A)
If the actual input of the total material is x kg., then the input of material A will be (x – 140) because actual input of material B is equal to 140 kg. The standard quantity of material A and B is 100 kg for each., i.e., both type of materials are utilised in the same ratio. If the
actual quantity is x kg., then RSQ for each type of material will be 2
x uniformly.
MMV = SP (RSQ – AQ)
For Material A = 24
140) - (x - 2
x
For Material B = 30
1402
x
MMV = 24
140) - (x - 2
x + 30
1402
x = -180
Or MMV = 24
140) - (x - 2
x + 30
1402
x = -180
= (12x – 24x + 3360) + (15x – 4200) = -180
382
= 12x – 24x + 15x = -180 – 3360 + 4200
= 3x = 660 or x= 220
If x = 220 then actual material of ‘A’ will be 220 – 140 = 80 kg. and hence, by knowing all the relevant information of material ‘A’, then MPV, MUV and MCV for material A can be calculated as under:
MPV = AQ (SP – AP)
= 80 (24 – 30) = Rs. 480 (A)
MUV = SP (SQ – AQ)
= 24 (100 – 80) = Rs. 480 (F)
MCV = (SP x SQ) – (AP x AQ)
= (24 x 100) – (30 x 80) = NIL
Question 25
The following information are obtained from the cost records of Jaiash Limited for the month of May, 2016:
Standard Actual
Output (Units)
Working days
Fixed Overheads (Rs.)
Variable Overheads (Rs.)
8000
20
2000000
600000
7600
21
1950000
600000
You are required to calculate:
(i) Variable Overhead Variance
(ii) Fixed Overhead Variance
(a) Expenditure Variance
(b) Volume Variance
(c) Cost Variance
Answer
(i) Actual Variable Overheads = Rs. 600000
Standard Variable Overheads for actual output
= (600000/8000) x 7600 Units
= Rs. 570000
Variable Overhead Variance
383
= (Std. Variable Overhead for actual output – Actual variable overheads)
= Rs. 570000 – Rs. 600000
= Rs. 30000 (A)
(ii) Actual Fixed Overheads = Rs. 1950000
Budgeted fixed overheads = Rs. 2000000
Std. fixed overheads for actual output
= (Rs. 2000000/8000 Units) x 7600 Units
= Rs. 1900000
(a) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overhead – Actual Fixed Overheads
= Rs. 2000000 – Rs. 1950000
= Rs. 50000 (F)
(b) Fixed Overhead Volume Variance
= Standard fixed overhead for actual output – Budget fixed overhead
= Rs. 1900000 – Rs. 2000000
= Rs. 100000 (A)
(c) Fixed Overhead Cost Variance
= Std. fixed overhead for actual output – Actual fixed overhead
= Rs. 1900000 – Rs. 1950000
= Rs. 50000 (A)
Question 26
A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fixed overheads are budgeted at Rs. 720000 per month. The standard time required to manufacture one unit of product is 2 hours.
In April, 2016, the company worked 24 days of 840 machine hours per day and produced 10610 units of output. The actual fixed overheads were Rs. 710000.
You are required to compute:
(i) Expenditure Variance
(ii) Volume Variance
(iii) Total fixed overheads variance
384
Answer
Working Notes
1. Budgeted working hours per month: 120 x 8 x 25 = 24000 hours
2. Actual working hours during the month: 840 x 24 = 20160 hours
3. Budgeted production units per month = (Budget 24000 ÷ 2 hrs.) = 12000 Units.
4. Actual production during the month = 10610 Units
5. Standard F.O. rate per unit = Rs.720000/12000 = Rs. 60
6. Standard F.O. rate per hour = Rs.720000/24000 = Rs. 30
7. Standard F.O. rate per day = Rs.720000/25 = Rs. 28800
8. Standard fixed overhead for actual production = 10610 units x Rs. 60 = Rs. 636600
Variances:
(i) F.O. Expenditure Variance = Budgeted F.O. – Actual F.O.
= Rs.720000 – Rs.710000 = Rs. 10000 (F)
(ii) Total Volume Variance = (Standard F.O. Absorbed – Budgeted F.O.)
= 636600 – 720000 = Rs. 83400 (A)
(iii) Fixed overhead variance = (Std. F.O. Absorbed – Actual F.O.)
= 636600 – 710000
= Rs. 73400 (A)
Or Expenditure + Volume = 10000 (F) + 83400 (A) = Rs. 73400 (A)
Question 27
Savitri Limited has furnished you the following information for the month of May, 2016:
Budget Actual
Output (units) 60000 65000
Hours 30000 33000
Fixed overhead Rs. 450000 Rs. 500000
Variable overhead Rs. 600000 Rs. 680000
Working days 25 26
Calculate overhead variances.
Answer
Basic Calculations
Standard hours per unit = 60000
30000
units Budgeted
hours Budgeted = 0.5 hour
Std. hrs. for actual output = 65000 x 0.5 hr. = 32500 hours
385
Standard overhead rate per hour = hours Budgeted
overhead Budgeted
For fixed overhead = 30000
450000 = Rs. 15 per hour
For variable overhead = 30000
600000 = Rs. 20 per hour
Std. F.O. rate per day = Rs.450000 ÷ 25 days = Rs. 18000
Recovered overhead = Std. hrs. for actual output x Std. rate
For fixed overhead = 32500 hrs. x Rs. 15 = Rs. 487500
For variable overhead = 32500 hrs. x Rs. 20 = Rs. 650000
Standard overhead = Actual hours x Std. rate
For fixed overhead = 33000 x 15 = Rs. 495000
For variable overhead = 33000 x 20 = Rs. 660000
Revised budget hours =days Budgeted
hours Budgeted x Actual days
= 25
30000x 26 = 31200 hours
Revised budgeted overhead (for fixed overhead) = 31200 x 15 = Rs. 468000
Calculation of variances:
Fixed Overhead Variances
(i) F.O. Cost Variance = Recovered Overhead – Actual Overhead
= 487500 – 500000
= Rs. 12500 (A)
(ii) F.O. Expenditure Variance = Budgeted Overhead – Actual Overhead
= 450000 – 500000
= Rs. 50000 (A)
(iii) F.O. Volume Variance = Recovered Overhead – Budgeted Overhead
= 487500 – 450000
= Rs. 37500 (F)
Variable Overhead Variances
(i) V.O. Cost Variance = Recovered Overhead – Actual Overhead
= 650000 – 680000
= Rs. 30000 (A)
(ii) V.O. Expenditure Variance = Standard Overhead – Actual Overhead
386
= 660000 – 680000
= Rs. 20000 (A)
(iii) V.O. Efficiency Variance = Recovered Overhead – Standard Overhead
= 650000 – 660000
= Rs. 10000 (A)
Verification
(i) F.O. Cost Variance = Expenditure variance + Volume variance
12500 (A) = 50000 (A) + 37500 (F)
(ii) V.O. Cost Variance = Expenditure Variance + Efficiency Variance
30000 (A) = 20000 (A) + 10000 (A)
Question 28
MDS Limited has furnished the following data:
Budget Actual
No. of working days 25 27
Production in units 10000 11000
Fixed overheads Rs.450000 Rs.465000
Budgeted fixed overhead rate is Rs. 15 per hour. In May, 2016, the actual hours worked were 31500.
Calculate the following variances:
(i) Volume variance.
(ii) Expenditure variance.
(iii) Total overhead variance.
Answers
For Fixed Overhead Variances
Actual F.O. incurred Rs.465000
Budgeted F.O. for the period or standard fixed overhead Rs.450000
Standard F.O. absorbed for production (Standard output for actual time x
Standard F.O. per unit) (Rs.450000/10000) x 11000 = Rs.495000
Computation of Variances:
(i) Fixed overhead expenditure variance:
= (Budgeted F.O. – Actual F.O.)
= Rs.450000 – Rs.465000 = Rs. 15000 (A)
387
(ii) Fixed overhead volume variance:
= (Standard F.O. absorbed – Budgeted F.O.)
= Rs.495000 – Rs.450000 = Rs.45000 (F)
(iii) Fixed overhead variance:
= (Standard F.O. absorbed – Actual F.O.)
= Rs.495000 – Rs.465000 = Rs.30000 (F)
Question 29
In Sewda Industries Limited the standard units of production of the year were fixed at 600000 units and overhead expenditure were estimated to be:
Fixed Rs. 6540000
Variable Rs. 3360000
Actual production during the month of April, 2016 was 40000 units. Each month has 20 working days. During the month in question there was one statutory holiday. The actual overheads amounted to:
Fixed Rs. 652600
Variable Rs. 278400
You are required to find out the:
(i) Overhead Cost Variance
(ii) Fixed Overhead Cost Variance
(iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Volume Variance
(v) Fixed Overhead Expenditure Variance
(vi) Fixed Overhead Calendar Variance
Answer
(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (Rs. 436000 + Rs. 224000) – (Rs. 652600 + Rs. 278400)
= (Rs. 660000 – Rs. 931000)
= Rs. 271000 (A)
(ii) F.O. Cost Variance = Absorbed F.O. – Actual F.O.
= Rs. 436000 – Rs. 652600
= Rs. 216600 (A)
(iii) Variable Overhead Cost Variance = Std. V.O. for actual production – Actual V.O.
= Rs. 224000 – Rs. 278400
= Rs. 54400 (A)
388
(iv) F.O. Volume Variance = Absorbed F.O. – Budgeted F.O.
= Rs. 436000 – Rs. 545000
= Rs. 109000 (A)
(v) F.O. Expenditure Variance = Budgeted F.O. – Actual F.O.
= Rs. 545000 – Rs. 654000
= Rs. 109000 (A)
(vi) F.O. Calendar Variance = Possible F.O. – Budgeted F.O.
= Rs. 517750 – Rs. 545000
= Rs. 27250 (A)
Working Notes:
1. Standard Rate of absorption of Fixed Overhead per unit =Units 600000
6540000 Rs.= Rs. 10.90
per Unit
2. Absorbed F.O. on production = 40000 Units @ Rs. 10.90 = Rs. 436000
3. Standard Variable Overhead per unit = Units 600000
3360000 Rs. = Rs. 5.60 per unit
4. Standard V.O. for 40000 Units (output) = 40000 Units x Rs. 5.60 = Rs. 224000
5. Budgeted monthly F.O. = Rs. 6540000/12 = Rs. 545000
6. Possible F.O. for the month = days working Budgeted
F.O. Budgetedx Actual days
= days 20
545000 Rs. x 19 days
= Rs. 517750
Question 30
Jeenu Limited has furnished the following standard cost data for per unit of production:
Material: 5 kg @ Rs. 20 per kg.
Labour: 3 hours @ Rs. 45 per hour
Variable Overhead @ Rs. 15 per Labour hour
Fixed Overhead Rs. 621000 per month based on a normal volume of 51750 Labour hours.
The actual cost data for the month of May, 2016 were as follows:
Material used 42250 kg at a cost of Rs. 1679000
Labour paid Rs. 2285000 for 51000 hours
Variable Overheads Rs. 742800
389
Fixed Overheads Rs. 615400
Actual production 16650 Units
You are required to calculate:
(i) Material Cost Variance
(ii) Labour Cost Variance
(iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Cost Variance
Answer
Working Notes
1. Budgeted monthly production = 51750 hours/3 = 17250 Units
2. Budgeted F.O. Rate = Rs. 621000/17250 Units = Rs. 36 per Unit
3. Total Standard Material Cost for actual production
= 16650 Units x 5 kg x Rs. 20 = Rs.1665000
4. Total Standard Labour Cost for actual production
= 16650 Units x 3 hours x Rs.45 = Rs.2247750
5. Absorbed F.O. = 16650 x Rs. 36 = Rs.599400
6. Absorbed V.O. = 16650 Units x 3 hours x Rs. 15 = Rs.749250
Variances:
(i) MCV = TSC – TAC
= Rs. 1665000 – Rs.1679000
= Rs. 14000 (A)
(ii) LCV = TSC – TAC
= Rs. 2247750 – Rs.2285000
= Rs. 37250 (A)
(iii) F.O. Cost Variance = Absorbed F.O. – Actual F.O.
= Rs. 599400 – Rs.615400
= Rs. 16000 (A)
(iv) V.O. Cost Variance = Absorbed V.O. – Actual V.O.
= Rs. 749250 – Rs.742800
= Rs. 6450 (F)
Question 31
The following details are available in the cost records of Patta Limited for the month of May, 2016:
Raw material purchased 60000 kg.at a cost of Rs. 1530000
390
Raw material consumed 56500 kg
Wages paid Rs. 481800 for 8760 hours
Units produced 11500 Units
Standards:
Raw Material: 5 kg per unit @ Rs. 25 per kg
Direct Wages: 3 hours required for 4 units of output @ Rs. 50 per hour
You are required to calculate material and labour variances for the month of May, 2016.
Answer
Material Variances
(i) Material Cost Variance = (SQ x SP) – (AQ x AP)
= (57500 x 25) – (56500 x 25.50)
= Rs. 1437500 – Rs.1440750
= Rs. 3250 (A)
(ii) Material Price Variance = AQ (SP – AP)
= 56500 (25 – 25.50)
= Rs. 28250 (A)
(iii) Material Usage Variance = SP (SQ – AQ)
= 25 (57500 – 56500)
= Rs. 25000 (F)
Labour Variances
(i) Labour Cost Variance = (SH x SR) – (AH x AR)
= (8625 x 50) – (8760 x 55)
= Rs.431250 – Rs.481800
= Rs. 50550 (A)
(ii) Labour Rate Variance = AH (SR – AR)
= 8760 (50 – 55)
= Rs. 43800 (A)
(iii) Labour Efficiency Variance = SR (SH – AH)
= 50 (8625 – 8760)
= Rs. 6750 (A)
Working Notes:
(i) Actual Price (AP) = Rs. 1530000/60000 kg = Rs. 25.50 per kg
(ii) Actual hourly wages Rate (AR) = Rs. 481800/8760 hours = Rs. 55 per hour
(iii) Standard Quantity (SQ) = 11500 Units x 5 kg = 57500 kg
(iv) Standard Hours (SH) = 11500 x 4
3 = 8625 hours.
***
391
Question 1
Question 1
What do you understand by forecast and budget? Distinguish between forecast and budget.
Answer
Forecast and Budget
A forecast is an assessment of probable future events. Budget is an operating and financial plan of a business enterprise. At planning stage it is necessary to prepare forecasts of probable course of action for the business in future. Budget is a sort of commitment or a target which the management seek to attain on the basis of the forecasts made. Forecasts are made regarding sales, production cost and financial requirements of the business. A forecast denotes some degree of flexibility while a budget denotes a definite target.
The following points of distinction can be noted between forecast and budget:
Forecast Budget
(i) Forecast is a mere estimate of what is likely to happen. It is a statement of probable events which are likely to happen under anticipated conditions during a specified period of time.
Budget shows that policy and programmes to be followed in a future period under planned conditions.
(ii) Forecasts, being statements of future events, do not connote any sense of control.
A budget is a tool of control since it represents actions which can be shaped according to will so that it can be suited to the conditions which may or may not happen.
(iii) Forecasting is a preliminary step for budgeting. It ends with the forecast of likely events.
It begins when forecasting ends. Forecasts are converted into budgets.
(iv) Forecasts have wider scope, since it can be made in those spheres also where budgets can not interfere.
Budgets have limited scope. It can be made of phenomenon non capable of being expressed quantitatively.
10
Budget, Budgeting and
Budgetary Control
392
Question 2
State the objectives of budgetary control.
Answer
Objectives of Budgetary Control
The objectives of budgetary control are the following:
(1) To use different levels of management in a co-operative endeavour for achievement of the objectives of the firm.
(2) To facilitate centralised control with delegated authority and responsibility.
(3) To achieve maximum profitability by planning income and expenditure through
optimum use of the available resources.
(4) To ensure adequate working capital in other resources for efficient operation of
business.
(5) To reduce losses and wastes to the minimum.
(6) To bring out clearly where effort is needed to remedy the situation.
(7) To see that the firm is not deflected from marching towards its long-term
objectives without being overwhelmed by emergencies.
(8) Various activities like production, sales, purchase of materials etc. are co-
ordinated with the help of budgetary control.
Question 3
What are the limitations of budgetary control?
Answer
Limitations of Budgetary Control are:
(1) Budgetary control starts with the formulation of budgets which are mere estimates. Therefore, the adequacy or otherwise of budgetary control system, to a very large extent, depends upon the adequacy or accuracy with which estimates are made.
(2) Budgets are meant to deal with business conditions which are constantly changing. Therefore, budgets estimates lose much of their usefulness under changing conditions because of their rigidity. It is necessary that budgetary control system should be kept adequately flexible.
(3) The system of budgetary control is based on quantitative data and represent only an impersonal appraisal to the conduct of business activity unless it is supported by proper management of personal administration.
(4) It has often been found that in practice the organisation of budgetary control system become top heavy and, therefore, costly specially from the point of view of small concern.
393
(5) Budgets and budgetary control have given rise to a very unhealthy tendency to be regarded as the solvent of all business problems. This has resulted in a very luke-warm human effort to deal with such problems and ultimately results in failure of budgetary control system.
(6) It is a part of human nature that all controls are resented to. Budgetary control which places restrictions on the authority of executive is also resented by the employees.
The limitations stated above merely point to the need of maintaining the budgetary control system on a realistic and dynamic basis rather than as a routine.
Question 4
Write short note on Superiority of zero base budgeting (ZBB) to traditional budgeting.
Answer
Superiority of zero base budgeting (ZBB) to traditional budgeting
Zero base budgeting is superior to traditional budgeting due the following reasons:
(i) Zero base budgeting provides a systematic base for evaluation of different activities.
(ii) It gives an opportunity for management to allocate resources to various activities after a proper cost benefit analysis.
(iii) It assigns that the functions undertaken are critical for the achievement of the objectives.
(iv) It provides a base for a system of management by objectives.
(v) It provides a close relationship between departmental budget and corporate objectives / budget.
(vi) It helps in identifying wastage and their elimination.
Question 5
What is a budget manual? Explain.
Answer
Budget Manual
A budget manual is a document which sets outstanding instructions governing the responsibilities of persons and the procedures, forms and records relating to the preparation and use of budgets and it is a booklet containing standing instructions regarding the procedures to be followed and the time schedules to be observed. The following are some important matters dealt with in the budget manual:
(i) the dates by which preliminary forecasts and plans are to submitted;
(ii) the form in which these are to be submitted and the persons to whom these are to be forwarded;
394
(iii) the important factors that must be considered for each forecast or plan;
(iv) the categorisation of expenses, e.g., variable and fixed, and the manner in which each category is to be estimated and dealt with;
(v) the manner of scrutiny and the personnel to carry it out;
(vi) the matters which must be settled only with the consent of the managing director, departmental manager, etc.;
(vii) the finalisation of the functional budgets and their compilation into the master budget;
(viii the form in which the various reports are to be made out, their periodicity and dates, the persons to whom these and their copies are to be sent;
(ix) the reporting of the remedial action;
(x) the manner in which budgets, after acceptance and issuance, are to be revised or amended; and (xi) the matters, included in budgets, on which action may be taken only with the approval of top management.
Question 6
State the pre-requisitions required for the successful implementation of a budgetary control system.
Answer
Pre-requisitions for Implementation of a Budgetary Control System
For the successful implementation of a system of budgetary control certain pre-requisites are to be fulfilled. They are summarised below:
(1) There should be an organisation chart laying out in clear terms the responsibilities and duties of each level of executives and the delegation of authority to the various levels.
(2) The objectives, plans, and policies of the business should be defined in clear cut and unambiguous terms.
(3) The budget factor or the key factor(s) which will be the starting point of the preparation of the various budgets should be indicated.
(4) For formulation and efficient execution of the plan, a Budget Committee should be set up.
(5) There should be an efficient system of accounting to record and provide data in line with the budgetary control system.
(6) There should be a proper system of communication and reporting between the various levels of management.
(7) There should be a Budget Manual wherein all details regarding the plan and its procedure of operation are given as also the length of the budget period.
395
(8) The budgets should primarily be prepared by those who are responsible for performance.
(9) The budgets should be comprehensive, complete, continuous and realistic to attain.
(10) There should be an assurance from the top management executives for co-operation and acceptance of the budgetary control system.
(11) For the success of a budgetary control system, it is essential that there should be a sound organisation for budget preparation, budget maintenance, and budget administration. The budgetary control organisation is usually headed by a top executive who is known variously as the Budget Controller, Budget Director, or Budget Officer, who may have under him a Budget Committee constituted with the representatives of various departments like purchases, sales, production, development, administration and accounts.
Question 7
List 10 functional budgets prepared by a business concern.
Answer 7
Main functional budgets are:
(i) Sales Budget
(ii) Production Budget
(iii) Plant utilisation Budget
(iv) Direct Material Purchase Budget
(v) Direct Material Usage Budget
(vi) Direct Labour Budget
(vii) Factory overhead Budget
(viii) Production Cost Budget
(ix) Cost of Goods Sold Budget
(x) Administration Expenses Budget
(xi) Selling and Distribution Expenses Budget
(xii) Research and development Budget
(xiii) Capital Expenditure Budget
(xiv) Cash Budget
Question 8
Briefly explain the concept of master budget.
396
Answer
Master Budget
Master budget is a consolidated summary of the various functional budgets. A master budget is the summary budget incorporating its component functional budget and which is finally approved, adopted and employed. It is the culmination of the preparation of all other budgets like the sales budget, production budget, purchase budget etc. It consists in reality of the budgeted profit and loss account, the balance sheet and the budgeted funds flow statement.
The master budget is prepared by the budget committee on the basis of coordinated functional budgets and becomes the target of the company during the budget period when it is finally approved. This budget acts as the company’s individualised key to successful financial planning and control. It provides the basis of computing the effect of any changes in any phase of operations, such as sales volume, product mix, prices, labour costs, material costs or change in facilities. It segregates income, costs and profits by areas of responsibility. Master budget presents all this information to the depth appropriate for the top management action.
In the master budget, costs are classified and summarised by types of expenses as well as by departments. This information extends the range of usefulness of master budget. It is considered as the best mode of understanding the company’s micro- economic position relating to the forthcoming budget period. Master Budget is not merely a compendium of theoretical calculations. The figures that it contains, are the reflection of the actual intentions of the company relating to different areas for the forthcoming budget period.
Question 9
What is fixed budget and Flexible budget? State the differences between the two.
Answer
Fixed Budget
A fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained. A fixed budget is one which is designed for a specific planned output level and is not adjusted to the level of activity attained at the time of comparison between the budgeted and actual costs. The fixed budgets can be established only for a small period of time when the actual output is not anticipated to differ much from the budgeted output. However, a fixed budget is liable to revision if due to business conditions undergoing a basic change or due to other reasons, actual operations differ widely from those planned in the fixed budget.
Flexible Budget
CIMA, London defines flexible budget as a budget which by recognising different cost behaviour patterns, is designed to change as volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost for any level of activity. It is a budget which by recognising the difference between fixed, semi-fixed and variable cost is designed to change in relation to the activity attained. It is designed to furnish budgeted cost at any level of activity attained
397
Difference between fixed and flexible budgets
S. No. Fixed Budget Flexible Budget
1.
It does not change with actual volume of activity achieved. Thus it is rigid.
It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.
2. It operates on one level of activity and one set of conditions.
It consists of various budgets for different level of activity.
3.
If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture.
It facilitates the cost ascertainment and price fixation at different levels of activity.
4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels.
It provided meaningful basis of comparison of actual and budgeted targets.
Question 10
What do you understand by zero base budgeting? State its advantages.
Answer
Zero Base Budgeting
Zero base budgeting is a revolutionary concept of planning the future activities and there is a sharp contradiction from conventional budgeting. Zero base budgeting, may be better termed as “De nova budgeting” or budgeting from the beginning without any reference to any base-past budgets and actual happening. Zero base budgeting may be defined as “a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should spend any money at all. The approach requires that all activities be analysed in decision packages which are evaluated by systematic analysis and ranked in order of importance”.
CIMA defines zero base budgeting as “a method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available.”
Advantages of Zero Base Budgeting:
(i) Zero base budgeting is not based on incremental approach, so it promotes operational efficiency because it require managers to review and justify their activities or the fund requested.
(ii) Since this system requires participation of all managers, preparation of budgets, responsibility of all levels at management in successful execution of budgetary system can be ensured.
398
(iii) This technique is relatively elastic because budgets are prepared every year on a zero base. This system makes it obligatory to develop financial planning and management information system.
(iv) This system weeds out inefficiency and reduces the cost of production because every budget proposal is evaluated on the basis of cost benefit analysis.
(v) It provides the organisation with a systematic way to evaluate different operations and programmes undertaken by the management. It enables management to allocate resources according to priority of the programmes.
(vi) It is helpful to the management in making optimum allocation of scarce resources because a unique aspect of zero base budgeting is the evaluation of both current and proposed expenditure and placing it some order of priority.
Question 11
The following information is provided by Vikash Limited
Product Sales (Units) as per Sales Budget for 2016-17
Stock (Units) 1.4.2016
Estimated Stock (Units) 31.3.2017
P-1 3,75,000 34,000 39,500
P-2 2,15,000 22,000 18,000
P-3 4,32,000 37,500 47,000
P-4 1,87,000 15,000 21,000
You are required to prepare a production budget for the year ending 31st March, 2017.
Answer
Production Budget for the year ending 31st March, 2017
Particulars Products
P1 (Units) P2 (Units) P3 (Units) P4 (Units)
Sales as per Sales Budget for 2016-17
3,75,000 2,15,000 4,32,000 1,87,000
Add : Estimated stock on 31.3.2017
39,500 18,000 47,000 21,000
4,14,500 2,33,000 4,79,000 2,08,000
Less : Stock on 01.04.2016 34,000 22,000 37,500 15,000
Production Budget for 2016-17 3,80,500 2,11,000 4,41,500 1,93,000
399
Question 12
Pooja Limited sells and produces two products A and B. Which are sold in four areas N,S,E and W. The Budgeted sales for the year ended 31st March 2016were as follows:
N. A: 10,000 units at Rs. 200 each
B: 6,000 units at Rs. 100 each
S. B: 12,000 units at Rs. 100 each
E. A: 15,000 units at Rs. 200 each
W. A: 8,000 units at Rs. 200 each
B: 5,000 units at Rs. 100 each
Actual sales for this period were as follow:
N. A: 11,500 units at Rs. 200 each
B: 7,000 units at Rs. 100 each
S. B: 12,500 units at Rs. 100 each
E. A: 16,500 units at Rs. 200 each
W. A: 9,500 units at Rs. 200 each
B: 5,250 units at Rs. 100 each
Budgeted sales for the year ending 31st March, 2017 could be as follow:
N. A: Increase of 2,000 units on 31.3.2016 budget
B: Increase of 500 units on 31.3.2016 budget
S. B: Increase of 1,000 units on 31.3.2016 budget
E. A: Increase of 2,000 units on 31.3.2016 budget
W. A: Increase of 1,000 units on 31.3.2016 budget
B: Increase of 500 units on 31.3.2016 budget
It is decided to undertake sales campaigns in areas S and E. This will result in additional sales of 3,000 units of A in the S area and 5,000 units of B in the E area. Prepare sales budget for the year ended 31st March 2017. Also show the budgeted and actual sales for the year ended 31st march, 2016.
400
Answer
Sales Budget For the year ending 31st March,2017
Area Product
Budget for year ended 31.3.2017
Budget for year ended 31.3.2016
Actual for year ended 31.3.2016
Units PriceRs.
Amount Rs.
Units Price Rs.
Amount Rs.
Units Price Rs.
Amount Rs.
N A 12,000 200 24,00,000 10,000 200 20,00,000 11,500 200 23,00,000
B 6,500 100 6,50,000 6,000 100 6,00,000 7,000 100 7,00,000
TOTAL 18500 30,50,000 16,000 26,00,000 18,500 30,00,000
S A 3,000 200 6,00,000 - - - - - -
B 13,000 100 13,00,000 12,000 100 12,00,000 12,500 100 12,50,000
TOTAL 16,000 19,00,000 12,000 12,00,000 12,500 12,50,000
E A 17,000 200 34,00,000 15,000 200 30,00,000 16,500 200 13,00,000
B 5,000 100 5,00,000 - - - - - -
TOTAL 22,000 39,00,000 15,000 30,00,000 16,500 33,00,000
W A 9,000 200 18,00,000 8,000 200 16,00,000 9,500 200 19,00,000
B 5,500 100 5,50,000 5,000 100 5,00,000 5,250 100 5,25,000
TOTAL 14,500 23,50,000 13,000 21,00,000 14,750 24,25,000
GRAND TOTAL
71,000 1,12,00,000 56,000 89,00,000 62,250 99,75,000
Question 13
Patasa limited manufactures two products A and B and sells them, through two divisions North and South .From the following information prepare a sales budget showing the budgeted and actual sales for the current year:
Budget sales for the current year Actual sales for the year
Product North South North South
A 20,000 units @ Rs.18
30,000 units @ Rs.18
25,000 units @ Rs.18
35,000 units @ Rs.18
B 15,000 units @ Rs.42
25,000 units @ Rs.42
10,000 units @ Rs.42
20,000 units @Rs.42
401
Adequate market studies reveal that product “A” is popular under priced. It is observed that if the price of A is increased by Rs. 2, it will still find a ready market. On the other hand “B” is over priced for customers and the market could absorb more if sales price of “B”, be reduced by Rs. 2. The management has agreed to give effect to the above price changes. As a result of the above decisions, the following estimates have been prepared by divisional managers:
Product North South
A +10% +10%
B +20% +10%
With the help of intensive advertisement campaign the following additional sales, over estimated the sales of divisional managers are possible:
Product North South
A 3000 units 2000 units
B 2000 units 2500 units
Answer
Expected Sales for Future
Particulars A A B B
North South North South
Budget Sales(Units) 20,000 30,000 15,000 25,000
Add : Increase due to change in price policy
2,000 3,000 3,000 2,500
Add : Increase due to advertisement campaign
3,000 2,000 2,000 2,500
Total (Nos.) 25,000 35,000 20,000 30,000
Sales Budget of Patasa limited
Division
&
Product
Budget for current year Actual for current year Budget for future period
Qty. Price
Rs.
Value
Rs. Qty.
Price
Rs.
Value
Rs. Qty.
Price
Rs.
Value
Rs.
North A 20,000 18 3,60,000 25,000 18 4,50,000 25,000 20 5,00,000
B 15,000 42 6,30,000 10,000 42 4,20,000 20,000 40 8,00,000
402
Total 35,000 9,90,000 35,000 8,70,000 45,000 13,00,000
South A 30,000 18 5,40,000 35,000 18 6,30,000 35,000 20 7,00,000
B 25,000 42 10,50,000 20,000 42 8,40,000 30,000 40 12,00,000
Total 55,000 15,90,000 55,000 14,70,000 65,000 19,00,000
Sum. A 50,000 18 9,00,000 60,000 18 10,80,000 60,000 20 12,00,000
B 40,000 42 16,80,000 30,000 42 12,60,000 50,000 40 20,00,000
Total 90,000 25,80,000 90,000 23,40,000 1,10000 32,00,000
Question 14
The Sales Director of a manufacturing company reports that in the new year, he expects to sell 27000 units of a certain product. The production manager consults the store-keeper and casts his figures as follows.
Two kinds of raw materials, A and B are required for manufacturing the product. Each unit of the product requires 4 units of A and 6 units of B. The estimated opening balances at the commencement of the next year are: Finished Product: 5000 units, A: 24000 units, and B: 30000 units. The desirable closing balances at the end of the next year are: Finished Product: 7000 units, A: 26000 units, and B: 32000 units. Draw up a quantitative chart showing the Material Purchase Budget for the next year.
Answer
Production Budget (Finished Product)
Particulars Units
Expected Sales Volume
Add: Desired Closing Stock
Total requirements
Less: Opening Balance
Production (i.e., units to be produced during next year)
27000
7000
34000
(5000)
29000
Purchase Budget (Raw Materials A and B)
Particulars Raw Materials
A (units) B (units)
Raw Materials required for producing 29000 units: (A: 29000 x 4)
(B : 29000 x 6)
Add: Desired Closing Stock
116000
26000
174000
32000
403
Total requirements
Less: Opening Balance
Purchase to be made, next year
142000
24000
206000
30000
118000 176000
Purchase = (for Production + Closing Stock – Opening Stock)
Question 15
Mohari Limited produces two types of fans, Deluxe and summer. From the following information prepare its production budget for the year ended 31st March 2017:
I Quarter II Quarter III Quarter IV Quarter
Sales Deluxe 12,000 9,000 6,000 3,000
Summer 60,000 48,000 36,000 12,000
Budgeted Closing Stock:
Deluxe 3,000 2,400 1,200 3,000
Summer 12,000 9,000 6,000 12,000
Stock on 31.3.2016 Deluxe 3,000
Summer 12,000
Answer
Production Budget
(For the year ended 31st March, 2017)
(Production in Units)
Particulars I Quarter II Quarter III Quarter IV Quarter
Deluxe Summer Deluxe Summer Deluxe Summer Deluxe Summer
Sales 12,000 60,000 9,000 48,000 6,000 36,000 3,000 12,000
Add : Closing Stock
3,000 12,000 2,400 9,000 1,200 6,000 3,000 12,000
Total
15,000 72,000 11,400 57,000 7,200 42,000 6,000 24,000
Less : Open. Stock
3,000 12,000 3,000 12,000 2,400 9,000 1,200 6,000
Estimates of Production
12,000 60,000 8,400 45,000 4,800 33,000 4,800 18,000
404
Question 16
You are requested to prepare Selling & Distribution Overhead Budget from the estimates given below.
Rs.
Advertisement 250000
Salaries of the Distribution department 500000
Expenses of sales department 150000
Sales department salaries and dearness allowances 600000
Commission to counter salesmen at 1% on their sales.
Travelling salesmen’s commission at 10% on their sales and expenses at 5% on their sales.
Distribution Cost @ 2% on total sales.
The sales during the period were estimated as follows.
Counter Sales Travelling Salesmen’ Sales
(i) Rs. 8000000 Rs. 1000000
(ii) Rs. 12000000 Rs. 1500000
(iii) Rs. 14000000 Rs. 2000000
Answer
Selling & Distribution Overhead Budget
Particulars
Estimated Sales (Rs.)
9000000 13500000 16000000
Variable Overheads:
Commission to counter salesmen (at 1% on their sales)
Travelling salesmen:
Commission (10% on their sales)
Expenses (5% on their sales)
Distribution Cost @ 2% on total sales
(a)
Fixed Overheads:
Advertisement
80000
100000
50000
180000
120000
150000
75000
270000
140000
200000
100000
320000
410000 615000 760000
250000
250000
250000
405
Salaries of Distribution department
Expenses of Sales department
Salary and DA of Sales department
(b)
Therefore, Total Selling & Distribution Overheads (a + b)
500000
150000
600000
500000
150000
600000
500000
150000
600000
1500000 1500000 1500000
1910000 2115000 2260000
1. Sales overhead expenses are computed at three different sales levels viz., Rs. 9000000; Rs. 13500000 and Rs. 16000000. These three sales levels represent aggregate of counter sales and sales by travelling salesmen [(Rs. 8000000 + Rs. 1000000 = Rs. 9000000), (Rs. 12000000 + Rs. 1500000 = Rs. 13500000), (Rs. 14000000 + Rs. 2000000 = Rs. 16000000)]
2. Commission = 1% of sales at the counter (i.e., 1% of Rs. 8000000 = Rs. 80000; 1% of Rs. 12000000 = Rs. 12000000 = Rs. 120000; and 1% of Rs. 14000000 = Rs. 140000)
Question 17
Patel Electronics Limited is manufacturing for sale, two model of LED Television Sets. The major components, viz, Cabinet, Transformer and the Speaker are bought out by the company. Two cabinet style (A and B), one kind of transformer and one kind of speaker are assembled in the following ways in the final product:
Model Cabinet Transformer Speaker
Standard A @ Rs. 2,000 @Rs. 2,000 @ Rs. 3,000
Deluxe B @ Rs. 3,000
Stock in hand on 1.3.2016, was:
Finished Sets : Standard 460, Deluxe 730
Sub-assemblies:
Cabinet: A-300, B-400, Transformers: 310, Speakers: 270
The sales manager estimates that sales for the quarter April to June, 2016 will be:
Standard : 2000 and Deluxe : 6000
The following quantities of stock have been budgeted for 30th June, 2016 finished sets: 250 in each model;
Sub-assemblies: Cabinet 150 each model; Transformers 200 and Speakers 300.
Prepare Production and Material cost Budgets for the above items for the quarter April to June, 2016.
406
Answer
Production Budget for LED Television Sets
(April to June, 2016)
Particulars Standard Deluxe
Quantity Quantity
Budgeted Sales 2,000 6,000
Add : Required Closing Stock 250 250
2,250 6,250
Less : Estimated Opening Stock 460 730
Budgeted Production 1,790 5,520
Total Budgeted Production = 1790 + 5520 = 7310 LED Television Sets
Material Cost Budget
Cabinet Transformer Speaker
A B
Budgeted production 1790 5520 7310 7310
Add: Closing Stock 150 150 200 300
1940 5670 7510 7610
Less : Opening Stock 300 400 310 270
Net Purchase (Quantity) 1640 5270 7200 7340
Rate per unit (Rs.) 2,000 3,000 2,000 3,000
Material Purchase (Rs.) 32,80,000 1,58,10,000 1,44,00,000 2,20,20,000
Total Material Cost Rs. 55510000
407
Question 18
The following information is given to you. Prepare selling and Distribution Cost Budget for six months ending 30th September, 2016.
(i) Direct Selling Expenses : 10% of Sales.
(ii) Advertising : 2% of Sales.
(iii) Distribution Expenses : 5% of Sales.
(iv) Sales office Expenses : N Rs. 10,000; S Rs. 8,000; E Rs. 12000; and W Rs. 15,000.
(v) Sales @ Rs. 50 per unit : N : 6100 units; S : 3800 units ; E : 7800 units and W : 4700 units.
Answer
Selling and Distribution Cost Budget
For the six months ended 30th Sept. 2016
Areas Total
Particulars N S E W
Rs. Rs. Rs. Rs. Rs.
Direct Selling Expenses 30,500 19,000 39,000 23,500 1,12,000
Advertising 6,100 3,800 7,800 4,700 22,400
Distribution Expenses 15,250 9,500 19,500 11,750 56,000
Sales Office Expenses 10,000 8,000 12,000 15,000 45,000
61,850 40,300 78,300 54,950 2,35,400
Question 19
The following details are available from the costing records of Ralawata Manufacturing Limited regarding budgeted figures for the year ended 31st march, 2017:
(i) Budgeted Sales : 125000 units @ Rs. 400 per unit (A).
(ii) Budgeted Production Cost : Materials Rs. 20000000 (D), Labour Cost Rs. 7500000 (E); and Factory Overheads Rs. 2500000 (F)
(iii) Budgeted Administration Overhead Rs. 6000000 (G)
408
(iv) Budgeted Selling Overheads Rs. 4000000 (H)
(v) Appropriations : Taxes Rs. 5000000; Divided Rs. 3500000 and Transfer to Reserves Rs. 1500000
Prepare the Master Budget for the year ended 31st march, 2017
[Note : (A), (D), (E), (F), (G) and (H) given within brackets indicate the examples given above, these figures have been taken from these functional budgets.]
Answer
Master Budget
For the year ended 31st March, 2017
(Rs. in Lakhs)
Rs. Rs.
Sales 125000 units at Rs. 400 each (A) 500
Cost of Sales :
Direct Material (D) 200
Direct Labour (E) 75
Factory Overhead (F) 25 300
Gross Profit 200
Administration Overhead (G) 60
Selling Overhead (H) 40 100
Net Profit 100
Profit Appropriation : Taxes 50
Dividends 35
Reserves 15 100
Question 20
Three articles, X, Y and Z are produced by Shri Ram Industries. They pass through two cost centers : A and B. From the data furnished, compile a statement for budgeted machine utilization in both the centers.
(a) Sales budget for the year,
Product Annual Budget Sales (units)
Opening Stock of Finished Products (units)
Closing Stock
X
Y
Z
48000
24000
24000
6000
3000
8000
Equivalent to two months’ Sales
Equivalent to two months’ Sales
Equivalent to two months’ Sales
409
(b) Machine hours per unit of products,
Product Machine Hours per unit, Cost Centre
A B
X
Y
Z
0.3
2
0.375
0.7
1
0.125
(c) Total number of machines,
Cost Centre Number
A
B
Total
29
25
54
(d) Total working hours during the year, Estimated 2500 hours per machine.
Answer
Number of machine hours available,
Cost Centre: A = (29 machines x 2500 hours) = 72500 hours
B = 25 machines x 2500 = 62500 hours
Production Budget (units)
Particulars Products (units)
X Y Z
Annual Sales Volume (budgeted)
Add : Closing Stock (two months’ sales)
Total requirement
Less : Opening Stock
Therefore, Production
48000
8000
24000
4000
24000
4000
56000
6000
28000
3000
28000
8000
50000 25000 20000
410
Machine Utilisation Budget
Particulars Cost Centre
A B
Number of Machine Hours required for Budgeted Production of products:
X: (50000 units x 0.3 hours); (50000 units x 0.7 hours)
Y: (25000 units x 2 hours); (25000 units x 1 hour)
Z: (20000 units x 0.375 hours); (20000 units x 0.125 hours)
Total number of machine hours
Number of Machines required for product:
X
Y
Z
Number of Machines required
15000
50000
7500
35000
25000
2500
72500 62500
6
20
3
14
10
1
29 25
1. Closing Stock:
[(48000 units ÷ 12 months) x 2 months] = 8000 units (Product X)
[(24000 units ÷ 12 months) x 2 months] = 4000 units (Product Y)
[(24000 units ÷ 12 months) x 2 months] = 4000 units (Product Z)
2. Number of Machines required:
For Product X,
Centre A, (15000 hours ÷ 2500 hours per year) = 6 machines
B, (35000 hours ÷ 2500 hours per year) = 14 machines
For Product Y,
Centre A, (50000 hours ÷ 2500 hours per year) = 20 machines
B, (25000 hours ÷ 2500 hours per year) = 10 machines
Product Z,
Centre A, (7500 hours ÷ 2500 hours per year) = 3 machines
B, (2500 hours ÷ 2500 hours per year) = 1 machine
411
Question 21
Estimate cash requirements of Satish Milk Products Limited for June, 2016 on the basis of the following data : Rs.
(a) Sales :
February , 2016 25000000
March, 2016 20000000
April to June, 2016 30000000 per month
Roughly half the sales are for cash, 90% of Credit Sales are collected in the month following the sale and the balance one month after.
(b) Milks are always bought for cash to avail of the cash discount of 5%. The purchase budget for the second quarter (April-June) was 15,000 carrots per month at Rs. 1050 per carrots
(c) Wages and salaries for second quarter were budgeted at Rs. 4250000 per month.
(d) Manufacturing and other expenses budgeted for the quarter are : Cash Manufacturer Expenses Rs. 4470000. Depreciation Rs. 7500000’ Selling Expenses Rs. 2520000; Administrative Expenses (in April and May only) Rs. 1800000.
Answer
Cash Budget for the quarter ending June, 2016
(Rs. in Thousands)
Particulars April May June
Cash Receipts Rs. Rs. Rs.
Balance B/d -------- 2807.5 9865
Cash Sales (1/2 of Sales) 15,000 15,000 15,000
Cash Collected from Debtors 10,250 14,500 15,000
Total 25,250 32307.5 39865
Cash Disbursements:
Cash Purchase (Less : Cash Discount) 14962.5 14962.5 14962.5
Wages & Salaries 4250 4250 4250
412
Cash Expenses (4470000/3) 1490 1490 1490
Selling Expenses (2520000/3) 840 840 840
Adm. Exp.(1800000/2) 900 900 ----
Total 22442.5 22442.5 21542.5
Closing Cash Balance 2807.5 9865 18322.5
Cash requirements for June 2016 will be Rs. 18322500
Working Notes : Collection from Debtors regarding credit sales are as follows:
(Rs. in 000’)
Particulars February March April May June
Rs. Rs. Rs. Rs. Rs.
Credit Sales (1/2 of Total Sales)
12,500 10,000 15,000 15,000 15,000
Collection from Debtors :
90% of Previous Month’s credit sales
--- --- 9,000 13,500 13,500
10% of Credit Sales of previous two months
--- --- 1,250 1,000 1,500
Total --- --- 10,250 14,500 15,000
2. Cash Purchase : 15000 carrots @ Rs. 1050 = Rs. 15750000
Less : 5% Cash Discount = Rs. 787500
Net Cash Purchase per month = Rs. 14962500
Question 22
Using the information given below, prepare a Cash Budget showing expected cash receipts and disbursements for the month of May and balance expected on May 31, 2016:
Budgeted Cash Balance on May 1, 2016 Rs. 550000
Sales for March, Rs.70000000; April, Rs.45000000 and May, Rs. 80000000, half of which is collected in the month of sale, 40% in next month, 10% in third month.
413
Merchandise purchase for April: Rs. 50000000, May: Rs. 66000000; 40%payment in month of purchase, 60% paid in next month.
Wages due in May Rs. 7920000
Three years Insurance Policy due in May for renewal Rs. 420000 to be paid in cash. Other expenses for May, payable in May, Rs.44,000,00
Depreciation for month of May: Rs. 2,00000
Fixed Deposit Receipts due May15 : Rs. 17000000 plus Rs. 1500000 interest.
Answer
Cash Budget for the month of May, 2016
Cash Receipts : Rs. Rs.
Balance on May 1st 550,000
Debtors Collected: ½ of May Sales 4,00,00,000
March Sales : being 10% 70,00,000
April Sales : being 40% of 4,50,000 00 1,80,00,000
Fixed Deposits 1,85,00,000 8,40,50,000
Less : Cash Disbursements :
Payment to Creditors:
40% of May Purchase Rs. 66000000 2,64,00,000
60% of April Purchase Rs. 50000000 3,00,00,000
Wages paid 79,20,000
Insurance Premium 4,20,000
Other Expenses
Cash Balance on 31st May, 2016
44,000,00
6,91,40,000
1,49,10,000
414
Question 23
From the following information, prepare cash budget for kachari Limited by adjusted profit and loss account method for the year ended 31st March, 2017:
Summarised Balance sheet as on 31st March, 2016
(Rs.in Crores)
Liabilities Rs. Assets Rs.
Share Capital 125 Plant and Machinery 220
Profit and Loss Account 133.50 Investments 100
Debentures 73.50 Stock 61.9
Accumulated Depreciation 50 Debtors 49
Creditors 67.5 Cash and Bank 18.6
449.50 449.5
Summarised Forecast Profit and Loss Account
For the year ended March 31st March, 2017
Rs.in Crores
Rs. Rs.
To Depreciation 22 By Gross Profit 200
To Adm. and Selling Overhead 10 By Profit on Sale of Investments 2
To Interest 3 By Interest 10
To Loss on Sale of Plant 8
To Net Profit 169
212 212
To Income Tax 5 By Net Profit 169
To Dividend 10
To Balance c/d 154
169 169
Additional information is as follows :
(i) New plant costing Rs. 80 Crores to be purchased during the year and an old plant costing Rs.60 Crores. (Accumulated Depreciation Rs.42 crores.)to be sold for Rs. 10 crores.
(ii) Investment Rs. 10 Crores to be sold for Rs. 12 Crores.
415
(iii) Debentures to be redeemed Rs.23.5 Crores
(iv) New shares to be issued Rs. 50 Crores
(v) Balance on 31st March, 2017: Debtors Rs. 83.2 Crores; Creditors Rs. 100.2 Crores and Stock Rs. 92.5 Crores.
Answer
Cash Budget
for the year ended 31 March, 2017
(Adjusted Profit and Loss Account Method)
(Rs. in Crores)
Rs. Rs.
Opening Balance of cash and bank (31 March, 2016) 18.6
Add : Budgeted Profit for the year 154
Depreciation 22
Loss on Sale of plant 8
Sale of Investments Less Profit(12-2) 10 Sale of old Plant 10 Increase in Creditors 32.7
Issue of Shares 50
Total 305.3
Less : Dividend 10
Increase in Stock 30.6
Increase in Debtors 34.2
Redemption of Debentures 23.5
Purchase of Plant 80 178.3
Closing Balance of Cash and Bank 127
Question 24
Prepare a Cash Budget for April to June, 2016 from the following information:
a. The estimated sales and expenses are as follows (Rs.):
Feb, 2016 Mar, 2016 Apr, 2016 May, 2016 June, 2016
Sales 1000000 1500000 2400000 2000000 2000000
Wages &
Salaries 240000 240000 300000 270000 270000
Misc.
Expenses 300000 240000 270000 270000 270000
b. 20% of the sales are on cash and the balance on credit.
416
c. The firm has a gross margin of 25% on sales.
d. 50% of the credit sales are collected in the month following the sales, 30% in the second month and 20% in the third month.
e. Material for the sales of each month is purchased one month in advance on a credit for two months.
f. The time lag in the payment of wages and salaries in one-third of a month and of miscellaneous expenses one month.
g. The firm maintains a minimum cash balance of Rs. 400000. Funds can be borrowed at 12% per annum in the multiples of Rs. 10000, the interest being payable on monthly basis.
h. Cash balance at the end of March is Rs. 648000.
Answer
Calculation of Collection from Customers and Payment of Wages
Particulars April (Rs.) May (Rs.) June(Rs.)
Cash Sales (20%)
Collection:
50% of Credit Sales in the following month
30% in the second month
20% in the third month
Total collection
Wages and Salaries:
2/3rd in the same month
1/3rd in the following month
480000
600000
240000
192000
400000
960000
360000
160000
400000
800000
576000
240000
1512000 1880000 2016000
200000
80000
180000
100000
180000
90000
280000 280000 270000
Calculation of Payment to Suppliers
Particulars Feb (Rs.) March (Rs.)
April (Rs.)
May (Rs.) June (Rs.)
Sales
Cost of Material 75% of sales
Purchase of Material are made one month in Advance, hence March’s material purchased in February
1000000
750000
1125000
1500000
1125000
1800000
2400000
1800000
1500000
2000000
1500000
1500000
2000000
1500000
417
Payment to suppliers on two months credit
1125000
1800000
1500000
Cash Budget (April to June, 2016)
Particulars Month (2016)
April (Rs.) May (Rs.) June (Rs.)
Opening balance of Cash
Add: Receipts from Customers
Sales of Debentures
Bank Borrowings*
Total (a)
Payments to Suppliers
Payment of Wages and Salaries
Payment of Miscellaneous expenses
Interest on Bank Loan
Total (b)
Closing Balance
648000
1512000
-
-
515000
1880000
-
360000
405000
2016000
-
30000
2160000 2755000 2451000
1125000
280000
240000
-
1800000
280000
270000
-
1500000
270000
270000
3600
1645000 2350000 2043600
515000 405000 407400
May, 2016 (Rs.) June, 2016 (Rs.)
*Total of Opening Balance and Cash
Receipts (excluding Bank Loan) 2395000 2421000
Total Cash Payments 2350000 2043600
Add : Minimum Cash Balance 400000 2750000 400000 2443600
Loan to be raised 355000 22600
Therefore, it has to borrow Rs. 360000 and Rs. 30000 of loan (i.e., in multiples of Rs. 10000) during May and June respectively.
Question 25
Mudgal School has a total 1500 students consisting of 25 sections with 60 students per section. The school plans a picnic around the city during the week end to places such as the zoo, the amusement park, the planetarium etc. A private transport operator has come forward to lease out the buses for taking the students. Each bus will have a maximum capacity of 50 excluding 4 seats reserved for the teachers accompanying the students. The school will employ four teachers for each bus, paying them an allowance of Rs. 500 per teacher. It will also lease out the required number of buses. The following are the other cost estimates :
418
Cost per student
Rs.
Breakfast 50
Lunch 100
Tea 30
Entrance fee at zoo 20
Rent Rs. 6500 per bus
Special permit fee Rs. 500 per bus
Block entrance fee at the planetarium Rs. 5000
Prizes to students for games Rs. 5000
No costs are incurred in respect of the accompanying teachers except the allowance of Rs. 500 per teacher.
Prepare a flexible budget estimating the total cost for the levels of 300, 600, 900, 1200 and 1500 students and showing each item of cost separately. Also compare the average cost per student at these levels.
Answer
Flexible Budget
Items Levels of Students
300 600 900 1200 1500
Rs. Rs. Rs. Rs. Rs.
A. Variable Costs :
Breakfast @Rs.50 15000 30000 45000 60000 75000
Lunch@ Rs.100 30000 60000 90000 120000 150000
Tea@ Rs.30 9000 18000 27000 36000 45000 Ent. fee at zoo@ Rs.20 6000 12000 18000 24000 30000
60000 120000 180000 240000 300000 B. Semi-Variable Costs :
Bus Rent
39000
78000
117000
156000
195000
Special Permit Fee 3000 6000 9000 12000 15000 Allowance for Teachers 12000 24000 36000 48000 60000
54000 108000 162000 216000 270000 C. Fixed Costs :
Block Ent. Fee 5000 5000 5000 5000 5000
Prizes to Students 5000 5000 5000 5000 5000
10000 10000 10000 10000 10000
D. Total Cost(A+B+C) 124000 238000 352000 466000 580000
Avg. Cost per student 413.33 396.67 391.11 388.33 386.67
Note : Semi-variable costs are based on number of buses taken on lease i.e.6, 12, 18, 24, 30 for 300, 600, 900, 1200 and 1500 students.
419
Question 26
A Company produces a standard product. The Estimated costs are as follows :
Raw material Rs. 80 per unit
Direct labour Rs. 40 per unit
The semi-variable costs are : Indirect material Rs. 470000, Indirect labour Rs. 312000 Maintenance and repairs Rs. 1140000
The variable cost per unit included in semi variables are; Indirect material Rs. 1, Indirect labour Rs. 1.60; Maintenance and repairs Rs. 2.0
The fixed costs are : Factory Rs. 4,000000 Administration Rs. 6,000000 ; Selling and Distribution Rs. 5000000.
The above costs are for 70% of normal capacity producing 70000 units and selling price is Rs. 600 per unit.
Prepare ‘Flexible Budget’ for 60%, 80% and 100% of normal capacity with the help of the above information.
Answer
Flexible Budget
(Rs. in Thousands)
Particulars Levels of Activity
Capacity 60% 80% 100%
Units 60,000 80,000 1,00,000
(A) VariableCosts Rs. Rs. Rs.
Direct Materials 4,800 6,400 8,000
Direct Wages 2,400 3,200 4,000
Variable Overhead 6,000 8,000 10,000
Total Variable Cost 13,200 17,600 22,000
(B) Semi-variable Cost
Indirect Material :
(i) Fixed 400 400 400
(ii) Variable 60 80 100 Indirect Labour:
(i) Fixed 200 200 200
(ii) Variable 96 128 160
Maintenance and Repairs :
(i) Fixed 1,000 1,000 1,000
(ii) Variable 120 160 200
Total Semi-Variable Cost 1,876 1,968 2,060
420
(C) Total Fixed Cost :
Factory 4,000 4,000 4,000
Administration 6,000 6,000 6,000
Selling and Distribution 5,000 5,000 5,000
Total Fixed Cost 15,000 15,000 15,000
(D) Total Cost = (A) + (B) + (C) 30,076 34,568 39,060
Profit 5,924 13,432 20,940
Sales @ Rs. 600 per unit 36,000 48,000 60,000
Question 27
The following data are available in a manufacturing company for the year ended 31st march 2017.
Fixed Expenses : Rs. (in Crores)
Wages and Salaries 9.5
Rent, rates and taxes 6.6
Depreciation 7.4
Sundry administrative expenses 6.5
Semi-Variable Expenses: (at 60%of Capacity)
Maintenance and repairs 3.5
Indirect labour 7.9
Sales department salaries etc. 3.8
Sundry administrative Expenses 2.8
Variable Expenses: (at 60% of Capacity)
Materials 26.04
Labour 24.48
Other Expenses 9.48
Assume that the fixed expenses remain constant for all levels of production; semi-variable expenses remain constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and by 20% between 80% an 100% capacity.
Sales at various levels are : Rs. (in crores)
60% Capacity 120
75% Capacity 150
90% Capacity 180
100% Capacity 200
Prepare a flexible budget for the year at 75%, 90% and 100% capacity.
421
Answer :
Flexible Budget
For year ended 31st March, 2017
(Rs. in Crores)
Capacity
75% 90% 100%
Rs. Rs. Rs.
Sales (a) 150 180 200
Variable Expenses :
Materials 32.55 39.06 43.40
Labour 30.60 36.72 40.80
Other Expenses 11.85 14.22 15.80
Semi-Variable Expenses :
Maintenance and Repairs 3.85 4.20 4.20
Indirect labour 8.69 9.48 9.48
Sales department salaries etc. 4.18 4.56 4.56
Sundry administrative expenses 3.08 3.36 3.36
Fixed Expenses :
Wages and Salaries 9.50 9.50 9.50
Rent, rates and taxes 6.60 6.60 6.60
Depreciation 7.40 7.40 7.40 7.40
Sundry administrative expenses 6.50 6.50 6.50
Total Cash (b) 124.80 141.60 151.60
Profit (a-b) 25.20 38.40 48.40
Question 28
Shivam Limited is currently working at 50 percent capacity and produces 20000 units. At this level the production costs are Rs. 184 per unit and is sold at Rs. 200 per unit. The breakup of the unit cost is as follows:
Rs.
Materials Cost 80
Labour Cost 50
Manufacturing overhead 30 (60% variable)
422
Administrative and Selling overhead 24 (50% fixed)
Estimate the profit of the company when it works to 60% capacity and 80% capacity . At 60% working, raw material cost decreases by 2% and selling price falls by 2 percent. At 80%, raw material cost decreases by 5 percent and selling price falls by 10 percent.
Answer
Statement showing profit at different output levels or flexible Budget
Particulars Output Levels
50% 60% 80%
(i) Output and Sales (Units) 20000 24000 32000
(ii) Selling price per unit
Rs.
200
Rs.
196
Rs.
180
Variable Costs:
Material Cost 80 78.40 76
Labour Cost 50 50 50
Manufacturing overhead 18 18 18
Adm. Selling overhead 12 12 12
(iii) Total variable cost per unit 160 158.4 156
(iv) Contribution per unit (ii)—(iii) 40 37.60 24
(v) Total Contribution (iv) X (i) 800000 902400 768000
Less : Fixed Cost 480000 480000 480000
Estimated Profit 3,20,000 422400 288000
Working Notes:
(i) Unit Selling price at 60% : 200 – 2% of 200 = 196
at 80% : 200 – 10% of 200 = 180
(ii) Unit Material Cost at 60% : 80 – 2% of 80 = 78.4
At 80% : 80-5% of 80 = 76
(iii) Variable overhead per unit :
Manufacturing – 60% of 30 = 18
Adm.& Selling 50% of 24 = 12
(iv) Fixed overhead at 50% capacity level :
423
Manufacturing 30 – 18 = 12 x 20000 = Rs. 2,40,000
Adm. & Selling 24 – 12 = 12 x 20, 000 = Rs. 2,40,000
Total Rs. 4,80,000
Question 29
Lookahead Ltd. produces and sells a single product. Sales budget for the calendar year 2009 for each quarter is as under :
Quarter No. of Units to be Sold
I 12,000
II 15,000
III 16,500
IV 18,000
The year 2009 is expected to open with an inventory of 4,000 units of finished product and close with an inventory of 6,500 units.
Production is customarily scheduled to provide for two-thirds of the current quarter’s demand plus one-third of the following quarter’s demand. Thus production anticipates sales volume by about one month. The standard cost details for one unit of the product is as follows :
— Direct materials 10 Kgs. @ 50 paise per kg.
— Direct labour 1 hour 30 minutes @ Rs.4 per hour.
— Variable overheads 1 hour 30 minutes @ Re.1 per hour.
— Fixed overheads 1 hour 30 minutes @ Rs.2 per hour based on a budgeted production volume of 90,000 direct labour hours for the year.
Answer the following —
(i) Prepare a production budget for the year 2009 by quarters, showing the number of units to be produced.
(ii) If the budgeted selling price per unit is Rs.17, what would be the budgeted profit for the year as a whole ? (iii) In which quarter of the year the company is expected to break-even ?
Answer
Number of units to be sold during the year 2009
Quarter I 12,000 units
Quarter II 15,000 units
Quarter III 16,500 units
Quarter IV 18,000 units
Sales during the year 61,500 units
424
(i) Production Budget (for the year 2009 by quarters)
Quarter I
Units
Quarter II
Units
Quarter
III Units
Quarter
IV Units
Total
Units
Units to be produced in each quarter :
8,000 10,000 11,000 12,000 41,000
2/3rd of the current
quarter’s sales demand
(2/3 x
12,000)
(2/3 x
15,000)
(2/3 x
16,500)
(2/3 x
18,000)
Add : 1/3 of the following quarter’s sales demand in first 3 quarters and closing inventory in the 4th quarter
5,000
(1/3 x
15,000)
5,500
(1/3 x
16,500)
6,000
(1/3 x
18,000)
6,500 23,000
Total 13,000 15,500 17,000 18,500 64,000
(1) Variable Cost per unit
Rs. Rs.
Direct Material : 10 kgs. @ 50 paise per kg. 5.00
Direct labour : 1-½ hours @ Rs.4 per hour 6.00
Variable overheads : 1-½ hours @ Re.1 per hour 1.50 12.50
(2) Fixed overhead per annum : 90,000 hrs. @ Rs. 2 = Rs.1,80,000
(ii) Statement of Budgeted Profit for the year (as a whole)
Rs.
Total Sales : 61,500 units @ Rs.17 per unit 10,45,000
Less : Total Variable Cost : 61,500 units @ 12.50 per unit 7,68,750
Contribution 2,76,750
Less : Fixed cost for the year 1,80,000
Profit for the year 2009 as a whole 96,750
(iii) Calculation of Break-even point/sales
Break Even Point = unit per Cost Variable – unit per Price Selling
Overheads Fixed
425
= 12.50 Rs. – 17 Rs.
1,80,000 Rs. = 40,000 units.
Total sales (in units) by the end of 3rd quarter will be 43,500 (i.e. 12,000 + 15,000 + 16,500).
Therefore, the company will break-even in the later part of the 3rd quarter.
Question 30
The monthly budgets for the manufacturing overheads of a concern for two levels of activity were as follows :
Capacity 60% 100%
Budgeted production (units) 600 1,000
Rs. Rs.
Wages 1,200 2,000
Consumable stores 900 1,500
Maintenance 1,100 1,500
Power and fuel 1,600 2,000
Depreciation 4,000 4,000
Insurance 1,000 1,000
9,800 12,000
You are required to ––
(i) Indicate which of the items are fixed, variable and semi-variable;
(ii) Prepare a budget for 80% capacity; and
(iii) Find total cost, both fixed and variable costs per unit of output at 60%, 80% and 100% capacity.
Answer
(i) Fixed Costs : Depreciation and Insurance
Rs. 500 Variable Costs : Wages (Rs. 2 per unit)
Consumable Stores (Rs. 1.5 per unit)
Semi - Variable Costs:
Maintenance
Variable =600 - 1000 Rs.
1100 - 1500 Rs.
= Rs. 1 per unit
426
Fixed = Rs. 1100 – Rs. 600 =
Power and Fuel
Variable = 600 - 1000 Rs.
1600 - 2000 Rs.
= Rs.1 per unit
Fixed = Rs. 1600 – Rs. 600 =Rs. 1,000
(ii) Budget for 80% capacity (800 units)
Rs.
Wages (Rs. 2 per unit) 1,600
Consumable Stores (Rs.1.5 per unit) 1,200
Maintenance (Rs. 1 per unit + 500) 1,300
Power and Fuel (Rs. 1 per unit + 1,000) 1,800
Depreciation 4,000
Insurance 1,000
Total Cost 10,900
(iii) Flexible budget
Capacity Units 60%
600
80%
800
100%
1000
Total Cost (Rs.)
Per unit Total Cost (Rs.)
Per unit
Total Cost (Rs.)
Per unit
Fixed Costs
Depreciation 4,000 4,000 4,000
Insurance 1,000 1,000 1,000
Maintenance 500 500 500
Power and Fuel 1,000 1,000 1,000
(A) Total 6,500 10.83 6,500 8.125 6,500 6.5
427
Variable Costs
Wages (Rs. 2 per unit) Consumable Stores
1,200 1,600 2,000
(Rs. 1.5 per unit) 900 1,200 1,500
Maintenance (Rs. 1 per unit)
600 800 1,000
Power and Fuel (Rs. 1 per unit)
600 800 1,000
(B) Total 3,300 5.5 4,400 5.5 5,500 5.5
Total Cost (A + B) 9,800 16.33 10,900 13.625 12,000 12
***
428
Question 1
Question 1
What do you mean by Cost Audit?
Answer
Cost audit is an independent examination of cost records and other related information of an entity including a non-profit entity, when such an examination is conducted with a view to expressing an opinion thereon.
Cost audit comprises of the followings:
(a) Verification of the cost accounting records for the accuracy of the cost accounts, cost reports, cost statements and cost data and
(b) Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objectives.
Question 2
State the provisions of the Companies Act, 2013 with respect to Cost Accounting records.
Answer
Section 2(13) and section 128 of the Companies Act, 2013 deals with the books of accounts to be kept by a company. According to section 2(13) on the Companies Act, 2013 “books of account” includes records maintained in respect of-
(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;
Section 128 on the Companies Act, 2013 provides that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting.
11
Cost Accounting Records and
Cost Audit
429
Further all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place.
Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed.
Question 3
What is the purpose of Cost Audit. Briefly explain various advantages of Cost audit.
Answer
The primary purpose of Cost audit is to express an opinion on the cost accounts of the company whether these have been properly maintained and compiled according to the cost accounting system followed by the enterprise or not.
However the purposes of cost audit may be segregated into general and social objectives.
The general objectives can be described to include the following:
1. Verification of cost accounts with a view to ascertaining that these have been properly maintained and compiled according to the cost accounting system followed by the enterprise.
2. Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to.
3. Detection of errors and fraud.
4. Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been properly ascertained.
5. Determination of inventory valuation.
6. Facilitating the fixation of prices of goods and services.
7. Periodical reconciliation between cost accounts and financial accounts.
8. Ensuring optimum utilization of human, physical and financial resources of the enterprise.
9. Detection and correction of abnormal loss.
10. Inculcation of cost consciousness.
11. Advising management, on the basis of inter-firm comparison of cost records, as regards the areas where performance calls for improvement.
12. Promoting corporate governance through various operational disclosures.
Social purposes of cost audit
The following deserve special mention
1. Facilitate in fixation of reasonable prices of goods and services produced by the enterprise.
430
2. Improvement in productivity of human, physical and financial resources of the enterprise.
3. Channelise enterprise resources to most optimum, productive and profitable areas.
4. Availability of audited cost data as regards contracts containing escalation clauses.
5. Facilitate in settlement of bills in the case of cost-plus contracts entered into by the Government.
6. Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc., such that necessary corrective action could be taken in time.
Advantages of Cost Audit
Cost audit provides numerous benefits to the management, society, shareholders and the government. The advantages are as under :
Advantages to Management
(i) Management gets reliable data for its day-to-day operations like price fixing, control, decision making, etc.
(ii) A close and continuous check on all wastages will be kept through a proper system of reporting to management.
(iii) Inefficiencies in the working of the company will be brought to light to facilitate corrective action.
(iv) Management by exception becomes possible through allocation of responsibilities to individual managers.
(v) The system of budgetary control and standard costing will be greatly facilitated.
(vi) A reliable check on the valuation of closing stock and work-in-progress can be established.
(vii) It helps in the detection of errors and fraud.
Advantages to Society
(i) Cost audit is often introduced for the purpose of fixation of prices. The prices so fixed are based on the Audit Cost data and so the consumers are saved from exploitation.
(ii) Since price increase by some industries is not allowed without proper justification like increase in cost of production, inflation through price hikes can be controlled and consumers can maintain their standard of living.
Advantages to Shareholder
Cost audit ensures that proper records are kept as to purchases and utilisation of materials and expenses incurred on wages, etc. It also makes sure that the valuation of closing stocks and work-in- progress is on a fair basis. Thus the shareholders are assured of a fair return on their investment.
431
Advantages to Government
(i) Where the Government enters into a cost-plus contract, cost audit helps government to fix the price of the contract at a reasonable level.
(ii) Cost audit helps in the fixation of ceiling prices of essential commodities and thus undue profiteering is checked.
(iii) Cost audit enables the government to focus its attention on inefficient units.
(iv) Cost audit enables the government to decide in favour of giving protection to certain industries.
(v) Cost audit facilitates settlement of trade disputes brought to the government.
(vi) Cost audit and consequent management action can create a healthy competition among the various units in an industry. This imposes an automatic check on inflation.
Question 3
Discuss the Applicability of Cost audit under the Companies Act, 2013 and exemptions if any.
Answer
Every company covered under Rule 3 of the Companies (Cost Records and Audit) Amendment Rules, 2014 and with such threshold limits as specified in the Rules shall within one hundred and eighty days of the commencement of every financial year appoint a cost auditor. The company shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central
Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
Further every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed. The cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.
The cost auditor shall forward his report to the Board of Directors of the company within a period of one hundred and eighty days from the closure of the financial year to which the report relates and the Board of directors shall consider and examine such report particularly any reservation or qualification contained therein.
Every company covered above shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained
432
therein, in form CRA-4 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.
The provisions of section 143(12) of the Companies Act, 2013 and the relevant rules made thereunder shall apply mutatis mutandis to a cost auditor during performance of his functions under section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014.
Exemptions
The requirement of Cost Audit is not applicable for the following categories of companies even if they are covered under applicable class of companies:
· whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total revenue or
· which is operating from a special economic zone
Question 4
Write short notes on the following:
(a) Cost audit report
(b) Cost audit programme
(c) Appointment of Cost auditor
Answer
(a) Cost audit report
Cost audit report means the report duly audited and signed by the cost auditor including attachment, annexure, qualifications or observations etc. to cost audit report. Every cost auditor, who conducts an audit of the cost records of the company, shall within 180 days from the close of the company’s financial year to which the report relates, submit the cost audit report along with his reservations or qualifications or observations or suggestions in the Form CRA-3 to the Board of Directors of the company.
Every cost auditor shall forward his report to the Board of Directors of the company within a period of 180 days from the closure of the financial year to which the report relates and the Board of Directors shall consider and examine such report particularly any reservation or qualification contained therein.
(b) Cost audit programme
Cost audit programme is an essential prerequisite for conducting an audit. It is a plan of action drawn in advance before taking up the audit, and to help the auditor to cover the entire area of his function thoroughly. The audit programme should include all the usual broad steps that a financial auditor includes in his audit programme. However, the significant things that should not be missed are: proper vouching of expenses, capital and revenue character determination, allocation of expenses, apportionment of overheads, arithmetical accuracy, the statutory requirements, examination of contracts and agreements, review of the Board’s and
433
shareholders’ minute books to trace important decisions having bearing on costs, verification of title deeds and documents relating to properties and assets, etc.
(c) Appointment of Cost auditor
As per the Companies (Cost Records and Audit) Rules, 2014, cost audit will be performed by a Cost auditor who shall be a Cost Accountant in practice. The companies covered under the Cost audit category shall within 180 days of the commencement of every financial year, appoint a cost auditor at remuneration to be determined in accordance with provisions of section 148(3) of the Companies Act, 2013 and rules made thereunder.
Provided that before such appointment is made, written consent of the cost auditor to such appointment, and a certificate that the appointment, if made, shall be in accordance with the provisions of section 139, section 141 and section 148 of the Companies Act, 2013 and the rules made thereunder, as applicable shall be obtained from the cost auditor.
***
434
Que
stion 1
Question 1
Describe the methods and devises used for analysis of financial statements.
Answer
The analysis of financial statements consists of a study of relationship and trends, to determine whether or not the financial position and results of operations as well as the financial progress of the company are satisfactory or unsatisfactory.
Analytical methods and devices used in analysing financial statements are as follows:
1. Comparative Statements
2. Common Size Statements
3. Trend Ratios
4. Ratio Analysis
5. Cash Flow Statements
6. Fund Flow Statement
Question 2
Write down the advantages and limitations of Ratio Analysis.
Answer
Advantages of Ratio Analysis
1. It helps to analyse and understand financial health and trend of a business, its past performance, and makes it possible to forecast the future state of affairs of the business. They diagnose the financial health by evaluating liquidity, solvency, profitability etc. This helps the management to assess the financial requirements and the capabilities of various business units. It serves as a media to link the past with the present and the future.
2. It serves as a useful tool in management control process, by making a comparison between the performance of the business and the performance of similar types of business.
3. Ratio analysis play a significant role in cost accounting, financial accounting, budgetary control and auditing.
12
Analysis and Interpretation of
Financial Statements
435
4. It helps in the identification, tracing and fixing of the responsibilities of managerial personnel at different levels.
5. It accelerates the institutionalisation and specialisation of financial management.
6. Accounting ratios summarise and systematise the accounting figures in order to make them more understandable in a lucid form. They highlight the inter-relationship which exists between various segments of the business expressed by accounting statements.
Limitations of Ratio Analysis:
Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. But these are subject to certain limitations:
(i) Usefulness of ratios depend on the abilities and intentions of the persons who handle them. It will be affected considerably by the bias of such persons.
(ii) Ratios are worked out on the basis of money-values only. They do not take into account the real values of various items involved. Thus, the technique is not realistic in its approach.
(iii) Historical values (specially in balance sheet ratios) are considered in working out the various ratios. Effects of changes in the price levels of various items are ignored and to that extent the comparisons and evaluations of performance through ratios become unrealistic and unreliable.
(iv) One particular ratio, in isolation is not sufficient to review the whole business. A group of ratios are to be considered simultaneously to arrive at any meaningful and worthwhile opinion about the affairs of the business.
(v) Since management and financial policies and practices differ from concern to concern, similar ratios may not reflect similar state of affairs of different concerns. Thus, comparisons of performance on the basis of ratios may be confusing.
(vi) Ratio analysis is only a technique for making judgements and not a substitute for judgement.
(vii) Since ratios are calculated on the basis of financial statements which are themselves affected greatly by the firm’s accounting policies and changes therein, the ratios may not be able to bring out the real situations.
(viii) Ratios are at best, only symptoms; they may indicate what is to be investigated - only a careful investigation will bring out the correct position.
(ix) Ratios are only as accurate as the accounts on the basis of which these are established. Therefore, unless the accounts are prepared accurately by applying correct values to assets and liabilities, the statements prepared there from would not be correct and the relationship established on that basis would not be reliable.
Question 3
What is Management Information System? What are its features? Explain the role of MIS.
436
Answer
Management Information System (MIS)
Management Information System is a systematic process of providing relevant information in right time in right format to all levels of users in the organization for effective decision making. MIS is also defined to be system of collection, processing, retrieving and transmission of data to meet the information requirement of different levels of managers in an organization.
According to CIMA MIS is a set of procedures designed to provide managers at different levels in the organization with information for decision making, and for control of those parts of the business for which they are responsible.
Feature of MIS
1. The MIS is a system which provides information support for decision making in the organization.
2. The MIS is an integrated system of man and machine for providing the information to support the operations, the management and the decision making function in the organization.
3. The MIS is a system based on the database of the organization evolved for the purpose of providing information to the people in the organization.
4. The MIS is a Computer based Information System.
Role of the Management Information System
MIS ensures that an appropriate data is collected from the various sources, processed, and sent further to all the needy destinations. The system is expected to fulfil the information needs of an individual, a group of individuals, the management functionaries: the managers and the top management.
The MIS satisfies the diverse needs through a variety of systems such as Query Systems, Analysis Systems, and Decision Support Systems. MIS helps in Strategic Planning, Management Control, Operational Control and Transaction Processing.
Question 4
Write Short Notes on:
(a) Liquidity Test Ratio
(b) Profitability Test Ratios
(c) Turnover Ratios.
Answer
(a) Liquidity test ratio
Liquid test ratio is also known as Quick Ratio or Acid Test Ratio. This ratio is calculated by relating liquid or quick assets to current liabilities. Liquid assets mean those assets which are immediately converted into cash without much loss. All
437
current assets except inventories and prepaid expenses are categorised as liquid assets. The ratio can be computed as:
Liquid Ratio = Liquid Assets /Current Liabilities
Liquidity ratio may also be computed by substituting liquid liabilities in place of current liabilities. Liquid liabilities mean those liabilities which are payable within a short period. Bank overdraft and cash credit facilities, if they become a permanent mode of financing are to be excluded from current liabilities to arrive at liquid liabilities. Thus:
Liquid Ratio = Liquid Assets/ Liquid Liabilities
This ratio is an indicator of the liquid position of an enterprise. Generally, a liquid ratio of 1:1 is considered as ideal as the firm can easily meet all current liabilities.
(b) Profitability test ratios
A measure of ‘profitability’ is the overall measure of efficiency. By measuring the output as a proportion of the input, and comparing result of similar other firms or periods the relative change in its profitability can be established.
The income as compared to the capital employed indicates profitability of a firm. Thus the chief profitability ratio is:
(Operating Profit (net margin) / Operating Capital Employed)×100
Once this is known, the analyst compares the same with the profitability ratio of other firms or periods. Then, when he finds some contrast, he would like to have details of the reasons.
Profitability ratio can be determined on the basis of either investments or sales. Profitability in relation to investments is measured by return on capital employed, return on shareholders’ funds and return on assets. The profitability in relation to sales are profit margin and expenses ratio or operating ratio.
(c) Turnover ratios
These ratios used to measure the effectiveness of the employment of resources are termed as activity ratios. Since these ratios relate to the use of assets for generation of income through turnover they are also known as turnover ratios,. More efficient the operations of an undertaking, the quicker and more number of times the rotation is. The turnover ratios as regards capital employed and assets are discussed below:
1. Capital Turnover Ratio = Net Sales/ Capital Employed
The higher the ratio the greater are the profits.
2. Total Assets Turnover Ratio =Net Sales/ Total Assets
A high ratio is an indicator of overtrading of total assets while a low ratio reveals idle capacity.
438
3. Fixed Assets Turnover Ratio =Net Sales/ Fixed Assets
This ratio is an indicator of the extent to which investment in fixed assets contributes to generate sales. The fixed assets are to be taken net of depreciation. The higher is the ratio the better is the performance.
4. Working Capital Turnover Ratio = Net Sales /Working Capital
It indicates to what extent the working capital funds have been employed in the business towards sales.
5. Stock Turnover Ratio (Inventory Turnover Ratio) = Cost of Goods Sold/Average Inventory.
Question 5
From the following data calculate :
(i) Gross Profit Ratio
(ii) Net Profit Ratio
(iii) Return on Total Assets
iv) Inventory Turnover
(iv) Working Capital Turnover
(v) Net worth to Debt
Rs.
Sales 23, 94,000
Cost of sale 18,24,000
Net profit 3,42,000
Net worth 14,25,000
Debt. 8,55,000
Fixed Assets 13,68,0000
Inventory 7,60,000
Current Liabilities 5,70,000
Answer
1. Gross Profit Ratio = (GP/ Sales) * 100 = (5,70,000 / 23,94,000)*100 =23.81
Sales – Cost of Sales = Gross Profit
23,94,000 – 18,24,000 = 5,70,000
2. Net Profit Ratio = (NP / Sales)* 100 = (3,42,000 / 23,94,000) *100= 14.29
3. Inventory Turnover Ratio = (Cost of Sales / Average Inventory) = 1824000/766,000 = 2.4 times
439
4. Return on Total Assets = NP/ Total Assets = (3,42,000 /21,28,000)*100 = 16.07%
Total Asset = FA+ Inventory =13, 68,000+ 7, 60,000] = 21, 28,000
5. Net worth to Debt = Net worth/ Debt= (14,25,000 / 8,55,000) = 1.66 times
6. Working Capital Turnover = Sales /Working capital = 23, 94,000 /1, 90,000= 12.6
Working Capital = Current Assets – Current Liabilities
= 7,60,000 – 5,70,000
=1,90,000
Question 6
Zenith Consultancy Services have the following Balance sheet. You are required to compute the following ratios.
(a) Liquid Ratio
(b) Solvency Ratio
(c) Debt-Equity Ratio
(d) Stock of Working Capital Ratio
Balance Sheet
Liabilities Rs. Assets Rs.
Equity share capital 14,55,000 Fixed Assets
13,58,000
Reserve Fund 97,000 Stock 4,85,000
6% Debentures 2,91,000 Debtors 1,94,000
Overdraft 77,600 Cash 1,26,100
Creditors 2,42,500
Total 21,63,100 Total 21,63,100
Answer
(a) Liquid Ratio = Liquid Assets / Current Liabilities
= 3,20,100 / 3,20,100 = 1
Liquid Asset = Debtors + Cash = 1,94,000+ 1,26,100
= 3,20,100
440
Current Liabilities = Creditors + Overdraft
= 2,42,500 + 77,600
= 3,20,100
(b) Debt Equity Ratio = Debt / Share holders’ Equities
= 6,11,100 / 15,52,000
= 0.394
Debt = 2,91,000+ 77,600 + 2,42,500 = 6,11,100
Share holders Equities = Capital + Reserves
= 14,55,000 + 97,000 = 15,52,000
(c) Solvency Ratio = Outside Liabilities / Total Assets
Outside Liabilities = Debenture + Overdraft + Creditors
= 2,91,000+ 77,600 + 2,42,500 = 6,11,100
Solvency Ratio = (6,11,100 / 21,63,100) * 100
= 28.25%
(d) Stock of Working Capital Ratio = Stock / Working Capital
Working Capital = Current Assets – Current Liabilities
= 8,05,100 – 3,20,100 = 4,85,000
Stock of Working Capital Ratio = (4,85,000 / 4,85,000)* 100 = 100%
Question 7
Calculate the following ratios from the Balance Sheet given below :
(i) Debt – Equity Ratio
(ii) Liquidity Ratio
(iii) Fixed Assets to Current Assets
(iv) Fixed Assets Turnover
(v) Proprietary Ratio
Balance Sheet
Liabilities Rs. Assets Rs.
Equity shares of Rs. 10 each 1,05,000 Goodwill 63,000
Reserves 21,000 Fixed Assets 1,47,000
P&L A/c 31,500 Stock 31,500
441
Secured loan 84,000 Sundry Debtors 31,500
Sundry creditors 52,500 Advances 26,250
Provision for taxation 21,000 Cash Balance 15750
3,15,000 3,15,000
The sales for the year were Rs. 5,88,000.
Answer
Debt – Equity Ratio = Long – Term Debt / Shareholders Fund
Shareholder’s Fund = Equity Share Capital + Reserves + P&L A/c
= 1, 05,000 + 21,000 + 31,500
= 1, 57,500
Debt-Equity Ratio = 84,000 / 1, 57,500=0.53
Liquidity Ratio = Liquid Assets / Liquid Liabilities
Liquid Assets = Sundry Debtors + Advances + Cash Balance
=31,500 + 15,750 + 26,250
= 73,500
Liquid Liabilities = Provision for Taxation + sundry creditors
= 21,000 + 52,500 = 73,500
Liquid Ratio = 73,500 / 73,500= 1
Fixed Assets to Current Assets= Fixed Assets / Current Assets
= 1,47,000/ 1,05,000
= 1.4
Fixed Assets Turnover =Turnover / Fixed Assets
= 5, 88,000/1,47,000
= 4
Proprietor’s Ratio = Proprietor’s Fund / Total Tangible Assets
Proprietor’s Fund = Equity Share Capital + Profit and Loss a/c + Reserves
=1,05,000 + 31,500 + 21,000
=1,57,500
Total Tangible Assets =Total Assets –Goodwill
=3,15,000 – 63,000 =2,52,000
Proprietary Ratio =1,57,500 / 2,52,000
= 0.625
442
Question 8
(a) From the following details of a trader you are required to calculate:
(i) Purchase for the year.
(ii) Rate of Stock Turnover
(iii) Percentage of Gross Profit to Turnover
Sales Rs. 33,984
Sales Returns Rs. 380
Stock at the beginning at cost price Rs.1378
Stock at the close at cost price Rs. 1814
Gross Profit for the year Rs. 8068
(b) Calculate Stock Turnover Ratio from the following information:
Rs.
Opening stock 55,100
Purchases 4,59,800
Sales 6,08,000
Gross Profit Rate 25% on Sales
(c) Calculate the operating Ratio from the following figures.
Items (Rs.)
Sales 17,87,400
Sales Returns 400
Other Incomes 5,300
Cost of Sales 15,44,000
Administration and Selling Exp 1,84,300
Answer
(a)
Dr. Trading Account Cr.
Rs. Rs.
To Opening Stock 1378 By Sales 33,984
To Purchase (Bal. Fig)
26,732 Sales Return 380
To gross profit 8068 By closing Stock 1814
36,178 36,178
443
(i) Purchase for the year Rs. 26,732
(ii) Stock Turnover = Cost of Goods Sold/ Average Stock
Cost of Goods Sold = Sales – G.P.
= 33,984 – 8,068 = 25,916
Average Stock = (Opening Stock + Closing Stock)/ 2
= (1372+ 1814)/2= 1596
Stock turnover ratio = 25916/1596 = 16.24 times
(iii) Percentage of Gross Profit to Turnover = Gross Profit / Sales *100
= 8,068 / 33,984 * 100= 23.74%.
(b) Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Cost of Goods Sold = Sales– G.P
= 6,08,000 – 1,52,000 = 4,56,000
Stock Turnover Ratio = 4,56,000 /55,100
= 8.27 times
(c) Operating Ratio = [(Cost of Goods Sold + Operating Expenses)/Sales * 100]
= [(15,44,000 + 1,84,300)/ 17,87,000)*100]
= 97%
Question 9
Using the following information, complete the Balance Sheet given below:
i) Total Debt to Net Worth : 1:2
ii) Total Assets Turnover : 2
iii) Gross Profit on sales : 25%
iv) Average Collection Period : 30 days
(Assume 360 days in a year)
v) Inventory turnover ratio based on
cost of goods sold and year end inventory : 3
vi) Acid test ratio : 0.75
Balance Sheet
Liabilities Rs. Assets Rs.
Equity Share Capital 4,40,000 Plant & Machinery ------------
Reserve & Surplus 6,60,000 Other Fixed Asset ------------
Total Debt:
Current Liabilities
------------
Current Assets:
Inventory
Debtors
Cash
------------
------------
------------
444
Answer
Net worth = Capital + Reserve & Surplus
= 440000 + 660000 =11,00,000
Total Debt / Net worth =1/2
Total Debt =11,00,000/2= 5,50,000
Total Liability Side =4,40,000 + 6,60,000 + 5,50,000
=16,50,000
So, Total Assets =16,50,000
Total asset turnover = Sales /Total Assets
2 = Sales /16,50000
Sales = 33,00,000
Gross profit on sales =25%
=33,00,000*25%
=8,25,000
Cost of Sales =33,00,000 – 8,25,000
=24,75,000
Inventory Turnover = Cost of sales / Inventory
3 =24,75,000/ Inventory
Inventory =8,25,000
Average Collection period = Average Debtors/Sales per day
30 =Debtors / (33,00,000/360)
Debtors =2,75,000
Acid test ratio = (Current Asset – Stock)/ Current Liabilities
0.75 = (Current Asset – 8, 25,000)/ 5,50,000
=Current Asset=12,37,500
Fixed Asset =Total Assets – Current Assets
=16,50,000– 12,37,500
= 4,12,500
Cash and Bank Balances = Current Assets – Inventory – Debtors
= 12,37,500 – 8,25,000 – 2,75,000
=1,37,500
445
Balance Sheet
Liabilities Rs. Assets Rs.
Equity Share Capital
4,40,000 Plant & Machinery 4,12,500
Reserve & Surplus 6,60,000 Current Assets:
Inventory
Debtors
Cash
8,25,000
2,75,000
1,37,500
Total Debt:
Current Liabilities
5,50,000
16,50,000 16,50,000
Question 10
From the following information, calculate cash flow from operating activities using direct method.
Statement of Profit and Loss for the year ended on March 31, 2015
Particulars Figures for Current reporting period (Rs)
i) Revenue from operations 2,09,000
ii) Other Income -------
iii) Total revenue (i+ii) 2,09,000
iv) Expenses:
Cost of materials consumed 1,14,000
Employees benefits expenses 28,500
Depreciation 19,000
Other expenses -----
Insurance Premium 7,600
Total expenses 1,69,100
v) Profit before tax (iii-iv) 39,900
Less : Income tax (9,500)
446
vi) Profit after tax 30,400
Additional information:
Particulars April 01, 2014 March 31, 2015
Rs Rs
Trade receivables 31,350 34,200
Trade payables 16,150 14,250
Inventory 20,900 25,650
Outstanding employees benefits 1,900 2,850
Prepaid insurance 4,750 5,225
Income tax outstanding 2,850 1,900
Answer
Cash Flows from Operating Activities
Particulars (Rs)
Cash receipts from customers 2,06,150
Cash Paid to suppliers (1,20,650)
Cash Paid to employees (27,550)
Cash Paid for Insurance premium (8,075)
Cash generated from operations 49,875
Income Tax paid (10,450)
Net Cash Inflow from Operations 39,425
Working Notes:
1. Cash Receipts from Customers is calculated as under:
Cash Receipts from Customers = Revenue from Operations + Trade Receivables
in the beginning – Trade Receivables in the end
= Rs 2,09,000 + Rs 31,350 – Rs 34,200
= Rs 2,06,150
2. Purchases = Cost of Revenue from Operations – Opening Inventory
+ Closing Inventory
= Rs 1,14,000 – Rs 20,900 + Rs 25,650= Rs 1,18,750
447
3. Cash payment to suppliers = Purchases + Trade Payables in the beginning – Trade Payables in the end.
= Rs 1,18,750 + Rs 16,150 – Rs 14,250
= Rs 1,20,650
4. Cash Expenses = Expenses on Accrual basis – Prepaid Expenses in the beginning and Outstanding Expenses in the end + Prepaid Expenses in the end and Outstanding Expenses in the beginning.
5. Cash Paid to Employees = Rs 28,500 + Rs 1,900 – Rs 2,850
= Rs 27,550
6. Cash Paid for Insurance Premium = Rs 7,600 – Rs 4,750 + Rs 5225 = Rs 8,075
7. Income Tax Paid = Rs 9,500+Rs 2,850 – Rs1,900
= Rs 10,450
Question 11
Calculate cash flows from operating activities from the following information.
Statement of Profit and Loss for the year ended March 31, 2015:
Particulars (Rs)
i) Revenue from Operations 47,500
ii) Other Income 4,750
iii) Total Revenue (i+ii) 52,250
iv) Expenses
Cost of Materials Consumed 14,250
Employees Benefits Expenses 9,500
Depreciation and Amortisation 6,650
Expenses:
Other Expenses 19,950
50,350
v) Profit before Tax (iii-iv) 1,900
Working Notes:
1. Other Income = Profit on Sale of Machinery + Income Tax Refund
= Rs 1,900 + Rs 2,850
= Rs 4,750
448
2. Depreciation and Amortisation = Depreciation + Goodwill Expenses Amortised
= Rs 4,750 + Rs 1,900
= Rs 6,650
3. Other Expenses = Rent + Loss on Sale of Equipment + Provision for Taxation
= Rs 9500 + Rs 2850 + Rs 7600
= Rs 19,950
Additional Information:
April 01, 2014 March 31, 2015
Rs Rs
Provision for Taxation 9,500 12,350
Rent Payable 1,900 2,375
Trade Payables 19,950 23,750
Trade Receivables 14,250 19,950
Inventories 23,750 20,900
Answer
Cash Flows from Operating Activities
Particulars (Rs)
Net profit before taxation, and extraordinary items 6,650
Adjustments for:
Depreciation
Loss on sale of equipment
Goodwill amortised
Profit on sale of machinery
Operating Profit before Working capital changes
Increase in Trade receivables
Decrease in Inventories
Increase in Trade payables
Increase in Rent payable
4,750
2,850
1,900
(1,900)
14,250
(5,700)
2,850
3,800
475
Cash generated from operations 15,675
Income Tax paid (4,750)
Income Tax refund 2,850
Net Cash from Operating activities 13,775
449
Working Notes:
1. Net profit before taxation & extraordinary item = Rs 1,900 + Rs 7,600 – Rs 2,850
= Rs 6,650
Dr. Provision for taxation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Cash (Income tax paid during the year: Bal. Fig.)
4,750 Balance b/d 9,500
Balance c/d 12,350 Profit and Loss a/c 7,600
17,100 17,100
Question 12
Square Ltd., made a profit of Rs 1,05,000 after charging depreciation of Rs. 21,000 on assets and a transfer to general reserve of Rs 31,500. The goodwill amortised was Rs 7,350 and gain on sale of machinery was Rs 3,150. Other information available to you (changes in the value of current assets and current liabilities) are trade receivables showed an increase of Rs 3,150; trade payables an increase of Rs. 6,300; prepaid expenses an increase of Rs 210; and outstanding expenses a decrease of Rs 2,100. Ascertain cash flow from operating activities.
Answer
Cash Flows from Operating Activities
Particulars (Rs.)
Net Profit before Taxation 1,36,500
Adjustment for Non-cash and Non-operating Items:
Depreciation
Goodwill amortised
Gain on sale of machinery
Operating profit before working capital
Adjustment for working capital charges:
Increase in Trade receivables
Increase in Trade payables
Increase in Prepaid expenses
Decrease in Outstanding expenses
21,000
7,350
(3,150)
1,61,700
(3,150)
6,300
(210)
(2,100)
Net Cash from Operating Activities 1,62,540
450
Working Notes:
Calculation of Net Profit before Taxation and Extraordinary items:
Rs.
(1) Net Profit 1,05,000
Transfer to General reserve 31,500
1,36,500
Question 13
(a) Marcos Ltd. has provided the following information:
(Rs.)
Machinery as on April 01, 2012 50,000
Machinery as on March 31, 2013 60,000
Accumulated Depreciation on April 01, 2012 25,000
Accumulated Depreciation on March 31, 2013 15,000
During the year, a Machine costing Rs 25,000 with Accumulated Depreciation of
Rs 15,000 was sold for Rs 13,000.
Calculate cash flow from Investing Activities on the basis of the above information.
(b) From the following information, calculate cash flows from financing activities:
April 1, March 31,
2014 2015
(Rs.) (Rs.)
Long-term Loans 2,00,000 2,50,000
During the year, the company repaid a loan of Rs 1,00,000.
Answer
(a)
Cash Flows from Investing Activities
Sale of Machinery 13,000
Purchase of Machinery (35,000)
Net cash used in Investing Activities (22,000)
451
Working Notes:
Dr. Machinery Account Cr.
Particulars Amount in (Rs)
Particulars Amount in (Rs)
Balance B/d 50,000 Cash (proceeds from sale of machine)
13,000
Profit on sale of machine 3,000 Accumulated Depreciation 15,000
Cash (bal. Fig. new machinery purchased)
35,000 Balance c/d 60,000
88,000 88,000
Dr. Accumulated Depreciation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Machinery 15,000 Balance b/d 25,000
Balance c/d 15,000 By Profit and Loss (Depreciation provided during the year)
5,000
30,000 30,000
(b)
Cash flows from Financing Activities
Proceeds from long-term borrowings 1,50,000
Repayment of long-term borrowings (1,00,000)
Net cash inflow from Financing Activities 50,000
452
Working Notes:
Dr. Long-term Loan Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Cash (loan repaid) 1,00,000 Balance B/d 2,00,000
Balance C/d 2,50,000 Cash (new loan raised) 1,50,000
3,50,000 3,50,000
Question 14
From the following information, prepare Cash Flow Statement for Pratik Ltd.
Balance Sheet of Pratik Ltd., as on March 31, 2015
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital
b) Reserve and surplus
6,65,000
3,32,500
4,75,000
1,90,000
2. Non-current Liabilities
Long-term borrowings: Bank Loan
47,500
95,000
3. Current Liabilities
a) Trade payables
b) Other current liabilities: outstanding rent
c) Short-term provisions
42,750
6,650
1,14,000
47,500
4,750
76000
Total 12,08,400 8,88,250
II. Assets
1. Non-current assets
a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
4,75,000
90,250
4,75,000
95,000
453
b) Non-current investments 95,000 -
2. Current assets
a) Inventories
b) Trade receivables
c) Cash and cash equivalents
1,23,500
1,14,000
3,10,650
47,500
76,000
1,94,750
Total 12,08,400 8,88,250
Notes to Accounts:
Particulars 31st March
2015 (Rs)
31st March
2014 (Rs)
1. Equity Share Capital 6,65,000 4,75,000
2. Reserve and Surplus
Surplus: i.e., Balance in Statement of Profit and Loss
3,32,500 1,90,000
3. Short-term Provision:
Proposed Dividend
Provision for Taxation
66,500
47,500
47,500
28,500
4. Fixed Assets
– Tangible assets
– Equipments
– Furniture
2,18,500
2,56,500
1,90,000
2,85,000
5. Intangible Assets
Patents
90,250
95,000
6. Cash and cash equivalents
i) Cash
ii) Bank balance
25,650
2,85,000
4,750
1,90,000
454
During the year, equipment costing Rs 76,000 was purchased.Loss on Sale of equipment amounted to Rs 4,750. Depreciation of Rs 14,250 and Rs2,850 charged on equipments and furniture.
Answer
Cash Flow Statement
Particulars (Rs.)
I. Cash flows from Operating Activities :
Net profit before taxation & extraordinary items
Provision for:
Depreciation on equipment
Depreciation on furniture
Patents written-off
Loss on sale of equipment
Operating Profit before Working capital Changes
Decrease in Trade payables
Increase in Outstanding rent
Increase in Trade receivables
Increase in inventories
Cash generated from Operating activities
Tax paid
A. Cash Inflows from Operating Activities
2,56,500
14,250
28,500
4,750
4,750
3,08,750
(4,750)
1,900
(38,000)
(76,000)
1,91,900
(28,500)
1,63,400
II. Cash flows from Investing Activities:
Proceeds from sale of equipments
Purchase of new equipment
Purchase of Investments
B. Cash used in Investing Activities
28,500
(76,000)
(95,000)
(1,42,500)
III. Cash flows from Financing Activities:
Issues of equity share capital
Repayment of bank loan
Payment of dividend
C. Cash Inflows from Financing Activities
1,90,000
(47,500)
(47,500)
95,000
455
Net increase in Cash & Cash Equivalents (A+B+C) 1,15,900
Cash and Cash Equivalents in the beginning 1,94,750
Cash and Cash Equivalents in the end 3,10,650
Working Notes:
(1)
Dr. Equipment Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance b/d 1,90,000 Depreciation 14,250
Cash 76,000 Bank 28,500
Profit & Loss
(Loss on Sale)
4,750
Balance c/d 2,18,500
2,66,000 2,66,000
(2) Patents of Rs 4,750 (i.e., Rs 95,000 – Rs 90,250) were written-off during the year, and depreciation on furniture Rs 28,500. (Rs 2,85,000 – Rs 2,56,500)
(3) It is assumed that dividend of Rs 47,500 and tax of Rs 28,500 provided in 2013- 2014 has been paid during the year 2014-15. Hence, proposed dividend and provision for tax during the year amounts to Rs 66,500 and Rs 47,500 respectively.
(Rs)
(4) Profit and Loss at the end 3,32,500
(–) Profit and Loss in the beginning 1,90,000
Net Profit during the year 1,42,500
+ Provision for tax during the year 47,500
+ Proposed dividend 66,500
Net Profit before taxation & extraordinary Items 2,56,500
456
Question 15
From the following Balance Sheets of AMX Ltd., prepare cash flow statement.
Balance Sheets of AMX Ltd.
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital
b) Reserve and surplus
14,25,000
7,12,500
9,50,000
5,70,000
2. Non-current Liabilities
Long-term borrowings
95,000
1,90,000
3. Current Liabilities
a) Trade payables
b) Short-term provisions(Provision for taxation)
95,000
90,250
1,04,500
76,000
Total 24,17,750 18,90,500
II. Assets
1. Non-current assets
a) Fixed assets
(i) Tangible assets
(ii) Intangible assets (Goodwill)
b) Non-current investment
9,59,500
1,71,000
5,70,000
11,40,000
1,90,000
-
2. Current assets
a) Inventories
b) Trade Receivables
c) Cash and cash equivalents
1,71,000
1,90,000
3,56,250
95,000
1,42,500
3,23,000
Total 25,17,750 18,90,500
457
Additional information:
1. Dividend proposed and paid during the year Rs 1,42,500.
2. Income tax paid during the year includes Rs 14,250 on account of dividend tax.
3. Land and building book value Rs 1,42,500 was sold at a profit of 10%.
4. The rate of depreciation on plant and machinery is 10%.
Answer
Cash Flow Statement
Particulars (Rs)
I. Cash flows from Operating Activities :
Net profit before taxation & extraordinary items
Adjustment for –
Depreciation
Goodwill written-off
3,75,250
38,000
19,000
Notes to Accounts:
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
1. Long-term borrowings:
i) Debentures
ii) Bank loan
-
95000
95000
1,90,000
-
1,90,000
2. Tangible Assets
i) Land and building
ii) Plant and machinery
6,17,500
3,42,000
9,59,500
7,60,000
3,80,000
11,40,000
3. Cash and cash equivalents
i) Cash in hand
ii) Bank balance
66,500
2,89,750
3,56,250
47,500
2,75,500
3,23,000
458
Profit on Sale of Land
Operating Profit before working capital changes
Decrease in Trade Payables
Increase in Trade Receivables
Increase in Inventories
Cash generated from Operations
Income Tax Paid (1)
A. Cash Inflows from Operations
(14,250)
4,18,000
(9,500)
(47,500)
(76,000)
2,85,000
(61,750)
2,23,250
II. Cash flows from Investing Activities
Proceeds from Sale of Land and Building
Purchase of Investment
B. Cash used in Investing Activities
1,56,750
(5,70,000)
(4,13,250)
III. Cash flows from Financing Activities
Proceeds from issue of Equity Share Capital
Redemption of Debentures
Proceeds from raising Bank Loan
Dividend Paid
Dividend Tax Paid
C. Cash flows from Financing Activities
4,75,000
(1,90,000)
95,000
(1,42,500)
(14,250)
2,23,250
Net Increase in cash and cash equivalents (A+B+C) 33,250
Cash and Cash Equivalents in the beginning 3,23,000
Cash and Cash Equivalent at the end 3,56,250
Working Notes:
(1) Total tax paid during the year Rs 76,000
Dividend tax paid (given) Rs (14,250)
Income tax paid for operating activities Rs 61,750
(2) Net profit earned during the year after tax and dividend
= Rs 7,12,500 – 5,70,000 = Rs 1,42,500
459
(3) Net profit before tax
= Net profit earned during the year after tax and dividend + Provision for tax made + Proposed Dividend
= 1,42,500 + 90,250 +1,42,500
= Rs 3,75,250
Dr. Equity Share Capital Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance c/d 14,25,000 Balance b/d 9,50,000
Cash
(New capital raised)
4,75,000
14,25,000 14,25,000
Dr. Debenture Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Cash (Redemption) 19,000 Balance b/d 19,000
19,000 19,000
Dr. Bank Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance c/d 95000 Cash 95000
95,000 95,000
Dr. Provision for Taxation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Cash (Tax paid : which includes Rs 14,250 as dividend )
76,000 By Balance b/d 76,000
Balance c/d 90,250 By Profit and Loss (Provision made during the year)
90,250
1,66,250 1,66,250
460
Dr. Land and Building Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance b/d 76,000 Cash 1,56,750
To Profit and Loss
(Profit on sale)
14,250 Balance c/d 6,17,500
7,74,250 7,74,250
Dr. Proposed Dividend Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Cash 1,42,500 Surplus 1,42,500
1,42,500 1,42,500
Dr. Plant and Machinery Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance b/d 3,80,000 Depreciation 38,000
Balance c/d 3,42,000
3,80,000 3,80,000
Question 16
From the following information of PQR Ltd., prepare cash flow statement:
Balance Sheet of PQR Ltd. as on 31st March, 2014 and 2015
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital
1,300
1400
461
b) Reserve and surplus (Surplus) 4,700 4000
2. Current Liabilities
a) Short-term loan
b) Trade payables
200
500
600
400
Total 6,700 6,400
II. Assets
1. Non-current assets
(a) Fixed assets
(b) Non-current investment
2400
300
2400
200
2. Current assets
a) Inventories
b) Trade Receivables
c) Cash and cash equivalents
d) Short-term loans and advances
1,200
800
1200
800
1300
900
800
800
Total 6,700 6,400
Notes to Accounts:
Particulars 31st March 31st March 2014 (Rs) 2015 (Rs)
1. Share capital
Equity share capital 1,000 1,000
10% preference share capital 300 400
1,300 1,400
2. Fixed assets
Tangible assets 3,600 3,400
Less: Accumulated depreciation (1,200) (1,000)
2,400 2,400
Statement of Profit and Loss for the year ended 31st March, 2015
Particulars 31st March, 2015 (Rs)
I. Revenue from operation 2,800
II. Other income (dividend income) 1,000
462
III. Total Revenue 3,800
IV. Expenses
Cost of material consumed 400
Employees benefit expenses 200
Finance cost (interest paid) 200
Depreciation 200
Loss due to earthquake 1,100
2,100
V. Profit before tax 1,700
VI. Tax paid (1,000)
Profit after tax 700
Additional information:
1. No dividend paid by the company during the current financial year.
2. Out of fixed assets, land worth Rs 1,000 having no accumulated depreciation was sold at no profit or no loss.
Answer
Cash Flow Statement
Particulars (Rs)
I. Cash flows from Operating Activities :
Net Profit before Tax and Extraordinary Items (w.n.1)
Adjustment for :
Interest paid
Depreciation
Operating Profit before working capital changes
Decrease in Inventories
Decrease in Trade Receivables
Increase in Trade Payables
Cash generated from operations
Income Tax paid
Cash Flow before Extraordinary items
Loss due to earthquake
A. Net cash from Operating Activities
2,800
200
200
3,200
100
100
100
3,500
(1,000)
2,500
(1,100)
1,400
463
II. Cash flows from Investing Activities
Sale of Land
Purchase of fixed assets (w.n.2)
Purchase of Investments
B. Net cash from Investing Activities
1,000
(1,200)
(100)
(300)
III. Cash flows from Financing Activities
Payment of short-term loans
Interest Paid
Redemption of 10% preference share capital
C. Net Cash used in Financing Activities
(400)
(200)
(100)
(700)
Net Increase in cash and cash equivalents (A+B+C) 400
Cash and Cash Equivalents in the beginning 800
Cash and Cash Equivalent at the end 1,200
Working Notes:
(1) Net Profit before Tax and Extraordinary Items = Rs 700 + Rs 1,100 + Rs 1,000
= Rs 2,800
(2)
Dr. Fixed Assets Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance b/d 3,400 Cash (Sale of land) 1,000
Cash (Purchase of fixedassets)
1,200 Balance c/d 3,600
4,600 4,600
Dr. Accumulated Depreciation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
Balance b/d 1,200 Balance b/d 1,000
By Profit and Loss 200
1,200 1,200
464
Question 17
From the following information of ST Ltd., prepare a cash flow statement:
Balance Sheet of PQR Ltd. as on 31st March, 2014 and 2015
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital
b) Reserve and surplus (Surplus)
15,000
34,100
12,500
13,800
2. Non-current Liabilities
Long-term borrowings
(Long-term loan)
11,100
10,400
3. Current Liabilities
a) Trade payables
b) Other current liabilities
1,500
6,300
18,900
11,000
Total 68,000 66,600
II. Assets
1. Non-current assets
a) Fixed assets
b) Non-current investments
7,300
25,000
8,500
25,000
2. Current assets
a) Current investments (Marketable)
b) Inventories
c) Trade Receivables
d) Cash and cash equivalents
e) Other current assets
(Interest receivables)
6,700
9,000
17,000
2,000
1000
1,350
19,500
12,000
250
--
Total 68,000 66,600
465
Notes to Accounts:
Particulars 31st March 2015 (Rs)
31st March 2014 (Rs)
1. Other Current Liabilities
i) Interest payable
ii) Income tax payable
2,300
4,000
1,000
10,000
6,300 11,000
2. Fixed Assets:
Tangible
Less: Accumulated depreciation
21,800
(14,500)
19,100
(10,600)
7,300 8,500
Statement of Profit and Loss for the year ended31st March, 2015
Particulars 31st March, 2015
(Rs)
I. Revenue from operation 3,06,500
II. Other income 6,400
III. Total Revenue 3,12,900
IV. Expenses
Cost of material consumed 2,60,000
Finance cost (interest expenses) 4,000
Depreciation 4,500
Other expenses 9,100
(Admn. and selling expenses) _______
Total expenses 2,77,600
Profit before tax 35,300
Less: Tax (3,000)
Profit after tax 32,300
466
Notes to Accounts:
Particulars Rs.
1. Other Income during the year 2014-15
i) Interest Income 3,000
ii) Dividend Income 2,000
iii) Insurance Proceeds from earthquake disaster Settlement 1,400
6,400
Additional Information:
(i) An amount of Rs 2500 was raised from the issue of share capital and a further Rs 2500 was raised from long-term borrowings.
(ii) Interest expense was Rs 4000 of which Rs 1700 was paid during the period. Rs 100 relating to interest expense of the prior period was also paid during the period.
(iii) Dividends paid were Rs 12,000.
(iv) Tax deducted at source on dividends received (included in the tax expense of Rs 3000 for the year) amounted to Rs 400.
(v) During the period, the enterprise acquired Fixed Assets for Rs 3500. The payment was made in cash.
(vi) Plant with original cost of Rs 800 and accumulated depreciation of Rs 600 was sold for Rs 200.
(vii) Trade Receivables and Trade Payables include amounts relating to credit sales and credit purchases only.
Answer
Cash Flow Statement
Particulars (Rs)
I. Cash flows from Operating Activities :
Net Profit before Taxation and Extraordinary Item
Adjustments for:
Depreciation
Interest Income
Dividend Income
Interest Expense
Operating Profit before working capital changes
33,900
4500
(3000)
(2000)
4000
37,400
467
Increase in Trade Receivables
Decrease in Inventories
Decrease in Trade Payables
Cash generated from Operations
Income Tax paid
Cash flow before Extraordinary Items
Proceeds from earthquake disaster settlement
Net cash from Operating Activities
(5000)
10500
(17400)
25,500
(8600)
16,900
1400
18,300
II. Cash Flows from Investing Activities
Purchase of Fixed Assets
Proceeds from Sale of Equipment
Interest Received
Dividends Received (net of TDS)
Net cash from Investing Activities
(3500)
200
2000
1600
300
III. Cash flows from Financing Activities
Proceeds from issuance of Share Capital
Proceeds from Long-term Borrowings
Repayment of Long-term Borrowings
Interest Paid
Dividends Paid
Net Cash used in Financing Activities
2500
2500
(1800)
(2700)
(12000)
(11500)
Net Increase in Cash and Cash Equivalents 7100
Cash and Cash Equivalents at the beginning of the period 1600
Cash and Cash Equivalents at the end of the period 8700
Working Notes:
(1) Cash and Cash Equivalents:
Cash and Cash Equivalents consist of cash in hand and balances with banks, and investments in money-market instruments. Cash and Cash Equivalents included in the Cash Flow Statement comprise of the following balance sheet amounts.
2015 2014
(Rs) (Rs)
Cash in Hand and balances with Bank 2,000 250
468
Short-term Investments 6,700 1,350
___ ____
Cash and Cash Equivalents 8,700 1,600
(2) Cash Receipts from Customers
Sales 3,06,500
Add : Trade Receivables at the beginning of the year 12,000
3,18,500
Less : Trade Receivables at the end of the year (17,000)
3,01,500
(3) Cash paid to Suppliers and Employees
Cost of Revenue from operations 2,60,000
Administrative and Selling Expenses 9,100
(i) 2,69,100
Add : Trade Payables at the beginning of the year 18,900
Inventories at the end of the year 9,000
(ii) 27,900
(i) + (ii) 2,97,000
Less : Trade Payables at the end of the year 1500
Inventories at the beginning of the year 19500 (21,000)
2,76,000 (4) Income Tax paid (including TDS from dividends received)
Income Tax expense for the year 3000 (including tax deducted at source from dividends received)
Add : Income Tax liability at the beginning of the year 10,000
13,000
Less : Income tax payable at the end of the year (4000)
9,000
Out of Rs 9000, tax deducted at source on dividends received (amounting to Rs 400) is included in cash flows from investing activities and the balance of Rs 8600 is included in cash flows from operating activities.
(5) Repayment of Long-term Borrowings
Long-term Debts at the beginning of the year 10,400
Add : Long-term Borrowings made during the year 2,500
12,900
469
Less : Long-term Borrowings at the end of the year (11,100)
1,800
(6) Interest paid
Interest expense for the year 4,000
Add: Interest Payable at the beginning of the year 1,000
5,000
Less : Interest Payable at the end of the year (2,300)
2,700
Question 18
The following are the summarised balance sheets of M/s. Pelican Ltd. as on 31.12.2014 and 31.12.2015
Balance Sheet of Pelican Ltd. as on 31st March, 2014 and 2015
Particulars 31st March 2014 (Rs)
31st March 2015 (Rs)
Liabilities
10% preference shares 1,00,000 1,10,000
Equity Shares 2,20,000 2,50,000
Share premium 20,000 26,000
Profit & Loss A / c 1,04,000 1,34,000
12% debentures 70,000 64,000
Creditors 38,000 46,000
Bills Payable 5,000 4,000
Provision for tax 10,000 12,000
Dividend Payable 7,000 8,000
5,74,000 6,54,000
Assets
Machinery 2, 00,000 2,30,000
Buildings 1,50,000 1, 76,000
470
Land 18,000 18,000
Cash 42,000 32,000
Debtors 38,000 38,000
Bills receivable 42,000 62,000
Stock 84,000 98,000
5,74,000 6,54,000
You are required to prepare a statement of sources and application of funds.
Answer
Fund Flow Statement
Source of funds Amount in (Rs)
Application of fund Amount in (Rs)
Issue of preference shares 10,000 Purchase of machinery 30,000
Issue of Equity shares 30,000 Purchase of Building 26,000
Share premium received 6,000 Increase in working capital
14,000
Fund from operation 30,000 Redemption of debenture
6,000
76,000 76,000
Workings
(i) Statement of changes in working capital
2014 2015
Rs. Rs.
Current Assets:
Cash 42,000 32,000
Debtors 38,000 38,000
471
Bills receivables 42,000 62,000
Stock 84,000 98,000
Total current assets 2,06,000 2,30,000
Current Liabilities :
Creditors 38,000 46,000
Bills payable 5,000 4,000
Provision for Tax 10,000 12,000
Dividend payable 7,000 8,000
Total current liabilities 60,000 70,000
Working capital 1,46,000 1,60,000
Increase in working capital : Rs 14000 (1,46,000 – 1,60,000)
Dr. Profit and Loss Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d (closing)
1,34,000 By Balance c/d
1,04,000
By Fund from operation
30,000
1,34,000 1,34,000
Question 19
From the following balance sheets, prepare schedule of changes in working capital.
Liabilities Mar 2014
Rs.
Mar 2015
Rs.
Assets Mar 2014
Rs.
Mar 2015
Rs.
Share capital 2,00,000 2,50,000 Cash 30,000 47,000
Creditors 70,000 45,000 Debtors 1,20,000 1,15,000
Retained Earnings
10,000 23,000 Land 50,000 66,000
Stock 80,000 90,000
2,80,000 3,18,000 2,80,000 3,18,000
472
Answer
Fund Flow Statement
Source of funds Amount in (Rs)
Application of fund Amount in (Rs)
Issue of shares 50,000 Purchase of Land 16,000
Fund from operation 13,000 increase in working capital
47,000
63000 63000
Workings
(i) Statement of changes in working capital
Current Assets : Mar. 2014 Mar. 2015
Rs Rs
Cash 30,000 47,000
Debtors 1,20,000 1,15,000
Stock 80,000 90,000
Total current assets 2,30,000 2,52,000
Current liabilities:
Creditors 70,000 45,000
Total current Liabilities 70,000 45,000
Working capital 1,60,000 2,07,000
Increase in working capital (2,07,000 – 1,60,000) = Rs 47,000
(ii)
Dr. Profit and Loss Accounts Cr.
Particular Amount in (Rs) Particular Amount in (Rs)
To Balance b/d 23,000 By Balance c/d 10,000
By Fund from operation (b/f)
13,000
23000 23000
473
Question 20
The following are the summarized balance sheets of PQR Ltd., as on 31 March 2014 and 2015.
Liabilities 31st Mar 2014 Rs
31st Mar 2015 Rs
Assets 31st Mar 2014 Rs
31st Mar 2015 Rs
Redeemable preference Shares
-
10,000
Fixed Assets 41,000 40,000
Less: Depreciation 11,000
30,000
15,000
25,000
Equity shares
40,000 40,000 Debtors 20,000 24,000
General Reserve
2,000 2,000 Stock 30,000 35,000
Profit and loss A/c
1,000 1200 Prepaid exp. 300 500
Debentures 6000 7000 Cash 1,200 3,500
Creditors 12000 11000
Provision for Tax
3,000 4,200
Proposed dividend
5,000 5,800
Bank overdraft
12,500 6,800
81,500 88,000 81,500 88,000
You are required to prepare:
1. A statement showing changes in the working capital
2. A statement of sources and application of funds.
474
Answer
Fund Flow Statement
Source of Funds Amount in (Rs) Application of Funds Amount in (Rs)
Issue of Preference Shares 10,000 Increase in working capital
16,200
Issue of Debentures 1,000
Sale of Fixed Assets 1,000
Fund from Operation 4,200
16,200 16,200
Workings:
i. Statement of Changes in working capital :
2014 2015 Rs Rs
Current Assets :
Debtors 20,000 24000
Stock 30,000 35000
Prepaid Expenses 300 500
Cash 1,200 3500
Total Current Assets (A) 51,500 63000
Current liabilities :
Creditors 12,000 11,000
Provision for tax 3,000 4,200
Proposed Dividend 5,000 5,800
Bank Overdraft 12,500 6,800
Total Current Liabilities (B) 32,500 27800
Working capital (A – B) 19,000 35,200
Increase in working capital 16,200
475
(ii)
Dr. Profit and Loss Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 1200 By Balance c/d 1000
To Depreciation 4000 By fund from operation 4200
5200 5200
Question 21
From the following balance sheets of Beta Ltd., prepare a statement showing changes in working capital during 2015.
Balance sheet of Beta Ltd as on 31st December
Liabilities 2014 Rs.
2015 Rs.
Share Capital 5,00,000 6,00,000
Reserves 1,50,000 1,80,000
P.L. A/c 40,000 65,000
Debentures 3,00,000 2,50,000
Creditors for goods 1,70,000 1,60,000
Provision for income tax 60,000 80,000
12,20,000 13,35,000
Assets
Fixed Assets 10,00,000 11,20,000
Less: Depreciation 3,70,000 4,60,000
6,30,000 6,60,000
Stock 2,40,000 3,70,000
Book debts 2,50,000 2,30,000
Cash in hand and at Bank Balance 80,000 60,000
Preliminary Expenses 20,000 15,000
12,20,000 13,35,000
476
Answer
Fund Flow Statement
Source of Funds Amount in (Rs) Application of Funds Amount in (Rs)
Issue of shares 1,00,000 Redemption of debentures
50,000
Fund from operation 1,50,000 Purchase of fixed assets
1,20,000
Increase in working capital
80,000
2,50,000 2,50,000
Workings
(i) Statement of changes in working capital
2014 2015 Rs. Rs.
Current Assets:
Stock 2,40,000 3,70,000
Book Debts 2,50,000 2,30,000
Cash in hand & Bank Balance 80,000 60,000
Total Current assets 5,70,000 6,60,000
Current liabilities:
Creditors for goods 1,70,000 1,60,000
Provision for income tax 60,000 80,000
Total Current Liabilities 2,30,000 2,40,000
Working capital 3,40,000 4,20,000
Increase in working capital 80,000
(ii)
Dr. Profit and Loss Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 65,000 By Balance c/d 40,0000
To Reserves 30,000 By fund from operation
1,50,000
To Preliminary Expenses Written off
5,000
To Depreciation 90,000
1,90,000 1,90,000
477
Question 22
Calculate Fund from Operation from the information given below as on 31.3.2015.
1. Net profit for the year ended 31.3.2015 Rs. 6,50,000.
2. Gain on sale of buildings Rs. 35,500.
3. Goodwill appears in the books at Rs. 1,80,000 out of that 10% has been written off duringthe year.
4. Old machinery worth Rs. 8,000 has been sold for Rs. 6,500 during the year.
5. Rs. 1,25,000 have been transferred to reserve fund.
Depreciation has been provided during the year on machinery and furniture at 20% whose value is Rs. 6,50,000.
Answer
Calculation of Fund from operation Rs. Rs.
Net profit for the year ended 31.3.2015 6,50,000
Add : Non fund items
Goodwill written off
(1,80,000 x 10/100)
Loss on sale of machinery
(8000 – 6500)
Transferred to Reserve fund
Depreciation
(6,50,000 x 20/100)
18000
1,500
1,25,000
1,30,000
2,74,500
9,24,500
Less : Non fund items
Gain on sale of Buildings
(35,500)
Fund from operation 8,89,000
Question 23
From the following balance sheets of a sole trader, prepare a fund flow statement.
Liabilities 2014
Rs.
2015
Rs.
Assets 2014
Rs.
2015
Rs.
Capital 63,000 1,00,000 Cash 15,000 20,000
Long term loans
50,000 60,000 Debtors 30,000 28,000
478
Trade creditors
42,000 39,000 Stock 55,000 72,000
Bank overdraft
35,000 25,000 Land & building 80,000 1,00,000
Outstanding expenses
5,000 6,000 furniture 15,000 10,000
195000 2,30,000 1,95,000 2,30,000
Answer
Fund Flow Statement
Source of funds Amount in (Rs) Application of funds Amount in (Rs)
Loan borrowed 10,000 Purchase of land & Buildings
20,000
Sale of Furniture 5,000 Increase in working capital
32,000
Fund from operation 37,000
52,000 52,000
Workings
(i) Statement of changes in working capital
2014 2015 Rs. Rs.
Current Assets :
Cash 15,000 20,000
Debtors 30,000 28,000
Stock 55,000 72,000
Total current assets 1,00,000 1,20,000
Current Liabilities :
Trade creditors 42,000 39,000
Bank overdraft 35,000 25,000
Outstanding expenses 5,000 6,000
Total current liabilities 82,000 70,000
Working capital 18,000 50,000
Increase in working capital 32,000
479
(ii)
Dr. Capital Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance c/d 1,00,000 By Balance b/d 63,000
By P.L. A/c 37,000
1,00,000 1,00,000
(iii)
Dr. Profit and Loss Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Capital Account 37,000 By Fund from operation
37,000
37,000 37,000
Question 24
The following are the Balance Sheets of Garima Limited for the year ending 31st March, 2014 and 31st March, 2015:
Balance Sheet of Garima Ltd as on 31st March, 2014 and 31st March 2015
Liabilities 2014 Rs.
2015 Rs.
Share Capital 6,41,250 7,48,125
General Reserves 2,13,750 2,67,188
Capital Reserve (Profit on sale of investment) - 10,688
Profit & Loss Account 1,06,875 2,13,750
15% Debentures 3,20,625 2,13,750
Accrued Expenses 10,688 12,825
Creditors 1,71,000 2,67,188
Provisions for Dividends 32,063 36,338
Provisions for Taxation 74,813 81,225
15,71,063 18,51,077
480
Assets
Fixed Assets 10,68,750 12,82,500
Less: Depreciation (2,13,750) (2,67,188)
Net Fixed Assets 9,00,000 10,15,313
Long-term Investments (at cost) 1,92,375 1,92,375
Stock (at cost) 2,13,750 2,88,563
Debtors (net of provisions for doubtful debts of Rs. 45,000 and Rs. 56,250 respectively for 2014 and 2015)
2,40,469 2,61,844
Bills Receivables 42,750 69,469
Prepaid Expenses 10,688 12,825
Miscellaneous Expenditures 16,031 10,688
15,71,063 18,51,077
Additional Information:
i) During the year 2014 and 2015, fixed assets with a net book value of Rs. 10,688 (accumulated depreciation, Rs. 32,063) was sold for Rs. 8,550.
ii) During the year 2014-15, Investments costing Rs. 85,500 were sold and also Investments costing Rs. 85,500 were purchased.
iii) Debentures were retired at a Premium of 10%.
iv) Tax of Rs. 58,781 was paid for 2014-15.
v) During the year 2014-15, bad debts of Rs. 14,963 were written off against the provision for Doubtful Debts account.
vi) The proposed dividend for 2013-14 was paid in 2014-15.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial position on working capital basis) for the year ended 31st March, 2015.
Answer
Computation of Funds from Operations
Particulars Amount in (Rs.)
Profit and Loss Balance on 31st March, 2015 2,13,750
Add : Depreciation
Loss on Sale of Assets
85,501
2,138
481
Miscellaneous Expenditure written off
Transfer to Reserves
Premium on Redemption of Debentures
Provision for Dividend
Provision for Taxation
5,343
53,438
10,688
36,338
65,193
4,72,389
Less : Profit and Loss Balance on 31st March, 2014 (1,06,875)
Funds from Operations 3,65,514
Dr. Accumulated Depreciation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Fixed Asset A/c 32,063 By Balance b/d 2,13,750
To Balance c/d 2,67,188 By Profit and Loss A/c ( Provision for Depreciation)
85,501
2,99,251 2,99,251
Dr. Fixed Assets Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 10,68,750 By Accumulated Depreciation A/c
32,063
To Bank A/c (Fixed Assets)
(Balancing Figure)
2,56,501 By Cash A/c 8,550
By Profit and Loss A/c (Loss on sale)
2,138
By Balance c/d 12,82,500
13,25,251 13,25,251
482
Dr. Provision for Tax Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Cash (tax paid) 58,781 By Balance b/d
74,813
To Balance c/d 81,225 By Profit and Loss A/c (Provision)
(Balancing Figure)
65,193
1,40,006 1,40,006
Statement of Changes in Working Capital
Particulars 31st March, 2014
31st March, 2015
Changes in Working Capital
+ -
Current Assets :
Stock 2,13,750 2,88,563 74,813 -
Debtors 2,40,469 2,61,844 21,375 -
Bills Receivables 42,750 69,469 26,719 -
Prepaid Expenses 10,688 12,825 2,137 -
5,07,656 6,32,700 1,25,044 -
Less : Current liabilities
Accrued Expenses 10,688 12,825 - 2,137
Creditors 1,71,000 2,67,188 - 96,188
1,81,688 2,80,013 - 98,325
Working Capital 3,25,968 3,52,687 - -
Increase in Working Capital - 26,719
1,25,044 1,25,044
483
Funds Flow Statement for the ended 31st March, 2015
Sources Rs.
Working Capital from operations 3,65,514
Sale of Fixed Assets 8,550
Sale of Investments 96,188
Share Capital Issued 1,06,875
Total Funds Provided (A) 5,77,125
Uses Rs.
Purchase of Fixed Assets 2,56,500
Purchase of Investments 85,500
Payments of Debentures (at a Premium of 10%) 1,17,563
Payment of Dividends 32,063
Payment of Taxes 58,781
Total Funds Applied (B) 5,50,406
Increase in Working Capital (A-B) 26,719
Question 25
Distinguish between Cash Flow and Funds Flow Statement.
Answer
Difference between Cash Flow and Fund Flow
Cash Flow Fund Flow
Cash flow statement is based on narrow concept of funds, which considers changes in cash.
Funds flow statement is based on the concept of working capital.
It does not contain any opening and closing balance.
It contains opening as well as closing balances of cash and cash equivalents.
Cash flow statement is more useful in short term analysis and cash planning.
Funds flow statement is more useful in long-term analysis of financial planning.
In cash flow statement cash from the operations are calculated after adjusting the increases and decreases in current assets and liabilities.
In funds flow statement such changes in current items are adjusted in the changes of working capital.
Classification of current and non-current is not relevant.
Such classification is required in this case.
484
Question 26
Following are the financial statement of Zenith Limited:
Balance Sheet as on
31st March, 2014
Rs.
31st March, 2015
Rs.
Capital and Liabilities:
Share Capital, Rs. 10 par value 16,750 15,000
Share Premium 33,500 23,750
Reserves and Surplus 17,430 12,325
Debentures 24,000 -
Long-term Loans 4,000 5,000
Creditors 2,880 2,710
Bank Overdraft 750 625
Accrued expenses 435 460
Income-tax Payable 4,825 1,685
1,04,570 61,555
Assets :
Land 360 360
Building, net of depreciation 60,180 17,840
Machinery, net of depreciation 11,085 10,705
Investment in ‘A’ Ltd. 7,500 -
Stock 5,880 4,615
Prepaid expenses 190 230
Debtors 7,635 7,715
Trade investments 4,000 10,500
Cash 7,740 9,590
1,04,570 61,555
485
Income Statement
For the year ended 31st March, 2015
Particulars Rs.
Net Sales 1,35,000
Less : Cost of goods sold and operating expenses (including depreciation on Buildings of Rs. 600 and depreciation on machinery of Rs. 1,140)
1,25,895
Net operating profit 9,105
Gain on sale of trade investments 640
Gain on sale of machinery 185
Profits before tax 9,930
Less : Income-tax 4,825
Profits after tax 5,105
Additional information:
i) Machinery with a net book value of Rs. 915 was sold during the year.
ii) The shares of ‘A’ Ltd. were acquired by issue of debentures.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial position on Working capital Basis) for the year ended 31st March, 2015.
Answer
Schedule of Changes in Working Capital
Particulars 31st March,
2015 31st March,
2014
Impact on Working Capital
Increase Decrease
Current Assets:
Stock 5,880.00 4,615.00 1 ,265.00 -
Prepaid expenses
190.00
230.00 - 40.00
Debtors 7,635.00 7,715.00 - 80.00
Trade Investments 4000.00 10,500.00 - 6,500.00
Cash 7,740.00 9,590.00 - 1,850.00
25,445.00 32,650.00 1,265.00 8,470.00
486
Current Liabilities:
Creditors 2880.00 2710.00 - 170.00
Bank overdraft 750.00 625.00 - 125.00
Accrued expenses 435.00 460.00 25.00 -
Income tax payable
4825.00
1685.00 - 3140.00
8890.00 5480.00 25.00 3435.00
Net Working Capital 16,555.00 27,170.00 1,290.00 11,905.00
Decrease in net working capital 10,615.00 - 10,615.00 -
27,170.00 27,170.00 11,905.00 11,905.00
Dr. Machinery Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 10,705 By Sale of machinery A/c (given)
915
To Purchase of machinery A/c
2435 By Depreciation A/c (given)
1140
By Balance c/d 11085
13140 13140
Dr. Trade Investment Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 10500 By Cash A/c (sale of trade Investments)
6500
By Balance c/d 4000
10500 10500
487
Estimation of Funds flow from Operations:
Rs.
Profits after tax 5105
Add : Depreciation on Building 660
Depreciation on Machinery 1140 1800
6905
Less : Gain on sale of machinery 185
Funds from Operations 6720
Gain on sale of trade investments has been considered as an operating income. Trade investments have been considered as part of current assets.
Statement of changes in Financial Position (Working Capital basis)
For the ended 31st March, 2015
Sources : Rs.
Funds from Operations 6720.00
Sale of machinery on gain (915 + 185) 1100.00
Debentures issued (Rs. 24000 – 7500) 16500.00
Investment in ‘A’ Ltd. Financial transaction and hence not affecting working capital
Issue of share capital (Including share premium) 11500.00
Financial Resources Provided 35,820.00
Uses :
Purchase of building (60180 + 660 + 17840) 43000.00
Purchase of machinery 2435.00
Payment of long-term loan 1000.00
Financial Resources Applied 46435.00
Net Decrease in Working Capital 10615.00
488
Question 27
(a) Calculate the relevant investment ratios with the following information:
Dividend per share = Rs.0.20
Market price per share = Rs.5.00
Annual earning = Rs.100000
Number of equity shares = Rs 200000
(b) Calculate the relevant profitability ratios with the following information:
Stock at start of year: Rs.30,000
Stock at end of year : Rs.20,000
Annual Sales: Rs.50,000
Annual Purchases:Rs.10,000
Total expenses: Rs.5,000
Capital at start: Rs.62,000
Capital at end: Rs.18,000
(c) Calculate the relevant liquidity ratios with the following information:
Trade Debtors: Rs.21,000
Trade Creditors: Rs.15,000
Proposed dividends: Rs.2,500
Bank: Rs.5,000
Closing stock: Rs.9,000
Opening stock: Rs.8,000
Answer
a) (1) Dividend yield = ( Dividend per share/ Market price per share ) * 100 % = (0.2 / 5) * 100% = 4%
(2) Earnings per share (EPS) = Profit available to shareholders / Number of shares =Rs.100,000 / 200,000 = Rs.0.50
(3) Price earnings ratio (P/E) = Market price per share / EPS = Rs. 5 / 0.50 = 10
(4) Payout Ratio = Dividend per share / EPS = 0.2 / 0.5 = 0.4 = 40%
b) (1) Gross profit percentage = (Gross profit / Net sales) * 100 = (30,000 / 50,000) *100 = 60%
(2) Net profit percentage = (Net profit / Net sales) * 100 = (25,000 / 50,000) * 100 = 50%
(3) Return on capital employed = (Profit before interest / Capital employed) * 100 % = (25,000 / 40,000) * 100 = 62.5%
489
Workings Gross profit = Sales – Cost of goods sold = 50,000 – 20,000 = Rs. 30,000
Cost of goods sold = Stock at start + Purchases – Stock at end = 30,000 + 10,000 – 20,000 = Rs. 20,000
Net profit = Gross profit – Total expenses = 30,000 – 5,000 = Rs. 25,000
Average capital employed = (Capital at start + Capital at end) / 2 = (62,000 + 18,000)/ 2 = Rs. 40,000
(c) (1) Current ratio = Current Assets / Current Liabilities = 35,000 / 17,500 = 2
(2) Quick ratio = (Current Assets – stock) / Current Liabilities = (35,000 – 9,000) / 17,500 = 1.49
Workings:
Current assets = closing stock + debtors + bank = 9,000 + 21,000 + 5,000 = Rs. 35,000
Current liabilities = creditors + proposed dividends = 15,000 + 2,500 = Rs. 17,500
Question 28
(a) Given:
Current Ratio = 2.6
Liquid Ratio = 1.4
Working Capital = Rs. 1,04,500
Calculate: (I) Current Assets (2) Current Liabilities (3) Liquid Assets and (4) Stock.
(b) Calculate Gross Profit Ratio from the following figures :
Rs.
Sales 50,000
Sales Return 5,000
Closing Stock 3,500
Opening Stock 7,000
Purchases 35,000
Answers
a) Calculation of current assets and current liabilities :
Working Capital = Current Assets – Current Liabilities
Current Ratio = Current Assets: Current Liabilities
(or) Current Assets /Current Liabilities
= 2.6:1
490
Working Capital =Current Assets – Current Liabilities
=2.6– 1
=1.6
Working Capital (Given) = 1,04,500
= 1.6 =1,04,500
(1) Current Assets = 1,04,500 x 2.6 /1.6 = Rs. 1,69,812
(2) Current Liabilities=1,04,500 x1/1.6= Rs.65312
(3) Calculation of Liquid Assets :
Liquid Ratio (Given) =1.4
Liquid Ratio = Liquid Assets/Current Liabilities
1.4=Liquid Assets/65312
Liquid Assets=65312 x 1.4=91,437
(4) Calculation of Stock:
Liquid Assets = Current Assets – (Stock + Prepaid Expenses)
Stock = Current Assets – Liquid Assets
= 1,69,812 – 91,437
= 78,375
b) Gross Profit Ratio = Gross Profit / Net Sales x 100
Net Sales = Sales – Sales Return
= Rs. 50,000 – 5,000
= Rs. 45,000
Gross Profit = Sales – Cost of Goods Sold
Cost of goods sold = Opening Stock + Purchase – Closing Stock
= Rs. 7,000 + 35,000 – 3,500
= Rs. 42,000 – 3,500 = Rs. 38,500
Gross Profit = Rs. 45,000 – 38,500 = Rs. 6,500
Gross Profit Ratio = 6,500 / 45,000 x100
= 14.44%
491
Question 29
The following is the Balance sheet of M/s Sharma Ltd. for the year ending 31st March 2015:
Liabilities Rs. Assets Rs.
Equity Share Capital 40,000 Goodwill 15,000
Reserves 4,000 Building 20,000
Profit and Loss Alc 8,000 Machinery 25,000
Debenture 10,000 Stock 8,000
Secured Loans 10,000 Sundry Debtors 6,000
Creditors 8,000 Bills Receivable 4,000
Provision for Tax 5,000 Cash at Bank 5,000
Bills Payable 4,000 Preliminary Expenses 6,000
89,000 89,000
You are required to calculate:
(a) Current Ratio
(b) Liquid Ratio
(c) Gross Capital Employed
(d) Net Capital Employed
(e) Average Capital Employed
(f) Return on Capital Employed Ratio
Answer
(a) Current Ratio = Current Assets /Current Liabilities
Current Assets = Stock + Sundry Debtors + Bills Receivable + Cash at Bank +Preliminary Expenses
= 8,000+6,000+4,000 + 5,000+6,000
= 29,000
Current Liabilities = Creditors + Provision for Tax + Bills Payable
= 8,000+5,000+4,000
= 17,000
492
Current Ratio = 29,000 / 17,0000
= 1.70
(b) Liquid Assets = Current Assets – (Stock and Preliminary Expenses)
= 29,000 – (8,000+6,000)
= 15,000
Liquid Ratio = 15,000 / 17,000 =0.88
(c) Gross Capital Employed = Fixed Assets + Current Asset
Fixed Assets = Goodwill + Building + Machinery
= 15,000+20,000+29,000
= 60,000
Current Assets = 29,000
Gross Capital Employed= 60,000+29,000
= 89,000
(d) Net Capital Employed = Total Assets – Current Liabilities
Total Assets = 89,000
Current Liabilities = 17,000
Net Capital Employed = 89,000-17,000
= 72,000
(e) Average Capital Employed = Net Capital Employed + 1/2of Profit after Tax
½ of Profit after Tax = ½(8,000-5,000)
= 1,500
Average Capital Employed = 72,000+1,500
= 73,500
(f) Return on Capital Employed = Net Profit after Tax /Gross Capital Employed x 100
= ((8,000-5,000)/89,000) x 100
= 3.37%
Question 30
a) Classify the following into cash flows from operating activities investing activities financing activities :
(a) Sale of goods in Cash
(b) Cash paid to suppliers of raw material
(c) Cash payments of salaries and wages to employees.
493
(d) Cash payment to acquire fixed assets
(e) Cash proceeds from issues of shares at premium.
(f) Payment of dividend
(g) Interest received on investment
(h) Interest on debenture
(i) Payment of income tax
(j) Cash payment of a long term loan
b) Fill in the blanks:
(i) Provision for taxation is .............
(ii) Increases in share capital is ...........................
(iii) Purchase of fixed assets is ...........................
(iv) Decrease in share capital is ...........................
c) The following relevant Information is obtained from the book of XL LTD.
Liabilities 2014 2015
Rs Rs
Provision for Taxation 40,000 56,000
The amount of tax paid during 2015 amounted to Rs.32,000. How would you deal with this item presuming to be non current? Net profit after taxation is given as Rs.64,000.
Answer
(a) Cash Flow from operating activities are:
(a) Cash sale of goods
(b) Cash paid to suppliers of raw materials
(c) Cash payment of salaries and wages
(d) Payment of Income Tax
Cash Flow from investing Activities
(a) Cash payment to acquire fixed assets
(b) Interest received on Investment
Cash Flow from financing Activities
494
(a) Cash proceeds from issuing shares at premium
(b) Payment of dividends
(c) Interest paid on debentures
(d) Cash payment of a long term loan
(b) i) Non-operating Expenses iii) Investment activities
ii) Inflow of Cash iv) Out flow of Cash
(c)
Dr. Provision for Taxation Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Bank 32,000 By Balance b/d
40,000
To Balance c/d 56,000 By Profit and loss A/c (Bal. Fig.)
48,000
88,000 88,000
(i) Cash provided from operating activities: Rs.
Net Income after taxation 64,000
Add: Provision for taxation treated as non-cash expense 48,000
1,12,00
Question 31
From the following information as at 31st March 2015 prepare balance sheet:
Current ratio 2.5 Working capital 30,000
Liquidity ratio 1.5 Reserves and surplus 20,000
Proprietary ratio 0.75 Bank overdraft 5,000
There is no long-term loan or fictitious asset.
Answer
Working Notes:
(1) Current Ratio = Current Assets/ Current Liabilities= 2.5
Current Asset = 2.5 (Current liabilities)
Working Capital = Current assets – Current liabilities
495
Rs.30,000 = 2.5 (Current liabilities) – Current liabilities
Rs.30,000 = 1.5 (Current liabilities)
Current liabilities = 20,000
Therefore, Current assets = 50,000
(2) Proprietary funds + Current liabilities = Current assets + Fixed assets
Fixed Assets /Proprietary Funds = 0.75
Fixed assets = 0.75 (Proprietary funds)
Substituting in the equation above
Proprietary funds + 20,000 = 50,000 + 0.75 (Proprietary funds)
0.25 Proprietary funds = 30,000
Proprietary funds = 1,20,000
Hence,
Fixed assets = 0.75 (1,20,000)
Fixed assets = 90,000
Share capital = Proprietary funds – Reserve and surplus
= 1,20,000 – 20,000 = 1,00,000
(3) Liquid ratio = Liquid assets / Current Liabilities =1.5
Liquid Assets = 30,000 i.e. 1.5 (Current liabilities)
Therefore, stock = 50,000 – 30,000 = 20,000
(i.e. Stock = Current assets – Liquid assets)
Balance Sheet as at 31st March 2015
Liabilities Rs. Assets Rs.
Capital 1,00,000 Fixed assets 90,000
Reserves and surplus 20,000 Stock 20,000
Bank overdraft 5,000 Other current assets 30,000
Other current liabilities 15,000
1,40,000 1,40,000
496
Question 32
What is a cash flow statement? Write down its usefulness.
Answers
A statement of cash flows reports the inflows and outflows of cash and its equivalents of an organisation during a particular period. A statement of cash flow reports cash receipts and payments classified according to the entities’ major activities – operating, investing and financing during the period. This statement reports a net cash inflow or net cash outflow for each activity and for the overall business. It also reports from where cash has come and how it has been spent. It explains the causes for the changes in the cash balance
Usefulness of a Cash flow statement:
(i) Predict future cash flows : The cash flow statement makes it possible to predict the amounts, timing and uncertainty of future cash flows on the basis of what has happened in the past. This approach is better than accrual basis data presented by Statement of Profit & Loss and the balance sheet.
(ii) Determine the ability to pay dividends and other commitments : A cash flow statement indicates the sources and uses of cash under suitable headings such as operating, investing and financing activities. Shareholders are interested in receiving dividends on their investments in the shares. Creditors want to receive their interest and principal amount on time. The statement of cash flows helps investors and creditors to predict whether the business can make these payments.
(iii) Show the relationship of net income to changes in the business cash : Usually cash and net income move together. High levels of income tend to lead to increase in cash and vice-versa. However, a company’s cash balance can decrease when its net income is high, and cash can increase when income is low. The users want to know the difference between the net profit and net cash provided by operations. The net profit shows the progress of the business during the year while cash flow relates more to the liquidity of the business. The users can assess the reliability of net profit with the help of cash flow statement.
(iv) Efficiency in cash management : Cash flow analysis helps in evaluating financial policies and cash position. It facilitates the management to plan and co-ordinate the financial operations properly. The management can estimate how much funds are needed, from which source they will be derived, how much can be generated internally and how much should be arranged from outside.
(v) Discloses the movement of cash : A comparison of cash flow statement for the previous year with the budget for that year would indicate to what extent the resources of the enterprise were raised and applied. A comparison of the original forecast with actual result may highlight trend of movement that might otherwise remain undetected.
497
(vi) Discloses success or failure of cash planning : A success or failure of cash planning can be known by comparing the projected cash flow statement with the actual cash flow statement and necessary remedial measures can be taken. Moreover it provides a better measure for inter-period and inter-firm comparison.
vii) Evaluate management decisions : The statement of cash flows reports the companies’ investing and financing activities and thus gives the investors and creditors about cash flow information for evaluating managers’ decisions.
Question 33
From following information of ABC Ltd. prepare cash flow statement for the year ended 31.3.2015.
31.3.2014 Rs.
31.3.2015 Rs.
Liabilities
Equity share capital 1,50,000 2,00,000
8% Preference shares 75,000 50,000
Capital reserve - 10,000
General reserve 20,000 25,000
Profit & Loss Account 15,000 24,000
Proposed dividend 21,000 25,000
Sundry creditors 12,500 23,500
Bills payable 10,000 8,000
Liability for expenses 15,000 18,000
Provision for taxation 20,000 25,000
3,38,500 4,08,500
Assets
Goodwill 50,000 40,000
Land and building 1,00,000 85,000
Plant 40,000 1,00,000
Investment 10,000 15,000
Sundry debtors 70,000 85,000
498
Stock 38,500 54,500
Bills receivable 10,000 15,000
Cash in hand 7,500 5,000
Cash at bank 5,000 4,000
Preliminary expenses 7,500 5,000
3,38,500 4,08,500
Additional information:
(i) A piece of land has been sold during the year and the profit on sale has been credited to capital reserve. Depreciation charged on building during the year is Rs.2,500; no additions under this head during the year.
(ii) A machine was sold for Rs.5,000. The written down value of the machine was Rs.6,000. Depreciation of Rs.5,000 is charged on plant in 2014-15.
(ii) Investments are trade investments. Rs.1,500 by way of dividend is received including Rs.500 from pre-acquisition profit which has been credited to investment account.
(iii) An interim dividend of Rs.10,000 has been paid in 2014-15.
Answer
Cash Flow Statement for the year ended 31.3.2015
Cash Flows from Operating Activities:
Net profit before tax and extraordinary items
Adjustments for: Depreciation:
Building 2,500
Plant & Machinery 5,000
Preliminary expenses
Loss on sale of plant
Goodwill written off
Dividend received
Operating profit before working capital changes
Adjustments for:
Increase in debtors
Increase in stock
54000
7500
2,500
1,000
10,000
(1,000)
74,000
(15,000)
(16,000)
499
Increase in bills receivable
Decrease in bills payable
Increase in sundry creditors
Increase in liability for expenses
Net Cash from Operating Activities
(5,000)
(2,000)
11,000
3,000
50,000
Cash Flows from Investing Activities:
Sale of proceeds of land
Sale proceeds of machine
Purchase of plant
Purchase of investment
Dividend received
Net Cash Used in Investing Activities
22,500
5,000
(71,000)
(5,500)
1,500
(47,500)
Cash Flows from Financing Activities:
Issue of share capital
Redemption of preference shares
Interim dividend paid
Dividend paid (assumed)
Net Cash Used in Financing Activities
50,000
(25,000)
(10,000)
(21,000)
(6,000)
Net Increase in Cash and Cash Equivalents (3,500)
Cash and Cash Equivalents on 31.3.2014 (Opening balance) 12,500
Cash and Cash Equivalents on 31.3.2015(Closing balance) 9,000
(i) Net profit before tax and extra-ordinary items:
Profit & Loss Account as on 31.3.2015 24,000
Less: Profit & Loss Account as on 31.3.2014 (15,000)
Profit earned during the year after appropriation and provision for tax 9,000
Add: Transfer to general reserve 5,000
Proposed dividend 25,000
Interim dividend 10,000
Provision for taxation 5,000 45,000
Profit before tax and extraordinary items 54,000
500
Dr. Land and Building Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 1,00,000 By Depreciation A/c 2,500
To Capital reserve 10,000 By Bank (purchases) (Bal. Fig.)
22,500
By Balance c/d 85,000
1,10,000 1,10,000
Dr. Plant and Machinery Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 40,000 By Bank (sales) 5,000
To Bank (purchases) 71,000 By Profit & Loss Account (loss)
1,000
By Depreciation 5,000
By Balance c/d 1,00,000
1,11,000 1,11,000
Dr. Investment Account Cr.
Particulars Amount in (Rs) Particulars Amount in (Rs)
To Balance b/d 10,000 By Dividend 500
To Bank (purchases)
5,500 By Balance c/d
15,000
15,500 15,500
***